<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON SEPTEMBER 29, 1999
REGISTRATION NO. 333-84037
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 1
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
MAIN STREET BANKS INCORPORATED
(Name of Small Business Issuer in its charter)
<TABLE>
<S> <C> <C>
GEORGIA 6022 58-1806330
- -------------------------------- -------------------------------- --------------------------------
(State or jurisdiction of (Primary Standard Industrial (I.R.S. Employer Identification
incorporation or organization) Classification Code Number) No.)
</TABLE>
1121 FLOYD STREET
COVINGTON, GEORGIA 30014
(770) 786-3441
(Address, and telephone number
of principal executive offices)
COPIES TO:
<TABLE>
<S> <C>
ROBERT R. FOWLER, III KATHERINE M. KOOPS, ESQ.
MAIN STREET BANKS INCORPORATED POWELL, GOLDSTEIN, FRAZER & MURPHY LLP
1121 FLOYD STREET 191 PEACHTREE STREET, N.E., 16(TH) FLOOR
COVINGTON, GEORGIA ATLANTA, GEORGIA 30303
(770) 786-3441 (404) 572-6600
(Name, address, and telephone number, of agent for service)
</TABLE>
------------------------
APPROXIMATE DATE OF PROPOSED SALE TO THE PUBLIC: As soon as practicable
after the date of this Registration Statement. If any of the securities being
registered on this form are to be offered on a delayed or continuous basis
pursuant to Rule 415 under the Securities Act of 1933, check the following
box. /X/
If this Form is filed to register additional securities for an offering pursuant
to rule 462(b) under the Securities Act, please check the following box and list
the Securities Act registration statement number of the earlier effective
registration statement for the same offering. / /
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
If this form is a post-effective amendment filed pursuant to 462(d) under the
Securities Act, check the following box and list the Securities Act registration
statement number of the earlier effective registration statement for the same
offering. / /
If the delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. / /
------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
PRELIMINARY PROSPECTUS DATED SEPTEMBER 29, 1999; SUBJECT TO COMPLETION
THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE MAY
NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER
TO SELL THESE SECURITIES AND IT IS NOT SOLICITING AN OFFER TO BUY THESE
SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED.
<PAGE>
90,000 SHARES
MAIN STREET BANKS INCORPORATED
COMMON STOCK
This is an offering of 90,000 shares of Main Street Banks Incorporated's
common stock. Of these shares, Main Street Banks Incorporated is offering 60,000
shares and Robert R. Fowler, III, the selling shareholder, is offering 30,000
shares. Our officers and directors will offer and sell the common stock on a
best-efforts basis without compensation. Prior to this offering, there has been
no public trading market for the common stock. We have applied to list the
common stock on the American Stock Exchange under the symbol "MBS."
INVESTING IN THE COMMON STOCK INVOLVES RISKS, WHICH ARE DESCRIBED IN THE
"RISK FACTORS" SECTION BEGINNING ON PAGE 7 OF THIS PROSPECTUS.
The shares of common stock offered are not deposits, savings accounts, or
other obligations of a bank or savings association and are not insured by the
FDIC or any other governmental agency.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
PER SHARE TOTAL
------------------ ------------------
<S> <C> <C>
Public price........................................ $14.00 $1,260,000
Proceeds to us, before expenses..................... $14.00 $ 840,000
Proceeds to the selling shareholder................. $14.00 $ 420,000
</TABLE>
We will deposit the subscription proceeds in a noninterest-bearing deposit
account with Main Street Bank until the close of the offering. We plan to close
the offering on , 1999, but may choose to end the offering sooner or
to extend the offering for a period not beyond , 1999.
You must subscribe for at least 100 shares of common stock. You may not
cancel or change your subscription after you have submitted your signed
subscription agreement unless you receive our express permission to do so. We
may choose to reject your subscription entirely or accept it for only a portion
of the shares for which you subscribe.
If we receive subscriptions for less than 90,000 shares of common stock, all
subscriptions received for up to 30,000 shares will first be allocated to the
selling shareholder. Subscriptions received in excess of 30,000 shares and up to
a total of 90,000 shares will be allocated to Main Street. We will not accept
subscriptions for more than 90,000 shares of common stock. See "The Offering"
beginning on page 12 of this prospectus.
The date of this prospectus is , 1999.
<PAGE>
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
1
2
3
4
5
6
7
8
9
10
11
12
13
<S> <C>
COVINGTON
1 Main Office
1134 Clark Street
Covington, GA 30014
(770) 786-3441
2 North Office
3110 Highway 278
Covington, GA 30014
(770) 385-2613
3 Kroger Office
3139 Highway 278
Covington, GA 30014
(770) 385-2580
4 Eastside Office
9130 Highway 278
Covington, GA 30014
(770) 385-2570
CONYERS
5 940 Main Street
Conyers, GA 30012
(770) 918-6970
6 2405 Salem Road
Conyers, GA 30013
(770) 929-3670
7 3430 Highway 20, SE
Conyers, GA 30013
(770) 929-1708
LOGANVILLE
8 4644 Highway 78
Loganville, GA 30249
(770) 466-2296
LAWRENCEVILLE
9 867 Buford Drive
Lawrenceville, GA 30243
(770) 237-0047
WINDER
10 45 East Athens Street
Winder, GA 30680
(770) 867-3161
ATHENS
11 2065 Timothy Road
Athens, GA 30606
(706) 549-6607
12 475 East Broad Street
Athens, GA 30601
(706) 548-0868
13 190 Gaines School Road
Athens, GA 30601
(706) 543-5900
</TABLE>
<PAGE>
SUMMARY
THIS SUMMARY DOES NOT CONTAIN ALL THE INFORMATION YOU SHOULD CONSIDER BEFORE
INVESTING IN THE COMMON STOCK. YOU SHOULD READ CAREFULLY THE ENTIRE PROSPECTUS.
SHARE INFORMATION INCLUDED IN THIS PROSPECTUS HAS BEEN RESTATED TO REFLECT A
SIX-FOR-ONE STOCK SPLIT WHICH BECAME EFFECTIVE ON APRIL 30, 1996 AND A
FOUR-FOR-ONE STOCK SPLIT WHICH BECAME EFFECTIVE ON SEPTEMBER 1, 1998. IN
ADDITION, UNLESS OTHERWISE INDICATED, ALL REFERENCES TO "WE", "US", "OUR", AND
"MAIN STREET" IN THIS PROSPECTUS REFER TO MAIN STREET BANKS INCORPORATED AND ITS
SUBSIDIARY, MAIN STREET BANK, ON A CONSOLIDATED BASIS.
MAIN STREET BANKS INCORPORATED
1121 FLOYD STREET
COVINGTON, GEORGIA 30014
(770) 786-3441
Main Street is a one-bank holding company headquartered in Covington,
Georgia. As of June 30, 1999, we had total consolidated assets of approximately
$464.6 million, total deposits of $377.1 million, and shareholders' equity of
approximately $44.1 million.
Through our wholly owned subsidiary, Main Street Bank, we offer a broad line
of banking and financial products and services using a strategy of combining
large-bank products and services with small-bank service and responsiveness. We
rank fourteenth in asset size out of 61 bank holding companies headquartered in
Georgia based on December 31, 1998 call report data. Much of our growth has
occurred in the last eight years through acquisitions and expansion of our
market areas.
We operate 13 full-service banking locations and 17 automated teller
machines that are located in six contiguous counties in Northeast Georgia. Our
main office is located in the city of Covington, Newton County, Georgia. We also
have branch offices in the following locations:
<TABLE>
<CAPTION>
City County Number of Branches
- ------------ --------- -------------------------
<S> <C> <C>
Covington Newton 3
Conyers Rockdale 3
Winder Barrow 1
Loganville Walton 1
Lawrenceville Gwinnett 1
Athens Clarke 3
</TABLE>
As of June 30, 1998, our deposit market share was 36.5% in Newton County,
where Covington is the county seat. We provide mortgage, brokerage, and
insurance products through three divisions of Main Street Bank: Main Street
Mortgage, Main Street Investments, and Main Street Insurance.
PURPOSE OF THE OFFERING
We are conducting this offering to expand our shareholder base and register
our common stock with the Securities and Exchange Commission so that we can
qualify to be listed on the American Stock Exchange. We believe listing our
common stock on the American Stock Exchange will provide greater liquidity and
marketability for our common stock and will increase community awareness and
involvement in Main Street. Greater liquidity and marketability of our common
stock will in turn give us flexibility to use our common stock, rather than
cash, as consideration in future merger or expansion transactions. While we
currently have no commitments or understandings with regard to the acquisition
of any other business or financial institution, we have and will continue on an
ongoing basis to monitor and discuss potential acquisition opportunities.
3
<PAGE>
BUSINESS STRATEGY
Our mission statement is "We want to be THE bank for consumers and small
businesses." To achieve our mission statement, our operating strategies are to:
- Provide leading technology combined with small-town service at all
locations;
- Staff offices with local and responsive management teams that emphasize a
high level of personalized customer service;
- Target individuals, professionals and small- to medium-sized business
customers that require the attention and service a community bank is
well-suited to provide; and
- Provide a broad array of traditional banking products and services, along
with a complement of fee-based services, which offer customers a complete
line of financial products.
LINES OF BUSINESS
We provide traditional banking products and services through high-quality
and personalized delivery systems. We offer a wide variety of checking, savings,
certificates of deposit and loan accounts. Additionally, we offer credit and
debit cards, lines of credit, PC banking and voice response banking. We
recognize the need to adapt as our customers and the financial industry become
more technologically driven. As a result, we recently began offering Internet
banking to our customers. To complement our traditional banking products and
services, we also offer mortgages, brokerage services and insurance products.
4
<PAGE>
THE OFFERING
<TABLE>
<S> <C>
Common stock offered by Main Street Banks
Incorporated............................... 60,000 shares
Common stock offered by selling
shareholder................................ 30,000 shares
Common stock to be outstanding after the
offering................................... 8,889,000 shares
Use of proceeds.............................. The offering will provide us with only a
nominal amount of additional capital, which
we do not anticipate will have a material
impact on our current operations. We intend
to invest the net proceeds of the offering in
short-term investments such as Federal funds
sold or other short-term U.S. Government
securities. These investments will provide us
with a source of liquidity to support asset
growth and for other general corporate
purposes. See "--Purpose of the Offering"
(page 3), "The Offering" (page 12) and "Use
of Proceeds" (page 14).
Proposed trading symbol...................... "MBS"
</TABLE>
The number of shares of common stock to be outstanding after the offering
includes 720,000 shares of restricted stock issued under Main Street's
Restricted Stock Award Plan and 45,960 shares of restricted stock issued under
Main Street's Long-term Incentive Plan. See "Management--Restricted Stock Award
Plan and --Long-term Incentive Plan" (page 56).
5
<PAGE>
SUMMARY CONSOLIDATED FINANCIAL DATA
The following summary consolidated unaudited financial data should be read
in conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and the financial statements and related notes
included elsewhere in this prospectus. This information has been derived from
audited financial statements for 1994 through 1998 and from unaudited financial
statements for the six months ended June 30, 1999 and 1998. You should not rely
on the six-month information as being indicative of results expected for the
entire year.
<TABLE>
<CAPTION>
AT AND
FOR THE SIX
MONTHS ENDED AT AND
JUNE 30 FOR THE YEARS ENDED DECEMBER 31
-------------------- -----------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
1999 1998 1998 1997 1996 1995 1994
--------- --------- --------- --------- --------- --------- ---------
<CAPTION>
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
SELECTED BALANCE SHEET DATA:
Total assets......................... $ 464,626 $ 420,655 $ 431,250 $ 400,201 $ 364,469 $ 346,665 $ 320,522
Mortgage loans held for sale......... 3,657 2,720 4,283 -- -- -- --
Loans, net of unearned income........ 355,223 307,155 324,617 298,091 258,831 237,732 221,658
Total deposits....................... 377,051 359,305 365,896 355,947 327,257 312,027 281,372
Investment securities available for
sale............................... 44,510 49,943 49,618 56,198 47,228 53,897 11,848
Investment securities held to
maturity........................... 15,793 12,525 12,497 12,068 13,352 16,710 58,145
Shareholders' equity................. 44,144 40,407 42,946 38,109 34,521 31,543 28,932
AVERAGE BALANCES:
Assets............................... $ 439,869 $ 410,267 $ 417,548 $ 397,289 $ 358,947 $ 338,268 $ 315,529
Earning assets....................... 401,134 373,226 380,012 364,697 327,123 313,146 288,942
Loans, net of unearned income........ 338,923 303,720 312,014 281,572 249,065 231,024 208,718
Shareholders' equity................. 44,092 39,348 40,397 36,227 33,019 30,584 28,463
SELECTED INCOME STATEMENT DATA:
Interest income...................... $ 18,143 $ 17,555 $ 35,788 $ 33,647 $ 29,768 $ 27,757 $ 23,861
Interest expense..................... 6,546 6,538 13,266 13,043 12,399 12,790 10,269
Net interest income.................. 11,596 11,017 22,522 20,604 17,369 14,967 13,592
Provision for loan losses............ 535 670 865 1,405 935 1,160 704
Noninterest income................... 3,213 2,637 5,795 4,348 3,685 2,815 2,160
Noninterest expense.................. 9,654 8,821 17,847 15,560 14,016 12,280 11,771
Income tax expense................... 1,468 1,285 3,090 2,498 1,811 1,142 769
Net income........................... 3,152 2,878 6,515 5,490 4,291 3,201 2,508
PER SHARE DATA:(1)
Net income per share basic and
diluted............................ $ .36 $ .33 $ .75 $ .63 $ .50 $ .38 $ .30
Dividends paid per share............. .16 .125 .250 .208 .167 .125 .083
Book value........................... 5.00 4.65 4.87 4.38 3.99 3.70 3.42
Average common shares outstanding.... 8,827,537 8,695,788 8,710,970 8,657,180 8,548,456 8,469,719 8,454,026
ASSET QUALITY RATIOS:
Net charge-offs to average loans
outstanding........................ 0.10% 0.03% 0.03% 0.29% 0.27% 0.12% 0.21%
Allowance to period end loans........ 1.75% 1.86% 1.80% 1.71% 1.77% 1.81% 1.53%
Allowance to non-performing loans.... 375.55% 1175.93% 405.69% 675.33% 453.98% 245.31% 735.24%
Allowance to non-performing assets... 218.38% 300.95% 233.16% 321.06% 270.43% 233.92% 251.92%
SELECTED FINANCIAL RATIOS:
Taxable-equivalent yield on average
interest-earning assets............ 9.13% 9.51% 9.51% 9.31% 9.25% 9.07% 8.48%
Cost of average interest-bearing
liabilities........................ 4.15% 4.37% 3.79% 4.38% 4.60% 4.71% 3.90%
Net interest margin.................. 5.87% 6.01% 6.02% 5.76% 5.46% 4.99% 4.93%
Net income to average total assets... 1.43% 1.40% 1.56% 1.38% 1.20% 0.95% 0.79%
Net income to average shareholders'
equity............................. 14.30% 14.63% 16.13% 15.15% 13.00% 10.47% 8.81%
Efficiency ratio(2).................. 65.19% 64.67% 63.06% 62.40% 66.08% 68.81% 75.23%
Average shareholders' equity to
average total assets............... 10.02% 9.59% 9.67% 9.12% 9.20% 9.06% 8.91%
</TABLE>
- ------------------------------
(1) All per share amounts have been adjusted for common stock splits, effected
in the form of dividends, to shareholders of record on September 1, 1998 and
April 30, 1996.
(2) Calculated by dividing total noninterest expense, excluding securities gains
and losses, by net interest income plus noninterest income.
6
<PAGE>
RISK FACTORS
AN INVESTMENT IN THE COMMON STOCK INVOLVES A SIGNIFICANT DEGREE OF RISK. YOU
SHOULD CAREFULLY CONSIDER THE FOLLOWING RISK FACTORS AND OTHER INFORMATION IN
THIS PROSPECTUS BEFORE DECIDING TO INVEST IN THE COMMON STOCK.
UNPREDICTABLE ECONOMIC CONDITIONS MAY HAVE AN ADVERSE EFFECT ON THE QUALITY OF
OUR LOAN PORTFOLIO AND OUR FINANCIAL PERFORMANCE
Economic recession over a prolonged period or other economic problems in our
market areas could have a material adverse impact on the quality of our loan
portfolio and the demand for our products and services. For example, a downturn
in the local economy could make it more difficult for borrowers to repay their
loans, which could lead to loan losses for Main Street Bank. This could in turn
adversely affect our financial condition, results of operations or cash flows.
Our success depends to a significant extent upon economic conditions in Georgia
and particularly in the counties in which we have branches. The banking industry
in Georgia is affected by general economic conditions such as inflation,
recession, unemployment and other factors beyond our control. See "Business of
Main Street" (page 18).
WE COULD SUFFER LOAN LOSSES FROM A DECLINE IN CREDIT QUALITY
We could sustain losses if borrowers, guarantors and related parties fail to
perform in accordance with the terms of their loans. Because we derive a
significant portion of our net income from our loan portfolio, our financial
condition, results of operations and cash flows could be materially adversely
affected if our borrowers are unable to repay their loans as scheduled. See
"Business of Main Street" (page 18).
CHANGES IN INTEREST RATES MAY DECREASE OUR NET INTEREST INCOME
If we are unsuccessful in managing interest rate fluctuations, our net
interest income could decrease materially. Our operations depend substantially
on our net interest income, which is the difference between the interest income
earned on our interest-earning assets and the interest expense paid on our
interest-bearing liabilities. Like most depository institutions, our earnings
and net interest income are affected by changes in market interest rates and
other economic factors beyond our control. While we take measures to guard
against interest rate risk, these measures may not be effective in minimizing
our exposure to interest rate risk. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Interest Rate Sensitivity and
Liquidity" (page 35).
INDUSTRY COMPETITION MAY HAVE AN ADVERSE EFFECT ON OUR PROFITABILITY
The banking business is highly competitive, and our profitability depends
upon our ability to compete in our market areas. Our competitors may attract
customers by offering more favorable interest rate or financing terms than we
do. Many of our competitors have greater financial and other resources than we
have and compete aggressively with us for market share. In addition, recent
legislation has led to increased competition among financial institutions. The
United States Congress or the Georgia legislature may enact legislation that may
further increase competitive pressures on us. Our competitors include commercial
banks, savings banks, savings and loan associations, credit unions, mortgage
companies, finance companies, mutual funds, insurance companies, brokerage and
investment banking firms, asset-based non-bank lenders, retail stores and other
non-financial entities that maintain their own credit programs, and governmental
organizations. See "Business of Main Street-- Competition" (page 20).
7
<PAGE>
DEPARTURES OF OUR KEY PERSONNEL MAY IMPAIR OUR OPERATIONS
Each member of our management team is important to our success and the
unexpected loss of any of these persons could impair our day-to-day operations
as well as our strategic direction. Our management team includes Robert R.
Fowler, III, Chairman, President and Chief Executive Officer; Samuel B. Hay,
III, Executive Vice President and Chief Financial Officer; Frank B. Turner, Vice
Chairman; and Joseph K. Strickland, Jr., Executive Vice President and Chief
Credit Officer. Although we have key man life insurance on Mr. Fowler, we have
not entered into employment agreements with any employees. See "Management"
(page 53).
OUR ABILITY TO PAY DIVIDENDS IS RESTRICTED BY FEDERAL AND STATE POLICIES AND
REGULATIONS
Federal Reserve Board policy and Georgia Department of Banking and Finance
regulations restrict our ability to pay dividends, and we cannot assure that we
will pay dividends on our common stock in the future. Federal Reserve Board
policy states that bank holding companies should pay cash dividends on common
stock only out of net income available over the past year and only if
prospective earnings retention is consistent with the organization's expected
future needs and financial condition. The policy provides that bank holding
companies should not maintain a level of cash dividends that undermines its
ability to serve as a source of strength to its banking subsidiaries. Our
ability to declare and pay dividends on the common stock depends upon our
earnings and financial condition, our liquidity and capital requirements, the
general economic and regulatory climate and other factors our Board of Directors
deems relevant.
Our principal source of funds to pay dividends is cash dividends that we
receive from our subsidiary, Main Street Bank. The Georgia Department of Banking
and Finance regulates Main Street Bank's dividend payments and must approve
dividend payments that would exceed 50% of Main Street Bank's net income for the
preceding year. Additionally, FDIC policies and regulations restrict Main Street
Bank's ability to pay dividends. See "Supervision and Regulation--Payment of
Dividends" (page 63).
OUR EXECUTIVE OFFICERS AND DIRECTORS OWN A MAJORITY OF OUR OUTSTANDING COMMON
STOCK AND WILL BE ABLE TO CONTROL THE OUTCOME OF CORPORATE ACTIONS THAT
REQUIRE SHAREHOLDER APPROVAL
After the completion of the offering, our executive officers and directors,
collectively, will have the power to block business combinations and to control
the outcome of all matters required to be submitted to our shareholders for
approval. The matters include decisions relating to the election of directors,
the determination of day-to-day corporate and management policies and other
significant corporate transactions. Our executive officers and directors
collectively will beneficially own approximately 5,126,114, or 57.67%, of the
outstanding shares of common stock after completion of the offering. Of these
shares 2,563,368 shares, which will represent 28.84% of the total outstanding
shares of common stock after the offering, are held in various trusts. Each of
the trusts prohibits the sale or other disposition of the shares held in the
trust and precludes the trustee from voting the shares for a sale or liquidation
of Main Street. See "Principal Shareholders and Stock Ownership of Management"
(page 52), "Management" (page 53) and "Description of Capital Stock" (page 58).
THE ARBITRARILY DETERMINED PUBLIC OFFERING PRICE MAY BE HIGHER OR LOWER THAN THE
MARKET PRICE OF THE COMMON STOCK AFTER THE OFFERING
The public offering price may not indicate the market price for the common
stock after the offering. Because an active trading market does not exist for
the common stock, we were unable to set an offering price that would reflect the
effect of an efficient market for the stock. Instead, we determined the public
offering price based on a variety of factors, including the prices at which the
common stock has most recently been sold, the history of, and prospects for, the
banking industry in
8
<PAGE>
our market areas, the price to earnings and price to book value multiples
represented by the offering price and by the prices of publicity traded common
stock of comparable companies, our historical and prospective cash flow and
earnings and that of comparable companies in recent periods. See "The
Offering--Determination of Offering Price" (page 13).
IF AN ACTIVE TRADING MARKET FOR THE COMMON STOCK DOES NOT DEVELOP, IT MAY BE
DIFFICULT FOR YOU TO SELL YOUR SHARES OF COMMON STOCK
Prior to the offering, there has been no public market for the shares of
common stock and an active trading market may not develop. If an active trading
market does not develop or continue after this offering, you may not be able to
resell your shares at or above the price at which these shares are being offered
to the public. Although we have filed an application to have the common stock
approved for quotation on the American Stock Exchange under the symbol MBS, an
active public market may not develop or be sustained after the offering. A
public trading market, which has the desired characteristics of depth, liquidity
and orderliness, depends upon the presence in the marketplace of willing buyers
and sellers of the common stock at any given time. The presence of willing
buyers and sellers depends upon individual decisions of investors, over which
neither we nor any market maker has any control.
THE MARKET PRICE OF THE COMMON STOCK WILL FLUCTUATE AND COULD FLUCTUATE
SIGNIFICANTLY
If a market develops for the common stock after the offering, we may
experience significant volatility in the market price of our common stock.
Factors that may affect the price of our common stock include the depth and
liquidity of the market for the common stock, investor perception of our
financial strength, conditions in the banking industry such as credit quality
and monetary policies, and general economic and market conditions. Our quarterly
operating results, changes in analysts' earnings estimates, changes in general
conditions in the economy or financial markets or other developments affecting
us could cause the market price of the common stock to fluctuate substantially.
In addition, from time to time the stock market experiences extreme price and
volume fluctuations. This volatility may significantly affect the market price
of the common stock for reasons unrelated to our operating performance.
GOVERNMENT REGULATION MAY HAVE AN ADVERSE EFFECT ON OUR PROFITABILITY AND GROWTH
Bank holding companies and banks are subject to extensive state and federal
government supervision and regulation. Changes in state and federal banking laws
and regulations or in federal monetary policies could adversely affect our
ability to maintain profitability and continue to grow. For example, new
legislation or regulation could limit the manner in which we may conduct our
business, including our ability to obtain financing, attract deposits, make
loans and achieve satisfactory interest spreads. Many of these regulations are
intended to protect depositors, the public and the FDIC, not shareholders. In
addition, the burden imposed by federal and state regulations may place us at a
competitive disadvantage compared to competitors who are less regulated. The
laws, regulations, interpretations and enforcement policies that apply to us
have been subject to significant, and sometimes retroactively applied, changes
in recent years, and may change significantly in the future. Future legislation
or government policy may also adversely affect the banking industry or our
operations. See "Supervision and Regulation" (page 61).
IF WE RAISE ADDITIONAL CAPITAL BY ISSUING MORE SHARES OF COMMON STOCK, YOUR
OWNERSHIP INTEREST IN MAIN STREET MAY BE DILUTED
The issuance of additional shares of common stock could dilute your
ownership interest in Main Street. Our Board of Directors may elect to obtain
additional capital by issuing additional shares of
9
<PAGE>
common stock or other securities. We may issue additional securities at prices
or on terms less favorable than or equal to the public offering price and terms
of this offering.
OUR COMPUTER SYSTEMS AND THOSE OF OTHERS ON WHOM WE RELY MAY NOT OPERATE
PROPERLY ON YEAR 2000-SENSITIVE DATES
The year 2000 issue common to most corporations concerns the inability of
some types of software and databases to recognize the year 2000 and other year
2000-sensitive dates. If we or any of our service providers, correspondents,
vendors or customers experience a disruption of business resulting from a year
2000 problem, our financial condition, results of operations and liquidity could
be materially adversely affected. We, like most banks, depend heavily on complex
computer systems for most phases of our operations. If not corrected, a year
2000 problem could disrupt our operations as well as those of other financial
institutions, which are particularly sensitive to these disruptions. These
disruptions could include events ranging from electrical or water failure to
computer systems failure, with any of these events potentially resulting in a
cessation of our operations until the problem is resolved.
We utilize in-house computer equipment to provide us with the information
systems used in our operations. Our in-house computer system includes software
and hardware purchased from independent third parties, who have not certified
that these software and hardware products are year 2000 compliant. We, however,
have tested our in-house computer system for year 2000 readiness. Although our
tests were designed to identify year 2000 problems, we cannot assure you that we
have identified all potential year 2000 problems. Also, unknown or unanticipated
events or factors which we have not considered may cause year 2000 disruptions
despite our testing. Additionally, we could be adversely affected by year 2000
problems experienced by others, including our customers, service providers,
vendors, customers' vendors, correspondent banks, government agencies, and the
financial services industry in general, over which we have no control. If, for
example, one of our major borrowers is unable to conduct its operations as a
result of a year 2000 problem, that borrower could be unable to maintain its
cash flow and could therefore default on its loan, which would lead to loan
losses for us. We have received written confirmations of year 2000 readiness
from critical suppliers such as telecommunications services, utilities and major
vendors, but have not received warranties from them. As a result, if one of
these parties encounters an unanticipated year 2000 problem that has an adverse
impact on our financial condition or results of operations, we may have no legal
recourse against that party. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations-- Year 2000 Compliance" (page 39)
for a description of our plan to address the year 2000 issue.
THE MARKET PRICE OF OUR COMMON STOCK COULD DROP SIGNIFICANTLY IF LARGE BLOCKS OF
OUR COMMON STOCK ARE SOLD IN THE PUBLIC MARKET
The market price of our common stock could drop significantly if the holders
of shares of common stock, which are available for resale in the public market,
sell or are perceived by the market as intending to sell large blocks of shares.
After this offering, we will have up to 8,889,000 outstanding shares of common
stock. Of these shares, approximately 3,575,496 will be immediately available
for resale in the public market without restriction. The remaining 5,313,504
outstanding shares will represent shares held by affiliates, restricted shares
issued under our Restricted Stock Award Plan and Long-term Incentive Plan, and
shares that are restricted under the federal securities laws. These shares will
become available for resale in the public market as indicated below:
- 5,126,114 shares, which are held by our affiliates, will become available
for resale beginning 90 days after the close of this offering, subject to
the volume and other limitations under federal securities laws. This
amount includes 117,600 shares, which were issued under our Restricted
Stock Award Plan or Long-term Incentive Plan, that must also meet the
vesting requirements under these plans before they may be resold.
10
<PAGE>
- 93,440 shares, which were issued to nonaffilitates under our Restricted
Stock Award Plan or Long-term Incentive Plan, will become available for
resale between the closing date of this offering and November 22, 1999
without restriction under federal securities laws, but subject to the
vesting requirements under these plans.
- 93,950 shares, which are held by nonaffiliates, will become available for
resale between 90 days after the close of this offering and May 2000,
subject to volume and other limitations under federal securities laws.
This amount includes 73,000 shares, which were issued under our Restricted
Stock Award Plan or Long-term Incentive Plan, that must also meet the
vesting requirements under these plans before they may be resold.
See "Shares Eligible for Future Sale" (page 61), for a discussion of the
resale limitations under federal securities laws and see "Management--Restricted
Stock Award Plan and--Long-term Incentive Plan" (page 56).
WE MAY NOT ALLOCATE ALL OF THE NET PROCEEDS OF THIS OFFERING IN THE MOST
PROFITABLE MANNER
Our management will have broad discretion in allocating the net proceeds of
the offering, which are estimated to be $748,000. We intend to invest the net
proceeds in short-term investments such as Federal funds sold or other
short-term U.S. Government securities to provide a source of liquidity to
support asset growth and for other general corporate purposes. Our management
will have discretion as to the timing and specific application of the net
proceeds, and investors will not have the opportunity to evaluate the economic,
financial and other relevant information that we will use in applying the
proceeds. Although we intend to use the net proceeds to serve Main Street's best
interest, our allocation may not ultimately reflect the most profitable
application of these proceeds. See "Use of Proceeds" (page 14).
IF OUR BYLAWS DETER A CHANGE IN CONTROL, YOU MAY BE DEPRIVED OF AN OPPORTUNITY
TO SELL YOUR SHARES AT A PREMIUM OVER MARKET PRICES
Our Bylaws contain a provision relating to the removal of directors from our
Board that may make it more difficult and time consuming for a potential
acquiror to obtain control of Main Street by replacing the Board of Directors or
management. If this provision deters an attempt to change or gain control of
Main Street, you may be deprived of opportunities to sell some or all of your
shares at prices that represent a premium over market prices. See "Provisions of
Our Articles of Incorporation and Bylaws" (page 58).
CAUTIONARY STATEMENT ABOUT
FORWARD-LOOKING STATEMENTS
THIS PROSPECTUS CONTAINS "FORWARD-LOOKING STATEMENTS," WHICH INCLUDE
INFORMATION ABOUT POSSIBLE OR ASSUMED FUTURE RESULTS OF OUR OPERATIONS OR OUR
FINANCIAL PERFORMANCE. FORWARD-LOOKING STATEMENTS MAY ALSO INCLUDE INFORMATION
REGARDING OUR FUTURE PLANS AND OBJECTIVES. FORWARD-LOOKING STATEMENTS ARE BASED
ON THE BELIEF OF OUR MANAGEMENT, AS WELL AS ASSUMPTIONS THEY HAVE MADE AND
INFORMATION CURRENTLY AVAILABLE TO THEM. WORDS SUCH AS "EXPECT," "ESTIMATE,"
"ANTICIPATE," "BELIEVE" AND OTHER SIMILAR EXPRESSIONS ARE INTENDED TO IDENTIFY
FORWARD-LOOKING STATEMENTS.
THE CAUTIONARY STATEMENTS IN THE "RISK FACTORS" SECTION AND ELSEWHERE IN
THIS PROSPECTUS IDENTIFY IMPORTANT FACTORS AND POSSIBLE EVENTS, WHICH INVOLVE
RISKS AND UNCERTAINTIES, THAT COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY
FROM THOSE CONTAINED IN THE FORWARD-LOOKING STATEMENTS. IF YOU ARE INTERESTED IN
PURCHASING SHARES OF THE COMMON STOCK, YOU SHOULD CAREFULLY CONSIDER THESE RISK
FACTORS, AS WELL AS FACTORS DISCUSSED ELSEWHERE IN THIS PROSPECTUS, BEFORE
MAKING A DECISION TO INVEST IN THE COMMON STOCK.
11
<PAGE>
THE OFFERING
GENERAL
Main Street is offering 60,000 shares and the selling shareholder, Robert R.
Fowler, III, is offering 30,000 shares of Main Street common stock at a price of
$14.00 per share. The minimum purchase for any one investor is 100 shares,
unless Main Street, in its sole discretion, accepts a subscription for a lesser
number of shares. The shares are being offered through the best efforts of our
officers and directors until , unless we decide to end the offering
sooner or extend the offering as described under "Expiration Date" below. Our
officers and directors will not receive any commissions or other compensation
for soliciting sales of the common stock, but they will be reimbursed for
reasonable expenses they incur in the offering. THE OFFERING IS NOT
UNDERWRITTEN.
We are conducting this offering to expand our shareholder base and register
our common stock with the Securities and Exchange Commission so that we can
qualify to be listed on the American Stock Exchange. We believe listing our
common stock on the American Stock Exchange will provide greater liquidity and
marketability for our common stock and will increase community awareness of and
involvement in Main Street. Greater liquidity and marketability of our common
stock will in turn give us flexibility to use our common stock, rather than
cash, as consideration in future merger or expansion transactions. While we
currently have no commitments or understandings with regard to the acquisition
of any other business or financial institution, we have and will continue on an
ongoing basis to monitor and discuss potential acquisition opportunities.
ELIGIBILITY TO SUBSCRIBE FOR SHARES
Because the purpose of this offering is to diversify and broaden our
shareholder base, current executive officers and directors of Main Street Banks
Incorporated or any of its divisions or subsidiaries are not eligible to
purchase shares of common stock in this offering.
HOW TO PURCHASE SHARES IN THE OFFERING
You can purchase shares of the common stock by delivering to Main Street
Banks Incorporated, 1121 Floyd Street, Covington, Georgia 30014, Attn: Samuel B.
Hay, III the following items:
- Your completed and signed subscription agreement for at least 100 shares
of common stock; and
- A check or a money order payable to "Main Street Banks Incorporated" in
the amount of the total purchase price for the shares you wish to
purchase, calculated based on a price of $14.00 per share.
A blank Subscription Agreement accompanies this prospectus. Additional forms
are available upon request from Angela King at the address listed above. You may
not revoke or change your subscription after you have submitted your signed
Subscription Agreement unless you receive our express permission to do so. You
must subscribe for at least 100 shares of common stock. Additionally, we may
reject any subscription or limit the number of shares sold to any subscriber.
EXPIRATION DATE
This offering will expire at 5:00 p.m., Eastern Standard Time, on
unless we choose to end the offering sooner or extend the offering
period. Our decision to end or extend the offering will be based on demand for
the shares. We will not extend the offering beyond . We will promptly
publish a notice in various local newspapers including THE COVINGTON NEWS or
otherwise notify you if we change the expiration date of the offering.
12
<PAGE>
ALLOCATION OF SUBSCRIPTIONS IF THE OFFERING IS UNDERSUBSCRIBED
If we receive subscriptions for less than 90,000 shares of common stock, all
subscriptions received for up to 30,000 shares will first be allocated to the
selling shareholder. Subscriptions received in excess of 30,000 shares and up to
a total of 90,000 shares will be allocated to Main Street. We will not accept
subscriptions for more than 90,000 shares of common stock. See "--Discretion to
Accept Subscriptions" below.
DISCRETION TO ACCEPT SUBSCRIPTIONS
We have the right, in our sole discretion, to accept or reject any
subscription in whole or in part. In order to broaden our shareholder base to
the greatest extent possible, if we receive subscriptions for a total of more
than 90,000 shares, we will generally give preference to subscriptions for
smaller numbers of shares and may limit the number of shares sold to any
subscriber. As a result, you may not receive any or all of the shares for which
you subscribe. Any subscription that we reject in whole or in part will
terminate on the expiration date of the offering.
We will notify subscribers promptly after the expiration date as to whether
and to what extent their subscriptions have been accepted. If we do not accept
all or a portion of a subscription, we will return to the subscriber the
unaccepted portion of the subscription funds, without interest.
ISSUANCE OF STOCK CERTIFICATES
Promptly after the expiration date described above, Main Street Bank, as
transfer agent, will issue stock certificates representing the shares purchased
by investors in this offering. Main Street Bank will follow the instructions
contained in the accepted Subscription Agreements when it issues the stock
certificates.
SUBSCRIPTION PROCEEDS
We will deposit all subscription proceeds as we receive them in a
noninterest-bearing deposit account with Main Street Bank. Promptly following
the expiration date of the offering, we will refund any amounts due to
subscribers whose subscriptions we did not accept as described under
"--Discretion to Accept Subscriptions" above and distribute to the selling
shareholder the portion of the subscription proceeds without interest due to
him. The remaining subscription proceeds due to us will become immediately
available for our use.
DETERMINATION OF OFFERING PRICE
Our Board of Directors established the offering price of $14.00 per share,
which is equal to 2.8 times our consolidated book value per share of $5.00 at
June 30, 1999, and 18.7 times our net income per share of $0.75 for the year
ended December 31, 1998. The Board considered a number of factors in setting the
price, including:
- the prices at which the common stock has most recently been sold,
- the history of, and prospects for, the banking industry
- the price to earnings and price to book value multiples represented by the
offering price and by the prices of publicly traded common stock of
comparable companies, and
- our historical and prospective cash flow and earnings and that of
comparable companies in recent periods.
See "Selected Consolidated Financial Information" (page 17) and "Market
Price of and Dividends on Common Stock" (page 14).
13
<PAGE>
USE OF PROCEEDS
We estimate that the net proceeds from the sale of 60,000 shares of common
stock that we plan to sell in this offering, after we pay estimated expenses of
the offering, will be $748,000. This represents a nominal amount of additional
capital, which we do not anticipate to materially impact our current operations.
We intend to invest the net proceeds of the offering in short-term investments
such as Federal funds sold or other short-term U.S. Government securities. These
investments will provide us with a source of liquidity to support asset growth
and for other general corporate purposes. If the offering is undersubscribed,
however, we may not receive any of the proceeds of the offering. See "The
Offering--Allocation of Subscription if the Offering is Undersubscribed" (page
13).
Our management will have complete discretion over the timing and specific
application of the net proceeds of this offering. See "Risk Factors--We may not
allocate all of the net proceeds of this offering in the most profitable manner"
(page 11).
MARKET PRICE OF AND DIVIDENDS ON COMMON STOCK
We had 196 shareholders of record on June 30, 1999. Prior to this offering,
our common stock has not been traded on an established public trading market and
quotations for the common stock were not reported on any market. As a result,
there has been no regular market for the common stock, and the sales prices
known to us do not necessarily reflect the price that would be paid for the
common stock in an active market. Our common stock was traded at a price of
$5.00 per share during 1997, between $10.00 and $12.00 during 1998 and between
$12.50 and $14.00 during 1999. In an effort to improve the trading market for
our common stock, we intend to list the common stock on the American Stock
Exchange when the offering is completed. See "Risk Factors--If an active trading
market for the common stock does not develop, it may be difficult for you to
sell your shares of common stock" (page 9).
The following table sets forth the amount of the quarterly dividends paid on
the common stock during the periods indicated. All per share dividend amounts
have been adjusted to reflect the six-for-one stock split that was effective on
April 30, 1996 and the four-for-one stock split that was effective on September
1, 1998.
<TABLE>
<CAPTION>
CASH
DIVIDEND
PAID PER
FISCAL YEAR DATE PAID SHARE
- --------------------------------------------------------------------------------- ------------------- ---------
<S> <C> <C>
1997
First Quarter.................................................................... January 16, 1997 $.05
Second Quarter................................................................... April 10, 1997 .05
Third Quarter.................................................................... July 8, 1997 .055
Fourth Quarter................................................................... October 15, 1997 .055
1998
First Quarter.................................................................... January 15, 1998 $.0625
Second Quarter................................................................... April 10, 1998 .0625
Third Quarter.................................................................... July 15, 1998 .0625
Fourth Quarter................................................................... October 15, 1998 .0625
1999
First Quarter.................................................................... January 15, 1999 $.0800
Second Quarter................................................................... April 15, 1999 .0800
Third Quarter.................................................................... July 15, 1999 .0800
</TABLE>
We currently pay cash dividends on a quarterly basis and have paid dividends
every year since our inception in 1988. Main Street Banks Incorporated is a
legal entity separate and distinct from Main Street Bank, and its revenues
depend primarily on the payment of dividends it receives from Main Street Bank.
Banking regulations limit the amount of dividends that may be paid by Main
Street Bank without prior approval of the Georgia Department of Banking and
Finance. At June 30, 1999, $1,852,155 was available for the payment of dividends
to Main Street Banks Incorporated without prior regulatory approval. Supervision
and Regulation--Payment of Dividends" (page 63).
14
<PAGE>
DILUTION
As of June 30, 1999, our net tangible book value was $4.82 per share. "Net
tangible book value per share" is tangible net worth, or total tangible assets
less total liabilities, divided by the number of shares of common stock
outstanding. After giving effect to the sale of the shares of common stock
offered by this prospectus and after deducting estimated offering expenses to be
paid by us, the pro forma net tangible book value at June 30, 1999 would have
been $4.87 per share. This represents an immediate increase in the net tangible
book value of $0.05 per share to existing shareholders and an immediate dilution
of $9.13 per share to the new investors purchasing the shares in this offering.
The following table illustrates this per share dilution to new investors:
<TABLE>
<S> <C>
Assumed initial public offering price per share..................................... $ 14.00
Net tangible book value per share at June 30, 1999................................ $ 4.82
Increase in net tangible book value per share attributable to new investors....... 0.05
Pro forma net tangible book value per share after offering.......................... 4.87
Dilution in net tangible book value per share to new investors...................... $ 9.13
---------
---------
</TABLE>
15
<PAGE>
CAPITALIZATION
The following table shows our capitalization as of June 30, 1999, and as
adjusted to give effect to the receipt of the net proceeds from the sale of
60,000 shares of common stock in the offering. The as adjusted capitalization
assumes that we sell 60,000 shares of common stock at $14.00 per share and that
the net proceeds from the offering, after deducting the estimated offering
expenses payable by us, are approximately $748,000.
<TABLE>
<CAPTION>
JUNE 30, 1999
----------------------------
<S> <C> <C>
ACTUAL AS ADJUSTED
------------- -------------
Shareholders' Equity:
Common stock; $1.00 par value; 30,000,000 shares authorized;
8,829,000 shares issued and outstanding and 8,889,000
shares issued and outstanding, as adjusted................. $ 8,829,000 $ 8,889,000
Additional paid-in capital................................... 791,088 1,479,088
Accumulated other comprehensive loss......................... (490,154) (490,154)
Retained earnings............................................ 35,014,063 35,014,063
------------- -------------
Total Shareholders' Equity..................................... $ 44,143,997 $ 44,891,997
------------- -------------
------------- -------------
</TABLE>
16
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated unaudited financial data should be read
in conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and the financial statements and related notes
included elsewhere in this prospectus. This information has been derived from
audited financial statements for 1994 through 1998 and from unaudited financial
statements for the six months ended June 30, 1999 and 1998. You should not rely
on the six-month information as being indicative of results expected for the
entire year.
<TABLE>
<CAPTION>
AT AND FOR THE
SIX MONTHS AT AND
ENDED JUNE 30 FOR THE YEARS ENDED DECEMBER 31
-------------------- -----------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
1999 1998 1998 1997 1996 1995 1994
--------- --------- --------- --------- --------- --------- ---------
<CAPTION>
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
SELECTED BALANCE SHEET DATA:
Total assets............................. $ 464,626 $ 420,655 $ 431,250 $ 400,201 $ 364,469 $ 346,665 $ 320,522
Mortgage loans held for sale............. 3,657 2,720 4,283 -- -- -- --
Loans, net of unearned income............ 355,223 307,755 324,617 298,091 258,831 237,732 221,658
Total deposits........................... 377,051 359,305 365,896 355,947 327,257 312,027 281,372
Investment securities available for
sale................................... 44,510 49,943 49,618 56,198 47,228 53,897 11,848
Investment securities held to maturity... 15,793 12,525 12,497 12,068 13,352 16,710 58,145
Shareholders' equity..................... 44,144 40,407 42,946 38,109 34,521 31,543 28,932
AVERAGE BALANCES:
Assets................................... $ 439,869 $ 410,267 $ 417,548 $ 397,289 $ 358,947 $ 338,268 $ 315,529
Earning assets........................... 401,134 373,226 380,012 364,697 327,123 313,146 288,942
Loans, net of unearned income............ 338,923 303,720 312,014 281,572 249,065 231,024 208,718
Shareholders' equity..................... 44,092 39,348 40,397 36,227 33,019 30,584 28,463
SELECTED INCOME STATEMENT DATA:
Interest income.......................... $ 18,143 $ 17,555 $ 35,788 $ 33,647 $ 29,768 $ 27,757 $ 23,861
Interest expense......................... 6,546 6,538 13,266 13,043 12,399 12,790 10,269
Net interest income...................... 11,596 11,017 22,522 20,604 17,369 14,967 13,592
Provision for loan losses................ 535 670 865 1,405 935 1,160 704
Noninterest income....................... 3,213 2,637 5,795 4,348 3,685 2,815 2,160
Noninterest expense...................... 9,654 8,821 17,847 15,560 14,016 12,280 11,771
Income tax expense....................... 1,468 1,285 3,090 2,498 1,811 1,142 769
Net income............................... 3,152 2,878 6,515 5,490 4,291 3,201 2,508
PER SHARE DATA:(1)
Net income per share basic and diluted... $ .36 $ .33 $ .75 $ .63 $ .50 $ .38 $ .30
Dividends paid per share................. .16 .125 .250 .208 .167 .125 .083
Book value............................... 5.00 4.65 4.87 4.38 3.99 3.70 3.42
Average common shares outstanding........ 8,827,537 8,695,788 8,710,970 8,657,180 8,548,456 8,469,719 8,454,026
ASSET QUALITY RATIOS:
Net charge-offs to average loans
outstanding............................ 0.10% 0.03% 0.03% 0.29% 0.27% 0.12% 0.21%
Allowance to period end loans............ 1.75% 1.86% 1.80% 1.71% 1.77% 1.81% 1.53%
Allowance to non-performing loans........ 375.55% 1175.93% 405.69% 675.33% 453.98% 245.31% 735.24%
Allowance to non-performing assets....... 218.38% 300.95% 233.16% 321.06% 270.43% 233.92% 251.92%
SELECTED FINANCIAL RATIOS:
Taxable-equivalent yield on average
interest-earning assets................ 9.13% 9.51% 9.51% 9.31% 9.25% 9.07% 8.48%
Cost of average interest-bearing
liabilities............................ 4.15% 4.37% 3.79% 4.38% 4.60% 4.71% 3.90%
Net interest margin...................... 5.87% 6.01% 6.02% 5.76% 5.46% 4.99% 4.93%
Net income to average total assets....... 1.43% 1.40% 1.56% 1.38% 1.20% 0.95% 0.79%
Net income to average shareholders'
equity................................. 14.30% 14.63% 16.13% 15.15% 13.00% 10.47% 8.81%
Efficiency ratio(2)...................... 65.19% 64.67% 63.06% 62.40% 66.08% 68.81% 75.23%
Average shareholders' equity to average
total assets........................... 10.02% 9.59% 9.67% 9.12% 9.20% 9.06% 8.91%
</TABLE>
- ------------------------------
(1) All per share amounts have been adjusted for common stock splits, effected
in the form of dividends, to shareholders of record on September 1, 1998 and
April 30, 1996.
(2) Calculated by dividing total noninterest expense, excluding securities gains
and losses, by net interest income plus noninterest income.
17
<PAGE>
BUSINESS OF MAIN STREET
BACKGROUND
Main Street Bank was founded in 1901 as "The Bank of Covington" and operated
as a state chartered commercial bank under that name until 1996, when it was
renamed "Main Street Bank." This name change was the culmination of a long-term
strategy of expansion from our headquarters in Covington to communities in
surrounding Georgia counties. In May 1988, Main Street Banks Incorporated was
formed to serve as a holding company for The Bank of Covington. Upon formation,
The Bank of Covington, which had four locations in Covington, Newton County, was
our sole subsidiary.
We began implementing our expansion strategy shortly after formation of the
holding company. In August 1990, we purchased Southern Heritage Savings Bank
located in Winterville, Clarke County, Georgia. In December 1990, we purchased
two branches of Prime Bank, formerly Dekalb Federal Savings Bank, in Conyers,
Rockdale County, Georgia. At the same time, we formed our third subsidiary, Main
Street Savings Bank, FSB.
In 1993, Main Street Savings Bank purchased three branches of the former
First Federal Savings Bank of Georgia in Winder, Barrow County; Loganville,
Walton County; and Athens, Clarke County from the Resolution Trust Corporation.
At the beginning of 1996, we were a three-subsidiary holding company operating
seventeen branches in six counties. In late 1996 we consolidated our
subsidiaries into one subsidiary, Main Street Bank, and as a result realized our
vision of operating a streamlined, multi-county bank.
Since then, we have continued to provide leading technology combined with
small-town customer service in all of our locations. Main Street Bank continues
to be a traditional community bank in all its communities. We currently own and
operate 13 banking offices in six counties, and had approximately $464.6 million
in assets as of June 30, 1999.
LINES OF BUSINESS
Through Main Street Bank, we provide basic banking services to our customers
in the form of receiving deposits and making loans. The brick and mortar
facility with people-to-people banking has been our mainstay since 1901. As the
financial industry becomes more technology-driven, we recognize the need to
adapt and have developed new products and business lines to meet the changing
needs and desires of our customers. In addition to a wide variety of checking,
savings, certificates of deposit and loan accounts, we also offer credit and
debit cards, Ready Reserve lines of credit, check imaging, corporate PC banking,
consumer Internet banking, and voice response touch-tone banking. Main Street
Bank recently began offering Internet banking. In addition, we offer mortgages,
brokerage services, insurance products, and accounts receivable financing
through four business lines known as Main Street Mortgage, Main Street
Investments, Main Street Insurance, and Business Manager.
Our services are:
- REAL ESTATE LENDING. Our real estate loans consist of residential first
and second mortgage loans, residential construction loans and home equity
lines of credit, and term loans secured by first and second mortgages on
the residences of borrowers for home improvements, education and other
personal expenditures. At June 30, 1999, real estate loans constituted
approximately 35.7% of total loans. We make mortgage loans with a variety
of terms, including fixed and floating rates. At June 30, 1999,
approximately 62.3% of our real estate loans had fixed rates, while
approximately 37.7% had variable rates. Generally, we retain real estate
loans with maturities under 10 years and sell mortgage loans with longer
maturities. Almost all of our loans for acquisition, development and
construction purposes are secured by single-family residences or
residential development property. We also offer Small Business
Administration loans.
18
<PAGE>
Risks associated with real estate lending include fluctuations in the
value of real estate, new job creation trends, and the borrower's
financial stability. Real estate loans are made consistent with our
appraisal policy and real estate lending policy, which prescribe maximum
loan-to-value ratios and maturities. We expect that these loan-to-value
ratios are sufficient to compensate for fluctuations in the real estate
market and to minimize the risk of loss. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations For the Six
Months Ended June 30, 1999 and 1998--Financial Condition--Loan Portfolio"
(page 28).
- CONSUMER LENDING. We offer consumer installment loans to business owners
and other individuals for personal, family, and household purposes. We
also offer credit cards and home equity lines of credit to consumers. At
June 30, 1999, consumer loans constituted approximately 8.8% of total
loans, with approximately 99.6% of our consumer loans having fixed rates
and the remaining 0.4% having variable rates. Consumer lending presents
certain unique risks. Consumer loan repayments depend upon a borrower's
financial stability and are more likely to be adversely affected by job
loss, divorce, illness and other personal hardships. In addition,
collateral such as automobiles and other personal property securing
consumer loans depreciates rapidly and sometimes is an inadequate
repayment source if a borrower defaults. In evaluating these loans, we
require our lending officers to review the borrower's level and stability
of income, past credit history, and the impact of these facts on the
borrower's ability to repay the loan in a timely manner. In addition, we
require that our banking officers maintain an appropriate margin between
the loan amount and collateral value. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations For the Six
Months Ended June 30, 1999 and 1998--Financial Condition--Loan Portfolio"
(page 28).
- COMMERCIAL LENDING. Our commercial loan portfolio is dispersed among
various business lines such as a wide variety of small businesses,
commercial real estate (both owner-occupied and investment property), and
acquisition and development and construction lending. These loans are
primarily for the financing of property and plants used in the course of
business by these business operators, and to a lesser degree, for the
financing of equipment, inventory and accounts receivable. Of our
commercial real estate loans, approximately 66% are secured by properties
that house the businesses of the property's owners. The remainder is made
up of loans on properties that may be deemed investment property. At June
30, 1999, commercial loans constituted approximately 55.5% of total loans,
with approximately 76.3% of commercial loans having fixed rates and the
remaining 23.7% having variable rates.
Commercial lending entails greater risks than traditional,
single-family residential lending. Commercial loans typically involve
larger loan balances concentrated among fewer borrowers. The analysis of
commercial loans, which requires expertise in evaluating a commercial
enterprise and its collateral, is generally more complex than the analysis
required for single family residential lending. Like consumer loans,
commercial loans are subject to adverse conditions in the economy, as well
as the market for the specific goods and services sold by the commercial
borrower. Loans secured by commercial real estate can also be affected by
trends in the local real estate market. In making all these loans, we
manage our credit risk by actively monitoring measures such as cash flow,
collateral value and other appropriate credit factors. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations
For the Six Months Ended June 30, 1999 and 1998--Financial Condition--Loan
Portfolio" (page 28).
- DEPOSITS AND OTHER BORROWINGS. Deposits are a key component of our banking
business, serving as a source of funding for lending as well as for
increasing customer account relationships. We offer competitively priced
deposit products, including checking, savings and time deposit accounts,
as we seek to increase core deposits and market share. Borrowings,
principally from
19
<PAGE>
the Federal Home Loan Bank, and lines of credit with other banks, provide
sources of additional liquidity and funding.
- BROKERAGE SERVICES/INVESTMENTS. We provide brokerage services through Main
Street Investments, a comprehensive brokerage service. Main Street
Investments offers our customers a wide variety of investment options,
including stocks and bonds, mutual funds, annuities, 401(k) plans, life
insurance, Individual Retirement Accounts and Simplified Employee Pension
Accounts, estate planning and financial needs analysis.
- INSURANCE. We provide insurance services through Main Street Insurance, a
full-service insurance agency that enables us to offer customers both
consumer and commercial insurance products.
- ACCOUNTS RECEIVABLE. We provide accounts receivable financing through the
Business Manager program. Business Manager is a process through which we
finance existing receivables on a discounted basis and take over the
responsibility for billing our customer's clients and collecting their
payments, and providing business owners with needed liquidity.
We developed brokerage, insurance, and accounts receivable services as a
strategy to retain existing customers, to attract additional customers from our
market areas, and to enhance our franchise by offering a broader scope of
financial services.
Our operating revenues are derived primarily from interest earned from our
loan and investment securities portfolios and fee income from loan and deposit
products. We are not dependent upon a single customer, or a few customers, the
loss of any one or more of which would have a material adverse effect on our
financial condition or results of operations.
MARKET AREAS
Main Street Bank is ranked twentieth in asset size out of 349 Georgia banks.
We operate principally in North Georgia, within the eastern side of metropolitan
Atlanta, extending into the Athens area. We have branches in Barrow, Clarke,
Gwinnett, Newton, Rockdale, and Walton counties and have a total of 13 banking
offices. Our primary market area is the six-county region in which we have
branches, and our secondary market includes counties contiguous to that region.
The following chart describes the communities in which we operate. Market
share data is based on deposit information available from the FDIC. Branch
deposit data is as of June 30, 1998. Population household and income figures are
available from DEMOGRAPHICS USA-COUNTY EDITION, MARKET STATISTICS, 1998 EDITION
and unemployment rates are August 1998 estimates by the Georgia Department of
Labor.
<TABLE>
<CAPTION>
AVERAGE
HOUSEHOLD
EFFECTIVE UNEMPLOYMENT DEPOSIT
COUNTY POPULATION HOUSEHOLDS BUYING INCOME RATE MARKET SHARE
- ------------------------------------------ ----------- ----------- -------------- ----------------- ---------------
<S> <C> <C> <C> <C> <C>
Barrow.................................... 39,000 13,900 $ 34,947 4.0% 12.39%
Clarke.................................... 93,000 35,700 33,879 3.3 5.06
Gwinnett.................................. 508,700 184,400 52,152 2.5 0.19
Newton.................................... 55,300 19,500 35,225 3.6 36.50
Rockdale.................................. 67,600 23,100 48,728 2.7 12.24
Walton.................................... 52,300 18,400 35,730 3.5 3.01
</TABLE>
COMPETITION
We compete with several local and regional commercial banks, thrifts, credit
unions and mortgage companies for deposits, loans, and other banking-related
financial services. There is intense competition in our market areas from other
financial institutions as well as other "non-bank" companies that engage in
similar activities. Some of our competitors are not subject to the degree of
regulatory review
20
<PAGE>
and restrictions that apply to us. In addition, we must compete with much larger
financial institutions that have greater financial resources than we do and that
compete aggressively for market share. These competitors attempt to gain market
share through their financial product mix, pricing strategies and banking center
locations. Legislative developments related to interstate branching and banking
in general are creating more competitive pressure on smaller financial
institutions by providing large banking institutions easier access to a broader
marketplace. We also compete with insurance companies, savings banks, consumer
finance companies, investment banking firms, brokerage houses, mutual fund
managers, investment advisors, and credit unions. Retail establishments compete
for loans by offering credit cards and retail installment contracts for the
purchase of goods and merchandise.
We anticipate that competition from both bank and non-bank entities will
continue to grow. We have been able to compete effectively with other financial
institutions by emphasizing customer service and local office decision-making,
by establishing long-term customer relationships and building customer loyalty,
and by providing products and services designed to address the specific needs of
our customers.
EMPLOYEE RELATIONS
As of June 30, 1999, we had 300 employees, of whom 251 were full-time and 49
part-time. In addition to a bonus program, we currently maintain an employee
benefit program providing, among other benefits, a medical insurance plan, a
profit sharing and 401(k) retirement plan, and life and disability insurance. We
also grant shares of stock in Main Street to some of our officers under our
Restricted Stock Plan and have also adopted a long-term incentive plan under
which we may grant other forms of stock-based compensation to selected
employees. We consider these employee benefits, as a whole, to be generally
competitive with employee benefits provided by other employers in Georgia. We
believe our future success depends, in part, on our ability to continue to
attract and retain skilled retail, technical, and managerial personnel in order
to maintain our quality delivery of financial and banking services. None of our
employees is subject to a collective bargaining agreement, and we have never
experienced a work stoppage.
FACILITIES
Our executive offices are located at 1121 Floyd Street and our main banking
office is located at 1134 Clark Street, Covington, Georgia 30014. Our principal
support and operational functions are located at 2118 Usher Street, Covington,
Georgia 30014. All of our branch offices are located in Georgia. The following
chart indicates whether each office is leased or owned and lists the loan and
deposit balances for each office, as of June 30, 1999.
<TABLE>
<CAPTION>
DEPOSITS AS
BANKING OWNED (O) LOANS AS OF OF
OFFICES LEASED (L) JUNE 30, 1999 JUNE 30, 1999
- -------------------------------------------------- ----------------- ------------- -------------
<S> <C> <C> <C>
(IN THOUSANDS)
COVINGTON
Main Office....................................... O $ 115,425 $ 127,843
1134 Clark Street
Covington, GA 30014
North Office...................................... O 11,807 35,913
3110 Hwy. 278
Covington, GA 30014
Eastside Office................................... O 617 4,365
9130 Hwy. 278
Covington, GA 30014
</TABLE>
21
<PAGE>
<TABLE>
<CAPTION>
DEPOSITS AS
BANKING OWNED (O) LOANS AS OF OF
OFFICES LEASED (L) JUNE 30, 1999 JUNE 30, 1999
- -------------------------------------------------- ----------------- ------------- -------------
(IN THOUSANDS)
<S> <C> <C> <C>
Kroger Office (supermarket)....................... L 217 3,372
3139 Hwy. 278
Covington, GA 30014
CONYERS
2405 Salem Road................................... O 5,084 13,193
Conyers, GA 30013
1887 Hwy. 20, SE.................................. O 40,703 29,719
Conyers, GA 30013
940 Main Street NE................................ O 4,499 34,108
Conyers, GA 30012
LOGANVILLE
4644 Hwy. 78...................................... O 17,682 11,287
Loganville, GA 30052
WINDER
45 East Athens Street............................. O 60,205 49,525
Winder, Georgia 30680
LAWRENCEVILLE
867 Buford Drive.................................. O 28,568 10,769
Lawrenceville, GA 30043
ATHENS
2065 Timothy Road................................. O 60,969 26,447
Athens, GA 30606
475 East Broad Street............................. O 8,186 12,268
Athens, GA 30601
190 Gaines School Road............................ O 1,261 18,242
Athens, GA 30605
Main Street Insurance............................. O NA NA
4644 Hwy. 78
Loganville, GA 30052
Main Street Investments........................... O NA NA
1134 Clark Street
Covington, GA 30014
Main Street Mortgage.............................. O NA NA
475 East Broad Street
Athens, GA 30601
</TABLE>
22
<PAGE>
<TABLE>
<CAPTION>
NONBANKING OWNED (O)
OFFICES LEASED (L)
- ----------------------------------------------- -----------------
<S> <C> <C> <C>
COVINGTON
Corporate Offices and Marketing................ L
1121 Floyd Street
Covington, GA 30014
Operations Center.............................. L
2118 Usher Street
Covington, GA 30014
Human Resources................................ O
1122 Pace Street
Covington, GA 30014
Accounting and Card Services................... L
1114 Pace Street
Covington, GA 30014
</TABLE>
See "Certain Transactions" (page 57) for a description of the terms of the
leases for our corporate and marketing offices, operations center and accounting
and card services offices, which Mr. Fowler leases to Main Street Bank.
LEGAL PROCEEDINGS
In the ordinary course of operations, we are a party to various legal
proceedings. In the opinion of our management, there is no proceeding pending,
or to our knowledge, threatened in which an adverse decision would have a
material adverse effect on our financial condition or results of operations.
23
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Management's Discussion and Analysis of Financial Condition and Results of
Operations analyzes the major elements of our Consolidated Statements of
Financial Condition and Consolidated Statements of Income. This section should
be read in conjunction with our financial statements and accompanying notes and
other detailed information appearing elsewhere in this Prospectus.
FOR THE SIX MONTHS ENDED JUNE 30, 1999 AND 1998
OVERVIEW
The six-month period ended June 30, 1999 was marked by continued strong loan
demand. Total loans increased $47.5 million or 15.4%, compared to June 30, 1998,
as a result of the internal growth of our real estate construction and mortgage
loan portfolios. We experienced positive earnings growth during the six months
ended June 30, 1999 due to the increase in the overall loan portfolio.
Net income for the six months ended June 30, 1999 was $3.2 million, which
was $274,000 or 9.5% more than net income for the six months ended June 30,
1998. Basic and diluted earnings per common share were $0.36 for the six months
ended June 30, 1999 and $0.33 for the six months ended June 30, 1998. The
increase in net income reflected a one time gain on the sale of our West Broad
Street, Athens Branch of $304,000 before taxes and the fact that net interest
income increased $580,000 during the period. Annualized return on average assets
and return on average common equity were 1.44% and 14.3%, respectively, for the
six months ended June 30, 1999 compared to 1.40% and 14.6%, respectively, for
the same period in 1998. Main Street's annualized efficiency ratio, calculated
by dividing total noninterest expense (excluding securities gains and losses) by
net interest income plus noninterest income, was 65.2% for the six months ended
June 30, 1999 and 64.7% for the six months ended June 30, 1998. The increase in
the efficiency ratio was primarily due to increased compensation expense related
to our new lines of business including insurance, investments and card services
that required a significant initial investment. These lines are crucial to us to
meet our customers' needs and to diversify our revenue sources. Management
believes these new lines of business will increase our return on equity and
shareholder value in the future.
Total assets at June 30, 1999 increased to $464.6 million from $420.7
million at June 30, 1998, an increase of $43.9 million or 10.4%. Deposits rose
to $377.1 million at June 30, 1999 from $359.3 million at June 30, 1998, an
increase of $17.8 million or 5.0%. Total shareholders' equity was $44.1 million
at June 30, 1999, representing an increase of $3.7 million or 9.2% over total
shareholders' equity of $40.4 million at June 30, 1998.
RESULTS OF OPERATIONS
NET INTEREST INCOME. Net interest income represents the amount by which
interest income on interest-earning assets, including securities and loans,
exceeds interest expense incurred on interest-bearing liabilities, including
deposits and other borrowed funds. Net interest income is the principal source
of our earnings. Interest rate fluctuations, as well as changes in the amount
and type of earning assets and liabilities, combine to affect net interest
income.
Net interest income for the six months ended June 30, 1999 was $11.6 million
compared to $11.0 million for the six months ended June 30, 1998, an increase of
$580,000 or 5.27%. Net interest income increased as a result of significant loan
growth. Loans, net of unearned income, increased to $355.2 million at June 30,
1999 from $307.8 million at June 30, 1998, an increase of $47.4 million or
15.4%; however, the decline in interest rates attributable to the Federal
Reserve Bank's 75 basis point decrease in rates during the fourth quarter of
1998 reduced our net interest rate spread somewhat. The
24
<PAGE>
yield on average interest-earning assets decreased to 9.13% for the six months
ended June 30, 1999 from 9.51% for the six months ended June 30, 1998. The cost
of interest-bearing liabilities decreased to 4.15% for the six months ended June
30, 1999 from 4.37% for the six months ended June 30, 1998. Our net interest
margin on a tax-equivalent basis was 5.87% and 6.01% and net interest spread was
4.98% and 5.14% for the periods ended June 30, 1999 and June 30, 1998,
respectively. We were unable to offset completely the yield decline on earning
assets through rate reductions on interest bearing liabilities.
The following table presents the total dollar amount of average balances,
interest income from average interest-earning assets and the resultant yields,
as well as the interest expense on average interest-bearing liabilities,
expressed both in dollars and rates. Nonaccrual loans were $1.7 million and
$486,000 at June 30, 1999 or June 30, 1998, respectively, and are included in
the average loan balances in the table below.
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30
-----------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1999 1998
----------------------------------- ----------------------
<CAPTION>
BALANCE INTEREST YIELD/ RATE BALANCE INTEREST
--------- ----------- ----- --------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
AVERAGE ASSETS
INTEREST-EARNING ASSETS:
Loans, net of unearned income(1)................................ $ 338,923 $ 16,366 9.66% $ 303,720 $ 15,362
Investment securities:
Taxable..................................................... 47,234 1,394 5.90 52,779 1,693
Non-taxable(2).............................................. 13,401 523 7.81 13,133 591
Interest-bearing deposits....................................... 344 7 4.07 133 3
Federal funds sold.............................................. 1,232 31 5.03 3,461 107
--------- ----------- --------- -----------
Total interest-earning assets..................................... 401,134 18,321 9.13% 373,226 17,756
NONINTEREST-EARNING ASSETS:
Cash and due from banks......................................... 15,365 18,117
Allowance for loan losses....................................... (5,985) (5,442)
Premises and equipment.......................................... 14,914 12,948
Other real estate owned......................................... 1,041 1,313
Other assets.................................................... 13,400 10,105
--------- ---------
Total assets................................................ $ 439,869 $ 410,267
--------- ---------
--------- ---------
AVERAGE LIABILITIES AND SHAREHOLDERS' EQUITY
INTEREST-BEARING LIABILITIES:
Demand and money market deposits................................ $ 84,294 $ 944 2.24% $ 81,337 $ 1,008
Savings deposits................................................ 25,876 247 1.91 24,277 241
Time deposits................................................... 181,453 4,707 5.19 188,153 5,129
FHLB advances................................................... 18,293 514 5.62 3,392 96
Federal funds purchased and other borrowings.................... 5,410 135 4.99 2,093 64
--------- ----------- --------- -----------
Total interest-bearing liabilities................................ 315,326 6,547 4.15% 299,252 6,538
NONINTEREST-BEARING:
Demand deposits............................................. 78,965 68,034
Other liabilities........................................... 1,486 3,633
--------- ---------
Total liabilities........................................... 395,777 370,919
Shareholders' equity.............................................. 44,092 39,348
--------- ---------
Total liabilities and shareholders' equity.................. $ 439,869 $ 410,267
--------- ---------
--------- ---------
Net interest rate spread........................................ 4.98%
Net interest income and margin(3)............................... $ 11,774 5.87% $ 11,218
<CAPTION>
<S> <C>
YIELD/ RATE
-----
<S> <C>
AVERAGE ASSETS
INTEREST-EARNING ASSETS:
Loans, net of unearned income(1)................................ 10.12%
Investment securities:
Taxable..................................................... 6.42
Non-taxable(2).............................................. 9.00
Interest-bearing deposits....................................... 4.51
Federal funds sold.............................................. 6.18
Total interest-earning assets..................................... 9.51%
NONINTEREST-EARNING ASSETS:
Cash and due from banks.........................................
Allowance for loan losses.......................................
Premises and equipment..........................................
Other real estate owned.........................................
Other assets....................................................
Total assets................................................
AVERAGE LIABILITIES AND SHAREHOLDERS' EQUITY
INTEREST-BEARING LIABILITIES:
Demand and money market deposits................................ 2.48%
Savings deposits................................................ 1.99
Time deposits................................................... 5.45
FHLB advances................................................... 5.66
Federal funds purchased and other borrowings.................... 6.12
Total interest-bearing liabilities................................ 4.37%
NONINTEREST-BEARING:
Demand deposits.............................................
Other liabilities...........................................
Total liabilities...........................................
Shareholders' equity..............................................
Total liabilities and shareholders' equity..................
Net interest rate spread........................................ 5.14%
Net interest income and margin(3)............................... 6.01%
</TABLE>
- ------------------------
(1) Fee income related to loans of $1,238,000 and $1,100,000 for the six months
ended June 30, 1999 and 1998 is included in interest income.
(2) In order to make pre-tax income and resultant yields on tax-exempt
investments comparable to those on taxable investments, a tax-equivalent
adjustment has been computed using a federal income tax rate of 34%.
(3) The net interest margin is equal to net interest income divided by average
interest-earning assets.
The following schedule presents the dollar amount of changes in interest
income and interest expense for the major components of interest-earning assets
and interest-bearing liabilities and distinguishes between the increase related
to changes in outstanding balances and the changes in
25
<PAGE>
interest rates. For purposes of this table, changes attributable to both rate
and volume which cannot be segregated have been allocated to rate.
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30
-------------------------------
<S> <C> <C> <C>
1999 VS. 1998
INCREASE (DECREASE) DUE TO
-------------------------------
<CAPTION>
VOLUME RATE TOTAL
--------- --------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
INTEREST-EARNING ASSETS:
Loans................................................................................. $ 1,781 $ (777) $ 1,004
Investment securities:
Taxable........................................................................... (178) (121) (299)
Non-taxable....................................................................... 12 (68) (56)
Interest-bearing deposits............................................................. 5 (1) 4
Federal funds sold.................................................................... (68) (7) (75)
--------- --------- ---------
Total increase (decrease) in interest income.......................................... 1,552 (974) 578
--------- --------- ---------
INTEREST-BEARING LIABILITIES:
Demand and money market deposits...................................................... 37 (101) (64)
Savings deposits...................................................................... 16 (11) 5
Time deposits......................................................................... (182) (240) (422)
FHLB advances......................................................................... 422 (4) 418
Federal funds purchased and other borrowings.......................................... 102 (31) 71
--------- --------- ---------
Total increase (decrease) in interest expense......................................... 395 (387) 8
--------- --------- ---------
Increase (decrease) in net interest income............................................ $ 1,157 $ (587) $ 570
--------- --------- ---------
--------- --------- ---------
</TABLE>
PROVISION FOR LOAN LOSSES. Provisions for loan losses are charged to income
to bring our allowance for loan losses to a level deemed appropriate by
management based on the factors discussed under "--Financial
Condition--Allowance for Loan Losses" (page 31). The provision for loan losses
was $535,000 for the six months ended June 30, 1999 compared to $670,000 for the
same time period in 1998, a decrease of $135,000 or 20.1%. Throughout 1998 and
the first two quarters of 1999 net charge-offs declined from 1997 levels
resulting in a lower provision during late 1998 and early 1999.
NONINTEREST INCOME. Noninterest income is an important source of revenue
for financial institutions. Service charges on deposit accounts are the largest
component of noninterest income and a significant source of revenue for us.
Noninterest income for the six months ended June 30, 1999 was $3.2 million, an
increase of $576,000 from $2.6 million for the same period in 1998. 1999 results
included a $304,000 gain before taxes on the sale of our West Broad Street
Branch property. Excluding the gain on sale of the West Broad Street Branch
property, noninterest income rose $272,000 or 10.3% over the same period in
1998.
26
<PAGE>
The following table presents the major categories of noninterest income:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30
--------------------
<S> <C> <C>
1999 1998
--------- ---------
<CAPTION>
(DOLLARS IN
THOUSANDS)
<S> <C> <C>
Service charges on deposit accounts........................................ $ 1,503 $ 1,540
Mortgage division income................................................... 521 486
Investment division income................................................. 131 63
Insurance division income.................................................. 25 0
Card services income....................................................... 417 311
Nonoperating income........................................................ 369 62
Other noninterest income................................................... 247 175
--------- ---------
Total noninterest income............................................... $ 3,213 $ 2,637
--------- ---------
--------- ---------
</TABLE>
NONINTEREST EXPENSE. In the six month period ended June 30, 1999,
noninterest expense increased $833,000 or 9.4% to $9.7 million from $8.8 million
for the period ended June 30, 1998. The increase reflected a 7.6% increase in
salaries and employee benefits due to several new positions added for the new
business lines. Premises and equipment expense increased reflecting an increased
investment in branch facilities, a new Operations Center and check imaging
equipment.
The following table presents the major categories of noninterest expense:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30
--------------------
<S> <C> <C>
1999 1998
--------- ---------
<CAPTION>
(DOLLARS IN
THOUSANDS)
<S> <C> <C>
Salaries and employee benefits............................................. $ 5,366 $ 4,987
Bank premises.............................................................. 667 622
Equipment rentals, depreciation and maintenance............................ 779 622
Professional fees.......................................................... 309 176
Regulatory assessments..................................................... 78 82
Intangible amortization.................................................... 219 219
Other...................................................................... 2,236 2,113
--------- ---------
Total noninterest expense.............................................. $ 9,654 $ 8,821
--------- ---------
--------- ---------
</TABLE>
INCOME TAXES. Income tax expense includes both federal income tax and
Georgia state income tax. The amount of federal income tax expense is influenced
by the amount of taxable income, the amount of tax-exempt income, the amount of
non-deductible interest expense and the amount of other non-deductible expenses.
During the six months ended June 30, 1999, income tax expense was $1.5 million
compared to $1.3 million for the six months ended June 30, 1998. The effective
tax rate for the six months ended June 30, 1999 was 31.8% compared to 30.9% for
the same period of 1998.
IMPACT OF INFLATION. The effects of inflation on the local economy and on
our operating results have been relatively modest for the past several years.
Since substantially all of our assets and liabilities are monetary in nature,
such as cash, securities, loans and deposits, their values are less sensitive to
the effects of inflation than to changing interest rates, which do not
necessarily change in accordance with inflation rates. We try to control the
impact of interest rate fluctuations by managing the relationship between its
interest rate sensitive assets and liabilities. See "--Financial
Condition--Interest Rate Sensitivity and Liquidity" (page 35).
27
<PAGE>
FINANCIAL CONDITION
LOAN PORTFOLIO. Loans, net of unearned income, were $355.2 million at June
30, 1999, an increase of $47.4 million or 15.4% from $307.8 million at June 30,
1998. Real estate construction loans increased by $10.3 million to $52.9 million
at June 30, 1999 from $42.6 million at June 30, 1998, a 24.2% increase. Real
estate mortgage loans increased to $236.3 at June 30, 1999 from $210.6 from June
30, 1998, a $25.7 million or 12.2% increase. Due to the sensitivity of repayment
of construction loans to fluctuations in the economy, we maintain a policy of
keeping construction loans below 18% of total loans, an amount management
believes will provide protection in the event of an economic downturn.
The following table summarizes the loan portfolio by type of loan:
<TABLE>
<CAPTION>
JUNE 30
--------------------------------------------
<S> <C> <C> <C> <C>
1999 1998
--------------------- ---------------------
<CAPTION>
AMOUNT PERCENT AMOUNT PERCENT
---------- --------- ---------- ---------
<S> <C> <C> <C> <C>
Commercial and industrial........................................... $ 18,499 5.21% $ 15,474 5.03%
Real estate construction............................................ 52,904 14.89 42,598 13.84
Real estate mortgage................................................ 236,326 66.53 210,572 68.42
Consumer and other.................................................. 47,494 13.37 39,111 12.71
---------- ----------
Total Loans....................................................... $ 355,223 100.00 $ 307,755 100.00
---------- ----------
---------- ----------
Mortgage loans held for sale........................................ $ 3,657 $ 2,720
---------- ----------
---------- ----------
</TABLE>
To accomplish our lending objectives, management seeks to achieve consistent
loan growth within our primary market areas while maximizing loan yields and
maintaining a high quality loan portfolio. We monitor our lending objectives
primarily through our Senior Loan Committee. Our lending objectives are clearly
defined in our Lending Policy, which is reviewed annually and approved by the
Board of Directors. The Senior Loan Committee is chaired by our Chief Credit
Officer. Other members of the committee include our five division executives,
our risk management officer and various lending officers.
Generally, all loans with total related debt of $250,000 or more are
reviewed for approval by the Senior Loan Committee. However, for certain loans
that the Board of Directors has identified as low risk loans, i.e., residential
mortgage loans and consumer loans, the division executives have approval
authority up to $500,000. The next level of approval authority rests with the
Board of Directors. The Board of Directors is generally responsible for
ratifying the actions of the Senior Loan Committee and serving as the ultimate
approval authority for single advances of $1 million or more. Additionally, the
Board of Directors is responsible for approving all new loan requests for which
a borrower's total debt exceeds $2.5 million.
To achieve consistent growth, a high yielding loan portfolio and sound loan
quality, we primarily focus on the following loan categories: (1) commercial,
(2) real estate construction, (3) real estate mortgage and (4) consumer loans.
Management has strategically located its branches in high growth markets and has
taken advantage of a surge in residential and industrial growth in northeastern
Georgia.
Real estate mortgage lending has significantly contributed to our loan
growth during the past several years. Generally, these loans are owner-occupied
and are amortized over a 15 year to 20 year period with a three to five year
maturity. The underwriting criteria for these loans is very similar to the
underwriting criteria used in the mortgage industry. Typically, a borrower's
debt to income ratio can not exceed 36% and the loan to appraised value ratio
cannot exceed 89.9%. However, our knowledge of our customers and our market
allows us to be more flexible in meeting our customers' needs. We also
underwrite commercial mortgage loans. Loans included in this category are
primarily for the acquisition
28
<PAGE>
or refinance of owner occupied commercial buildings. These loans are
underwritten on the borrower's ability to meet certain minimum debt service
requirements and the value of the underlying collateral to meet certain loan to
value guidelines. We will also perfect our interest on equipment or other
business assets of the borrower and obtain personal guaranties.
We also underwrite loans to finance the construction of residential and
non-residential properties which include speculative and pre-sale loans.
Speculative construction loans involve a higher degree of risk, as these are
made on the basis that a borrower will be able to sell the project to a
potential buyer after a project is completed. Pre-sale construction loans
usually have a pre-qualified buyer under contract before construction is to
begin. The major risk for pre-sale loans is getting the project completed in a
timely manner and according to plan specifications. Non-residential construction
loans include construction loans for churches, commercial buildings, strip
shopping centers, and acquisition and development loans. These loans also carry
a higher degree of risk and require strict underwriting guidelines. All
construction loans are secured by first liens on real estate and generally have
floating interest rates. We conduct periodic inspections either directly or
through an agent prior to approval of periodic draws on these loans. As an
underwriting guideline, management focuses on the borrower's past experience in
completing projects in a timely manner and the borrower's financial condition
with special emphasis placed on liquidity ratios. Although the construction
loans are deemed to be of higher risk, we believe that we can monitor and manage
this risk properly.
We also underwrite commercial and industrial loans. Generally, these loans
are for working capital purposes and are secured by inventory, accounts
receivable or equipment. We maintain strict underwriting standards for this type
of lending. Potential borrowers must meet certain working capital and debt
ratios as well as generate positive cash flow from operations. Borrowers in this
category will generally have a debt service coverage ratio of 1.3 to 1. We will
also perfect our interest on equipment or other business assets of the borrower
and obtain personal guaranties. This loan category represents our smallest loan
category.
Consumer loans we make include automobile loans, recreational vehicle loans,
boat loans, home improvement loans, home equity loans, personal loans
(collateralized and uncollateralized) and deposit account collateralized loans.
The terms of these loans typically range from 12 to 120 months and vary based
upon the nature of collateral and size of the loan. Consumer loans involve
greater risk than residential mortgage loans. This is due to the fact that these
loans may be unsecured or secured by rapidly depreciating assets such as
automobiles. Repossessed collateral for a defaulted consumer loan may not
provide an adequate source of repayment for the outstanding loan balance. The
remaining deficiency often does not warrant further substantial collection
efforts against the borrower beyond obtaining a deficiency judgment. In
addition, consumer loan collections are dependent on the borrower's continuing
financial stability, and thus are more likely to be adversely affected by job
loss, divorce, illness or personal bankruptcy. Furthermore, the application of
various federal and state laws may limit the amount which can be recovered on
such loans.
29
<PAGE>
The contractual maturity ranges of the commercial and industrial and real
estate-construction portfolios and the amount of such loans with predetermined
interest rates and floating interest rates in each maturity range as of June 30,
1999 are summarized in the following table:
<TABLE>
<CAPTION>
JUNE 30, 1999
-------------------------------------------------------
<S> <C> <C> <C> <C>
AFTER ONE
THROUGH FIVE AFTER FIVE
ONE YEAR OR LESS YEARS YEARS TOTAL
---------------- ------------- ----------- ---------
<CAPTION>
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Commercial and industrial.................................. $ 6,324 $ 5,150 $ 7,025 $ 18,499
Real estate-construction................................... 50,817 1,516 571 52,904
------- ------ ----------- ---------
Total.................................................... $ 57,141 $ 6,666 $ 7,596 $ 71,403
------- ------ ----------- ---------
------- ------ ----------- ---------
Loans with a predetermined interest rate................... $ 22,744 $ 6,666 $ 7,596 $ 37,006
Loans with a floating interest rate........................ 34,397 0 0 34,397
------- ------ ----------- ---------
Total.................................................... $ 57,141 $ 6,666 $ 7,596 $ 71,403
------- ------ ----------- ---------
------- ------ ----------- ---------
</TABLE>
NONPERFORMING ASSETS. We have several procedures in place to assist
management in maintaining the overall quality of our loan portfolio. We have
established written guidelines contained in our Lending Policy for the
collection of past due loan accounts. These guidelines explain in detail our
policy on the collection of loans over 30, 60, and 90 days delinquent.
Generally, loans over 90 days delinquent are placed in a nonaccrual status.
However, if the loan is deemed to be in process of collection, it may be
maintained on an accrual basis. Management makes loan officers aware of our
Lending Policy and the collection policy contained therein on a continuous
basis. Management has also staffed our collection department with properly
trained staff to assist lenders with collection efforts and to maintain records
and develop reports on delinquent borrowers.
We have historically had strong asset quality. Nonperforming assets were
$2.8 million or 0.79% of total loans and other real estate at June 30, 1999
compared to $1.9 million or 0.62% of total loans and other real estate at June
30, 1998. Despite the increase during the period, nonperforming assets remain
less than 1% of total loans and other real estate. For the periods ended June
30, 1999 and 1998, approximately $60,000 and $23,000 of interest income would
have been recorded on nonperforming loans, if all such loans had been accruing
interest at the original contract rate. We record real estate acquired through
foreclosure at the lesser of the outstanding loan balance or the fair value at
the time of foreclosure, less estimated cost to sell. We usually dispose of real
estate acquired through foreclosure within one year; however, if we are unable
to dispose of the foreclosed property, the property's value is assessed annually
and written down to its fair value less cost to sell.
30
<PAGE>
The following table presents information regarding nonperforming assets at
June 30, 1999 and June 30, 1998:
<TABLE>
<CAPTION>
JUNE 30
--------------------
<S> <C> <C>
1999 1998
--------- ---------
<CAPTION>
(DOLLARS IN
THOUSANDS)
<S> <C> <C>
Nonperforming Assets
Nonaccrual loans.......................................................................... $ 1,655 $ 486
Restructured loans........................................................................ -- --
Other real estate and repossessions....................................................... 1,191 1,413
--------- ---------
Total nonperforming assets................................................................ $ 2,846 $ 1,899
--------- ---------
--------- ---------
Loans past due 90 days or more and still accruing........................................... $ 1,015 $ 651
--------- ---------
--------- ---------
Ratio of past due loans to loans, net of unearned income(1)................................. 0.29% 0.21%
Ratio of nonperforming assets to loans, net of unearned income,
and other real estate(1).................................................................. 0.79% 0.62%
</TABLE>
- ------------------------
(1) Excludes mortgage loans held for sale
ALLOWANCE FOR LOAN LOSSES. The allowance for loan losses is a reserve
established through charges to earnings in the form of a provision for loan
losses. Management has established an allowance for loan losses which it
believes is adequate for inherent losses in our loan portfolio. Based on a
continuous credit evaluation of the loan portfolio, management presents a
quarterly review of the allowance for loan losses to the 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, management is able to effectively evaluate the portfolio by risk, which
management believes is the most effective way to analyze the loan portfolio and
thus analyze the adequacy of the reserve for loan losses. Also, management
reviews activity in the allowance for loan losses, such as charge-offs and
recoveries, during each quarter to identify trends.
We follow a loan review program to evaluate the credit risk in the loan
portfolio. Through the loan review process, we maintain an internally classified
loan list which, along with the delinquency list of loans, helps management
assess the overall quality of the loan portfolio and the adequacy of the
allowance for loan losses. Loans classified as "substandard" are those loans
with clear and defined weaknesses such as a highly-leveraged position,
unfavorable financial ratios, uncertain financial ratios, uncertain repayment
sources, or poor financial condition which may jeopardize recoverability of the
debt. Loans classified as "doubtful" are those loans that have characteristics
similar to substandard loans but have an increased risk of loss, or at least a
portion of the loan may require being charged-off. Loans classified as "loss"
are those loans that are in the process of being charged-off.
For the six months ended June 30, 1999, net charge-offs totaled $170,000 or
0.10% (annualized) of average loans outstanding for the period compared to
$47,000 in net charge-offs or 0.03% (annualized) of average loans outstanding at
June 30, 1998. For the six months ended June 30, 1999, we recorded a provision
for loan losses of $535,000 compared to $670,000 for the period ended June 30,
1998. Throughout 1998 and the first two quarters in 1999 net charge-offs
declined from 1997 levels resulting in a lower provision during late 1998 and
early 1999. At June 30, 1999 the allowance totaled $6.2 million and represented
1.75% of gross loans.
31
<PAGE>
The following table presents an analysis of the allowance for loan losses
and other related data:
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE
30
----------------------
<S> <C> <C>
1999 1998
---------- ----------
<CAPTION>
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Average loans outstanding............................................................. $ 338,923 $ 303,720
Total loans, net of unearned income, outstanding at end of period..................... $ 355,223 $ 307,155
Allowance for loan losses at beginning of period...................................... $ 5,850 $ 5,092
Provision for loan losses............................................................. 535 670
Charge-offs:
Commercial and industrial........................................................... (19) (43)
Real estate......................................................................... (73) (33)
Consumer............................................................................ (260) (111)
Recoveries:
Commercial and industrial........................................................... 20 24
Real estate......................................................................... 44 2
Consumer............................................................................ 118 114
---------- ----------
Net charge-offs....................................................................... $ (170) $ (47)
---------- ----------
Allowance for loan losses at end of period............................................ $ 6,215 $ 5,715
---------- ----------
---------- ----------
Ratio of allowance to end of period loans, net of unearned income..................... 1.75% 1.86%
Ratio of net charge-offs to average loans............................................. 0.10% 0.03%
Ratio of allowance to end of period nonperforming loans............................... 375.55% 300.95%
</TABLE>
The following table describes the allocation of the allowance for loan
losses among various categories of loans and certain other information for the
dates indicated. The allocation is made for analytical purposes and is not
necessarily indicative of the categories in which losses may occur. The total
allowance is available to absorb losses from any segment of loans.
<TABLE>
<CAPTION>
JUNE 30
----------------------------------------------
<S> <C> <C> <C> <C>
1999 1998
---------------------- ----------------------
<CAPTION>
PERCENT OF
PERCENT OF LOANS TO
LOANS TO TOTAL
AMOUNT TOTAL LOANS AMOUNT LOANS
--------- ----------- --------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Balance of allowance for loan losses applicable to:
Commercial and industrial......................................... $ 211 3.40% $ 206 3.59%
Real estate....................................................... 5,088 81.86% 4,717 82.55%
Consumer and other................................................ 916 14.74% 792 13.86%
Unallocated....................................................... -- -- -- --
--------- ----------- --------- -----------
Total allowance for loan losses................................. $ 6,215 100.00% $ 5,715 100.00%
--------- ----------- --------- -----------
--------- ----------- --------- -----------
</TABLE>
We believe that the allocation of our allowance for loan losses is
reasonable. Where management is able to identify specific loans or categories of
loans where specific amounts of reserve are required, allocations are assigned
to those categories. Federal and state bank regulators also require that a bank
maintain a reserve that is sufficient to absorb an estimated amount of
unidentified potential losses based on management's perception of economic
conditions, loan portfolio growth, historical charge-off experience and exposure
concentrations.
We believe that the allowance for loan losses at June 30, 1999 is adequate
to cover losses inherent in the portfolio as of such date. There can be no
assurance that we will not sustain losses in future periods, which could be
substantial in relation to the size of the allowance at June 30, 1999.
32
<PAGE>
INVESTMENT SECURITIES. We use our securities portfolio both as a source of
income and as a source of liquidity. At June 30, 1999, investment securities
totaled $58.7 million, a decrease of $2.4 million from $61.1 million at June 30,
1998. At June 30, 1999, investment securities represented 13.0% of total assets,
compared to 14.7% of total assets at June 30, 1998. The average yield on a fully
taxable equivalent basis on the investment portfolio for the six months ended
June 30, 1999 was 6.32% compared to a yield of 6.93% for the six months ended
June 30, 1998.
The following table presents the amortized cost and fair value of securities
classified as available-for-sale and held-to-maturity at June 30, 1999:
<TABLE>
<CAPTION>
JUNE 30, 1999
----------------------
<S> <C> <C>
AMORTIZED FAIR
COST VALUE
----------- ---------
<CAPTION>
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Held to maturity securities
States and political subdivisions...................................... $ 15,793 $ 15,705
----------- ---------
----------- ---------
Available for sale securities
U.S. Treasury securities............................................... $ 4,988 $ 4,984
U.S. Government agencies and corporations.............................. 13,995 13,772
Mortgage-backed securities............................................. 24,575 24,111
----------- ---------
$ 43,558 $ 42,867
----------- ---------
----------- ---------
</TABLE>
Mortgage-backed securities are securities which have been developed by
pooling real estate mortgages and are principally issued by federal agencies
such as the Federal National Mortgage Association and the Federal Home Loan
Mortgage Corporation. These securities are deemed to have high credit ratings,
and minimum regular monthly cash flows of principal and interest are guaranteed
by the issuing agencies.
At June 30, 1999, 62.6% of the mortgage-backed securities we held had
contractual final maturities of more than ten years. However, unlike U.S.
Treasury and U.S. government agency securities, which have a lump sum payment at
maturity, mortgage-backed securities provide cash flows from regular principal
and interest payments and principal prepayments throughout the lives of the
securities. Mortgage-backed securities which are purchased at a premium will
generally suffer decreasing net yields as interest rates drop because home
owners tend to refinance their mortgages. Thus, the premium paid must be
amortized over a shorter period. Therefore, these securities purchased at a
discount will obtain higher net yields in a decreasing interest rate
environment. As interest rates rise, the opposite will generally be true. During
a period of increasing interest rates, fixed rate mortgage-backed securities do
not tend to experience heavy prepayments of principal and consequently, the
average life of this security will not be unduly shortened. If interest rates
begin to fall, prepayments will increase.
33
<PAGE>
The following table summarizes the contractual maturity of investment
securities and their weighted average yields:
<TABLE>
<CAPTION>
JUNE 30, 1999
-----------------------------------------------------------------------------------------
AFTER FIVE YEARS BUT
AFTER ONE YEAR BUT
WITHIN ONE YEAR AFTER TEN
WITHIN FIVE YEARS WITHIN TEN YEARS YEARS
------------------------ ------------------------ ------------------------ -----------
AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD AMOUNT
----------- ----- ----------- ----- ----------- ----- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS)
U.S. Treasury securities................ $ 3,011 6.46% $ 1,973 5.22% -- -- --
U.S. government agencies................ -- -- 12,804 5.79 $ 968 6.15% --
Mortgage-backed securities.............. 181 5.12 3,227 5.69 5,602 6.00 $ 15,101
States and political subdivisions....... 1,656 5.08 4,672 4.84 6,445 5.19 3,020
----------- ----------- ----------- -----------
Total............................... $ 4,848 5.94% $ 22,676 5.53% $ 13,015 5.61% $ 18,121
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
<CAPTION>
YIELD TOTAL
----- ---------
<S> <C> <C>
U.S. Treasury securities................ -- $ 4,984
U.S. government agencies................ -- 13,772
Mortgage-backed securities.............. 5.60% 24,111
States and political subdivisions....... 6.25% 15,793
---------
Total............................... 5.71% $ 58,660
---------
---------
</TABLE>
We have adopted Statement of Financial Accounting Standards No. 115,
"Accounting for Certain Investments in Debt and Equity Securities." At the date
of purchase, we are required to classify debt and equity securities into one of
three categories: held-to-maturity, trading or available-for-sale. At each
reporting date, the appropriateness of the classification is reassessed.
Investments in debt securities are classified as held-to-maturity and measured
at amortized cost in the financial statements only if management has the
positive intent and ability to hold those securities to maturity. Securities
that are bought and held principally for the purpose of selling them in the near
term are classified as trading and measured at fair value in the financial
statements with unrealized gains and losses included in earnings. We do not have
any securities classified as trading securities. Investments not classified as
either held-to-maturity or trading are classified as available-for-sale and
measured at fair value in the financial statements with unrealized gains and
losses reported, net of tax, in accumulated other comprehensive income, a
separate component of shareholders' equity, until realized.
DEPOSITS. Main Street offers a variety of deposit accounts having a wide
range of interest rates and terms. Our deposits consist of demand, savings,
money market and time accounts. We rely primarily on competitive pricing
policies and customer service to attract and retain these deposits. We do not
have any brokered deposits.
Our average total deposits for the six months ended June 30, 1999 were
$370.6 million or 2.4% over average total deposits during the same period in
1998. Our total deposits at June 30, 1999, were $377.1 million, up $17.7 million
or 4.9% over total deposits at June 30, 1998. The increase in deposits is
attributable to internal growth.
Main Street's lending and investing activities are funded principally by
deposits, approximately 52.9% of which are demand, money market and savings
deposits. Average noninterest-bearing deposits at June 30, 1999 increased to
$79.0 million compared to $68.0 million at June 30, 1998, an increase of $11.0
million or 16.2% over 1998. Approximately 21.3% of the average deposits were
noninterest-bearing at June 30, 1999. We had a total cost of interest bearing
deposits of 4.07% for the first six months of 1998. Money Market deposits grew
$9.4 million or 29.1% at June 30, 1999 compared to June 30, 1998.
34
<PAGE>
The daily average balances and weighted average rates paid on
interest-bearing deposits for the period ended June 30, 1999 are presented
below:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30, 1999
---------------------
<S> <C> <C>
AMOUNT RATE
---------- ---------
<CAPTION>
(DOLLARS IN
THOUSANDS)
<S> <C> <C>
Demand and money market deposits..................................... $ 84,294 2.24%
Savings deposits..................................................... 25,876 1.91
Time deposits........................................................ 188,453 5.19
----------
Total interest-bearing deposits.................................. $ 298,623 4.07%
----------
----------
</TABLE>
The following table sets forth the amount of our certificates of deposit
that are $100,000 or greater by time remaining until maturity:
<TABLE>
<CAPTION>
JUNE 30, 1999
--------------
<S> <C>
(DOLLARS IN
THOUSANDS)
Three months or less.......................................................... $ 18,133
Over three through six months................................................. 5,600
Over six through 12 months.................................................... 15,424
Over 12 months................................................................ 4,046
-------
Total..................................................................... $ 43,203
-------
-------
</TABLE>
We expect that the majority of the certificates of deposit maturing within
one year will renew. Should this not occur, management believes that there will
be sufficient cash to fund payments.
OTHER BORROWINGS. Deposits are the primary source of funds for our lending
and investment activities. Occasionally, we obtain additional funds from the
Federal Home Loan Bank and correspondent banks. At June 30, 1999, we had $30.0
million in Federal Home Loan Bank advances compared to $17.0 million at the same
time in 1998. Main Street also has borrowing ability set up with the Federal
Reserve Discount Window, backed by a portion of our commercial loan portfolio.
Main Street's weighted average interest rate on FHLB borrowings for the period
ended June 30, 1999 was 5.57%. For a more detailed discussion of the borrowings
of Main Street, see note 7 to the Consolidated Financial Statements included
herein.
INTEREST RATE SENSITIVITY AND LIQUIDITY. Main Street's Asset Liability and
Funds Management Policy provides management with the necessary guidelines for
effective funds management, and we have established a measurement system for
monitoring its net interest rate sensitivity position. We manage our sensitivity
position within established guidelines.
Interest rate risk is managed by the Asset Liability Committee which is
composed of senior officers of Main Street, in accordance with policies approved
by our Board of Directors. The Asset Liability Committee formulates strategies
based on appropriate levels of interest rate risk. In determining the
appropriate level of interest rate risk, the Asset Liability Committee considers
the impact on earnings and capital of the current outlook on interest rates,
potential changes in interest rates, regional economies, liquidity, business
strategies and other factors. The Asset Liability Committee meets regularly to
review, among other things, the sensitivity of assets and liabilities to
interest rate changes, the book and market values of assets and liabilities,
unrealized gains and losses, purchase and sale activities, commitments to
originate loans and the maturities of investments and borrowings. Additionally,
the Asset Liability Committee reviews liquidity, cash flow flexibility,
maturities of deposits and consumer and commercial deposit activity. Management
uses two methodologies to manage interest rate risk: (i) an analysis of
relationships between interest-earning assets and interest-bearing
35
<PAGE>
liabilities; and (ii) an interest rate shock simulation model. We have
traditionally managed our business to reduce our overall exposure to changes in
interest rates.
Main Street manages its exposure to interest rates by structuring its
balance sheet in the ordinary course of business. At present we do not utilize
interest rate swaps, financial options, or financial future contracts in order
to reduce interest rate risk.
An interest rate sensitive asset or liability is one that, within a defined
time period, either matures or experiences an interest rate change in line with
general market interest rates. The management of interest rate risk is performed
by analyzing the maturity and repricing relationships between interest-earning
assets and interest-bearing liabilities at specific points in time ("GAP") and
by analyzing the effects of interest rate changes on net interest income over
specific periods of time by projecting the performance of the mix of assets and
liabilities in varied interest rate environments. Interest rate sensitivity
reflects the potential effect on net interest income of a movement in interest
rates. A company is considered to be asset sensitive, or having a positive GAP,
when the amount of its interest-earning assets maturing or repricing within a
given period exceeds the amount of its interest-bearing liabilities also
maturing or repricing within that time period. Conversely, a company is
considered to be liability sensitive, or having a negative GAP, when the amount
of its interest-bearing liabilities maturing or repricing within a given period
exceeds the amount of its interest-earning assets also maturing or repricing
within that time period. During a period of rising interest rates, a negative
GAP would tend to affect net interest income adversely, while a positive GAP
would tend to result in an increase in net interest income. During a period of
falling interest rates, a negative GAP would tend to result in an increase in
net interest income, while a positive GAP would tend to affect net interest
income adversely.
The following table sets forth an interest rate sensitivity analysis for
Main Street at June 30, 1999:
<TABLE>
<CAPTION>
VOLUMES SUBJECT TO PREPRICING WITHIN
<S> <C> <C> <C> <C> <C>
0-30 DAYS 31-180 DAYS 181-365 DAYS AFTER ONE YEAR TOTAL
---------- ----------- ------------ -------------- ----------
<CAPTION>
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Interest-earning assets:
Investment securities...................... $ 831 $ 7,506 $ 10,821 $ 41,145 $ 60,303
Loans...................................... 98,583 74,140 49,675 134,093 356,491
Federal funds sold and other short term
investments.............................. 1,717 -- -- -- 1,717
---------- ----------- ------------ -------------- ----------
Total interest-earning assets.......... 101,131 81,646 60,496 175,238 418,511
---------- ----------- ------------ -------------- ----------
Interest-bearing liabilities:
Demand, money market and savings
deposits................................. 1,741 8,707 10,449 94,363 115,260
Time deposits.............................. 23,845 74,264 61,224 18,120 177,453
Other borrowings........................... 8,500 3,000 -- 27,000 38,500
---------- ----------- ------------ -------------- ----------
Total interest-bearing liabilities..... 34,086 85,971 71,673 139,483 331,213
---------- ----------- ------------ -------------- ----------
Period GAP................................... $ 67,045 $ (4,325) $ (11,177) $ 35,755 $ 87,298
---------- ----------- ------------ -------------- ----------
---------- ----------- ------------ -------------- ----------
Cumulative GAP............................... $ 67,045 $ 62,720 $ 51,543 $ 87,298
---------- ----------- ------------ --------------
---------- ----------- ------------ --------------
Period GAP to total assets................... 14.43% (0.93)% (2.41 )% 7.70%
Cumulative GAP to total assets............... 14.43% 13.50 % 11.09% 18.79%
</TABLE>
Shortcomings are inherent in any GAP analysis since certain assets and
liabilities may not move proportionally as interest rates change. In addition to
GAP analysis, we use an interest rate risk simulation model and shock analysis
to test the interest rate sensitivity of net interest income and the balance
sheet, respectively. Contractual maturities and repricing opportunities of loans
are incorporated
36
<PAGE>
in the model as are prepayment assumptions, maturity data and call options
within the investment portfolio. Assumptions based on past experience are
incorporated into the model for nonmaturity deposit accounts. Based on our June
30, 1999 simulation analysis, we estimate that a 200 basis point rise or decline
in rates over the next 12 month period would have an impact of no more than 12%
on our net interest income for the period. The change is relatively small,
despite our asset sensitive GAP position.
As a financial institution, our primary component of market risk is interest
rate volatility. Fluctuations in interest rates will ultimately impact both the
level of income and expense recorded on most of our assets and liabilities, and
the market value of all interest-earning assets and interest-bearing
liabilities, other than those which have a short term to maturity. Based upon
the nature of our operations, we are not subject to foreign exchange or
commodity price risk. We do not own investment securities held as trading
assets.
Main Street's exposure to market risk is reviewed on a regular basis.
Interest rate risk is the potential of economic losses due to future interest
rate changes. These economic losses can be reflected as a loss of future net
interest income and/or a loss of current fair market values. The objective is to
measure the effect on net interest income and to adjust the balance sheet to
minimize the inherent risk while at the same time maximizing income. Management
realizes certain risks are inherent, and that the goal is to identify and accept
the risks.
Liquidity involves our 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, our liquidity needs have primarily been met by
growth in core deposits, as previously discussed, with limited use of advances
from the Federal Home Loan Bank. Although access to purchased funds from
correspondent banks is available and has been utilized on occasion to take
advantage of investment opportunities, we do not generally rely on these
external funding sources. The cash and federal funds sold position, supplemented
by amortizing investment and loan portfolios, have generally created an adequate
liquidity position.
CAPITAL RESOURCES. Capital management consists of providing equity to
support both current and future operations. We are subject to capital adequacy
requirements imposed by the Federal Reserve Board and Main Street Bank is
subject to capital adequacy requirements imposed by the FDIC and the Georgia
State Department of Banking and Finance. Both the Federal Reserve Board and the
FDIC have adopted risk-based capital requirements for assessing bank holding
company and bank capital adequacy. These standards define capital and establish
minimum capital requirements in relation to assets and off-balance sheet
exposure, adjusted for credit risk. The risk-based capital standards currently
in effect are designed to make regulatory capital requirements more sensitive to
differences in risk profiles among bank holding companies and banks, to account
for off-balance sheet exposure and to minimize disincentives for holding liquid
assets. Assets and off-balance sheet items are assigned to broad risk
categories, each with appropriate relative risk weights. The resulting capital
ratios represent capital as a percentage of total risk-weighted assets and
off-balance sheet items.
The risk-based capital standards issued by the Federal Reserve Board require
all bank holding companies to have "Tier 1 capital" of at least 4.0% and "total
risk-based" capital (Tier 1 and Tier 2) of at least 8.0% of total risk-adjusted
assets. "Tier 1 capital" generally includes common shareholders' equity and
qualifying perpetual preferred stock together with related surpluses and
retained earnings, less deductions for goodwill and various other intangibles.
"Tier 2 capital" may consist of a limited amount of intermediate-term preferred
stock, a limited amount of term subordinated debt, certain hybrid capital
instruments and other debt securities, perpetual preferred stock not qualifying
as Tier 1 capital, and a limited amount of the general valuation allowance for
loan losses. The sum of Tier 1 capital and Tier 2 capital is "total risk-based
capital."
37
<PAGE>
The Federal Reserve Board has also adopted guidelines which supplement the
risk-based capital guidelines with a minimum ratio of Tier 1 capital to average
total consolidated assets ("leverage ratio") of 3.0% for institutions with well
diversified risk, including no undue interest rate exposure; excellent asset
quality; high liquidity; good earnings; and that are generally considered to be
strong banking organizations, rated composite 1 under applicable federal
guidelines, and that are not experiencing or anticipating significant growth.
Other banking organizations are required to maintain a leverage ratio of at
least 4.0% to 5.0%. These rules further provide that banking organizations
experiencing internal growth or making acquisitions will be expected to maintain
capital positions substantially above the minimum supervisory levels and
comparable to peer group averages, without significant reliance on intangible
assets.
Pursuant to the Federal Deposit Insurance Corporation Improvement Act of
1991, each federal banking agency revised its risk-based capital standards to
ensure that those standards take adequate account of interest rate risk,
concentration of credit risk and the risks of nontraditional activities, as well
as reflect the actual performance and expected risk of loss on multifamily
mortgages. Main Street Bank is subject to capital adequacy guidelines of the
FDIC that are substantially similar to the Federal Reserve Board's guidelines.
Also pursuant to the Federal Deposit Insurance Corporation Improvement Act, the
FDIC has promulgated regulations setting the levels at which an insured
institution such as Main Street Bank would be considered "well capitalized,"
"adequately capitalized," "undercapitalized," "significantly undercapitalized"
and "critically undercapitalized." Under the FDIC's regulations, Main Street
Bank is classified "well capitalized" for purposes of prompt corrective action.
See "Supervision and Regulation" (page 61).
Shareholders' equity increased from $44.1 million at June 30, 1998 to $40.4
million at June 30, 1999, an increase of $3.7 million or 9.2%. This increase was
primarily the result of net income of $6.8 million, less dividends paid on
common stock of approximately $2.5 million.
The following table provides a comparison of Main Street's and its banking
subsidiary's leverage and risk-weighted capital ratios as of June 30, 1999 to
the minimum and well capitalized regulatory standards:
<TABLE>
<CAPTION>
TO BE WELL CAPITALIZED
MINIMUM REQUIRED FOR UNDER PROMPT
CAPITAL ADEQUACY CORRECTIVE ACTION ACTUAL RATIO AT
PURPOSES PROVISIONS JUNE 30, 1999
------------------------- ----------------------- ---------------
<S> <C> <C> <C>
Main Street
Leverage ratio...................................... 4.00%(1) 5.00% 9.65%
Tier 1 risk-based capital ratio..................... 4.00 6.00 12.34
Risk-based capital ratio............................ 8.00 10.00 13.60
Banking subsidiary
Leverage ratio...................................... 4.00%(2) 5.00% 9.13%
Tier 1 risk-based capital ratio..................... 4.00 6.00 11.39%
Risk-based capital ratio............................ 8.00 10.00 12.65%
</TABLE>
- ------------------------
(1) The Federal Reserve Board may require us to maintain a leverage ratio of up
to 200 basis points above the required minimum.
(2) The FDIC may require Main Street Bank to maintain a leverage ratio of up to
200 basis points above the required minimum.
38
<PAGE>
YEAR 2000 COMPLIANCE
THE YEAR 2000 PROBLEM. The year 2000 issue confronting us and our
suppliers, customers, customers' suppliers and competitors centers on the
inability of computer systems to recognize the year 2000 and other year
2000-sensitive dates, including September 9, 1999, December 31, 1999 and
February 29, 2000. Many existing computer programs and systems originally were
programmed with six-digit dates that provided only two digits to identify the
calendar year in the date field. With the impending new millennium, these
programs and computers will recognize "00" as the year 1900 rather than the year
2000. Like most financial service providers, our operations may be affected
significantly by the year 2000 issue because we depend on computer-generated
financial information. Software, hardware and equipment both within and outside
of our direct control, and third parties with which we electronically or
operationally interface are likely to be affected. These third parties include
customers and third party vendors providing data processing, information systems
management, computer system maintenance, and credit bureau information. If
computer systems are not able to identify the year 2000, many computer
applications could fail or create incorrect results. Consequently, many
calculations that rely on date-related information, such as interest, payment or
due dates and other operating functions, could generate significantly misstated
results, and we could lose our ability to process transactions, prepare
statements or engage in similar normal business activities. In addition, under
certain circumstances, failure to address adequately the year 2000 issue could
adversely affect the viability of our suppliers and creditors and the
creditworthiness of our borrowers. If not adequately addressed, the year 2000
issue could ultimately have a significant adverse impact on our products,
services and competitive condition and, in turn, our financial condition and
results of operations.
REGULATORY OVERSIGHT. The FDIC has issued guidelines for insured financial
institutions with respect to year 2000 compliance. We developed a year 2000
Readiness plan based in part on the guidelines and timetables issued by the
FDIC. Our readiness plan focuses on four primary areas: (1) service providers;
(2) in-house computers and systems located at our banking offices; (3) third
party and customer relationships; and (4) contingency planning. A company-wide
task force, staffed by employees, subcontractors, and outside consultants, was
established in 1997 to evaluate and manage the risks, solutions and cost
associated with addressing this issue. Under the direction of this group, with
direct supervision by executive management, we had identified all known risks
and completed most testing of critical systems as of December 31, 1998.
OUR STATE OF READINESS. We utilize in-house computer equipment to provide
us with the information systems used in our operations. Our in-house computer
system includes software and hardware purchased from independent third parties
who have not certified that these software and hardware products are year 2000
compliant. We, however, completed testing of our in-house computer equipment in
1998, and faulty software and hardware was identified and corrected at that
time. Ultimately, the potential impact of the year 2000 issue will depend not
only on the corrective measures we undertake, but also on the way in which the
year 2000 issue is addressed by governmental agencies, businesses and other
entities that provide data to, or receive data from, us, or whose financial
condition or operational capability is important to us as borrowers, suppliers
or customers. We have evaluated and taken action to mitigate these outside
risks.
Management has completed its review of external relationships and evaluated
certain relationships based upon the potential business impact, available
alternatives and cost of substitution. In the case of critical suppliers such as
third party providers of telecommunications services and other utilities and
major vendors, we have received written year 2000 readiness confirmations. We
have reviewed these confirmations and are familiar with the testing methods
utilized by these suppliers. Based on the confirmations we have received, to the
best of our knowledge we believe our most critical suppliers are year 2000 ready
and will not pose a significant risk to our operations. See "Risk Factors--Our
computer systems and those of others on whom we rely may not operate properly on
year 2000-sensative dates" (page 10). In regards to our customer relationships,
both consumer and
39
<PAGE>
commercial customers have been informed about the year 2000 through meetings and
various printed materials.
CONTINGENCY PLANS. As part of our normal business practice, we maintain
contingency plans to follow in the event of emergency situations, some of which
could arise from year 2000-related problems. Our formal year 2000 contingency
plan, which assesses several possible scenarios to which we may be required to
react, was completed in June of 1999.
FINANCIAL IMPLICATIONS. The costs incurred in addressing the year 2000
problem are being expensed as incurred in compliance with generally accepted
accounting principles except for equipment replaced in the normal course of
business, which was capitalized. None of these costs is expected to impact
materially the results of operations in any one period. Management estimates the
total cost of achieving year 2000 compliance to be approximately $425,000, of
which $207,000 was incurred by June 30, 1999. We will incur most of the
remainder by year end, although some expense related to non-critical equipment
will not be incurred until 2000. Included in the total number is a contingency
of $50,000.
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
OVERVIEW
Net income was $6.5 million, $5.5 million and $4.3 million for the years
ended December 31, 1998, 1997 and 1996, respectively, and basic and diluted
earnings per share were $0.75, $0.63 and $0.50 for these same periods. Earnings
growth from 1996 to 1997 and from 1997 to 1998 resulted principally from an
increase in net interest income which primarily was driven by strong loan demand
and an increase in noninterest income as a result of the addition and the
continued growth of several fee-based lines of business. We posted returns on
average assets of 1.56%, 1.38% and 1.20% and returns on average equity of
16.13%, 15.15% and 13.00% for the years ended December 31, 1998, 1997 and 1996,
respectively. Our efficiency ratio was 63.03% in 1998, 62.40% in 1997 and 66.08%
in 1996.
Total assets at December 31, 1998, 1997 and 1996 were $431.3 million, $400.2
million and $364.5 million, respectively. Total deposits at December 31, 1998,
1997 and 1996 were $365.9 million, $355.9 million and $327.3 million,
respectively. Loans, net of unearned income, were $324.6 million at December 31,
1998, an increase of $26.5 million or 8.9% from $298.1 million at the end of
1997. Loans, net of unearned income, were $258.8 million at year end 1996.
Shareholders' equity was $42.9 million, $38.1 million and $34.5 million at
December 31, 1998, 1997 and 1996, respectively.
RESULTS OF OPERATIONS
NET INTEREST INCOME. Net interest income for 1998 was $22.5 million,
compared to $20.6 million for 1997, an increase of $1.9 million or 9.2%. The
improvement in net interest income for 1998 was primarily due to the increase in
total interest earning assets, primarily in the loan portfolio. During 1998, the
yield on interest earning assets increased 20 basis points from 9.31% in 1997 to
9.51% in 1998 due to the increase in volume of higher yielding loans. The cost
of funds decreased 59 basis points from 4.38% in 1997 to 3.79% in 1998 primarily
due to the increase in lower yielding demand and money market deposits.
Our net interest income in 1997 was $20.6 million, an increase of 18.4% over
the 1996 level of $17.4 million, due to loan growth and a stable net interest
margin. The improvement in net interest income for 1997 was primarily due to the
increase in total interest earning assets, primarily in the loan portfolio.
During 1997, the yield on interest earning assets increased 6 basis points from
9.25% in 1996 to 9.31% in 1997 due to the increase in volume of higher yielding
loans. The cost of funds decreased 22 basis points from 4.60% in 1996 to 4.38%
in 1997 primarily due to the increase in lower cost transaction accounts and a
reduction in market rates overall.
40
<PAGE>
The following table presents the total dollar amount of average balances,
interest income from average interest-earning assets and the resultant yields,
as well as the interest expense on average interest-bearing liabilities,
expressed both in dollars and rates. Nonaccrual loans were $1.1 million,
$832,000 and $674,000 at December 31, 1998, 1997, and 1996, respectively. These
amounts are included in the average loan balances in the table below.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31
------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1998 1997 1996
----------------------------------- ----------------------------------- ----------------------
<CAPTION>
YIELD
BALANCE INTEREST YIELD/ RATE BALANCE INTEREST YIELD/ RATE BALANCE INTEREST
--------- ----------- ----- --------- ----------- ----- --------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
AVERAGE ASSETS
INTEREST-EARNING ASSETS:
Loans, net of unearned
income(1)..................... $ 312,014 $ 31,599 10.13% $ 281,572 $ 28,414 10.09% $ 249,065 $ 24,857
Investment securities:
Taxable....................... 50,044 3,178 6.35 57,916 3,731 6.44 54,094 3,470
Non-taxable(2)................ 12,466 1,042 8.36 12,435 1,189 9.56 14,631 1,409
Interest-bearing deposits....... 123 9 7.32 109 10 9.17 87 4
Federal funds sold.............. 5,365 314 5.85 12,665 707 5.58 9,246 508
--------- ----------- --------- ----------- --------- -----------
Total interest-earning assets..... 380,012 36,142 9.51% 364,697 34,051 9.31% 327,123 30,248
Noninterest-earning assets
Cash and due from bank.......... 19,250 15,787 13,583
Allowance for loan losses....... (5,471) (4,800) (2,723)
Premises and equipment.......... 13,959 13,174 9,188
Other real estate owned......... 832 628 674
Other assets.................... 8,966 7,803 11,102
--------- --------- ---------
Total assets.................. $ 417,548 $ 397,289 $ 358,947
--------- --------- ---------
--------- --------- ---------
AVERAGE LIABILITIES AND
SHAREHOLDERS' EQUITY
INTEREST-BEARING LIABILITIES:
Demand and money market deposits.. $ 80,373 $ 1,993 2.48% $ 79,625 $ 1,834 2.30% $ 64,092 $ 1,434
Savings deposits.................. 23,917 479 2.00 23,226 466 2.01 23,479 477
Time deposits..................... 185,237 10,127 5.48 193,050 10,617 5.50 180,380 10,393
FHLB advances..................... 10,252 586 5.72 1,764 106 6.01 462 24
Federal funds purchased and other
borrowings...................... 1,382 81 5.86 310 20 6.45 1,252 71
--------- ----------- --------- ----------- --------- -----------
--------- ----------- --------- ----------- --------- -----------
Total interest-bearing
Liabilities..................... 301,161 13,266 3.79% 297,975 13,043 4.38% 269,665 12,399
NON-INTEREST-BEARING:
Demand deposits................... 71,694 59,118 52,771
Other liabilities................. 4,296 3,969 3,492
--------- --------- ---------
--------- --------- ---------
Total liabilities................. 377,151 361,062 325,928
Shareholders' equity.............. 40,397 36,227 33,019
--------- --------- ---------
--------- --------- ---------
Total liabilities and
shareholders' equity............ $ 417,548 $ 397,289 $ 358,947
--------- --------- ---------
--------- --------- ---------
Net interest rate spread.......... 5.13% 4.93%
Net interest income and
margin(3)....................... $ 22,876 6.02% $ 21,008 5.76% $ 17,849
<CAPTION>
<S> <C>
YIELD/ RATE
-----
<S> <C>
AVERAGE ASSETS
INTEREST-EARNING ASSETS:
Loans, net of unearned
income(1)..................... 9.98%
Investment securities:
Taxable....................... 6.41
Non-taxable(2)................ 9.63
Interest-bearing deposits....... 4.60
Federal funds sold.............. 5.49
Total interest-earning assets..... 9.25%
Noninterest-earning assets
Cash and due from bank..........
Allowance for loan losses.......
Premises and equipment..........
Other real estate owned.........
Other assets....................
Total assets..................
AVERAGE LIABILITIES AND
SHAREHOLDERS' EQUITY
INTEREST-BEARING LIABILITIES:
Demand and money market deposits.. 2.24%
Savings deposits.................. 2.03
Time deposits..................... 5.76
FHLB advances..................... 5.19
Federal funds purchased and other
borrowings...................... 5.67
Total interest-bearing
Liabilities..................... 4.60%
NON-INTEREST-BEARING:
Demand deposits...................
Other liabilities.................
Total liabilities.................
Shareholders' equity..............
Total liabilities and
shareholders' equity............
Net interest rate spread.......... 4.65%
Net interest income and
margin(3)....................... 5.46%
</TABLE>
- ------------------------
(1) Fee income related to loans of $2,407,000, $1,942,000, and $1,485,000 for
the years December 31, 1998, 1997, and 1996, respectively, is included in
interest income.
(2) In order to make pre-tax income and resultant yields on tax-exempt
investments comparable to those on taxable investments, a tax-equivalent
adjustment has been computed using a federal income tax rate of 34%.
(3) The net interest margin is equal to net interest income divided by average
interest-earning assets.
The following schedule presents the dollar amount of changes in interest
income and interest expense for the major components of interest-earning assets
and interest-bearing liabilities and
41
<PAGE>
distinguishes between the increase related to higher outstanding balances and
the change in interest rates. For purposes of this table, changes attributable
to both rate and volume which cannot be segregated have been allocated to rate.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31 YEARS ENDED DECEMBER 31
------------------------------- -------------------------------
<S> <C> <C> <C> <C> <C> <C>
1998 VS. 1997 1997 VS. 1996
<CAPTION>
INCREASE (DECREASE) DUE TO INCREASE (DECREASE) DUE TO
------------------------------- -------------------------------
VOLUME RATE TOTAL VOLUME RATE TOTAL
--------- --------- --------- --------- --------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans....................................................... $ 3,060 $ 125 $ 3,185 $ 3,247 $ 310 $ 3,557
Investment securities:
Taxable..................................................... (508) (45) (553) 244 17 261
Non-taxable................................................. 3 (150) (147) (211) (9) (220)
Interest-bearing deposits................................... 1 (2) (1) 1 5 6
Federal funds sold.......................................... (407) 14 (393) 188 11 199
--------- --------- --------- --------- --------- ---------
Total increase (decrease) in interest income................ 2,149 (58) 2,091 3,469 334 3,803
--------- --------- --------- --------- --------- ---------
Interest-bearing liabilities:
Demand and money market deposits............................ 14 145 159 352 48 400
Savings deposits............................................ 15 (2) 13 (6) (5) (11)
Time deposits............................................... (453) (37) (490) 726 (502) 224
FHLB advances............................................... 510 (30) 480 68 14 82
Federal funds purchased and other borrowings................ 69 (8) 61 (53) 2 (51)
--------- --------- --------- --------- --------- ---------
Total increase (decrease) in interest expense............... 155 68 223 1,087 (443) 644
--------- --------- --------- --------- --------- ---------
Increase (decrease) in net interest income.................. $ 1,994 $ (126) $ 1,868 $ 2,382 $ 777 $ 3,159
--------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- ---------
</TABLE>
PROVISION FOR LOAN LOSSES. The allowance for loan losses at December 31,
1998 was $5.8 million, representing 1.80% of outstanding loans. One year
earlier, this ratio was 1.71% of outstanding loans. The provision for loan
losses charged against earnings was $865,000 in 1998 compared to $1.4 million in
1997. Net loans charged off in 1998 were $107,000 compared to $821,000 in 1997.
During 1997, Main Street made provisions totaling $1.4 million to the
allowance for loan losses, an increase of $470,000 compared to 1996. Net loans
charged off in 1997 were $821,000 compared to $661,000 in loan charge-offs for
1996.
NONINTEREST INCOME. For 1998, noninterest income totaled $5.8 million, an
increase of $1.5 million or 34.9% versus $4.3 million in 1997. The increase was
partly due to an increase of $416,000 in mortgage origination fees related to
mortgage loan sales. We began our Mortgage Division in 1996. Also, revenues from
our investment and insurance divisions and card services increased as business
grew from these lines. A one-time gain on the sale of the Winterville Office of
$136,000 before taxes was recognized during fourth quarter of 1998. Noninterest
income for 1997 was $4.3 million, a $664,000 or 16.2% increase from 1996
primarily due to an increase in service charges and mortgage division and card
services income. Nonoperating income for 1996 included a $425,000 pretax gain on
the sale of a bank charter.
42
<PAGE>
The following table presents the major categories of noninterest income:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31
-------------------------------
<S> <C> <C> <C>
1998 1997 1996
--------- --------- ---------
<CAPTION>
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Service charges on deposit accounts.................................................. $ 3,099 $ 2,898 $ 2,300
Mortgage division income............................................................. 1,035 620 146
Investment division income........................................................... 123 31 --
Insurance division income............................................................ 76 -- --
Card services income................................................................. 679 445 186
Nonoperating income.................................................................. 192 (16) 700
Other noninterest income............................................................. 591 370 353
--------- --------- ---------
Total noninterest income......................................................... $ 5,795 $ 4,348 $ 3,685
--------- --------- ---------
--------- --------- ---------
</TABLE>
NONINTEREST EXPENSE. For the years ended 1998, 1997 and 1996, noninterest
expense totaled $17.8 million, $15.6 million and $14.0 million, respectively.
The following table presents the major categories of noninterest expense:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31
-------------------------------
<S> <C> <C> <C>
1998 1997 1996
--------- --------- ---------
<CAPTION>
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Salaries and employee benefits................................................... $ 9,934 $ 8,649 $ 6,929
Bank premises expense............................................................ 1,337 1,210 1,019
Equipment rentals, depreciation and maintenance.................................. 1,379 1,115 918
Professional fees................................................................ 315 309 378
Regulatory assessments........................................................... 161 108 975
Intangible amortization.......................................................... 439 439 656
Other............................................................................ 4,281 3,730 3,141
--------- --------- ---------
Total noninterest expense.................................................... $ 17,846 $ 15,560 $ 14,016
--------- --------- ---------
--------- --------- ---------
</TABLE>
For 1998, noninterest expense totaled $17.8 million, an increase of $2.2
million or 14.1% over $15.6 million in 1997. Salaries and employee benefits for
1998 totaled $9.9 million, an increase of $1.3 million or 15.1% over $8.6
million for 1997. This was due to several new positions added. Other expenses
increased principally due to increased occupancy, equipment and other expenses
related to the opening of the Eastside Office and the new Operations Center.
Total noninterest expenses in 1997 were $15.6 million, a 11.4% increase over the
prior year's level of $14.0 million. Salaries and employee benefits in 1997
increased by 24.6% from $6.9 million to $8.6 million, largely due to staffing
the Mortgage Division which began operations in the fall of 1996, and the
increased staffing of several new and replacement branches that opened in the
third quarter of 1996. These new branches were also responsible for higher
occupancy, equipment and other expenses in 1997 over 1996.
INCOME TAXES. In 1998 income tax expense was $3.1 million compared to $2.5
million in 1997. The 1996 amount was $1.8 million. The effective tax rates in
1998, 1997 and 1996, respectively, were 32.2%, 31.3% and 29.7%.
43
<PAGE>
FINANCIAL CONDITION
LOAN PORTFOLIO. At December 31, 1998, loans, net of unearned income, were
$324.6 million, an increase of $26.5 million or 8.9% over net loans at December
31, 1997 of $298.1 million. The growth in the loan portfolio was attributable to
our consistent focus on growth and a strong lending market. At December 31, 1998
real estate-construction loans increased $8.4 million or 21.2% and real estate
mortgage loans increased $13.9 million or 6.7% from December 31, 1997. At
December 31, 1998, loans, net of unearned income, were 88.7% of deposits and
75.3% of total assets.
Loans, net of unearned income, increased 15.2% during 1997 from $258.8
million at December 31, 1996 to $298.1 million at December 31, 1997. The loan
growth during 1997 was also due to growth of our real estate-construction and
mortgage portfolios. At December 31, 1997 real estate-construction loans
increased $13.5 million or 52.2% and real estate-mortgage loans increased $23.4
million or 12.8% from December 31, 1996. At December 31, 1997, loans, net of
unearned income, were 83.7% of deposits and 74.5% of total assets.
The following table summarizes the loan portfolio of Main Street by type of
loan:
<TABLE>
<CAPTION>
DECEMBER 31
----------------------------------------------------------
1998 1997 1996 1995 1994
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS)
Commercial and industrial............................ $ 15,188 $ 13,917 $ 11,392 $ 10,190 $ 7,843
Real estate-construction............................. 47,831 39,449 25,917 19,962 18,327
Real estate-mortgage................................. 220,743 206,803 183,400 169,686 166,293
Consumer and other................................... 40,855 37,922 38,122 37,894 29,195
---------- ---------- ---------- ---------- ----------
$ 324,617 $ 298,091 $ 258,831 $ 237,732 $ 221,658
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
Mortgage loans held for sale......................... $ 4,283 -- -- -- --
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
Percent of loans by category to total loans
(Excluding loans held for sale):
Commercial and industrial............................ 4.68% 4.67% 4.40% 4.29% 3.54%
Real estate-construction............................. 14.73% 13.23% 10.01% 8.40% 8.27%
Real estate-mortgage................................. 68.00% 69.38% 70.86% 71.38% 75.02%
Consumer and other................................... 12.59% 12.72% 14.73% 15.93% 13.17%
---------- ---------- ---------- ---------- ----------
100.00% 100.00% 100.00% 100.00% 100.00%
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
</TABLE>
The contractual maturity ranges of the commercial and industrial and real
estate-construction portfolios and the amount of such loans with predetermined
interest rates and floating rates in each maturity range as of December 31, 1998
are summarized as follows:
<TABLE>
<CAPTION>
AFTER ONE
ONE YEAR OR YEAR THROUGH AFTER FIVE
LESS FIVE YEARS YEARS TOTAL
----------- ------------- ----------- ---------
<S> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS)
Commercial and industrial...................................... $ 6,240 $ 4,473 $ 4,475 $ 15,188
Real estate-construction....................................... 45,254 1,103 1,474 47,831
----------- ------ ----------- ---------
Total...................................................... $ 51,494 $ 5,576 $ 5,949 $ 63,019
----------- ------ ----------- ---------
----------- ------ ----------- ---------
Loans with a predetermined interest rate....................... $ 20,186 $ 5,576 $ 5,653 $ 31,415
Loans with a floating interest rate............................ 31,308 -- 296 31,604
----------- ------ ----------- ---------
Total...................................................... $ 51,494 $ 5,576 $ 5,949 $ 63,019
----------- ------ ----------- ---------
----------- ------ ----------- ---------
</TABLE>
44
<PAGE>
NONPERFORMING ASSETS. Our lending approach, as well as a healthy local
economy, has resulted in strong asset quality. We had nonperforming assets of $
2.5 million, $1.6 million, and $1.7 million as of December 31, 1998, 1997 or
1996, respectively. For 1998, the gross amount of interest income that would
have been recorded on nonperforming loans, if all such loans had been accruing
interest at the original contract rate, was approximately $33,000.
The following table presents information regarding nonperforming assets at
the dates indicated:
<TABLE>
<CAPTION>
DECEMBER 31
-----------------------------------------------------
1998 1997 1996 1995 1994
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS)
Nonperforming Assets
Nonaccrual loans................................................. $ 1,442 $ 754 $ 993 $ 1,726 $ 454
Other real estate and repossessions.............................. 1,067 832 674 84 871
--------- --------- --------- --------- ---------
Total nonperforming assets....................................... $ 2,509 $ 1,586 $ 1,667 $ 1,810 $ 1,325
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Loans past due 90 days or more and still accruing................ $ 359 $ 850 $ 156 $ 289 $ 536
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Ratio of past due loans to loans, net of unearned income(1)...... 0.11% 0.29% 0.06% 0.12% 0.24%
Ratio of nonperforming assets to loans, net of unearned income,
and other real estate(1)....................................... 0.77% 0.53% 0.64% 0.76% 0.60%
</TABLE>
- ------------------------
(1) Excludes mortgage loans held for sale.
ALLOWANCE FOR LOAN LOSSES. For the year ended 1998, net charge-offs totaled
$107,000 or 0.03% of average loans outstanding for the period, compared to
$821,000 or 0.29% in net charge-offs during 1997. Our net charge-offs totaled
$661,000 or 0.27% of average loans outstanding in 1996. During 1998, Main Street
recorded a provision for loan losses of $865,000 compared with $1.4 million for
1997. At December 31, 1998, the allowance for loan losses totaled $5.8 million,
or 1.80% of total loans, net of unearned income. We made a provision for loan
losses of $1.4 million during 1997 compared with a provision of $935,000 for
1996. At December 31, 1997, the allowance for loan losses was $5.1 million, or
1.71% of total loans, net of unearned income. At December 31, 1996, the
allowance was $4.5 million, or 1.77% of total loans, net of unearned income.
45
<PAGE>
The following table presents an analysis of the allowance for loan losses
and other related data:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31
----------------------------------------------------------
1998 1997 1996 1995 1994
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS)
Average loans outstanding............................ $ 312,014 $ 281,572 $ 249,065 $ 225,910 $ 206,744
Total loans, net of unearned income, at end of
period............................................. $ 324,617 $ 298,091 $ 258,831 $ 237,732 $ 221,658
Allowance for loan losses at beginning of period..... 5,092 4,508 4,234 3,338 3,082
Provision for loans losses........................... 865 1,405 935 1,160 704
Charge-offs:
Commercial and industrial.......................... (132) (93) (141) (24) (9)
Real estate........................................ (54) (221) (265) (62) (445)
Consumer........................................... (322) (762) (484) (269) (298)
Recoveries:
Commercial and industrial.......................... 62 38 37 1 8
Real estate........................................ 118 28 45 9 175
Consumer........................................... 221 189 147 81 121
---------- ---------- ---------- ---------- ----------
Net charge-offs...................................... $ (107) $ (821) $ (661) $ (264) $ (448)
---------- ---------- ---------- ---------- ----------
Allowance for loan losses at end of period........... $ 5,850 $ 5,092 $ 4,508 $ 4,234 $ 3,338
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
Ratio of allowance to end of period loans............ 1.80% 1.71% 1.77% 1.81% 1.53%
Ratio of net charge-offs to average loans............ 0.03% 0.29% 0.27% 0.12% 0.21%
Ratio of allowance to end of period nonperforming
Loans.............................................. 409.69% 675.33% 453.98% 245.31% 735.24%
</TABLE>
The following tables describe the allocation of the allowance for loan
losses among various categories of loans and certain other information. The
allocation is made for analytical purposes and is
46
<PAGE>
not necessarily indicative of the categories in which future losses may occur.
The total allowance is available to absorb losses from any segment of loans.
<TABLE>
<CAPTION>
DECEMBER 31
--------------------------------------------------
1998 1997
------------------------ ------------------------
PERCENT OF PERCENT OF
LOANS TO LOANS TO
TOTAL TOTAL
AMOUNT LOANS AMOUNT LOANS
--------- ------------- --------- -------------
<S> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS)
Balance of allowance for loan losses applicable to:
Commercial and industrial.................................... $ 274 4.68% $ 238 4.67%
Real estate.................................................. 4,840 82.73 4,207 82.61
Consumer and other........................................... 736 12.59 647 12.72
Unallocated.................................................. -- -- -- --
--------- ------ --------- ------
Total allowance for loan losses............................ $ 5,850 100.00% $ 5,092 100.00%
--------- ------ --------- ------
--------- ------ --------- ------
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31
----------------------------------------------------------------------
1996 1995 1994
---------------------- ---------------------- ----------------------
PERCENT OF PERCENT OF PERCENT OF
LOANS TO LOANS TO LOANS TO
AMOUNT TOTAL LOANS AMOUNT TOTAL LOANS AMOUNT TOTAL LOANS
--------- ----------- --------- ----------- --------- -----------
<S> <C> <C> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS)
Balance of allowance for loan losses applicable to:
Commercial and industrial........................... $ 198 4.40% $ 182 4.29% $ 118 3.54%
Real estate......................................... 3,646 80.87 3,378 79.78 2,780 83.29
Consumer and other.................................. 664 14.73 674 15.93 440 13.17
Unallocated......................................... -- -- -- -- -- --
--------- ----------- --------- ----------- --------- -----------
Total allowance for loan losses................... $ 4,508 100.00% $ 4,234 100.00% $ 3,338 100.00%
--------- ----------- --------- ----------- --------- -----------
--------- ----------- --------- ----------- --------- -----------
</TABLE>
INVESTMENT SECURITIES. The following table summarizes the contractual
maturity of investment securities and their weighted average yields.
<TABLE>
<CAPTION>
DECEMBER 31, 1998
-------------------------------------------------------------------------------------------------------
AFTER ONE YEAR AFTER FIVE YEARS
WITHIN ONE BUT WITHIN FIVE BUT WITHIN TEN AFTER TEN
YEAR YEARS YEARS YEARS
-------------------- ---------------------- ---------------------- ---------
AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD TOTAL
--------- --------- --------- ----- --------- ----- --------- ----- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. Treasury securities... $ 3,028 6.37% $ 1,013 6.30% -- -- -- -- $ 4,041
U.S. government agencies
and corporations......... 1,501 6.06 11,078 6.41 $ 2,025 6.19% -- -- 14,604
Mortgage-backed
securities............... 59 4.97 2,338 5.72 5,649 5.89 $ 21,552 5.99% 29,598
States and political
subdivisions............. 779 10.63 4,447 7.74 6,721 7.09 550 9.37 12,497
--------- --------- --------- --- --------- --- --------- --- ---------
Total.................. $ 5,367 6.89% $ 18,876 6.63% $ 14,395 6.48% $ 22,102 6.07% $ 60,740
--------- --------- --------- --- --------- --- --------- --- ---------
--------- --------- --------- --- --------- --- --------- --- ---------
</TABLE>
47
<PAGE>
The following table presents the amortized costs and fair value of
securities classified as available for sale and held-to-maturity at December 31,
1998, 1997 and 1996:
<TABLE>
<CAPTION>
1998 1997 1996
---------------------- ---------------------- ----------------------
AMORTIZED FAIR AMORTIZED FAIR AMORTIZED FAIR
COST VALUE COST VALUE COST VALUE
----------- --------- ----------- --------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS)
HELD TO MATURITY SECURITIES
States and political subdivisions..................... $ 12,497 $ 13,044 $ 12,068 $ 12,526 $ 13,352 $ 13,946
----------- --------- ----------- --------- ----------- ---------
----------- --------- ----------- --------- ----------- ---------
AVAILABLE FOR SALE SECURITIES
U.S.Treasury securities............................... $ 3,991 $ 4,041 $ 6,477 $ 6,529 $ 2,993 $ 2,990
U.S. Government agencies and corporations............. 14,495 14,604 24,526 24,633 18,163 18,090
Mortgage-backed securities............................ 29,663 29,598 23,705 23,672 26,411 26,137
----------- --------- ----------- --------- ----------- ---------
$ 48,149 $ 48,243 $ 54,708 $ 54,834 $ 47,567 $ 47,217
----------- --------- ----------- --------- ----------- ---------
----------- --------- ----------- --------- ----------- ---------
</TABLE>
At December 31, 1998, investment securities were $60.7 million, a decrease
of $6.2 million from $66.9 million at December 31, 1997. This was due to several
maturities and calls for which we did not reinvest in investment securities. At
December 31, 1998, investment securities represented 16.6% of total deposits and
14.1% of total assets. Approximately $25.3 million or 41.7% of our investment
securities reprice within one year. The average yield on a fully taxable
equivalent basis on the investment portfolio was 6.75% for 1998, compared to
6.99% for 1997.
Investment securities increased from $60.6 million at December 31, 1996 to
$66.9 million at December 31, 1997. The average yield on a fully taxable
equivalent basis on the investment portfolio was 6.99% for 1997, compared to
7.10% for 1996.
DEPOSITS. Deposits at December 31, 1998 were $365.9 million, an increase of
$9.9 million, or 2.8% from $356.0 million at December 31, 1997.
Noninterest-bearing deposits were $76.8 million at December 31, 1998, an
increase of $17.2 million, or 28.9% from $59.5 million at December 31, 1997.
Noninterest-bearing deposits as of December 31, 1997 were $59.5 million compared
to $52.7 million at December 31, 1996. We do not accept brokered deposits. Total
deposits at December 31, 1996 were $327.3 million.
The daily average balances and weighted average rates paid on deposits for
each of the years ended December 31, 1998, 1997 and 1996 are presented below:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31
----------------------------------------------------------------
1998 1997 1996
-------------------- -------------------- --------------------
AMOUNT RATE AMOUNT RATE AMOUNT RATE
--------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS)
Demand and money market deposits................................. $ 80,373 2.48% $ 79,625 2.30% $ 64,092 2.24%
Savings deposits................................................. 23,917 2.00 23,226 2.01 23,479 2.03
Time deposits.................................................... 185,237 5.48 193,050 5.50 180,380 5.76
--------- --- --------- --- --------- ---
Total interest-bearing deposits.............................. 289,527 4.35% 295,901 4.37% 267,951 4.59%
--------- --- --------- --- --------- ---
--------- --- --------- --- --------- ---
</TABLE>
48
<PAGE>
The following table sets forth the amount of Main Street's certificates of
deposit that are $100,000 or greater by time remaining until maturity:
<TABLE>
<CAPTION>
DECEMBER 31, 1998
(DOLLARS IN
THOUSANDS)
--------------------
<S> <C>
Three months or less.................................................... $ 9,748
Over three through six months........................................... 10,011
Over six through 12 months.............................................. 17,708
Over 12 months.......................................................... 5,906
-------
Total............................................................... $ 43,373
-------
-------
</TABLE>
OTHER BORROWINGS. Deposits are the primary source of funds for our lending
and investment activities. Occasionally, we obtain additional funds from the
FHLB and correspondent banks. At December 31, 1998, we had borrowings of $17.0
million in FHLB advances and $2.8 million in Federal Funds Purchased compared to
$2.0 million and $1.5 million, respectively, at December 31, 1997. Main Street's
weighted average interest rate for the period ended December 31, 1998 was 5.72%.
For a more detailed discussion of the borrowings of Main Street, see note 7 to
the Consolidated Financial Statements included herein.
INTEREST RATE SENSITIVITY AND LIQUIDITY. The following table sets forth an
interest rate sensitivity analysis for Main Street at December 31, 1998:
<TABLE>
<CAPTION>
VOLUMES SUBJECT TO PREPRICING WITHIN
------------------------------------------------------------
AFTER
0-30 DAYS 31-180 DAYS 181-365 DAYS ONE YEAR TOTAL
----------- ----------- ------------ --------- ---------
<S> <C> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS)
Interest-earning assets:
Investment Securities............................. $ 1,099 $ 8,197 $ 10,940 $ 41,879 $ 62,115
Loans............................................. 89,404 71,016 50,964 114,548 325,932
Federal funds sold and short term investments..... 143 -- -- -- 143
----------- ----------- ------------ --------- ---------
Total interest-earning assets................... 90,646 79,213 61,904 156,427 388,190
----------- ----------- ------------ --------- ---------
Interest-bearing liabilities:
Demand, money market and savings Deposits......... 1,479 7,393 8,871 89,936 107,679
Time deposits..................................... 10,520 70,025 77,464 23,446 181,455
Borrowings........................................ 2,800 2,000 -- 15,000 19,800
----------- ----------- ------------ --------- ---------
Total interest-bearing liabilities.............. 14,799 79,418 86,335 128,382 308,934
----------- ----------- ------------ --------- ---------
Period GAP.......................................... $ 75,847 $ (205) $ (24,431) $ 28,045 $ 79,256
----------- ----------- ------------ --------- ---------
----------- ----------- ------------ --------- ---------
Cumulative GAP...................................... $ 75,847 $ 75,642 $ 51,211 $ 79,256
----------- ----------- ------------ ---------
----------- ----------- ------------ ---------
Period GAP to total assets.......................... 17.59% (0.05)% 5.67% 6.50%
Cumulative GAP to total assets...................... 17.59% 17.54% 11.88% 18.38%
</TABLE>
CAPITAL RESOURCES. Shareholders' equity increased to $42.9 million at
December 31, 1998 from $38.1 million at December 31, 1997, an increase of $4.8
million or 12.6%. This increase was primarily the result of net income of $6.5
million, less dividends declared on common stock of $2.3 million. During 1997,
shareholders' equity increased by $3.6 million or 10.4% from $34.5 million at
December 31, 1996.
49
<PAGE>
The following table provides a comparison of Main Street's and its banking
subsidiary's leverage and risk-weighted capital ratios as of December 31, 1998
to the minimum and well capitalized regulatory standards:
<TABLE>
<CAPTION>
MINIMUM REQUIRED TO BE WELL CAPITALIZED
FOR CAPITAL UNDER PROMPT CORRECTIVE ACTUAL RATIO AT
ADEQUACY PURPOSES ACTION PROVISIONS DECEMBER 31, 1998
------------------- ------------------------- -------------------
<S> <C> <C> <C>
Main Street:
Leverage ratio.................................. 3.00%(1) 5.00% 9.67%
Tier 1 risk-based capital ratio................. 4.00 6.00 12.74
Risk-based capital ratio........................ 8.00 10.00 14.00
Banking Subsidiary:
Leverage ratio.................................. 3.00%(2) 5.00% 9.08%
Tier 1 risk-based capital ratio................. 4.00 6.00 11.92
Risk-based capital ratio........................ 8.00 10.00 13.17
</TABLE>
- ------------------------
(1) The Federal Reserve Board may require us to maintain a leverage ratio of up
to 200 basis points above the required minimum.
(2) The FDIC may require Main Street Bank to maintain a leverage ratio of up to
200 basis points above the required minimum.
QUARTERLY RESULTS
The following table sets forth certain consolidated quarterly financial
information of Main Street. This information is derived from unaudited
Consolidated Financial Statements which include, in the opinion of management,
all normal recurring adjustments which management considers necessary for a fair
presentation of the results for such periods. The results for any quarter are
not necessarily indicative of results for any future period. This information
should be read in conjunction with Main Street's Consolidated Financial
Statements and the Notes thereto included elsewhere in this report.
<TABLE>
<CAPTION>
1999 QUARTER ENDED
------------------------
MARCH 31 JUNE 30
----------- -----------
(DOLLARS IN THOUSANDS,
EXCEPT PER SHARE DATA)
<S> <C> <C>
Interest income...................................................... $ 8,834 $ 9,309
Interest expense..................................................... 3,272 3,275
Net interest income.................................................. 5,562 6,034
Provision for loan losses 225 310
Securities gains..................................................... 0 0
Earnings before income taxes......................................... 2,435 2,186
Net income........................................................... 1,638 1,514
Net income per share, basic and diluted.............................. $ 0.19 $ 0.17
</TABLE>
50
<PAGE>
<TABLE>
<CAPTION>
1998 QUARTER ENDED
----------------------------------------------------
<S> <C> <C> <C> <C>
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
----------- --------- ------------- -------------
<CAPTION>
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
Interest income.............................................. $ 8,732 $ 8,839 $ 9,042 $ 9,175
Interest expense............................................. 3,266 3,272 3,374 3,354
Net interest income.......................................... 5,466 5,567 5,668 5,821
Provision for loan losses.................................... 450 220 50 145
Securities gains............................................. 11 2 4 1
Earnings before income taxes................................. 2,012 2,151 2,603 2,839
Net income................................................... 1,416 1,462 1,726 1,911
Net income per share, basic and diluted...................... .16 .17 .20 .22
<CAPTION>
1997 QUARTER ENDED
----------------------------------------------------
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
----------- --------- ------------- -------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
Interest income.............................................. $ 7,639 $ 8,397 $ 8,809 $ 8,802
Interest expense............................................. 3,014 3,348 3,365 3,316
Net interest income.......................................... 4,625 5,049 5,444 5,486
Provision for loan losses.................................... 300 315 345 445
Securities gains............................................. 6 11 1 3
Earnings before income taxes................................. 1,631 1,755 2,453 2,149
Net income................................................... 1,152 1,198 1,668 1,472
Net income per share, basic and diluted...................... .13 .14 .19 .17
</TABLE>
51
<PAGE>
PRINCIPAL SHAREHOLDERS AND
STOCK OWNERSHIP OF MANAGEMENT
The following table lists, as of June 30, 1999, the number of shares of
common stock beneficially owned by (a) each current director, (b) our Chairman,
President, and Chief Executive Officer, (c) each person or entity known to us to
be the beneficial owner of more than five percent of our outstanding common
stock, (d) each person named in the Summary Compensation Table under
"Management-Executive Compensation" and (e) all current executive officers and
directors as a group.
Information relating to beneficial ownership of common stock by our
principal shareholders and management is based upon information furnished by
each person using "beneficial ownership" concepts under the rules of the
Securities and Exchange Commission. Under these rules, a person is deemed to be
a beneficial owner of a security if that person has or shares voting power,
which includes the power to vote or direct the voting of the security, or
investment power, which includes the power to vote or direct the voting of the
security. The person is also deemed to be a beneficial owner of any security of
which that person has a right to acquire beneficial ownership within 60 days.
Under the Securities and Exchange Commission rules, more than one person may be
deemed to be a beneficial owner of the same securities, and a person may be
deemed to be a beneficial owner of securities as to which he or she may disclaim
any beneficial ownership. Accordingly, the listed individuals are named as
beneficial owners of shares as to which they may disclaim any beneficial
interest.
The percentages prior to the offering are calculated based on 8,829,000
shares issued and outstanding on June 30, 1999. Percentages after the closing of
the offering are based on 8,889,000 shares to be issued and outstanding upon
consummation of the offering.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY SHARES BENEFICIALLY
OWNED PRIOR TO THE OWNED AFTER THE
OFFERING SHARES BEING OFFERING
----------------------- SOLD IN -----------------------
NAME OF BENEFICIAL OWNER NUMBER PERCENTAGE THE OFFERING NUMBER PERCENTAGE
- ------------------------------------------------- ---------- ----------- ------------- ---------- -----------
<S> <C> <C> <C> <C> <C>
Executive Officers and Directors
Robert R. Fowler, III............................ 4,458,638(1) 50.50 30,000 4,428,638(1) 49.82%
Frank B. Turner.................................. 193,440 2.19 0 193,440 2.18
Samuel B. Hay III................................ 270,000(2) 3.06 0 270,000(2) 3.04
Joseph K. Strickland, Jr......................... 134,500(3) 1.52 0 134,500(3) 1.51
C. Candler Hunt.................................. 99,536 1.13 0 99,536 1.12
0
All Executive Officers and Directors as Group (5
persons)....................................... 5,156,114(4) 58.40 30,000 5,126,114(4) 57.67
Other 5% Shareholders
Fowler Children's Trust.......................... 1,922,568 21.78 0 1,922,568 21.63
</TABLE>
- ------------------------
(1) Includes the following:
<TABLE>
<CAPTION>
NUMBER MANNER
OF SHARES HELD
- ---------- -----------------------------------------------------------------------------------------------------
<C> <S>
162,000 Issued under Main Street's Restricted Stock Award Plan
1,922,568 Held by the Fowler Children's Trust
207,000 Held by the Estate of Louly T. Fowler
640,800 Held by three Fowler Family Grandchildren's Trusts
560,000 Held by three Fowler Family Generation Skipping Tax Exempt Grandchildren's Trusts
405,520 Held by a family limited partnership formed by Mr. Fowler and his daughter
195,200 Held by Mr. Fowler's spouse, Mary H. Fowler
</TABLE>
52
<PAGE>
Mr. Fowler is the executor of the Estate of Louly T. Fowler, trustee of the
Children's trust and two of the Grandchildren's Trusts and Co-Trustee of the
other four Grandchildren's Trusts described above and general partner of the
family limited partnership described above.
(2) Includes 102,000 shares of stock issued to Mr. Hay pursuant to Main Street's
Restricted Stock Award Plan.
(3) Includes 93,000 shares of stock issued to Mr. Strickland pursuant to Main
Street's Restricted Stock Award Plan and 48,000 shares held by Sterne Agee &
Leach as IRA custodian for Mr. Strickland.
(4) Includes the shares described in notes (1) through (3) above.
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth information concerning each of our directors
and executive officers. All of the directors of Main Street Banks Incorporated
are also directors of Main Street Bank.
<TABLE>
<CAPTION>
NAME AGE POSITION AND OFFICES HELD
- --------------------------------------------- --- ------------------------------------------------------------
<S> <C> <C>
Robert R. Fowler, III........................ 60 Chairman of the Board, President, and Chief Executive
Officer
Frank B. Turner.............................. 60 Vice Chairman of the Board
Samuel B. Hay, III........................... 36 Director, Executive Vice President, and Chief Financial
Officer
Joseph K. Strickland, Jr..................... 54 Director, Executive Vice President and Chief Credit Officer
C. Candler Hunt.............................. 54 Director
</TABLE>
ROBERT R. FOWLER, III has been Chairman and Chief Executive Officer of Main
Street Banks Incorporated since its organization in 1988. He served as Chairman
of the Board of Main Street Bank from 1985 to 1996, and was elected Vice
Chairman in 1996. He has been employed by Main Street Bank since 1967. Mr.
Fowler also has served on the Board of Directors of The Bankers Bank since 1996.
FRANK B. TURNER has served as Vice Chairman of Main Street Banks
Incorporated since 1990. He has been City Manager of Covington, Georgia since
1970. Mr. Turner is a director of Main Street Bank.
SAMUEL B. HAY, III has served on the Board of Main Street Banks Incorporated
since 1992, and was elected Executive Vice President and Chief Financial Officer
in 1994. Mr. Hay was elected Chairman and Chief Executive Officer of Main Street
Bank in December 1996. He has been employed by Main Street Bank since 1990.
JOSEPH K. STRICKLAND, JR. became Executive Vice President and Chief Credit
Officer of Main Street Banks Incorporated in 1993 and was elected to the Board
in 1995. Mr. Strickland is the President and Chief Operating Officer and a
director of Main Street Bank.
C. CANDLER HUNT has been an executive of Godfrey's Warehouse, a manufacturer
of livestock feed located in Madison, Georgia, since 1971. He was elected as a
director of Main Street Banks Incorporated in 1989 and is a director of Main
Street Bank.
Messrs. Fowler and Turner are first cousins. Mr. Hay is Mr. Fowler's nephew.
Except for Mr. Fowler, none of our directors holds any directorships in
companies with a class of securities registered pursuant to Section 12 of the
Securities Exchange Act or subject to the
53
<PAGE>
requirements of Section 15(d) of such Act or any company registered as an
investment company under the Investment Company Act of 1940, as amended.
The directors were elected at the most recent annual meeting of shareholders
held on April 20, 1999 to a one-year term. The Board of Directors selects the
executive officers.
COMMITTEES
Our Board of Directors has established the following committees:
EXECUTIVE/MANAGEMENT COMMITTEE. The Executive Committee meets as needed,
and with certain exceptions, has the same power and authority as the Board of
Directors in the management of the business affairs of Main Street between
meetings of the Board. In addition, the committee reviews financial reports,
personnel and staffing, asset/liability management, investments, and audit
reports of Main Street. The Committee is composed of Robert R. Fowler, III,
Chairman, Joseph K. Strickland, Samuel B. Hay, III, and advisory member Frank B.
Turner.
POLICY COMMITTEE. The Policy Committee meets as needed, to review and
approve proposed compensation increases to senior officers and directors of Main
Street Bank. This committee also periodically reviews and approves general
policies and procedures relating to compensation and benefits for officers and
directors, reviews employee compensation plans and benefits, and periodically
reports to the Board of Directors. The committee also reviews policies
concerning officer and employee retirement, termination and resignation. Members
of this committee are Robert R. Fowler, III, Chairman, Frank B. Turner, Vice
Chairman, C. Candler Hunt, and Joseph E. Patrick, Jr.
EXECUTIVE OFFICER COMPENSATION COMMITTEE. A sub-committee of the Policy
Committee is the Executive Officer Compensation Committee. This committee
determines and sets executive officer salaries annually. It also reviews and
recommends to the Policy Committee the points at which various percentage awards
will be made under the Cash Incentive Bonus Plan for executive officers. Members
of the Executive Officer Compensation Committee are C. Candler Hunt, Joseph E.
Patrick, Jr., and Frank B. Turner.
AUDIT COMMITTEE. The Audit Committee meets with our internal audit staff on
a quarterly basis to review and discuss specifics of the audit function and to
review any problems known to the Audit Department. Members of this committee are
C. Candler Hunt, Chairman, Frank B. Turner, Vice Chairman, and Louly F. Hay.
ASSET LIABILITY MANAGEMENT & INVESTMENT COMMITTEE. This committee, which
generally meets on a monthly basis, or as needed, manages our assets and
liabilities, reviews procedures and practices relating to the investment
activities of all subsidiaries, reviews examinations and audits of the loan
portfolios, examines delinquencies, reviews financial transactions with
management, and periodically reports to the Board of Directors. Members of this
committee are Samuel B. Hay, III, Chairman, Robert R. Fowler, III, Joseph K.
Strickland, Jr., James R. Turner and Ronald H. Cook, Jr.
SENIOR LOAN COMMITTEE. The Senior Loan Committee meets weekly and reviews
applications for loans of $250,000 or more and all loans of customers with a
total debt of $250,000 or more. The committee also performs credit reviews on
loan customers with total debts of $250,000 or more. Further, the committee
reviews procedures and practices related to lending activities, analyzes
examinations and audits of loan portfolios, and examines delinquencies. The
voting members of the Senior Loan Committee are Joseph K. Strickland, Jr.,
Chairman, Hal W. Dally, Vice Chairman, Robert R. Fowler, III, John R. Chesnut,
Jr., Ronald E. Carter, James A. Fletcher, Samuel B. Hay, III, Guy M. Dabbs, III,
William F. Parker, Jr., M. Jay Staines, Rob M. Watts, Charles O. Summerour,
Kerry W. Lipscomb, Lee A. Northcutt, Webster G. Samples, and advisory member
Frank B. Turner.
54
<PAGE>
Main Street Bank's Board of Directors maintains several committees to assist
in the supervision and management of Main Street Bank. The committees perform
functions typically associated with committees of financial institutions.
DIRECTOR COMPENSATION
Directors of Main Street Banks Incorporated who are not also officers or
employees receive a fee of $300 per board meeting attended, and the Vice
Chairman of the Board receives an additional $300 per month for his services as
Vice Chairman.
All directors of Main Street Bank receive a fee of $300 per board meeting
attended. Those who are not also officers receive a fee of $300 per committee
meeting attended.
EXECUTIVE COMPENSATION
The table below shows information concerning the compensation paid to the
Chief Executive Officer and our two other most highly compensated executive
officers for services to us in all capacities for the years ended 1998, 1997 and
1996.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION AWARDS
----------------------
RESTRICTED STOCK
NAME AND PRINCIPAL ANNUAL COMPENSATION
POSITION ------------------------ AWARDS(1) NUMBER OF ALL OTHER
WITH COMPANY YEAR SALARY ($) BONUS ($) VALUE ($) SHARES COMPENSATION ($)(2)
- ----------------------------------------- --------- ----------- ----------- --------- ----------- -------------------
<S> <C> <C> <C> <C> <C> <C>
Robert R. Fowler, III ................... 1998 153,740 38,435 180,000 18,000 31,468(3)
Chairman, President and 1997 142,753 45,683 0 0 35,070(3)
Chief Executive Officer 1996 139,763 55,933 120,000 24,000 9,721(3)
Samuel B. Hay, III ...................... 1998 120,339 30,085 180,000 18,000 6,424
Executive Vice President 1997 104,641 33,485 0 0 9,148
and Chief Financial Officer 1996 90,988 35,971 60,000 12,000 8,779
Joseph K. Strickland .................... 1998 129,662 32,415 240,000 24,000 6,779
Executive Vice President 1997 119,076 38,104 0 0 9,279
and Chief Credit Officer 1996 112,259 50,064 60,000 12,000 7,405
</TABLE>
- ------------------------
(1) Prior to this offering, there has been no public trading market for the
shares of Main Street common stock. As a result, we determined the value of
the restricted stock awards listed above based on the per share sales price
of Main Street common stock in the transaction known to management to have
occurred nearest to the grant date. All awards granted in 1996 were granted
on November 22, 1996 and all awards granted in 1998 were granted on November
22, 1998. The nearest known transaction to November 22, 1996 occurred on
September 26, 1996 and the per share sales price was $5.00, as adjusted for
our September 1, 1998 four-for-one stock split. The nearest known
transaction to November 22, 1998 occurred on December 7, 1998 and the per
share sales price was $10.00. All of the restricted stock awards vest at a
rate of 20% per year beginning on the first anniversary of the grant date.
The number and aggregate value of the restricted stock holdings as of
December 31, 1998 are as listed below. The aggregate value is based on the
per share sales price of the transaction known to
55
<PAGE>
management to have occurred nearest to December 31, 1998. This transaction
occurred on December 14, 1998 and the per share sales price was $12.00.
<TABLE>
<CAPTION>
AGGREGATE
NUMBER OF SHARES VALUE
----------------- --------------
<S> <C> <C>
Mr. Fowler................................................ 162,000 $ 1,944,000
Mr. Hay................................................... 102,000 1,244,000
Mr. Strickland............................................ 96,000 1,152,000
</TABLE>
- ------------------------
(2) In all cases except for Mr. Fowler, the amounts shown represent matching and
other contributions that we have paid to the indicated person's Savings Plan
account. In Mr. Fowler's case, the amounts also include the payments
described in note (3) below.
(3) The amounts shown include matching and other contributions to Mr. Fowler's
Savings Plan account and the value of life insurance premiums paid on Mr.
Fowler's behalf under a split-dollar life insurance policy as follows:
<TABLE>
<CAPTION>
PREMIUMS ON
CONTRIBUTIONS TO SAVINGS SPLIT-DOLLAR
PLAN ACCOUNT LIFE INSURANCE
------------------------- -----------------------
<S> <C> <C>
1998..... 4,794 26,674
1997..... 9,480 25,590
1996..... 9,721 0
</TABLE>
RESTRICTED STOCK AWARD PLAN
The Main Street Banks Incorporated Restricted Stock Award Plan provides for
the grant of restricted stock awards as an incentive to key employees. We
reserved a total of 720,000 shares to be issued under the Restricted Stock Award
Plan. All of these shares of restricted stock are currently issued and
outstanding. These shares of restricted stock vest at a rate of 20% per year
beginning on the first anniversary of the grant date. See "Long-term Incentive
Plan" below for the amount of vested and unvested shares as of June 30, 1999.
LONG-TERM INCENTIVE PLAN
We have reserved 240,000 shares of common stock under our Long-term
Incentive Plan, which was adopted in April 1997. Under this plan, the Board of
Directors may grant options, restricted stock, or other stock-based compensation
to employees equal to the fair market value of the stock on the date of the
grant. As of June 30, 1999, 45,960 shares of restricted stock had been issued
under this plan. These shares of restricted stock vest at a rate of 20% per year
beginning on the first anniversary of the grant date. As of June 30, 1999, of
the 765,960 shares issued under the Restricted Stock Award Plan and the
Long-term Incentive Plan, 491,280 shares were vested and 274,680 were unvested.
SAVINGS PLAN
Effective January 1, 1988, Main Street Bank's qualified profit sharing plan
was converted to a Section 401(k) employee savings plan. The Savings Plan covers
all of our employees who have one year's credited service and includes a vesting
schedule for employer's matching contributions of 20% vesting after three years
and 20% vesting after each additional year's crediting service thereafter.
Matching contributions become fully vested after seven years.
CASH INCENTIVE BONUS PLAN
The Board of Directors established the Cash Incentive Bonus Plan was
established by the Board of Directors as a means of compensating our officers
through a cash bonus program tied to specific
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performance standards achieved by Main Street Banks Incorporated, as a whole, as
well as by each individual officer.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The following persons serve as members of the Executive Officer Compensation
Committee, which is a sub-committee of the Policy Committee: C. Candler Hunt,
Joseph E. Patrick, Jr. and Frank B. Turner. Mr. Turner is not an employee of
Main Street Banks Incorporated, but serves as Vice Chairman of the board of
directors.
CERTAIN TRANSACTIONS
Our Directors and certain business organizations and individuals associated
with them are customers of and have banking transactions with Main Street Bank
and our other former banking subsidiaries in the ordinary course of business.
Such transactions include loans, commitments, lines of credit and letters of
credit. All of those transactions were made on substantially the same terms,
including interest rates and collateral, as those prevailing at the time for
comparable transactions with other persons, and did not and do not involve more
than normal risk of collectibility or present any other unfavorable features.
Additional transactions with these persons and businesses are anticipated in the
future.
Robert R. Fowler, III, President, Chief Executive Officer and Chairman of
the Board, has entered into three lease agreements with us, through which he
leases to us buildings that we use for our operations center, corporate and
marketing offices, and accounting and card services office. These leases are
described below:
- OPERATIONS CENTER. We entered into the lease agreement for our operations
center on April 1, 1998. The operations center building is 22,300 square
feet and is located at 2118 Usher Street, Covington, Georgia 30014. Under
this lease agreement, we paid to Mr. Fowler rent at a rate of $2.36 per
square foot or an aggregate of $52,630 for the period from April 1, 1998
until April 1, 1999. The lease agreement provides a rental schedule by
which the rental rate is adjusted each year on the anniversary date of the
lease agreement. We expect to pay rent in the amount of $65,526 for the
period from April 1, 1999 until April 1, 2000. The lease agreement expires
March 31, 2007. We have the option to renew the lease agreement for two
successive five-year extension periods. Additionally, we may terminate the
lease agreement after the completion of five years of the term with a
termination payment equal to six months rent. The termination payments
decrease by the amount of one month's rental payment for each succeeding
lease year.
- CORPORATE AND MARKETING OFFICES. We entered into the lease agreement for
our corporate and marketing offices located at 1121 Floyd Street,
Covington, Georgia 30014 in May 1999. This building contains approximately
4,980 square feet. The rental rate from June 1, 1999 through December 1,
1999 is $2,747 per month and will increase to $3,245 per month on January
1, 2000. Thereafter, the lease agreement provides for 3% increases to the
rental rate on each January 1 until the expiration date, December 31,
2009. We have the option to renew the lease agreement for two successive
five-year extension periods.
- ACCOUNTING AND CARD SERVICES OFFICES. We entered into the lease agreement
for our accounting and card services offices, located at 1114 Pace Street,
Covington, Georgia 30014, on March 25, 1994. This building is
approximately 4,300 square feet. Since July 1999 the rental rate under
this lease agreement has been $1,850 per month. The rental rate will
increase to $2,220 per month in July 2003 and to $2,664 in July 2007. This
lease agreement expires on June 30, 2013.
We believe that the terms of the lease agreements are at least as favorable
to us as terms available from unrelated third parties.
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DESCRIPTION OF CAPITAL STOCK
Our Articles of Incorporation authorize us to issue up to 30,000,000 shares
of common stock, par value $1.00 per share, of which 60,000 shares will be
issued pursuant to this offering. As of June 30, 1999, 8,829,000 shares of
common stock were issued and outstanding.
All shares of common stock are entitled to share equally in dividends from
legally available funds, when, as and if declared by the Board of Directors.
Upon liquidation or dissolution of Main Street Banks Incorporated, whether
voluntary or involuntary, all shares of common stock are entitled to share
equally in all assets available for distribution to the shareholders. Each
holder of common stock is entitled to one vote for each share on all matters
submitted to the shareholders. Holders of common stock do not have any
preemptive right to acquire authorized but unissued capital stock. There is no
cumulative voting, redemption right, sinking fund provision or right of
conversion in existence with respect to the common stock. All shares of the
common stock issued in accordance with the terms of the offering as described in
this prospectus will be fully paid and non-assessable. See "Market Price of and
Dividends on Common Stock" (page 14) and "Supervision and Regulation--Payment of
Dividends" (page 63).
PROVISIONS OF OUR ARTICLES OF INCORPORATION AND BYLAWS
GENERAL
The Georgia Business Corporation Code and our Articles of Incorporation and
Bylaws govern shareholders' rights and related matters. Our Bylaws contain a
provision relating to the removal of our directors which could have the effect
of impeding an attempt to change or remove management or gain control of Main
Street in a transaction not supported by our Board of Directors. In addition,
our Articles of Incorporation also contain a provision which eliminates the
potential personal liability of directors for monetary damages and our Bylaws
contain provisions which provide indemnification for our directors. The
provision relating to removal of directors and the provisions relating to
elimination of liability and indemnification of directors are discussed more
fully below.
REMOVAL OF DIRECTORS. Under Georgia law, one or more directors of a
corporation may be removed with or without cause by the affirmative vote of a
majority of the shares present at a meeting at which a quorum is represented and
entitled to vote thereon, unless the articles of incorporation or a bylaw
adopted by the shareholders provides otherwise. However, Section 3.3 of our
Bylaws provides that our directors may be removed during their terms with or
without cause only by the affirmative vote of the holders of two-thirds of the
issued and outstanding shares of common stock entitled to vote in an election of
directors.
This provision may make it more difficult and time consuming for a potential
acquiror to obtain control of Main Street by replacing the Board of Directors
and management. Furthermore, the provision may also make it more difficult for
our shareholders to replace the Board of Directors or management, even if a
majority of the shareholders believes that replacing them would be in our best
interests. As a result, this provision may tend to perpetuate the incumbent
Board of Directors and management.
Although our management believes this provision is beneficial to our
shareholders, it also may tend to discourage some takeover bids that are not
supported by our Board. As a result, our shareholders may be deprived of
opportunities to sell some or all of their shares at prices that represent a
premium over prevailing market prices. On the other hand, defeating undesirable
acquisition offers can be a very expensive and time-consuming process. To the
extent that this provision discourages undesirable proposals, we may be able to
avoid those expenditures of time and money.
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INDEMNIFICATION
Our Bylaws contain certain indemnification provisions which provide that
directors, officers, employees or agents of Main Street, the insiders, will be
indemnified against expenses actually and reasonably incurred by them if they
are successful on the merits of a claim or proceeding.
When a case or dispute is not ultimately determined on its merits (i.e., it
is settled), the indemnification provisions provide that we will indemnify
insiders when they meet the applicable standard of conduct. The applicable
standard of conduct is met if the insider acted in a manner he or she in good
faith believed to be in or not opposed to the best interests of Main Street, and
with respect to any criminal action or proceeding, if the insider had no
reasonable cause to believe his or her conduct was unlawful. Whether the
applicable standard of conduct has been met is determined by the Board of
Directors, the shareholders or independent legal counsel in each specific case.
Our Bylaws also provide that the indemnification rights set forth in the
Bylaws are not exclusive of other indemnification rights to which an insider may
be entitled under any bylaw, resolution or agreement, either specifically or in
general terms approved by the affirmative vote of the holders of a majority of
the shares entitled to vote. We can also provide for greater indemnification
than that set forth in the Bylaws if we choose to do so, subject to approval by
our shareholders. We may not, however, indemnify an insider for liability
arising out of circumstances that constitute exceptions to limitation of an
insider's liability for monetary damages. See "--Limitation of Liability" below.
The indemnification provisions of the Bylaws specifically provide that we
may purchase and maintain insurance on behalf of any director against any
liability asserted against such person and incurred by him or her in any such
capacity, whether or not we would have had the power to indemnify against such
liability.
We are not aware of any pending or threatened action, suit or proceeding
involving any insiders for which indemnification from us may be sought.
To the extent indemnification for liabilities arising under the Securities
Act of 1933 is permitted to our directors, officers and controlling persons
under the above provisions, or otherwise, we have been advised that in the
opinion of the Securities and Exchange Commission indemnification is against
public policy as expressed in the Securities Act of 1933 and is, therefore,
unenforceable. In the event that a claim for indemnification against the
liabilities other than the payment by us of expenses incurred or paid by a
director, officer or controlling person of Main Street in the successful defense
of any action, suit or proceeding is asserted by a director, officer or
controlling person in connection with the securities being registered, we will,
unless in the opinion of our counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
the indemnification by us is against public policy as expressed in the
Securities Act of 1933 and will be governed by the final adjudication of the
issue.
LIMITATION OF LIABILITY
Article Eight of our Articles of Incorporation, subject to the exceptions
listed below, eliminates the potential personal liability of a director for
monetary damages to us and our shareholders for breach of a duty as a director.
There is no elimination of liability for:
(1) a breach of duty involving appropriation of a business opportunity of
the Company,
(2) an act or omission not in good faith or involving intentional misconduct
or a knowing violation of law,
(3) a transaction from which the director derives an improper material
tangible personal benefit, or
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(4) as to any payment of a dividend or approval of a stock repurchase that
is illegal under the Georgia Business Corporation Code.
Article Eight does not eliminate or limit our right or that of our
shareholders to seek injunctive or other equitable relief not involving monetary
damages.
We adopted Article Eight pursuant to the Georgia Business Corporation Code
which allows Georgia corporations, with the approval of their shareholders, to
include in their Articles of Incorporation a provision eliminating or limiting
the liability of directors, except in the circumstances described above. We
included Article Eight in our Articles of Incorporation to encourage qualified
individuals to serve and remain as our directors. While we have not experienced
any problems in locating directors, we could experience difficulty in the future
as our business activities increase and diversify. Article Eight was also
included to enhance our ability to secure liability insurance for our directors
at a reasonable cost. We intend to obtain liability insurance covering actions
taken by our directors in their capacities as directors. The Board of Directors
believes that Article Eight will enable us to secure such insurance on terms
more favorable than if such a provision were not included in the Articles of
Incorporation.
AMENDMENTS
Any amendment of Articles Eight and Nine of the Articles of Incorporation
requires the affirmative vote of the holders of at least two-thirds of the
outstanding shares of common stock.
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SHARES ELIGIBLE FOR FUTURE SALE
After the close of this offering, we will have up to 8,889,000 shares of
common stock outstanding. This includes approximately 3,575,496 shares that may
be immediately resold after the offering in the public market without
restriction. The remaining 5,313,504 shares of our outstanding common stock will
become available for resale in the public market at future dates after the close
of this offering subject to the resale limitations under the federal securities
laws and subject to vesting requirements, in the case of shares issued under our
Restricted Stock Award Plan or Long-term Incentive Plan. See "Risk Factors--The
market price of our common stock could drop significantly if large blocks of our
common stock are sold in the public market," (page 10) for a discussion of the
number of shares that will be eligible for sale after the close of this
offering. In addition see "Management--Restricted Stock Award Plan and
- --Long-term Incentive Plan" (page 56) for a description of the vesting
requirements that apply to shares issued under those plans.
Rule 144 under the Securities Act of 1933 places volume and other
limitations on the resale of restricted shares and shares held by affiliates of
Main Street. Restricted shares, for Rule 144 purposes are shares that have been
acquired within the last two years under an exemption from registration under
federal securities law. An affiliate is a person who directly, or indirectly
controls, is controlled by, or is under common control with, the Main Street.
Affiliates of a company generally include its directors, executives officers and
principal shareholders.
In general, under Rule 144 holders of restricted shares who have held their
shares for at least one year are entitled to sell within any three-month period
a number of shares that does not exceed the greater of one of the following
amounts:
(1) 1% of the outstanding shares of common stock; or
(2) the average weekly trading volume during the four calendar weeks
preceding his or her sale.
Sales under Rule 144 are also subject to provisions regarding the manner of
sale, notice requirements and the availability of current public information
about Main Street. Affiliates will no longer be subject to the volume
restrictions and other limitations under Rule 144 beginning 90 days after their
status as an affiliate terminates, if they have held their shares for two years.
A nonaffiliate who has held restricted shares for two years is not subject to
the volume and other limitations under Rule 144.
Prior to the offering, there has been no public market for the common stock,
and we cannot predict the effect, if any, that the sale of shares or the
availability of shares for sale will have on the market price prevailing from
time to time. Nevertheless, sales of substantial amounts of common stock in the
public market could adversely affect prevailing market prices and our ability to
raise equity capital in the future.
SUPERVISION AND REGULATION
The following discussion describes the material elements of the regulatory
framework that applies to banks and bank holding companies and provides certain
specific information related to us.
GENERAL
Main Street Banks Incorporated is a bank holding company registered with the
Board of Governors of the Federal Reserve System under the Bank Holding Company
Act of 1956, as currently in effect. As a result we and any future non-bank
subsidiaries we establish are and will be subject to the supervision,
examination, and reporting requirements of the Bank Holding Company Act and the
regulations of the Federal Reserve.
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The Bank Holding Company Act requires every bank holding company to obtain
the Federal Reserve's prior approval before: (1) it may acquire direct or
indirect ownership or control of any voting shares of any bank if, after the
acquisition, the bank holding company will directly or indirectly own or control
more than 5% of the bank's voting shares; (2) it or any of its non-bank
subsidiaries may acquire all or substantially all of the assets of any bank; or
(3) it may merge or consolidate with any other bank holding company.
The Bank Holding Company Act also provides that the Federal Reserve may not
approve any transaction that would result in or tend to create a monopoly,
substantially lessen competition or otherwise function as a restraint of trade,
unless the anticompetitive effects of the proposed transaction are clearly
outweighed by the public interest in meeting the convenience and needs of the
community to be served. The Federal Reserve is also required to consider the
financial and managerial resources and future prospects of the bank holding
companies and banks concerned and the convenience and needs of the community to
be served. The Federal Reserve's consideration of financial resources generally
focuses on capital adequacy, which is discussed below.
We, and any other bank holding company located in Georgia, may acquire a
bank located in any other state, and any bank holding company located outside of
Georgia may acquire any Georgia-based bank, regardless of state law to the
contrary. In either case, certain deposit-percentage, aging requirements, and
other restrictions apply. National and state-chartered banks may branch across
state lines by acquiring banks in other states. By adopting legislation prior to
June 1, 1997, a state could elect either to "opt in", accelerating the date
after which interstate branching would be permissible, or "opt out", prohibiting
interstate branching altogether. The Georgia Interstate Banking Act provides
that interstate acquisitions by or of institutions located in Georgia are
permitted in states that also allow national interstate acquisitions. The
Georgia Interstate Branching Act permits Georgia-based banks and bank holding
companies owning or acquiring banks outside of Georgia and all non-Georgia banks
and bank holding companies owning or acquiring banks in Georgia to merge any
lawfully acquired bank into an interstate branch network. The Georgia Interstate
Branching Act also allows banks to establish new branches throughout Georgia.
The Bank Holding Company Act generally prohibits us from engaging in
activities other than banking or managing or controlling banks or other
permissible subsidiaries. The Bank Holding Company Act also prohibits us from
acquiring or keeping direct or indirect control of any company engaged in any
activities other than those activities that the Federal Reserve determines to be
closely related to banking or managing or controlling banks. In determining
whether a particular activity is permissible, the Federal Reserve must consider
whether the activity reasonably can be expected to produce benefits to the
public, such as greater convenience, increased competition, or gains in
efficiency, that outweigh possible adverse effects, such as undue concentration
of resources, decreased or unfair competition, conflicts of interest, or unsound
banking practices. For example, the Federal Reserve has determined that
factoring accounts receivable, acquiring or servicing loans, leasing personal
property, conducting discount securities brokerage activities, performing
certain data processing services, acting as agent or broker in selling credit
life insurance and certain other types of insurance in connection with credit
transactions, and performing certain insurance underwriting activities are
permissible activities of bank holding companies. The Bank Holding Company Act
does not place territorial limitations on permissible non-banking activities of
bank holding companies. Despite prior approval, the Federal Reserve may order a
holding company or its subsidiaries to terminate any activity or ownership or
control of any subsidiary when it has reasonable cause to believe that the
holding company's continued activity, ownership or control constitutes a serious
risk to the financial safety, soundness, or stability of any bank subsidiaries.
Our deposits are insured by the FDIC to the maximum extent provided by law.
Main Street Bank is also subject to numerous state and federal statutes and
regulations that affect its business, activities
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and operations, and it is supervised and examined by one or more state or
federal bank regulatory agencies.
The FDIC and the Georgia Department of Banking and Finance regularly examine
the operations of Main Street Bank and have the authority to approve or
disapprove mergers, the establishment of branches, and similar corporate
actions. Both regulatory agencies also have the power to prevent the continuance
or development of unsafe or unsound banking practices or other violations of
law.
PAYMENT OF DIVIDENDS
Main Street Banks Incorporated is a legal entity separate and distinct from
Main Street Bank. The principal source of Main Street Banks Incorporated cash
flow, including cash flow to pay dividends to its shareholders, is dividends
that Main Street Bank pays to it. Statutory and regulatory limitations apply to
Main Street Bank's payment of dividends to Main Street Banks Incorporated as
well as to Main Street Banks Incorporated payment of dividends to its
shareholders.
If, in the opinion of the federal banking regulator, Main Street Bank were
engaged in or about to engage in an unsafe or unsound practice, the federal
banking regulator could require, after notice and a hearing, that it cease and
desist from its practice. The federal banking agencies have indicated that
paying dividends that deplete a depository institution's capital base to an
inadequate level would be an unsafe and unsound banking practice. Under the
Federal Deposit Insurance Corporation Improvement Act of 1991, a depository
institution may not pay any dividend if payment would cause it to become
undercapitalized or if it already is undercapitalized. Moreover, the federal
agencies have issued policy statements that provide that bank holding companies
and insured banks should generally only pay dividends out of current operating
earnings. See "--Prompt Corrective Action" (page 64).
The Georgia Department of Banking and Finance also regulates Main Street
Bank's dividend payments and must approve dividend payments that would exceed
50% of Main Street Bank's net income for the prior year. Our payment of
dividends may also be affected or limited by other factors, such as the
requirement to maintain adequate capital above regulatory guidelines.
At June 30, 1999, Main Street Bank was able to pay up to $1,852,155 in
dividends to Main Street Banks Incorporated without prior regulatory approval.
CAPITAL ADEQUACY
We are required to comply with the capital adequacy standards established by
the Federal Reserve in the case of Main Street Bank Incorporated and the
appropriate federal banking regulator in the case of Main Street Bank. The
Federal Reserve has established two basic measures of capital adequacy for bank
holding companies--a risk-based measure and a leverage measure. A bank holding
company must satisfy all applicable capital standards to be considered in
compliance.
The risk-based capital standards are designed to make regulatory capital
requirements more sensitive to differences in risk profiles among banks and bank
holding companies, to account for off-balance-sheet exposure, and to minimize
disincentives for holding liquid assets. Assets and off-balance-sheet items are
assigned to broad risk categories, each with appropriate weights. The resulting
capital ratios represent capital as a percentage of total risk-weighted assets
and off-balance-sheet items.
The minimum guideline for the ratio of total capital to risk-weighted assets
is 8%. At least one-half of total capital must comprise common stock, minority
interests in the equity accounts of consolidated subsidiaries, noncumulative
perpetual preferred stock, and a limited amount of cumulative perpetual
preferred stock, less goodwill and certain other intangible assets. This portion
of total capital is referred to as Tier 1 Capital. The remainder may consist of
subordinated debt, other preferred stock, and a limited amount of loan loss
reserves and is referred to as Tier 2 Capital. At June 30, 1999, our
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consolidated ratio of total capital to risk-weighted assets was 13.6% and our
consolidated ratio of Tier 1 Capital to risk-weighted assets was 12.3%.
In addition, the Federal Reserve has established minimum leverage ratio
guidelines for bank holding companies. These guidelines provide for a minimum
ratio of Tier 1 Capital to average assets, less goodwill and certain other
intangible assets, of 3% for bank holding companies that meet the specified
criteria including having the highest regulatory rating. All other bank holding
companies generally are required to maintain a leverage ratio of at least 3%,
plus an additional cushion of 100 to 200 basis points. Our leverage ratio at
June 30, 1999 was 9.7%. The guidelines also provide that bank holding companies
experiencing internal growth, or making acquisitions will be expected to
maintain strong capital positions substantially above the minimum supervisory
levels without significant reliance on intangible assets. Furthermore, the
Federal Reserve has indicated that it will consider a bank holding company's
Tier 1 Capital leverage ratio, after deducting all intangibles, and other
indicators of capital strength in evaluating proposals for expansion or new
activities.
Main Street Bank is subject to risk-based and leverage capital requirements
adopted by the FDIC, which are substantially similar to those adopted by the
Federal Reserve for bank holding companies.
Failure to meet capital guidelines could subject a bank to a variety of
enforcement remedies, including the issuance of a capital directive, the
termination of deposit insurance by the FDIC, a prohibition on the taking of
brokered deposits, and certain other restrictions on its business. As described
below, substantial additional restrictions can be imposed on FDIC-insured
depository institutions that fail to meet applicable capital requirements. See
"--Prompt Corrective Action" below.
SUPPORT OF SUBSIDIARY INSTITUTIONS
Under Federal Reserve policy, Main Street Banks Incorporated is expected to
act as a source of financial strength for, and to commit resources to support,
Main Street Bank. This support may be required at times when, without this
Federal Reserve policy, Main Street Banks Incorporated might not be inclined to
provide it. In addition, any capital loans by a bank holding company to its
subsidiary bank will be repaid only after its deposits and certain other
indebtedness are repaid in full. In the event of a bank holding company's
bankruptcy, any commitment by the bank holding company to a federal bank
regulatory agency to maintain the capital of a banking subsidiary will be
assumed by the bankruptcy trustee and entitled to a priority of payment.
PROMPT CORRECTIVE ACTION
The Federal Deposit Insurance Corporation Improvement Act of 1991
established a system of prompt corrective action to resolve the problems of
undercapitalized institutions. Under this system, the federal banking regulators
have established five capital categories (well capitalized, adequately
capitalized, undercapitalized, significantly undercapitalized and critically
undercapitalized), and are required to take certain mandatory supervisory
actions, and are authorized to take other discretionary actions, relating to
institutions in the three undercapitalized categories. The severity of the
action depends upon the capital category in which the institution is placed.
Generally, subject to a narrow exception, the banking regulator must appoint a
receiver or conservator for an institution that is critically undercapitalized.
The federal banking agencies have specified by regulation the relevant capital
level for each category.
An institution that is categorized as undercapitalized, significantly
undercapitalized, or critically undercapitalized is required to submit an
acceptable capital restoration plan to its appropriate federal banking agency. A
bank holding company must guarantee that a subsidiary depository institution
meets its capital restoration plan, subject to certain limitations. The
controlling holding company's obligation to fund a capital restoration plan is
limited to the lesser of 5% of an undercapitalized subsidiary's assets or the
amount required to meet regulatory capital requirements. An undercapitalized
institution
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is also generally prohibited from increasing its average total assets, making
acquisitions, establishing any branches, or engaging in any new line of
business, except under an accepted capital restoration plan or with FDIC
approval. In addition, the appropriate federal banking agency may treat an
undercapitalized institution in the same manner as it treats a significantly
undercapitalized institution, if it determines that those actions are necessary.
At June 30, 1999, Main Street Bank's capital level placed it in the
well-capitalized category.
FDIC INSURANCE ASSESSMENTS
The FDIC has adopted a risk-based assessment system for insured depository
institutions that takes into account the risks attributable to different
categories and concentrations of assets and liabilities. The system assigns an
institution to one of three capital categories: (1) well capitalized; (2)
adequately capitalized; and (3) undercapitalized. These three categories are
substantially similar to the prompt corrective action categories described
above, with the "undercapitalized" category including institutions that are
undercapitalized, significantly undercapitalized, and critically
undercapitalized for prompt corrective action purposes. The FDIC also assigns an
institution to one of three supervisory subgroups within each capital group. The
supervisory subgroup to which an institution is assigned is based on a
supervisory evaluation that the institution's primary federal regulator provides
to the FDIC and information that the FDIC determines to be relevant to the
institution's financial condition and the risk posed to the deposit insurance
funds. The FDIC determines an institution's insurance assessment rate based on
the institution's capital category and supervisory category. Under the
risk-based assessment system, there are nine combinations of capital groups and
supervisory subgroups to which different assessment rates are applied.
Assessments range from 0 to 27 cents per $100 of deposits, depending on the
institution's capital group and supervisory subgroup.
Effective January 1, 1997, the FDIC imposed assessments to help repay the
$780 million in annual interest payments on the $8 billion of Financing
Corporation bonds issued in the late 1980s as part of the government rescue of
the thrift industry. The FDIC will assess banks at a rate of 1.3 cents per $100
of deposits until December 31, 1999. Thereafter, it will add approximately 2.4
cents per $100 of deposits to each assessment.
The FDIC may terminate an institution's deposit insurance if it finds that
the institution has engaged in unsafe and unsound practices, is in an unsafe or
unsound condition to continue operations, or has violated any applicable law,
regulation, rule, order or condition imposed by the FDIC.
PROPOSED LEGISLATION AND REGULATORY ACTION
New regulations and statutes are regularly proposed that contain
wide-ranging proposals for altering the structures, regulations and competitive
relationships of the nation's financial institutions. We cannot predict whether
or in what form any proposed regulation or statute will be adopted or the extent
to which our business may be affected by any new regulation or statute.
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LEGAL MATTERS
Powell, Goldstein, Frazer and Murphy LLP, Atlanta, Georgia, will pass upon
the validity of the shares of common stock offered by this prospectus for Main
Street.
EXPERTS
Ernst & Young LLP, independent auditors, have audited Main Street's
consolidated financial statements for the three years ended December 31, 1998
included in this prospectus. Main Street's financial statements are included in
reliance on Ernst & Young LLP's report, given on their authority as experts in
accounting and auditing.
REPORTS TO SHAREHOLDERS
Upon the effective date of the Registration Statement on Form S-1 that
registers the shares of common stock offered by this prospectus with the
Securities and Exchange Commission, we will be subject to the reporting
requirements of the Securities Exchange Act of 1934, as amended, which include
requirements to file annual reports on Form 10-K and quarterly reports on Form
10-Q with the Securities and Exchange Commission. This reporting obligation will
exist for at least one year and will continue for fiscal years thereafter,
except that such reporting obligations may be suspended for any subsequent
fiscal year if at the beginning of such year the common stock of Main Street is
held of record by less than 300 persons.
At any time that we are not a reporting company, we will furnish our
shareholders with annual reports containing audited financial information for
each fiscal year on or before the date of the annual meeting of shareholders as
required by Rule 80-6-1-.05 of the Georgia Department of Banking and Finance.
Our fiscal year ends on December 31. Additionally, we will also furnish such
other reports as it may determine to be appropriate or as otherwise may be
required by law.
ADDITIONAL INFORMATION
We have filed with the Securities and Exchange Commission the Registration
Statement under the Securities Act, with respect to the shares of common stock
offered by this prospectus. This prospectus does not contain all of the
information set forth in the Registration Statement. For further information
with respect to Main Street and the common stock, reference is made to the
Registration Statement and the exhibits to it. Copies of the Registration
Statement may be obtained at prescribed rates from the Public Reference Section
of the Securities and Exchange Commission, Room 1024, 450 Fifth Street, NW,
Judiciary Plaza, Washington, DC 20549 or by calling the Securities and Exchange
Commission at 1-800-SEC-0330. The Securities and Exchange Commission also
maintains a Web site (http://www.sec.gov) that contains registration statements,
reports, proxy and information statements and other information regarding
registrants, such as Main Street, that file electronically with the Securities
and Exchange Commission.
66
<PAGE>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
MAIN STREET BANKS INCORPORATED
<TABLE>
<S> <C>
Report of Independent Auditors....................................................... F-2
Consolidated Statements of Financial Condition as of June 30, 1999 (unaudited) and F-3
December 31, 1998 and 1997.........................................................
Consolidated Statements of Income for the six months ended June 30, 1999 and June 30, F-4
1998 (unaudited) and for the years ended December 31, 1998, 1997 and 1996..........
Consolidated Statements of Changes in Shareholders' Equity for the years ended F-5
December 31, 1998, 1997 and 1996 and for the six months ended June 30, 1999
(unaudited)........................................................................
Consolidated Statements of Cash Flows for the six months ended June 30, 1999 and 1998 F-7
(unaudited) and for the years ended December 31, 1998, 1997 and 1996...............
Notes to Consolidated Financial Statements........................................... F-9
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Board of Directors
Main Street Banks Incorporated
We have audited the accompanying consolidated statements of financial
condition of Main Street Banks Incorporated and subsidiary as of December 31,
1998 and 1997, and the related statements of income, changes in shareholders'
equity, and cash flows for the three years ended December 31, 1998. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Main Street Banks Incorporated and subsidiary as of December 31, 1998 and 1997,
and the consolidated results of their operations and their cash flows for the
three years ended December 31, 1998 in conformity with generally accepted
accounting principles.
/s/ Ernst & Young LLP
Atlanta, Georgia
February 19, 1999
F-2
<PAGE>
MAIN STREET BANKS INCORPORATED AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
<TABLE>
<CAPTION>
DECEMBER 31
JUNE 30 ------------------------------
1999 1998 1997
-------------- -------------- --------------
<S> <C> <C> <C>
(UNAUDITED)
ASSETS
Cash and due from banks......................................... $ 23,262,766 $ 21,231,287 $ 16,829,585
Interest-bearing deposits in banks.............................. 256,989 143,111 103,170
Federal funds sold.............................................. 1,460,000 -- --
Investment securities held to maturity (fair value of
$15,704,559, $13,044,485 and $12,526,411 at June 30, 1999
(unaudited), December 31, 1998 and 1997, respectively)........ 15,793,457 12,497,146 12,068,110
Investment securities available for sale........................ 42,869,811 48,242,546 54,833,630
Other investments............................................... 1,640,000 1,375,579 1,364,798
Mortgage loans held for sale.................................... 3,656,746 4,282,914 --
Loans, net of unearned income................................... 355,222,597 324,616,860 298,091,318
Allowance for loan losses....................................... (6,215,284) (5,849,997) (5,091,653)
-------------- -------------- --------------
Loans, net...................................................... 349,007,313 318,766,863 292,999,665
Premises and equipment, net..................................... 15,895,476 16,328,067 13,717,197
Other real estate............................................... 1,157,711 832,023 627,820
Accrued interest receivable..................................... 2,875,701 2,739,057 2,984,236
Goodwill and other intangibles, net............................. 1,603,684 1,823,067 2,261,834
Other assets.................................................... 5,145,875 2,988,761 2,411,327
-------------- -------------- --------------
Total assets.................................................... $ 464,625,529 $ 431,250,421 $ 400,201,372
-------------- -------------- --------------
-------------- -------------- --------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Deposits:
Noninterest-bearing demand.................................... $ 84,337,093 $ 76,762,889 $ 59,529,993
Interest-bearing demand and money market...................... 90,192,692 83,520,903 82,258,989
Savings....................................................... 25,067,846 24,157,812 24,099,277
Time deposits of $100,000 or more............................. 43,202,979 43,373,125 41,931,273
Other time deposits........................................... 134,250,002 138,081,728 148,127,240
-------------- -------------- --------------
Total deposits.................................................. 377,050,612 365,896,457 355,946,772
Accrued interest payable........................................ 1,266,760 1,372,846 1,368,944
Federal Home Loan Bank advances................................. 30,000,000 17,000,000 2,000,000
Federal funds purchased......................................... 8,500,000 2,800,000 1,500,000
Other liabilities............................................... 3,664,160 1,234,796 1,276,437
-------------- -------------- --------------
Total liabilities............................................... 420,481,532 388,304,099 362,092,153
SHAREHOLDERS' EQUITY
Common stock--$1 par value; 30,000,000 authorized; 8,829,000
issued and outstanding at June 30, 1999 (unaudited) and
December 31, 1998; 2,172,400 issued and outstanding at
December 31, 1997............................................. 8,829,000 8,827,600 2,172,400
Additional paid-in-capital...................................... 791,088 783,488 6,758,688
Retained earnings............................................... 35,014,063 33,274,134 29,095,766
Accumulated other comprehensive income.......................... (490,154) 61,100 82,365
-------------- -------------- --------------
Total shareholders' equity...................................... 44,143,997 42,946,322 38,109,219
-------------- -------------- --------------
Total liabilities and shareholders' equity...................... $ 464,625,529 $ 431,250,421 $ 400,201,372
-------------- -------------- --------------
-------------- -------------- --------------
</TABLE>
See accompanying notes.
F-3
<PAGE>
MAIN STREET BANKS INCORPORATED AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
SIX MONTHS ENDED YEAR ENDED DECEMBER 31
---------------------- ----------------------------------
<S> <C> <C> <C> <C> <C>
1999 1998 1998 1997 1996
---------- ---------- ---------- ---------- ----------
<CAPTION>
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Interest income:
Loans, including fees.......................... $16,365,949 $15,362,081 $31,598,633 $28,414,337 $24,857,007
Interest on investment securities:
Taxable........................................ 1,393,724 1,693,107 3,178,151 3,731,234 3,469,851
Non-taxable.................................... 345,356 390,102 688,448 784,261 929,571
Federal funds sold............................. 30,792 106,782 314,158 707,009 507,646
Interest-bearing deposits in banks............. 6,909 3,221 8,912 9,797 3,515
---------- ---------- ---------- ---------- ----------
Total interest income............................ 18,142,730 17,555,293 35,788,302 33,646,638 29,767,590
Interest expense:
Interest-bearing demand and money market....... 944,379 1,008,126 1,992,775 1,833,960 1,434,074
Savings........................................ 246,572 241,287 479,459 465,560 477,668
Time deposits of $100,000 or more.............. 1,204,803 1,190,418 2,435,359 2,261,132 2,033,583
Other time deposits............................ 3,502,110 3,938,769 7,691,218 8,355,983 8,359,421
Federal Funds purchased........................ 121,649 55,816 62,871 4,314 53,800
Federal Home Loan Bank advances................ 513,822 95,683 586,113 105,661 24,204
Other.......................................... 13,076 7,954 18,494 16,044 16,134
---------- ---------- ---------- ---------- ----------
Total interest expense........................... 6,546,411 6,538,053 13,266,289 13,042,654 12,398,884
Net interest income.............................. 11,596,319 11,017,240 22,522,013 20,603,984 17,368,706
Provision for loan losses........................ 535,000 670,000 865,000 1,405,000 934,737
---------- ---------- ---------- ---------- ----------
Net interest income after provision for loan
losses......................................... 11,061,319 10,347,240 21,657,013 19,198,984 16,433,969
Noninterest income:
Service charges on deposit accounts............ 1,503,179 1,540,084 3,098,573 2,897,612 2,299,505
Investment securities gains.................... -- 13,080 17,533 20,958 76,200
Gain (loss) on sales of premises and
equipment.................................... 345,958 -- 55,284 (150,059) 444,852
Gains on sales of mortgage loans............... -- (6,128) 296,845 -- --
Gains on sales of other loans.................. -- 3,080 40,587 99,266 108,545
Other income................................... 1,363,804 1,086,424 2,286,219 1,480,375 755,402
---------- ---------- ---------- ---------- ----------
Total noninterest income......................... 3,212,941 2,636,540 5,795,041 4,348,152 3,684,504
Noninterest expense:
Salaries and other compensation................ $4,619,373 $4,314,743 $8,594,292 $7,291,916 $5,847,737
Employee benefits.............................. 746,709 672,207 1,339,640 1,357,062 1,081,103
Net occupancy and equipment expense............ 1,445,539 1,244,163 2,729,816 2,338,049 1,949,872
Professional services.......................... 308,877 176,278 315,015 308,854 378,157
Regulatory agency assessments.................. 77,824 81,803 161,351 107,622 975,369
Amortization of intangible assets.............. 219,383 219,383 438,767 438,767 656,371
Other expense.................................. 2,236,138 2,112,208 4,268,097 3,717,315 3,127,494
---------- ---------- ---------- ---------- ----------
Total noninterest expense........................ 9,653,843 8,820,785 17,846,978 15,559,585 14,016,103
Income before income taxes....................... 4,620,417 4,162,995 9,605,076 7,987,551 6,102,370
Income tax expense............................... 1,467,960 1,284,567 3,089,701 2,497,768 1,811,212
---------- ---------- ---------- ---------- ----------
Net income....................................... $3,152,457 $2,878,428 $6,515,375 $5,489,783 $4,291,158
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
Earnings per share-basic and diluted............. $ .36 $ .33 $ .75 $ .63 $ .50
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
Weighted average common shares outstanding....... 8,827,537 8,695,788 8,710,970 8,657,180 8,548,456
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
</TABLE>
See accompanying notes.
F-4
<PAGE>
MAIN STREET BANKS INCORPORATED AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
ACCUMULATED
COMMON STOCK ADDITIONAL OTHER TOTAL
-------------------- PAID-IN RETAINED COMPREHENSIVE SHAREHOLDERS'
SHARES AMOUNT CAPITAL EARNINGS INCOME EQUITY
--------- --------- ----------- ---------- -------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Balance at January 1, 1996......... 355,650 $ 355,650 $8,051,463 $23,097,475 $ 38,839 $31,543,427
Comprehensive income, net of tax:
Net income..................... -- -- -- 4,291,158 -- 4,291,158
Other comprehensive income:
Net unrealized loss on
investment securities held
for sale arising in the
current year............... (233,033) (233,033)
Less reclassification
adjustment for net gains
included in net income..... (50,292) (50,292)
-------------
Comprehensive income............. 4,007,833
Cash dividends declared per share
($.17 per share)............... -- -- -- (1,422,360) -- (1,422,360)
Stock issued under restricted
stock award plan............... 30,200 30,200 362,400 -- -- 392,600
Stock forfeited under restricted
stock award plan............... (60) (60) -- -- -- (60)
Common stock split (6 for 1),
effected in the form of a
dividend......................... 1,777,950 1,777,950 (1,777,950) -- -- --
--------- --------- ----------- ---------- -------------- -------------
Balance at December 31, 1996....... 2,163,740 $2,163,740 $6,635,913 $25,966,273 $ (244,486) $34,521,440
<CAPTION>
ACCUMULATED
COMMON STOCK ADDITIONAL OTHER TOTAL
-------------------- PAID-IN RETAINED COMPREHENSIVE SHAREHOLDERS'
SHARES AMOUNT CAPITAL EARNINGS INCOME EQUITY
--------- --------- ----------- ---------- -------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1996....... 2,163,740 $2,163,740 $6,635,913 $25,966,273 $ (244,486) $34,521,440
Comprehensive income, net of tax:
Net income..................... -- -- -- 5,489,783 -- 5,489,783
Other comprehensive income:
Net unrealized gains on
investment securities held
for sale arising in the
current year............... -- -- -- -- 340,683 340,683
Less reclassification
adjustment for net gains
included in net income..... -- -- -- -- (13,832) (13,832)
-------------
Comprehensive income............. 5,816,634
Cash dividends declared per share
($.27 per share)............... -- -- -- (2,360,290) -- (2,360,290)
Stock issued under restricted
stock award plan............... 9,700 9,700 135,800 -- -- 145,500
Stock forfeited under restricted
stock award plan............... (1,040) (1,040) (13,025) -- -- (14,065)
--------- --------- ----------- ---------- -------------- -------------
Balance at December 31, 1997....... 2,172,400 $2,172,400 $6,758,688 $29,095,766 $ 82,365 $38,109,219
</TABLE>
F-5
<PAGE>
MAIN STREET BANKS INCORPORATED AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (CONTINUED)
<TABLE>
<CAPTION>
ACCUMULATED
COMMON STOCK ADDITIONAL OTHER TOTAL
-------------------- PAID-IN RETAINED COMPREHENSIVE SHAREHOLDERS'
SHARES AMOUNT CAPITAL EARNINGS INCOME EQUITY
--------- --------- ----------- ---------- -------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1997....... 2,172,400 $2,172,400 $6,758,688 $29,095,766 $ 82,365 $38,109,219
Comprehensive income, net of tax:
Net income..................... 6,515,375 6,515,375
Other comprehensive income:
Net unrealized losses on
investment securities held
for sale arising in the
current year............... -- -- -- -- (32,837) (32,837)
Less reclassification
adjustment for net gains
included in net income..... -- -- -- -- 11,572 11,572
-------------
Comprehensive income............. 6,494,110
Cash dividends declared per share
($.27 per share)............... -- -- -- (2,337,007) -- (2,337,007)
Stock issued under restricted
stock award plan............... 132,000 132,000 548,000 -- -- 680,000
Common stock split (4 for 1),
effected in the form of a
dividend....................... 6,523,200 6,523,200 (6,523,200) -- -- --
--------- --------- ----------- ---------- -------------- -------------
Balance at December 31, 1998....... 8,827,600 $8,827,600 $ 783,488 $33,274,134 $ 61,100 $42,946,322
<CAPTION>
ACCUMULATED
COMMON STOCK ADDITIONAL OTHER TOTAL
-------------------- PAID-IN RETAINED COMPREHENSIVE SHAREHOLDERS'
SHARES AMOUNT CAPITAL EARNINGS INCOME EQUITY
--------- --------- ----------- ---------- -------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1998....... 8,827,600 $8,827,600 $ 783,488 $33,274,134 $ 61,100 $42,946,322
Comprehensive income, net of tax:
Net income (unaudited)......... 3,152,457 3,152,457
Other comprehensive income:
Net unrealized losses on
investment securities held
for sale arising in the
current year (unaudited)... (551,254) (551,254)
Less reclassification
adjustment for net gains
included in net income
(unaudited)................ -- --
-------------
Comprehensive income
(unaudited).................... 2,601,203
Cash dividends declared per share
($.16 per share) (unaudited)... (1,412,528) (1,412,528)
Stock issued under restricted
stock award plan............... 4,000 4,000 16,000 20,000
Stock forfeited under restricted
stock award plan............... (2,600) (2,600) (8,400) (11,000)
--------- --------- ----------- ---------- -------------- -------------
Balance at June 30, 1999
(unaudited)...................... 8,829,000 $8,829,000 $ 791,088 $35,014,063 ($ 490,154) $44,143,997
--------- --------- ----------- ---------- -------------- -------------
--------- --------- ----------- ---------- -------------- -------------
</TABLE>
See accompanying notes.
F-6
<PAGE>
MAIN STREET BANKS INCORPORATED AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
SIX MONTHS ENDED
<S> <C> <C> <C> <C> <C>
JUNE 30 YEAR ENDED DECEMBER 31
---------------------------- -------------------------------------------
<CAPTION>
1999 1998 1998 1997 1996
------------- ------------- ------------- ------------- -------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income.................................... $ 3,152,457 $ 2,878,428 $ 6,515,375 $ 5,489,783 $ 4,291,158
Adjustments to reconcile net income to net
cash provided by operating activities:
Provision for loan losses................... 535,000 670,000 865,000 1,405,000 934,737
Depreciation and amortization............... 673,682 489,016 1,090,001 913,918 691,690
Amortization of intangible assets........... 219,384 219,383 452,213 451,642 656,371
Net (gain) loss on sales of OREO............ (23,512) (945) (79,018) 10,677 (69,913)
Gain on sale of charter..................... -- -- -- -- (425,000)
Investment securities gains................. -- (13,080) (17,553) (20,958) (76,200)
Net amortization of investment securities... (32,264) (6,969) (33,502) (10,022) 41,520
Net accretion on loans purchased............ (57,731) (51,558) (69,695) (126,214) (223,353)
(Gain) loss on sales of premises and
equipment................................. (348,273) (3,383) (55,284) 150,059 (19,852)
Net decrease (increase) in mortgage loans
held for sale............................. 626,168 (2,719,505) (4,282,914) -- --
Gains on sales of mortgage loans............ (144,443) (116,503) (296,845) -- --
Gain on sales of other loans................ -- (3,080) (40,587) (99,266) --
Deferred income tax (benefit) expense....... (75,629) -- 95,955 (216,840) (160,206)
Deferred net loan fees...................... 50,135 50,135 100,120 50,135 63,922
Vesting in restricted stock award plan...... 244,644 30,000 493,000 335,700 216,840
Changes in operating assets and liabilities:
(Increase) decrease in accrued interest
receivable.............................. (136,644) 156,162 245,179 (468,856) 177,034
Increase (decrease) in accrued interest
payable................................. (106,086) (41,918) 3,902 165,487 (69,354)
Other..................................... 261,726 (1,036,558) (975,329) 201,087 (863,041)
------------- ------------- ------------- ------------- -------------
Net cash provided by operating activities..... 4,838,614 499,625 4,010,018 8,231,332 5,166,353
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of investment securities held to
maturity.................................... (3,722,280) (2,744,864) (3,764,460) (1,015,000) --
Purchases of investment securities available
for sale.................................... (9,999,093) (11,742,477) (25,389,492) (41,813,157) (9,268,893)
Purchases of other investments................ (268,200) (14,000) (14,000) (54,300) (591,500)
Maturities of investment securities held to
maturity.................................... 427,790 2,268,790 3,368,790 2,363,022 3,389,086
Maturities and calls of investment securities
available for sale.......................... 15,372,740 18,030,043 31,951,576 31,541,825 15,433,453
Proceeds from sales of investment securities
available for sale.......................... -- -- -- 3,106,435 --
Net proceeds from sale of charter............. -- -- -- -- 425,000
Net increase in loans......................... (31,024,617) (10,202,015) (27,319,593) (40,668,075) (23,532,349)
Purchases of premises and equipment........... (1,594,402) (1,844,343) (3,764,652) (1,367,513) (6,535,672)
Proceeds from sales of premises and
equipment................................... 943,722 9,542 491,506 572,198 89,765
Proceeds from sales of OREO................... 189,456 392,288 796,165 889,343 1,555,439
------------- ------------- ------------- ------------- -------------
Net cash used by investing activities......... (29,674,884) (5,847,036) (23,644,160) (46,445,222) (19,035,671)
</TABLE>
F-7
<PAGE>
MAIN STREET BANKS INCORPORATED AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30 YEAR ENDED DECEMBER 31
---------------------------- -------------------------------------------
1999 1998 1998 1997 1996
------------- ------------- ------------- ------------- -------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in demand and savings accounts... 15,156,027 12,188,031 18,553,345 14,767,417 19,657,158
(Decrease) increase in time deposits.......... (4,001,872) (8,826,835) (8,603,660) 13,922,667 (4,427,692)
(Decrease) increase in federal funds
purchased................................... 5,700,000 (1,500,000) 1,300,000 1,500,000 --
Increase in Federal Home Loan Bank advances... 13,000,000 15,000,000 15,000,000 2,000,000 --
Dividends paid................................ (1,412,528) (1,086,200) (2,173,900) (1,817,190) (1,422,360)
------------- ------------- ------------- ------------- -------------
Net cash provided by financing activities..... 28,441,627 15,774,996 24,075,785 30,372,894 13,807,106
------------- ------------- ------------- ------------- -------------
Net increase (decrease) in cash and cash
equivalents................................. 3,605,357 10,427,585 4,441,643 (7,840,996) (62,212)
Cash and cash equivalents at beginning of
period...................................... 21,374,398 16,932,755 16,932,755 24,773,751 24,835,963
------------- ------------- ------------- ------------- -------------
Cash and cash equivalents at end of period.... $ 24,979,755 $ 27,360,340 $ 21,374,398 $ 16,932,755 $ 24,773,751
------------- ------------- ------------- ------------- -------------
------------- ------------- ------------- ------------- -------------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION
Cash paid during the year for:
Interest.................................... $ 6,546,410 $ 6,538,052 $ 13,262,387 $ 12,877,167 $ 12,468,235
------------- ------------- ------------- ------------- -------------
------------- ------------- ------------- ------------- -------------
Income taxes, net........................... $ 785,000 $ 757,500 $ 2,764,270 $ 2,725,000 $ 2,450,000
------------- ------------- ------------- ------------- -------------
------------- ------------- ------------- ------------- -------------
SUPPLEMENTAL DISCLOSURES OF NONCASH
TRANSACTIONS
Loans transferred to real estate acquired
through foreclosure......................... $ 620,233 $ 491,632 $ 550,168 $ 496,750 $ 2,075,511
------------- ------------- ------------- ------------- -------------
------------- ------------- ------------- ------------- -------------
Bank owned premises transferred to other real
estate...................................... $ -- $ 485,000 $ 685,000 $ -- $ --
------------- ------------- ------------- ------------- -------------
------------- ------------- ------------- ------------- -------------
</TABLE>
See accompanying notes.
F-8
<PAGE>
MAIN STREET BANKS INCORPORATED AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS
Main Street Banks Incorporated is a one-bank holding company which conducts
business primarily in Barrow, Clarke, Gwinnett, Newton, Rockdale and Walton
counties through its wholly owned subsidiary, Main Street Bank. Main Street Bank
provides a full range of traditional banking, mortgage banking, and investment
and insurance services to individual and corporate customers through its
thirteen locations.
The consolidated financial statements of Main Street Banks Incorporated and
subsidiary (collectively the "Company") are prepared in accordance with
generally accepted accounting principles and practices within the financial
services industry, which requires management to make estimates and assumptions
that affect the amounts reported in the consolidated financial statements and
accompanying notes. Actual results could differ significantly from those
estimates. Material estimates that are particularly susceptible to significant
change in the near term relate to the determination of the allowance for loan
losses and the valuation of other real estate acquired in connection with
foreclosures or in satisfaction of loans. Management believes that the allowance
for loan losses is adequate and the valuation of other real estate is
appropriate. While management uses available information to recognize losses on
loans, future additions to the allowance may be necessary based on changes in
economic conditions.
BASIS OF PRESENTATION
The consolidated financial statements include the accounts of Main Street
Banks Incorporated ("Parent") and its wholly owned subsidiary, Main Street Bank.
All significant intercompany transactions and balances have been eliminated in
consolidation.
INVESTMENT SECURITIES
Management determines the appropriate classification of investment
securities at the time of purchase and reevaluates such designation as of each
balance sheet date. Investment securities are classified as held-to-maturity
when the Company has the positive intent and the ability to hold the securities
to maturity. Held to maturity securities are stated at amortized cost.
Investment securities not classified as held-to-maturity are classified as
available for sale. Available for sale securities are stated at fair value with
the unrealized gains and losses, net of tax, reported as a separate component of
shareholders' equity. Other investments are stated at amortized cost.
Realized gains and losses, and declines in value determined to be other than
temporary are included in net securities gains (losses). The cost of securities
sold is based on the specific identification method.
The amortized cost of investment securities classified as held-to-maturity
or available for sale is adjusted for amortization of premiums and accretion of
discounts to expected maturity, or in the case of mortgage-backed securities,
over the estimated life of the security. Such amortization is included in
interest income from investments.
F-9
<PAGE>
MAIN STREET BANKS INCORPORATED AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
LOANS
Loans are reported at the gross amount outstanding reduced by purchase
discount, deferred net loan fees and unearned income. Interest income on loans
is generally recognized over the terms of the loans based on the unpaid daily
principal amount outstanding. If the collectibility of interest appears
doubtful, the accrual thereof is discontinued. When accrual of interest is
discontinued, all unpaid interest is reversed. Interest income on such loans is
subsequently recognized only to the extent cash payments are received, the full
recovery of principal is anticipated, or after full principal has been recovered
when collection of principal is in question. Gains on sales of loans are
recognized at the time of sale, as determined by the difference between the net
sales proceeds and the book value of the loans sold. Loan origination fees, net
of direct loan origination costs, are deferred and recognized as income over the
life of the related loan on a level-yield basis.
MORTGAGE LOANS HELD FOR SALE
Mortgage loans held-for-sale are recorded at the lower of cost or market on
an individual loan basis, determined by outstanding commitments from investors
and prevailing market conditions. The Company did not have any mortgage loans
held-for-sale at December 31, 1997. Gains and losses on sales of loans are
recognized at settlement date. Gains and losses are determined as the difference
between the net sales proceeds and carrying value of the loans sold.
ALLOWANCE FOR LOAN LOSSES
The allowance for loan losses is established through a provision for loan
losses charged to expense. The allowance represents an amount which, in
management's judgment, will be adequate to absorb probable losses on existing
loans that may become uncollectible. Management's judgment in determining the
adequacy of the allowance is based on evaluations of the collectibility of loans
and takes into consideration such factors as changes in the nature and volume of
the loan portfolio, current economic conditions that may affect the borrower's
ability to pay, overall portfolio quality and review of specific problem loans.
Periodic revisions are made to the allowance when circumstances which
necessitate such revisions become known. Recognized losses are charged to the
allowance for loan losses, while subsequent recoveries are added to the
allowance.
PREMISES AND EQUIPMENT
Premises and equipment are reported at cost less accumulated depreciation
and amortization. Depreciation and amortization are computed using primarily
accelerated methods over the estimated useful lives of the assets. Leasehold
improvements are amortized over the shorter of the estimated useful lives of the
improvements or the term of the related lease.
OTHER REAL ESTATE
Other real estate represents property acquired through foreclosure or in
settlement of loans and is recorded at the lower of cost or fair value less
estimated selling expenses. Losses incurred in the acquisition of foreclosed
properties are charged against the allowance for loan losses at the time of
foreclosure. Subsequent writedowns of other real estate are charged to current
operations.
F-10
<PAGE>
MAIN STREET BANKS INCORPORATED AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
GOODWILL AND OTHER INTANGIBLE ASSETS
Substantially all costs in excess of net assets of entities acquired are
being amortized using the straight-line method over periods ranging from 10 to
15 years. Other intangibles related to entities acquired are being amortized
over periods ranging from 5 to 10 years using the straight-line method.
Intangible assets related to capital lease rights are being amortized over the
term of the related lease using the straight-line method. Accumulated
amortization was $3,070,317, $2,904,720 and $2,452,507 at June 30, 1999
(unaudited), December 31, 1998 and 1997, respectively. Amortization expense
totaled $219,383 for the periods ended June 30, 1999 and 1998 (unaudited) and
$452,213, $451,642 and $669,817 for the periods ended December 31, 1998, 1997
and 1996, respectively.
INCOME TAXES
The Company accounts for income taxes using the liability method. Under this
method, deferred tax assets and liabilities are determined based on differences
between financial reporting and tax bases of assets and liabilities and are
measured using the enacted tax rates that will be in effect when the differences
are expected to reverse. Deferred tax assets are reduced by a valuation
allowance when, in the opinion of management, it is more likely than not that
some portion or all of the deferred tax assets will not be realized.
EARNINGS PER SHARE AND COMMON STOCK SPLIT
The Company has adopted the provisions of Financial Accounting Standards
Board No. 128, "Earnings Per Share" ("Statement 128"). All earnings per share
amounts for all periods presented have been restated to conform to the
requirements of Statement 128. All per share amounts have been adjusted for the
common stock splits, effected in the form of dividends, to shareholders of
record on September 1, 1998 and April 30, 1996.
FINANCIAL INSTRUMENTS
In the ordinary course of business, the Company enters into
off-balance-sheet financial instruments consisting of commitments to extend
credit and standby letters of credit. Such financial instruments are recorded in
the financial statements when they are funded or when related fees are incurred
or received.
CASH AND CASH EQUIVALENTS
For purposes of presentation in the statement of cash flows, cash and cash
equivalents include cash on hand, amounts due from banks, interest-bearing
deposits in banks and federal funds sold. Generally, federal funds are purchased
and sold for one-day periods.
RECLASSIFICATION
Certain previously reported amounts have been reclassified to conform to
current presentation.
F-11
<PAGE>
MAIN STREET BANKS INCORPORATED AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board issued Statement No.
130, "Reporting Comprehensive Income" ("Statement 130"), which establishes
standards for reporting and display of comprehensive income and its components
in a full set of general-purpose financial statements. Statement 130 requires
that all items that are required to be recognized under accounting standards as
components of comprehensive income be reported in a financial statement that is
displayed with the same prominence as other financial statements. The Company
adopted this statement in 1998, which is a more inclusive reporting methodology
that includes disclosure of certain financial information that previously has
not been recognized in the calculation and reporting of net income. The
Company's only comprehensive income items are related to unrealized gains and on
investment securities classified as available for sale and reclassification
adjustment for gains and losses on securities sales and calls included in net
income. All comprehensive income items are tax effected at 34%.
In June 1997, the Financial Accounting Standards Board issued Statement No.
131, "Disclosure About Segments of an Enterprise and Related Information"
("Statement 131"), which establishes standards for the way that public business
enterprises report information about operating segments in annual and interim
financial statements. It also establishes standards for related disclosures
about products and services, geographical areas and major customers. The
adoption of this standard did not have a significant impact on the Company, as
the Company principally operates in one business segment.
In March 1998, the Accounting Standards Executive Committee of the American
Institute of Certified Public Accountants issued Statement of Position 98-1,
"Accounting for Costs of Computer Software Developed or Obtained for Internal
Use" ("SOP 98-1"). SOP 98-1 provides guidance as to when it is appropriate to
capitalize the costs of software developed or obtained for internal use. The
effect of the adoption of SOP 98-1 was not material to the Company's financial
position or results of operations.
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities" ("Statement 133"). Statement 133 establishes new
accounting and reporting standards for derivatives. This statement requires all
derivatives to be measured at fair value and recognized as either assets or
liabilities in the statement of financial condition. Accounting for the changes
in fair value of a derivative depends on the intended use of the derivative and
the resulting designation. In June of 1999, the Financial Accounting Standards
Board elected to defer the effective date of this statement for one year.
Adoption of this statement is required for the Company's financial statements
for the year ending December 31, 2001. Adoption is not expected to result in a
material financial impact based on the Company's limited use of derivatives.
2. CASH AND DUE FROM BANKS
The Company is required to maintain average reserve balances with the
Federal Reserve Bank, on deposit with national banks, or in cash. The average
reserve requirements at June 30, 1999 (unaudited), December 31, 1998 and 1997
were approximately $8,191,000, $8,588,000 and $6,665,000, respectively. The
Company maintained cash balances and reserves which were adequate to meet these
requirements.
F-12
<PAGE>
MAIN STREET BANKS INCORPORATED AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
3. INVESTMENT SECURITIES
The amortized cost and estimated fair value of investment securities are as
follows:
<TABLE>
<CAPTION>
JUNE 30, 1999
(UNAUDITED)
------------------------------------------------------
<S> <C> <C> <C> <C>
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED
COST GAINS LOSSES FAIR VALUE
------------- ----------- ----------- -------------
HELD TO MATURITY SECURITIES
States and political subdivisions......................... $ 15,793,456 $ 244,405 $ (333,302) $ 15,704,559
------------- ----------- ----------- -------------
------------- ----------- ----------- -------------
AVAILABLE FOR SALE SECURITIES
U.S. Treasury securities.................................. $ 4,988,396 $ 16,432 $ (20,458) $ 4,984,370
U.S. Government agencies and corporations................. 13,995,229 3,709 (226,446) 13,772,492
Mortgage-backed securities................................ 24,574,786 65,078 (529,648) 24,110,216
------------- ----------- ----------- -------------
$ 43,558,411 $ 85,219 $ (776,552) $ 42,867,078
------------- ----------- ----------- -------------
------------- ----------- ----------- -------------
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1998
------------------------------------------------------
<S> <C> <C> <C> <C>
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED
COST GAINS LOSSES FAIR VALUE
------------- ----------- ----------- -------------
HELD TO MATURITY SECURITIES
States and political subdivisions......................... $ 12,497,146 $ 547,339 $ -- $ 13,044,485
------------- ----------- ----------- -------------
------------- ----------- ----------- -------------
AVAILABLE FOR SALE SECURITIES
U.S. Treasury securities.................................. $ 3,991,421 $ 49,529 $ -- $ 4,040,950
U.S. Government agencies and corporations................. 14,495,177 108,438 -- 14,603,615
Mortgage-backed securities................................ 29,663,372 59,314 (124,705) 29,597,981
------------- ----------- ----------- -------------
$ 48,149,970 $ 217,281 $ (124,705) $ 48,242,546
------------- ----------- ----------- -------------
------------- ----------- ----------- -------------
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1997
------------------------------------------------------
<S> <C> <C> <C> <C>
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED
COST GAINS LOSSES FAIR VALUE
------------- ----------- ----------- -------------
HELD TO MATURITY SECURITIES
States and political subdivisions.......................... $ 12,068,110 $ 474,704 $ (16,403) $ 12,526,411
------------- ----------- ----------- -------------
------------- ----------- ----------- -------------
AVAILABLE FOR SALE SECURITIES
U.S. Treasury securities................................... $ 6,477,292 $ 52,078 $ -- $ 6,529,370
U.S. Government agencies and corporations.................. 24,525,744 108,351 (1,375) 24,632,720
Mortgage-backed securities................................. 23,705,261 51,176 (84,897) 23,671,540
------------- ----------- ----------- -------------
$ 54,708,297 $ 211,605 $ (86,272) $ 54,833,630
------------- ----------- ----------- -------------
------------- ----------- ----------- -------------
</TABLE>
The amortized cost and estimated fair value of investment securities held to
maturity and available for sale at December 31, 1998, by contractual maturity,
are shown below. Expected maturities will differ from contractual maturities
because issuers may have the right to call or repay obligations without call
F-13
<PAGE>
MAIN STREET BANKS INCORPORATED AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
3. INVESTMENT SECURITIES (CONTINUED)
or prepayment penalties. Mortgage-backed securities have been allocated based on
expected maturity dates after considering assumed prepayment patterns.
<TABLE>
<CAPTION>
INVESTMENT SECURITIES INVESTMENT SECURITIES
HELD TO MATURITY AVAILABLE FOR SALE
---------------------------- ----------------------------
<S> <C> <C> <C> <C>
AMORTIZED FAIR AMORTIZED FAIR
COST VALUE COST VALUE
------------- ------------- ------------- -------------
Due in one year or less............................. $ 778,704 $ 790,945 $ 4,555,526 $ 4,587,098
Due after one year through five years............... 4,447,348 4,589,487 14,352,309 14,429,299
Due after five years through ten years.............. 6,721,094 7,016,308 7,605,835 7,674,604
Due after ten years................................. 550,000 647,745 21,542,498 21,551,475
------------- ------------- ------------- -------------
$ 12,497,146 $ 13,044,485 $ 48,056,168 $ 48,242,476
------------- ------------- ------------- -------------
------------- ------------- ------------- -------------
</TABLE>
Gains and losses on sales of securities consist of the following:
AVAILABLE FOR SALE
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30 YEAR ENDED DECEMBER 31
-------------------- -------------------------------
<S> <C> <C> <C> <C> <C>
1999 1998 1998 1997 1996
--------- --------- --------- --------- ---------
<CAPTION>
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Gross gains................................................ -- $ 13,080 $ 17,533 $ 49,620 76,200
Gross losses............................................... -- -- -- (28,662) --
--------- --------- --------- --------- ---------
Net realized gains......................................... -- $ 13,080 $ 17,533 $ 20,958 $ 76,200
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
</TABLE>
The related income tax expense on sale of securities for the periods ended
June 30, 1999 and June 30, 1998 (unaudited), was $0, and $4,055, and $5,640,
$6,554 and $22,616 for periods ended December 31, 1998, 1997, and 1996,
respectively.
Securities with a carrying value of approximately $51,404,753, $51,551,503
and $56,060,292 at June 30, 1999 (unaudited), December 31, 1998 and 1997,
respectively, were pledged to secure public deposits and for other purposes.
F-14
<PAGE>
MAIN STREET BANKS INCORPORATED AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
4. LOANS
Loans are summarized as follows:
<TABLE>
<CAPTION>
DECEMBER 31
JUNE 30 ------------------------------
1999 1998 1997
-------------- -------------- --------------
<S> <C> <C> <C>
(UNAUDITED)
Commercial and industrial....................................... $ 18,498,571 $ 15,187,523 $ 13,916,875
Real estate construction........................................ 53,460,857 48,330,628 39,812,549
Real estate mortgage............................................ 236,668,017 221,142,074 207,272,423
Consumer and other.............................................. 47,863,475 41,271,359 38,542,292
-------------- -------------- --------------
Total loans..................................................... 356,490,920 325,931,584 299,544,139
Less:
Purchase discount............................................. (341,691) (399,422) (469,117)
Deferred net loan fees........................................ (556,805) (499,785) (364,203)
Unearned income............................................... (369,827) (415,517) (619,501)
Allowance for loan losses..................................... (6,215,284) (5,849,997) (5,091,653)
-------------- -------------- --------------
Loans net....................................................... $ 349,007,313 $ 318,766,863 $ 292,999,665
-------------- -------------- --------------
-------------- -------------- --------------
</TABLE>
Loans in nonaccrual status amounted to $1,655,484, $1,442,259 and $754,290
at June 30, 1999 (unaudited), December 31, 1998 and 1997, respectively. The
allowance for loan losses related to these impaired loans was $248,323, $216,339
and $113,144 at June 30, 1999 (unaudited), December 31, 1998 and 1997,
respectively. The average recorded investment in impaired loans was $1,631,492,
$826,254 and $783,226 at June 30, 1999 (unaudited), December 31, 1998 and 1997,
respectively. If such loans had been on an accrual basis, interest income would
have been approximately $59,985 and $23,306 higher for the periods ended June
30, 1999 and 1998 (unaudited) and $33,230, $27,933 and $25,537 higher for the
periods ended December 31, 1998, 1997 and 1996, respectively.
An analysis of activity in the allowance for loan losses is as follows:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30 YEAR ENDED DECEMBER 31
-------------------------- ----------------------------------------
<S> <C> <C> <C> <C> <C>
1999 1998 1998 1997 1996
------------ ------------ ------------ ------------ ------------
<CAPTION>
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Balance at beginning of year............... $ 5,849,997 $ 5,091,653 $ 5,091,653 $ 4,508,378 $ 4,233,786
Provision charged to expense............... 535,000 670,000 865,000 1,405,000 934,737
Loans charged off.......................... (352,461) (187,272) (507,555) (1,076,946) (891,253)
Recoveries of loans previously charged
off...................................... 182,748 140,884 400,899 255,221 231,108
------------ ------------ ------------ ------------ ------------
Balance at end of period................... $ 6,215,284 $ 5,715,265 $ 5,849,997 $ 5,091,653 $ 4,508,378
------------ ------------ ------------ ------------ ------------
------------ ------------ ------------ ------------ ------------
</TABLE>
A substantial portion of the Company's loans are secured by real estate in
northeast Georgia communities, primarily in Barrow, Clarke, 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 our loan portfolio and the recovery of a substantial
portion of the carrying amount of real estate are susceptible to changes in
market conditions in northeast Georgia.
F-15
<PAGE>
MAIN STREET BANKS INCORPORATED AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
5. PREMISES AND EQUIPMENT
Premises and equipment are comprised of the following:
<TABLE>
<CAPTION>
DECEMBER 31
JUNE 30 ----------------------------
1999 1998 1997
------------- ------------- -------------
<S> <C> <C> <C>
(UNAUDITED)
Land................................................................ $ 3,481,008 $ 3,462,623 $ 3,647,308
Buildings and leasehold improvements................................ 9,587,608 9,421,350 8,184,846
Furniture, fixtures and equipment................................... 8,238,894 7,553,580 6,856,975
Construction in process............................................. 210,095 917,897 321,289
------------- ------------- -------------
21,517,605 21,355,450 19,010,418
Less accumulated depreciation and amortization...................... (5,622,129) (5,027,383) (5,293,221)
------------- ------------- -------------
$ 15,895,476 $ 16,328,067 $ 13,717,197
------------- ------------- -------------
------------- ------------- -------------
</TABLE>
Depreciation and amortization expense totaled $673,682 and $489,016 for the
periods ended June 30, 1999 and 1998 (unaudited) and $1,090,001, $913,918, and
$691,690 for the periods ended December 31, 1998, 1997 and 1996, respectively.
The Company leases certain buildings and various equipment under operating
leases. Minimum payments, by year and in the aggregate, under noncancelable
operating leases with initial or remaining terms in excess of one year as of
December 31, 1998 are as follows:
<TABLE>
<S> <C>
1999............................................................ $ 197,265
2000............................................................ 188,816
2001............................................................ 144,739
2002............................................................ 147,906
2003............................................................ 115,405
Thereafter...................................................... 585,510
---------
Total minimum lease payments.................................... $1,379,641
---------
---------
</TABLE>
Rental expense for all operating leases was $106,063 and $104,982 for the
periods ended June 30, 1999 and 1998 (unaudited) and $200,933, $154,915, and
$173,672 for the periods ended December 31, 1998, 1997 and 1996, respectively.
Rental income of $1,950 and $16,382 for the periods ended June 30, 1999 and 1998
(unaudited) and $29,582, $20,880 and $15,819 for the periods December 31, 1998,
1997 and 1996, respectively, is included as a reduction of net occupancy and
equipment expense in the consolidated statements of income.
F-16
<PAGE>
MAIN STREET BANKS INCORPORATED AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
6. INTEREST BEARING DEPOSITS
A summary of time deposits by year of maturity at June 30, 1999 is as
follows (unaudited):
<TABLE>
<S> <C>
1999.......................................................... $94,507,434
2000.......................................................... 71,863,914
2001.......................................................... 6,761,076
2002.......................................................... 1,804,153
2003 and after................................................ 2,516,404
-----------
Total time deposits........................................... $177,452,981
-----------
-----------
</TABLE>
The Company had $43,202,979, $43,373,125 and $41,931,273 in time deposits
over $100,000 at June 30, 1999 (unaudited), December 31, 1998 and 1997,
respectively.
Interest expense on these deposits was $1,204,803 and $1,190,418 for the
periods ended June 30, 1999 and 1998 (unaudited) and $2,435,359, $2,261,132 and
$2,033,583 for the periods ended December 31, 1998, 1997, and 1996,
respectively.
7. BORROWINGS
At June 30, 1999 (unaudited), December 31, 1998 and 1997 the Company had
advances borrowed from the Federal Home Loan Bank totaling $30,000,000,
$17,000,000 and $2,000,000, respectively. Interest payments and principal
payments are due at various maturity dates through 2008 with rates ranging from
5.14% to 6.07%. The Company has pledged all of its eligible residential mortgage
loans secured by first mortgages on one-to-four family dwellings as collateral.
The Company is allowed to borrow up to 75% of the balance of the eligible loans
pledged as collateral. At June 30, 1999 (unaudited) and December 31, 1998 the
available balance under the Company's line with the Federal Home Loan Bank was
approximately $43,700,000 and $56,700,000, respectively. The Company's weighted
average interest rate on borrowings for the periods ended June 30, 1999
(unaudited), December 31, 1998 and 1997 was 5.57%, 5.72% and 5.99%,
respectively. Of the $30,000,000 balance outstanding at June 30, 1999
(unaudited), $3,000,000 matures in 1999, $7,000,000 matures in 2000, $5,000,000
matures in 2002, $5,000,000 matures in 2003 and $10,000,000 matures in 2008.
8. INCOME TAXES
Income tax expense is summarized as follows:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30 YEAR ENDED DECEMBER 31
-------------------------- ----------------------------------------
<S> <C> <C> <C> <C> <C>
1999 1998 1998 1997 1996
------------ ------------ ------------ ------------ ------------
<CAPTION>
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Current income tax provision............... $ 1,543,589 $ 1,284,567 $ 2,993,746 $ 2,714,248 $ 1,971,418
Deferred income tax expense (benefit)...... (75,629) -- 95,955 (216,480) (160,206)
------------ ------------ ------------ ------------ ------------
$ 1,467,960 $ 1,284,567 $ 3,089,701 $ 2,497,768 $ 1,811,212
------------ ------------ ------------ ------------ ------------
------------ ------------ ------------ ------------ ------------
</TABLE>
F-17
<PAGE>
MAIN STREET BANKS INCORPORATED AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
8. INCOME TAXES (CONTINUED)
A reconciliation of income tax computed at statutory rates to total income
tax expense is as follows:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30 YEAR ENDED DECEMBER 31
-------------------------- ----------------------------------------
<S> <C> <C> <C> <C> <C>
1999 1998 1998 1997 1996
------------ ------------ ------------ ------------ ------------
<CAPTION>
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Pretax income.............................. $ 4,620,417 $ 4,162,995 $ 9,605,076 $ 7,987,551 $ 6,102,370
------------ ------------ ------------ ------------ ------------
------------ ------------ ------------ ------------ ------------
Income tax computed at
statutory rate........................... $ 1,570,942 $ 1,415,418 $ 3,265,726 $ 2,715,768 $ 2,074,806
Increase (decrease) resulting from:
Tax-exempt interest...................... (155,533) (162,948) (299,866) (325,452) (316,090)
Nondeductible interest on tax-exempt
investments............................ 13,600 19,909 27,505 34,064 39,624
Amortization of goodwill................. 8,948 8,948 35,790 35,790 30,351
Other, net............................... 30,003 3,240 60,546 37,598 (17,479)
------------ ------------ ------------ ------------ ------------
$ 1,467,960 $ 1,284,567 $ 3,089,701 $ 2,497,768 $ 1,811,212
------------ ------------ ------------ ------------ ------------
------------ ------------ ------------ ------------ ------------
</TABLE>
The following summarizes the significant components of the Company's
deferred tax assets and (liabilities):
<TABLE>
<CAPTION>
JUNE 30 DECEMBER 31
------------ --------------------------
1999 1998 1997
------------ ------------ ------------
<S> <C> <C> <C>
(UNAUDITED)
Reserve for loan losses................................................. $ 1,691,102 $ 1,691,102 $ 1,470,169
Accumulated depreciation................................................ (274,128) (274,128) (197,352)
Core deposit intangible................................................. (15,594) (15,594) (72,677)
Deferred net loan fees.................................................. 169,927 169,927 123,829
Net unrealized gains on investment securities available for sale........ 110,483 (31,476) (42,968)
Other, net.............................................................. (137,896) (279,917) 63,376
------------ ------------ ------------
Net deferred tax asset.................................................. $ 1,543,894 $ 1,259,914 $ 1,344,377
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
9. EMPLOYEE BENEFITS
The Company sponsors a 401(k) Employee Savings Plan that permits employees
to defer annual cash compensation as specified under the plan. The Board of
Directors determines the Company's annual contribution, which was $77,290 and
$64,080 for the periods ended June 30, 1999 and 1998 (unaudited) and $195,434,
$278,272 and $244,192 for the periods ended December 31, 1998, 1997 and 1996,
respectively.
The Company has a Management Incentive Bonus Plan for key executives that
provides annual cash awards, if approved, based on eligible compensation and
achieving earnings goals. The Company also has a General Bonus Plan that
provides for annual cash awards to eligible employees as established by the
Board of Directors. The total expense under these plans was $420,000 and
$403,000 for the periods ended June 30, 1999 and 1998 (unaudited) and $465,669,
$474,109 and $483,270 for the periods ended December 31, 1998, 1997 and 1996,
respectively.
F-18
<PAGE>
MAIN STREET BANKS INCORPORATED AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
10. RELATED PARTY TRANSACTIONS
Directors, executive officers, and their related interests were customers of
the Company and had other transactions with us in the ordinary course of
business. Loans outstanding to certain directors, executive officers, and their
related interests at June 30, 1999 (unaudited), December 31, 1998 and 1997 were
$2,083,941, $2,378,145 and $2,060,571, respectively. For the periods ended June
30, 1999 (unaudited) and December 31, 1998 $78,784 and $744,424, respectively of
such loans were made and loan repayments totaled $372,988 and $426,756 for the
respective period. It is the Company's policy that such transactions be made on
substantially the same terms as those prevailing at the time for comparable
loans to other persons. These individuals and their related interests also
maintain customary demand and time deposit accounts with the Company.
The Company has operating leases for bank premises that are owned by related
parties. These related parties consist of an individual who is a primary
shareholder, a member of our Board of Directors, and one of our Executive
Officers, and also members of this individual's family. Terms for these related
party leases are substantially the same as those that would be expected to
prevail in the market place. Lease expense totaled approximately $63,000 and
$58,000 for the periods ended June 30, 1999 and 1998 (unaudited) and $111,000,
$95,000 and $62,000 for the periods ended December 31, 1998, 1997 and 1996,
respectively.
11. SHAREHOLDERS' EQUITY
Banking regulations limit the amount of dividends that may be paid to the
Parent without prior approval of the applicable regulatory agency. At December
31, 1998, under current state banking laws, the approval of the Georgia
Department of Banking and Finance will be required if the total of all dividends
declared by the Bank in the calendar year exceeds 50 percent of the net profits
for the previous calendar year and the ratio of equity capital to adjusted total
assets is less than 6 percent.
The Parent has adopted a nonqualified Restricted Stock Award Plan and a
Long-term Incentive Plan, which grants restricted stock and other stock based
compensation to key executives and officers of the Bank. In the case of
restricted stock, Bank executives and officers designated as an "eligible
executive" will vest in the number of shares of common stock awarded under the
plan based on future service over the next five years. A total of 960,000 shares
are authorized to be issued under the plans, with 765,960 shares of restricted
stock issued as of June 30, 1999 (unaudited) and December 31, 1998 and 626,560
shares of restricted stock issued as of December 31, 1997. A total of 491,280
shares were vested with 274,680 shares issued and unvested as of June 30, 1999
(unaudited) and December 31, 1998. A total of 399,600 shares were vested with
226,960 shares issued and unvested as of December 31, 1997.
12. REGULATORY MATTERS
The Company and its banking subsidiary are subject to various regulatory
capital requirements administered by federal and state banking agencies. Failure
to meet minimum capital requirements can initiate certain mandatory, and
possibly additional discretionary, actions by regulators that, if undertaken,
could have a direct material effect on our financial statements. The regulations
require the Company and its banking subsidiary to meet specific capital adequacy
guidelines that involve quantitative measures of the Company's and its banking
subsidiary's assets, liabilities, and certain off-balance-sheet items as
calculated under regulatory accounting practices. The Company and its
F-19
<PAGE>
MAIN STREET BANKS INCORPORATED AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
12. REGULATORY MATTERS (CONTINUED)
banking subsidiary's capital classification is also subject to qualitative
judgments by the regulators about components, risk weightings, and other
factors.
Quantitative measures established by regulation to ensure capital adequacy
require us and our banking subsidiary to maintain minimum amounts and ratios
(set forth in the table below) of Tier 1 capital (as defined in the regulations)
to total average assets (as defined), and minimum ratios of Tier 1 and total
capital (as defined) to risk-weighted assets (as defined). To be considered
adequately capitalized (as defined) under the regulatory framework for prompt
corrective action, the Company and its banking subsidiary must maintain minimum
Tier 1 leverage, Tier 1 risk-based, and total risk-based ratios. As set forth in
the table, as of June 30, 1999 (unaudited), December 31, 1998 and 1997, the
Company and its banking subsidiary were considered well capitalized under
current regulatory guidelines. There are no conditions or events since that
notification that management believes have changed the institution's category.
The following is a summary of the Company's and its banking subsidiary's
capital ratios at June 30, 1999 (unaudited), December 31, 1998 and 1997:
<TABLE>
<CAPTION>
TO BE WELL
CAPITALIZED
UNDER
PROMPT
FOR CAPITAL CORRECTIVE
ACTUAL ADEQUACY ACTION
AMOUNT RATIO PURPOSES RATIO PROVISIONS
------------- --------- ------------- --------- -------------
<S> <C> <C> <C> <C> <C>
Company only
As of June 30, 1999 (unaudited)
Total Capital (to Risk Weighted Assets).............. $ 47,742,000 13.60% $ 28,091,000 8.00% $ 35,114,000
Tier 1 Capital (to Risk Weighted Assets)............. 43,330,000 12.34% 14,046,000 4.00% 21,068,000
Tier 1 Capital (to Average Assets)................... 43,330,000 9.65% 17,964,000 4.00% 22,455,000
As of December 31, 1998
Total Capital (to Risk Weighted Assets).............. $ 45,713,000 14.00% $ 26,121,000 8.00% $ 32,651,000
Tier 1 Capital (to Risk Weighted Assets)............. 41,610,000 12.74% 13,061,000 4.00% 19,591,000
Tier 1 Capital (to Average Assets)................... 41,610,000 9.67% 17,213,000 4.00% 21,516,000
As of December 31, 1997
Total Capital (to Risk Weighted Assets).............. $ 40,642,000 13.66% $ 23,805,000 8.00% $ 29,756,000
Tier 1 Capital (to Risk Weighted Assets)............. 36,906,000 12.40% 11,903,000 4.00% 17,854,000
Tier 1 Capital (to Average Assets)................... 36,906,000 9.00% 16,403,000 4.00% 20,504,000
<CAPTION>
RATIO
---------
<S> <C>
Company only
As of June 30, 1999 (unaudited)
Total Capital (to Risk Weighted Assets).............. 10.00%
Tier 1 Capital (to Risk Weighted Assets)............. 6.00%
Tier 1 Capital (to Average Assets)................... 5.00%
As of December 31, 1998
Total Capital (to Risk Weighted Assets).............. 10.00%
Tier 1 Capital (to Risk Weighted Assets)............. 6.00%
Tier 1 Capital (to Average Assets)................... 5.00%
As of December 31, 1997
Total Capital (to Risk Weighted Assets).............. 10.00%
Tier 1 Capital (to Risk Weighted Assets)............. 6.00%
Tier 1 Capital (to Average Assets)................... 5.00%
</TABLE>
F-20
<PAGE>
MAIN STREET BANKS INCORPORATED AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
12. REGULATORY MATTERS (CONTINUED)
<TABLE>
<CAPTION>
TO BE WELL
CAPITALIZED
UNDER
PROMPT
FOR CAPITAL CORRECTIVE
ACTUAL ADEQUACY ACTION
AMOUNT RATIO PURPOSES RATIO PROVISIONS
------------- --------- ------------- --------- -------------
<S> <C> <C> <C> <C> <C>
Banking subsidiary only
As of June 30, 1999
(unaudited)
Total Capital (to Risk Weighted Assets).............. $ 45,456,000 12.65% $ 28,748,000 8.00% $ 35,935,000
Tier 1 Capital (to Risk Weighted Assets)............. 40,943,000 11.39% 14,374,000 4.00% 21,561,000
Tier 1 Capital (to Average Assets)................... 40,943,000 9.13% 17,944,000 4.00% 22,430,000
As of December 31, 1998
Total Capital (to Risk Weighted Assets).............. $ 43,056,000 13.17% $ 26,154,000 8.00% $ 32,692,000
Tier 1 Capital (to Risk Weighted Assets)............. 38,969,000 11.92% 13,077,000 4.00% 19,615,000
Tier 1 Capital (to Average Assets)................... 38,969,000 9.08% 17,172,000 4.00% 21,465,000
As of December 31, 1997
Total Capital (to Risk Weighted Assets).............. $ 37,293,000 12.89% $ 23,142,560 8.00% $ 28,928,200
Tier 1 Capital (to Risk Weighted Assets)............. 33,659,000 11.64% 11,571,289 4.00% 17,356,920
Tier 1 Capital (to Average Assets)................... 33,659,000 8.26% 16,292,250 4.00% 20,365,650
<CAPTION>
RATIO
---------
<S> <C>
Banking subsidiary only
As of June 30, 1999
(unaudited)
Total Capital (to Risk Weighted Assets).............. 10.00%
Tier 1 Capital (to Risk Weighted Assets)............. 6.00%
Tier 1 Capital (to Average Assets)................... 5.00%
As of December 31, 1998
Total Capital (to Risk Weighted Assets).............. 10.00%
Tier 1 Capital (to Risk Weighted Assets)............. 6.00%
Tier 1 Capital (to Average Assets)................... 5.00%
As of December 31, 1997
Total Capital (to Risk Weighted Assets).............. 10.00%
Tier 1 Capital (to Risk Weighted Assets)............. 6.00%
Tier 1 Capital (to Average Assets)................... 5.00%
</TABLE>
13. OFF-BALANCE-SHEET FINANCIAL INSTRUMENTS
The Company is a party to financial instruments with off-balance-sheet risk
in the normal course of business to meet the financing needs of 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
consolidated statements of financial condition. The contract amounts of those
instruments reflect the extent of involvement the Company has in particular
classes of financial instruments.
The Company's exposure to credit loss in the event of nonperformance by the
customer to the financial instrument for commitments to extend credit and
standby letters of credit is represented by the contractual amount of those
instruments. The Company uses the same credit policies in making commitments and
conditional obligations as are used for on-balance-sheet instruments.
Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the contract. Commitments
generally have fixed expiration dates or other termination clauses and may
require payment of a fee. Since many of the commitments are expected to expire
without being drawn upon, the total commitment amounts do not necessarily
represent future cash requirements. Total commitments to extend credit at June
30, 1999 (unaudited), December 31, 1998 and 1997 include $7,974,491, $9,719,000
and $6,644,817, respectively, in undisbursed credit lines and $34,304,567,
$29,711,000 and $16,550,260, respectively, in unfunded construction and
development loans. The Company's experience has been that approximately 80
percent of loan commitments are ultimately drawn upon by customers.
The Company issues standby letters of credit, which are conditional
commitments issued to guarantee the performance of a customer to a third party.
Those guarantees are primarily issued to support public and private borrowing
arrangements. The credit risk involved in issuing letters of credit
F-21
<PAGE>
MAIN STREET BANKS INCORPORATED AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
13. OFF-BALANCE-SHEET FINANCIAL INSTRUMENTS (CONTINUED)
is essentially the same as that involved in extending loan facilities to
customers. The Company had $601,659, $668,000 and $820,942 in irrevocable
standby letters of credit outstanding at June 30, 1999 (unaudited), December 31,
1998 and 1997, respectively. The Company was not required to perform under any
standby letters of credit during 1998.
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.
14. FAIR VALUES OF FINANCIAL INSTRUMENTS
The Company uses the following methods and assumptions in estimating fair
values of financial instruments:
Cash and cash equivalents - The carrying amount of cash and cash equivalents
approximates fair value.
Interest-bearing deposits - The carrying amount of interest-bearing deposits
approximates fair value.
Investment securities - The fair value of investment securities held to
maturity and available for sale is estimated based on published bid prices
or bid quotations received from securities dealers. The carrying amount of
other investments approximates fair value.
Loans - For variable rate loans that reprice frequently and have no
significant change in credit risk, fair values are based on carrying values.
For all other loans, fair values are calculated by discounting the
contractual cash flows using estimated market rates which reflect the credit
and interest rate risk inherent in the loan, or by using the current rates
at which similar loans would be made to borrowers with similar credit
ratings and for the same remaining maturities.
Mortgage loans held for sale -- The carrying amount of mortgage loans held
for sale approximates fair value.
Deposits - The fair value of deposits with no stated maturity, such as
demand, NOW and MMDA, and savings accounts, is equal to the amount payable
on demand. The fair value of certificates of deposit is based on the
discounted value of contractual cash flows using the rates currently offered
for deposits of similar remaining maturities.
Accrued interest - The carrying amount of accrued interest receivable and
payable approximates fair value.
Off-balance-sheet instruments - Fair values for off-balance-sheet lending
commitments are based on fees currently charged to enter into similar
agreements, taking into account the remaining terms of the agreements and
the borrowers' credit standing.
F-22
<PAGE>
MAIN STREET BANKS INCORPORATED AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
14. FAIR VALUES OF FINANCIAL INSTRUMENTS (CONTINUED)
The estimated fair values of the Company's financial instruments are as
follows:
<TABLE>
<CAPTION>
DECEMBER 31
----------------------------------------------------------
<S> <C> <C> <C> <C>
1998 1997
---------------------------- ----------------------------
<CAPTION>
CARRYING ESTIMATED CARRYING ESTIMATED
VALUE FAIR VALUE VALUE FAIR VALUE
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Financial assets:
Cash and due from banks........................... $ 21,231,287 $ 21,231,287 $ 16,829,585 $ 16,829,585
Interest-bearing deposits......................... 143,111 143,111 103,170 103,170
Investment securities held to maturity............ 12,497,146 13,044,485 12,068,110 12,526,411
Investment securities available for sale.......... 48,246,325 48,246,325 54,840,628 54,840,628
Other investments................................. 1,371,800 1,371,800 1,357,800 1,357,800
Loans............................................. 325,931,584 325,427,958 299,544,139 299,031,974
Mortgage loans held for sale...................... 4,282,914 4,282,914 -- --
Accrued interest receivable....................... 2,739,057 2,739,057 2,984,236 2,984,236
Financial liabilities:
Noncontractual deposits........................... 184,441,604 184,281,858 165,888,259 165,962,374
Contractual deposits.............................. 181,454,853 183,573,873 190,058,513 190,331,801
Accrued interest payable.......................... 1,372,846 1,372,846 1,368,944 1,368,944
Off-balance-sheet instruments:
Undisbursed credit lines.......................... -- 88,676 -- 60,628
Unfunded construction and development loans....... -- 271,087 -- 151,006
Standby letters of credit......................... -- 6,095 -- 7,490
</TABLE>
F-23
<PAGE>
MAIN STREET BANKS INCORPORATED AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
15. OTHER COMPREHENSIVE INCOME
Statement No. 130 requires that all components of comprehensive income and
total comprehensive income be reported on one of the following: (1) the
statement of income, (2) the statement of changes in shareholders equity, or (3)
a separate statement of comprehensive income. Comprehensive income is comprised
of net income and all changes to shareholders' equity, except those due to
investments by owners (changes in paid-in capital) and distributions to owners
(dividends). The Company adopted this statement effective January 1, 1998 and
has elected to report comprehensive income in the consolidated statements of
changes in shareholders' equity.
Other comprehensive income consists of unrealized gains and losses on
available for sale securities. For the six months ended June 30, 1999, the
change in net unrealized loss on available for sale securities is reported in
the consolidated statement of shareholders' equity.
16. PARENT COMPANY FINANCIAL INFORMATION
The following information presents the condensed statements of financial
condition of Main Street Banks Incorporated at June 30, 1999 (unaudited),
December 31, 1998 and 1997, and the statements of income and cash flows for the
periods ended June 30, 1999 (unaudited), June 30, 1998 (unaudited), December 31,
1998, 1997 and 1996:
<TABLE>
<CAPTION>
CONDENSED STATEMENTS OF FINANCIAL CONDITION
-------------------------------------------
<S> <C> <C> <C>
DECEMBER 31
----------------------------
1998 1997
------------- -------------
JUNE 30
-------------
1999
-------------
(UNAUDITED)
ASSETS
Cash and cash equivalents........................................... $ 2,057,274 $ 2,064,537 $ 2,096,310
Investment in subsidiary............................................ 42,748,578 40,852,625 36,542,632
Securities available for sale....................................... -- -- --
Other assets........................................................ 77,527 658,831 --
------------- ------------- -------------
Total assets........................................................ $ 44,883,379 $ 43,575,993 $ 38,638,942
------------- ------------- -------------
------------- ------------- -------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Other liabilities................................................... $ 739,382 $ 629,671 $ 529,723
Shareholders' equity................................................ 44,143,997 42,946,322 38,109,219
------------- ------------- -------------
Total liabilities and shareholders' equity.......................... $ 44,883,379 $ 43,575,993 $ 38,638,942
------------- ------------- -------------
------------- ------------- -------------
</TABLE>
F-24
<PAGE>
MAIN STREET BANKS INCORPORATED AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
16. PARENT COMPANY FINANCIAL INFORMATION (CONTINUED)
CONDENSED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30 YEARS ENDED DECEMBER 31
-------------------------- ----------------------------------------
<S> <C> <C> <C> <C> <C>
1999 1998 1998 1997 1996
------------ ------------ ------------ ------------ ------------
<CAPTION>
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Income:
Dividends from subsidiary................ $ 1,413,568 $ 1,083,962 $ 2,878,106 $ 1,821,328 $ 1,422,972
Other income............................. -- -- -- -- 425,000
------------ ------------ ------------ ------------ ------------
1,413,568 1,083,962 2,878,106 1,821,328 1,847,972
------------ ------------ ------------ ------------ ------------
Expenses:
Salaries and employee benefits........... 5,400 5,400 10,500 10,500 10,800
Legal and professional................... -- -- -- -- 14,037
Other expenses........................... 6,015 6,015 10,695 10,867 5,015
------------ ------------ ------------ ------------ ------------
Total expenses............................. 11,415 11,415 21,195 21,367 29,852
------------ ------------ ------------ ------------ ------------
Income before income tax benefits (expense)
and equity in undistributed income of
subsidiaries............................. 1,402,153 1,072,547 2,856,911 1,799,961 1,818,120
Benefit (expense) for income taxes......... 3,881 3,881 7,206 7,265 (63,291)
------------ ------------ ------------ ------------ ------------
Income before equity in undistributed
income of subsidiary..................... 1,406,034 1,076,428 2,864,117 1,807,226 1,754,829
Equity in undistributed income of
subsidiary............................... 1,746,423 1,802,000 3,651,258 3,682,557 2,536,329
------------ ------------ ------------ ------------ ------------
Net income................................. $ 3,152,457 $ 2,878,428 $ 6,515,375 $ 5,489,783 $ 4,291,158
------------ ------------ ------------ ------------ ------------
------------ ------------ ------------ ------------ ------------
</TABLE>
F-25
<PAGE>
MAIN STREET BANKS INCORPORATED AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
16. PARENT COMPANY FINANCIAL INFORMATION (CONTINUED)
CONDENSED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30 YEAR ENDED DECEMBER 31
---------------------------- ----------------------------------------
<S> <C> <C> <C> <C> <C>
1999 1998 1998 1997 1996
------------- ------------- ------------ ------------ ------------
<CAPTION>
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
OPERATING ACTIVITIES
Net income............................... $ 3,152,457 $ 2,878,428 $ 6,515,375 $ 5,489,783 $ 4,291,158
Adjustments to reconcile net income to
net cash provided by operating
activities:
Undistributed income of subsidiary....... (1,746,423) (1,802,000) (3,651,258) (3,682,557) (2,536,329)
Other.................................... (769) (3,881) (721,990) 4,536 1,111,551
------------- ------------- ------------ ------------ ------------
Net cash provided by operating
activities............................. 1,405,265 1,072,547 2,142,127 1,811,762 2,866,380
FINANCING ACTIVITIES
Dividends paid........................... (1,412,528) (1,086,700) (2,173,900) (1,817,190) (1,422,360)
------------- ------------- ------------ ------------ ------------
Net cash used in financing activities.... (1,412,528) (1,086,700) (2,173,900) (1,817,190) (1,422,360)
Net (decrease) increase in cash.......... (7,263) (14,153) (31,773) (5,428) 1,444,020
Cash at beginning of period.............. 2,064,537 2,096,310 2,096,310 2,101,738 657,718
------------- ------------- ------------ ------------ ------------
Cash at end of period.................... $ 2,057,274 $ 2,082,157 $ 2,064,537 $ 2,096,310 $ 2,101,738
------------- ------------- ------------ ------------ ------------
------------- ------------- ------------ ------------ ------------
</TABLE>
17. YEAR 2000--UNAUDITED
The Company relies heavily on information technology ("IT") systems and
other systems to conduct its business. The Company also has business
relationships with third party service providers, financial institutions, public
utilities and other critical vendors as well as regulators and customers who are
themselves reliant on IT and embedded systems to conduct their business.
STATE OF READINESS
During 1997, the Company developed a plan designed to make its IT systems
and embedded systems Year 2000 ready. The Company has evaluated substantially
all of its embedded systems. The results of these processes indicate that the
embedded systems should not present a material Year 2000 risk to us. The Company
has completed the testing of these systems.
The Company believes that its Year 2000 project is on schedule.
EXTERNAL RELATIONSHIPS
The Company also faces the risk that one or more of its critical suppliers
or customers ("external relationships") will not be able to interact with the
Company due to the third party's inability to resolve its own Year 2000 issues,
including those associated with its own external relationships. The Company has
completed its inventory of external relationships and evaluated certain external
relationships based
F-26
<PAGE>
MAIN STREET BANKS INCORPORATED AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
17. YEAR 2000--UNAUDITED (CONTINUED)
upon the potential business impact, available alternatives and cost of
substitution. The Company has determined the overall Year 2000 readiness of its
external relationships. In the case of critical suppliers such as third party
service providers, telecommunications and other utilities and major vendors, the
Company has obtained confirmation as to those parties' Year 2000 plans and state
of readiness. The Company believes that to the best of its knowledge its most
critical suppliers are year 2000 ready and will not pose a significant risk to
its operations.
YEAR 2000 COSTS
Total Year 2000 project costs are currently estimated to be $425,000. The
Company estimates that approximately $320,000 of the total project costs will be
expensed over the life of the project as the costs are incurred. The remaining
$105,000 will be capitalized under the Company' s regular policy for
capitalizing premises and equipment. The Company funds these costs through cash
generated from operations. At June 30, 1999 and December 31, 1998, approximately
$110,000 and $62,000 of project costs has been expensed, respectively, and
approximately $114,000 has been capitalized.
RISKS AND CONTINGENCY/RECOVERY PLANNING
If the Company's Year 2000 issues were unresolved, potential consequences
would include, among other things, the inability to accurately and timely record
customer transactions, update customers' accounts, process financial
transactions or report accurate data to management, customers, regulators and
others. Other potential consequences would include business interruptions or
shutdowns, financial losses, reputational harm, increased scrutiny by
regulators, and litigation related to Year 2000 issues. The Company is
attempting to limit the potential impact of the Year 2000 by monitoring the
progress of its own Year 2000 plan and those of its critical external
relationships. The Company cannot guarantee that it will be able to resolve all
of its Year 2000 issues. Any critical unresolved Year 2000 issues at the Company
or its external relationships, however, could have a material adverse effect on
its results of operations, liquidity or financial condition.
F-27
<PAGE>
EXHIBIT A
SUBSCRIPTION AGREEMENT
Main Street Banks Incorporated
1134 Clark Street
Covington, Georgia 30014
Ladies and Gentlemen:
I hereby subscribe to purchase the number of shares of Main Street Banks
Incorporated's common stock indicated below.
I have received a copy of Main Street Banks Incorporated's final prospectus,
dated , 1999. I understand that my purchase of Main Street Banks
Incorporated's common stock involves significant risk, as described under "Risk
Factors" in the prospectus. I also understand that no federal or state agency
has made any finding or determination regarding the fairness of Main Street
Banks Incorporated's offering of common stock, the accuracy or adequacy of the
final prospectus, or any recommendation or endorsement concerning an investment
in the common stock.
I enclose my check in the amount of $14.00 multiplied by the number of
shares I wish to buy. My check is made payable to "Escrow Account for Main
Street Banks Incorporated."
WHEN MAIN STREET BANKS INCORPORATED RECEIVES THIS SUBSCRIPTION AGREEMENT, I
AGREE THAT THIS SUBSCRIPTION WILL BE BINDING ON ME AND IRREVOCABLE BY ME UNTIL
THE OFFERING IS CLOSED. I acknowledge that this subscription agreement shall not
be binding on Main Street Banks Incorporated until accepted by Main Street Banks
Incorporated in writing, and that Main Street Banks Incorporated, in its sole
discretion, may accept or reject this subscription in whole or in part.
<TABLE>
<CAPTION>
<S> <C> <C>
Number of Shares
(minimum 100 shares):
--------------
Total Subscription
Price
(at $14.00 per share): $ -------------
-------------------------------------------
Please PRINT or TYPE exact name(s) in
which the shares should be registered
</TABLE>
(Over)
A-1
<PAGE>
SUBSTITUTE W-9
Under the penalties of perjury, I certify that: (1) the Social Security Number
or Taxpayer Identification Number given below is correct; and (2) I am not
subject to backup withholding. INSTRUCTION: YOU MUST CROSS OUT #2 ABOVE IF YOU
HAVE BEEN NOTIFIED BY THE INTERNAL REVENUE SERVICE THAT YOU ARE SUBJECT TO
BACKUP WITHHOLDING BECAUSE OF UNDERREPORTING INTEREST OR DIVIDENDS ON YOUR TAX
RETURN.
<TABLE>
<CAPTION>
<S> <C>
- ------------------------------------------- -------------------------------------------
Date Signature(s)*
- ------------------------------------------- -------------------------------------------
Area Code and Telephone No. Please indicate the form of ownership
desired for the shares (individual, joint
tenants with right of survivorship, tenants
in common, trust, corporation, partnership
custodian, etc.)
- -------------------------------------------
Email address, if available
- -------------------------------------------
Social Security or Federal Taxpayer
Identification No.
-------------------------------------------
Street Address
-------------------------------------------
City/State/Zip Code
</TABLE>
*When signing as attorney, trustee, administrator or guardian, please give your
full title as such. If a corporation, please sign in full corporate name by
president or other authorized officer. In case of joint tenants, each joint
owner must sign.
TO BE COMPLETED BY MAIN STREET BANKS INCORPORATED
Accepted as of , 1999, as to shares.
MAIN STREET BANKS INCORPORATED
By:
- ------------------------------------
Signature
- ------------------------------------
Print Name
A-2
<PAGE>
<TABLE>
<S> <C> <C>
Prospective investors may rely only on the
information contained in this prospectus. Main
Street Banks Incorporated has not authorized
anyone to provide prospective investors with
different or additional information. This
prospectus is not an offer to sell nor is it
seeking an offer to buy these securities in any
jurisdiction
where the offer or sale is not permitted. The MAIN STREET BANKS
information contained in this prospectus is INCORPORATED
correct only as of the date of this prospectus,
regardless of the time of the delivery of this
prospectus or any sale of these securities.
TABLE OF CONTENTS
PAGE
---------
Summary................................ 3
Summary Consoldated Financial Data..... 6
Risk Factors........................... 7 90,000
Cautionary Statement About Forward-
Looking Statements................... 11
The Offering........................... 12 SHARES OF
Use of Proceeds........................ 14 COMMON STOCK
Market Price of and Dividends on Common
Stock................................ 14
Dilution............................... 15
Capitalization......................... 16
Selected Consolidated Financial Data... 17
Business of Main Street................ 18
Management's Discussion and Analysis of
Financial Condition and Results of
Operations........................... 24
Principal Shareholders and Stock
Ownership of Management.............. 52
Management............................. 53 PROSPECTUS
Descripton of Capital Stock............ 58
Provisions of Our Articles of
Incorporation and Bylaws............. 58
Shares Eligible For Future Sale........ 61
Supervision And Regulation............. 61
Legal Matters.......................... 66
Experts................................ 66
Reports To Shareholders................ 66
Additional Information................. 66 , 1999
Index to Consolidated Financial
Statements........................... F-1
Subscription Agreement................. A-1
Until , 1999 (40 days after the
date of this prospectus), all dealers that buy,
sell or trade the common stock, whether or not
participating in this offering, may be required to
deliver a prospectus.
</TABLE>
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
Estimated expenses, other than underwriting discounts and commissions, of
the sale of the Registrant's common stock, $1.00 par value, are as follows:
<TABLE>
<S> <C>
Securities and Exchange Commission Registration Fee............... $ 351
American Stock Exchange Listing Fee............................... 5,000
Blue Sky Fees..................................................... 250
Legal Fees and Expenses........................................... 35,000
Accounting Fees and Expenses...................................... 35,000
Printing and Engraving Expenses................................... 12,000
Mail and Distribution............................................. 3,000
Miscellaneous..................................................... 1,399
---------
Total............................................................. $ 92,000
---------
---------
</TABLE>
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Consistent with the applicable provisions of the laws of Georgia, the
Registrant's Bylaws provide that the Registrant shall have the power to
indemnify its directors and officers against expenses (including attorneys'
fees) and liabilities arising from actual or threatened actions, suits or
proceedings, whether or not settled, to which they become subject by reason of
having served in such role if such director or officer acted in good faith and
in a manner he or she reasonably believed to be in or not opposed to the best
interests of the Registrant and, with respect to a criminal action or
proceeding, had no reasonable cause to believe his or her conduct was unlawful.
Advances against expenses shall be made so long as the person seeking
indemnification agrees to refund the advances if it is ultimately determined
that he or she is not entitled to indemnification. A determination of whether
indemnification of a director or officer is proper because he met the applicable
standard of conduct shall be made (1) by the Board of Directors of the
Registrant, (2) in certain circumstances, by independent legal counsel in a
written opinion or (3) by the affirmative vote of a majority of the shares
entitled to vote.
In addition, Article 11 of the Registrant's Articles of Incorporation,
subject to certain exceptions, eliminates the potential personal liability of a
director for monetary damages to the Registrant and to the shareholders of the
Registrant for breach of a duty as a director. There is no elimination of
liability for (1) a breach of duty involving appropriation of a business
opportunity of the Registrant, (2) an act or omission involving intentional
misconduct or a knowing violation of law, (3) a transaction from which the
director derives an improper material tangible personal benefit or (4) as to any
payment of a dividend or approval of a stock repurchase that is illegal under
the Georgia Business Corporation Code. The Articles of Incorporation do not
eliminate or limit the right of the Registrant or its shareholders to seek
injunctive or other equitable relief not involving monetary damages.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
None.
II-1
<PAGE>
ITEM 16. EXHIBITS.
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- --------- -------------------------------------------------------------------------------------------------------
<C> <S>
1.1 Form of Subscription Agreement.
3.1(a)* Amended and Restated Articles of Incorporation
3.1(b)* Amendment to Articles of Incorporation
3.2(a)* Bylaws
3.2(b)* Resolution to Amend Bylaws
4.1 Specimen Common Stock Certificate
4.2* See Exhibits 3.1 and 3.2 for provisions of the Articles of Incorporation and Bylaws defining rights of
holders of the common stock
5.1* Legal Opinion of Powell Goldstein Frazer & Murphy LLP
10.1* Main Street Banks Incorporated Restricted Stock Award Plan and Form of Restricted Stock Agreement
10.2* Amendment to Main Street Banks Incorporated Restricted Stock Award Plan, Adopted April 20, 1993
10.3* Amendment to Main Street Banks Incorporated Restricted Stock Award Plan, Adopted April 16, 1996
10.4* Main Street Banks Incorporated 1997 Long-term Incentive Plan
10.5* Lease Agreement by and between Robert R. Fowler, III and Main Street Bank, dated April 1, 1997
21.1* List of Subsidiaries
23.1 Consent of Ernst & Young LLP
23.2* Consent of Powell, Goldstein, Frazer & Murphy LLP (contained in Exhibit 5.1)
24.1* Power of Attorney (Reference is made to page II-5)
27.1 Financial Data Schedule (for SEC use only)
</TABLE>
- ------------------------
* Previously filed.
ITEM 17. UNDERTAKINGS.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
Registrant pursuant to foregoing provisions, or otherwise, the Registrant has
been advised that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Securities Act and
is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Registrant of expenses
incurred or paid by a director, officer or controlling person of the Registrant
in the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of such issue.
The undersigned Registrant hereby undertakes as follows:
II-2
<PAGE>
(1) To file, during any period in which offers or sells are being made, a
post-effective amendment to this Registration Statement:
(i) To include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising after the
effective date of the Registration Statement (or the most recent post-effective
amendment thereof) which, individually or in the aggregate, represent a
fundamental change in the information set forth in the Registration Statement.
Notwithstanding the foregoing, any increase or decrease in volume of securities
offered (if the total dollar value of securities offered would not exceed that
which was registered) and any deviation from the low or high end of the
estimated maximum offering range may be reflected in the form of prospectus
filed with the Commission pursuant to Rule 424(b) if, in the aggregate, the
changes in volume and price represent no more than 20% change in the maximum
aggregate offering price set forth in the "Calculation of Registration Fee"
table in the effective Registration Statement;
(iii) To include any material information with respect to the plan of
distribution not previously disclosed in the Registration Statement or any
material change to such information in the Registration Statement.
(2) That, for the purpose of determining any liability under the Securities
Act of 1933, each such post-effective amendment shall be deemed to be a new
registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof.
(3) To remove from registration by means of a post-effective amendment any
of the securities being registered which remain unsold at the termination of the
offering.
II-3
<PAGE>
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the
Registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements for filing on Form S-1 and authorized this Registration
Statement to be signed on its behalf by the undersigned in the city of
Covington, State of Georgia, on September 24, 1999.
<TABLE>
<S> <C> <C>
MAIN STREET BANKS INCORPORATED
By: /s/ ROBERT R. FOWLER, III
-----------------------------------------
Robert R. Fowler, III
CHAIRMAN, PRESIDENT AND CHIEF EXECUTIVE
OFFICER
</TABLE>
In accordance with the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates stated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ------------------------------------------------------ --------------------------------- ----------------------
<C> <S> <C>
/s/ ROBERT R. FOWLER, III Chairman, President and Chief
------------------------------------------- Executive Officer (principal September 24, 1999
Robert R. Fowler, III executive officer)
* Director
------------------------------------------- September 24, 1999
C. Candler Hunt
Executive Vice President, Chief
* Financial Officer, Director
------------------------------------------- (principal financial and September 24, 1999
Samuel B. Hay, III accounting officer)
* Executive Vice President, Chief
------------------------------------------- Credit Officer, Director September 24, 1999
Joseph K. Strickland, Jr.
* Vice Chairman and Director
------------------------------------------- September 24, 1999
Frank B. Turner
- ------------
*By: /s/ ROBERT R. FOWLER, III
---------------------------------------
Robert R. Fowler, III
Attorney-in-Fact
</TABLE>
II-4
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<C> <S>
1.1 Form of Subscription Agreement
3.1(a)* Articles of Incorporation
3.1(b)* Amendment to Articles of Incorporation
3.2(a)* Bylaws
3.2(b)* Resolution to Amend Bylaws
4.1 Specimen Common Stock Certificate
4.2* See Exhibits 3.1 and 3.2 for provisions of the Articles of Incorporation and
Bylaws defining rights of holders of the common stock
5.1* Legal Opinion of Powell Goldstein Frazer & Murphy LLP
10.1* Main Street Banks Incorporated Restricted Stock Award Plan and Form of
Restricted Stock Agreement
10.2* Amendment to Main Street Banks Incorporated Restricted Stock Award Plan,
Adopted April 20, 1993
10.3* Amendment to Main Street Banks Incorporated Restricted Stock Award Plan,
Adopted April 16, 1996
10.4* Main Street Banks Incorporated 1997 Long-term Incentive Plan
10.5* Lease Agreement by and between Robert R. Fowler, III and Main Street Banks
Incorporated, dated April 1, 1997
21.1* List of Subsidiaries of Main Street Banks Incorporated
23.1 Consent of Ernst & Young LLP
23.2* Consent of Powell, Goldstein, Frazer & Murphy LLP (contained in Exhibit 5.1)
24.1* Power of Attorney (Reference is made to page II-3)
27.1 Financial Data Schedule (for SEC use only)
</TABLE>
- ------------------------
* Previously filed.
<PAGE>
EXHIBIT 1.1
EXHIBIT A
SUBSCRIPTION AGREEMENT
Main Street Banks Incorporated
1134 Clark Street
Covington, Georgia 30014
Ladies and Gentlemen:
I hereby subscribe to purchase the number of shares of Main Street
Banks Incorporated's common stock indicated below.
I have received a copy of Main Street Banks Incorporated's final
prospectus, dated _______________, 1999. I understand that my purchase of Main
Street Banks Incorporated's common stock involves significant risk, as described
under "Risk Factors" in the prospectus. I also understand that no federal or
state agency has made any finding or determination regarding the fairness of
Main Street Banks Incorporated's offering of common stock, the accuracy or
adequacy of the final prospectus, or any recommendation or endorsement
concerning an investment in the common stock.
I enclose my check in the amount of $14.00 multiplied by the number of
shares I wish to buy. My check is made payable to "Escrow Account for Main
Street Banks Incorporated."
WHEN MAIN STREET BANKS INCORPORATED RECEIVES THIS SUBSCRIPTION
AGREEMENT, I AGREE THAT THIS SUBSCRIPTION WILL BE BINDING ON ME AND IRREVOCABLE
BY ME UNTIL THE OFFERING IS CLOSED. I acknowledge that this subscription
agreement shall not be binding on Main Street Banks Incorporated until accepted
by Main Street Banks Incorporated in writing, and that Main Street Banks
Incorporated, in its sole discretion, may accept or reject this subscription in
whole or in part.
Number of Shares
(minimum 100 shares):
-----------
Total Subscription Price
(at $14.00 per share): $
----------
-------------------------------------
Please PRINT or TYPE exact name(s) in
which the shares should be registered
(Over)
A-1
<PAGE>
SUBSTITUTE W-9
Under the penalties of perjury, I certify that: (1) the Social Security Number
or Taxpayer Identification Number given below is correct; and (2) I am not
subject to backup withholding. INSTRUCTION: YOU MUST CROSS OUT #2 ABOVE IF YOU
HAVE BEEN NOTIFIED BY THE INTERNAL REVENUE SERVICE THAT YOU ARE SUBJECT TO
BACKUP WITHHOLDING BECAUSE OF UNDERREPORTING INTEREST OR DIVIDENDS ON YOUR TAX
RETURN.
- ----------------------------------- ---------------------------------
Date Signature(s)*
- -----------------------------------
Area Code and Telephone No.
---------------------------------
Please indicate the form of
ownership desired for the shares
(individual, joint tenants with
right of survivorship, tenants in
common, trust, corporation,
partnership custodian, etc.)
- -----------------------------------
Email address, if available
- -----------------------------------
Social Security or Federal Taxpayer
Identification No.
---------------------------------
Street Address
---------------------------------
City/State/Zip Code
*When signing as attorney, trustee, administrator or guardian, please give your
full title as such. If a corporation, please sign in full corporate name by
president or other authorized officer. In case of joint tenants, each joint
owner must sign.
TO BE COMPLETED BY MAIN STREET BANKS INCORPORATED
Accepted as of ______________________, 1999, as to __________ shares.
MAIN STREET BANKS INCORPORATED
By:
--------------------------------
Signature
- -----------------------------------
Print Name
A-2
<PAGE>
EXHIBIT 4.1
Common Stock Number __________ (Seal)
Common Stock Shares __________
Incorporated Under the Laws of Georgia
See Reverse for Certain Definitions and Restrictions
Main Street Banks Incorporated
Cusip 560348 10 4
This certificate is transferable in the cities of Atlanta, Georgia and New
York, New York
This certifies that
is the owner of Fully paid and non-assessable shares of common stock, par
value $1.00 per share of MAIN STREET BANKS INCORPORATED transferable on the
books of the Corporation by the holder hereof in person or by duty authorized
attorney upon surrender of this Certificate properly endorsed. This
certificate is not valid until countersigned and registered by the Transfer
Agent and Registrar.
WITNESS the facsimile seal of the Corporation and the facsimile signatures of
its duly authorized officers.
Dated
(SEAL)
/s/ Sam B. Hay III
Executive Vice President
/s/ Robert R. Fowler III
Chairman, President, and Chief Executive Officer
Countersigned and Registered: Reliance Trust Company
Transfer Agent and Register
(Atlanta, Georgia)
By
Authorized Signature
<PAGE>
(Back of Certificate)
MAIN STREET BANKS INCORPORATED
The following abbreviations when used in the inscription on the face of this
certificate, shall be construed as though they were written out in full
according to applicable laws or regulations:
TEN COM- as tenants in common
TEN ENT- as tenants by the entireties
JT TEH- as joint tenants with right of survivorship and not as tenants in
common
UNIF GIFT MIN ACT- _________________ Custodian ______________
(Cust) (Minor)
under Uniform Gifts to Minors Act___________________________
(State)
Additional abbreviations may also be used though not in the above list.
For Value received,____________________hereby sell and assign and transfer
unto
PLEASE INSERT SOCIAL SECURITY OR OTHER
IDENTIFYING NUMBER OF
ASSIGNEE_______________________________________________________________
_______________________________________________________________________
PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS OF ASSIGNEE
Shares of the capitol stock represented by the within Certificate, and do
hereby irrevocably constitute and appoint___________________________________
Attorney to transfer the said stock on the books of the within-named
<PAGE>
Corporation with full
power of substitution in the premises.
Dated______________________________
X _________________________________
X _________________________________
NOTICE: THE SIGNATURE(S) TO THIS ASSIGNMENT
MUST CORRESPOND WITH THE NAME(S) AS WRITTEN
UPON THE FACE OF THE CERTIFICATE IN EVERY
PARTICULAR, WITHOUT ALTERATION OR ENLARGEMENT,
OR ANY CHANGE WHATEVER.
SIGNATURE GUARANTEED:_____________________________________
THE SIGNATURE MUST BE GUARANTEED BY AN ELIGIBLE GUARANTOR
INSTITUTION, (BANKS, STOCKBROKERS, SAVINGS, AND LOAN
ASSOCIATIONS AND CREDIT UNIONS WITH MEMBERSHIP IN AN
APPROVED SIGNATURE GUARANTEE MEDALLION PROGRAM) PURSUANT
TO S.E.C. RULE 17 Ad-15.
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" and to
the use of our report dated February 19, 1999, in the Registration Statement
(Form S-1 No. 333-84037) and related Prospectus of Main Street Banks
Incorporated for the registration of 90,000 shares of its common stock.
/s/ Ernst & Young LLP
Atlanta, Georgia
September 28, 1999
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 23,262,766
<INT-BEARING-DEPOSITS> 256,989
<FED-FUNDS-SOLD> 1,460,000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 42,869,811
<INVESTMENTS-CARRYING> 15,793,457
<INVESTMENTS-MARKET> 15,704,559
<LOANS> 355,222,597
<ALLOWANCE> 6,125,284
<TOTAL-ASSETS> 464,625,529
<DEPOSITS> 377,050,612
<SHORT-TERM> 8,500,000
<LIABILITIES-OTHER> 4,930,920
<LONG-TERM> 30,000,000
0
0
<COMMON> 8,829,000
<OTHER-SE> 35,314,997
<TOTAL-LIABILITIES-AND-EQUITY> 464,625,529
<INTEREST-LOAN> 16,365,949
<INTEREST-INVEST> 1,739,080
<INTEREST-OTHER> 37,701
<INTEREST-TOTAL> 18,142,730
<INTEREST-DEPOSIT> 5,897,864
<INTEREST-EXPENSE> 6,546,411
<INTEREST-INCOME-NET> 11,596,319
<LOAN-LOSSES> 535,000
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 9,653,843
<INCOME-PRETAX> 4,620,417
<INCOME-PRE-EXTRAORDINARY> 3,152,457
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,152,457
<EPS-BASIC> .36
<EPS-DILUTED> .36
<YIELD-ACTUAL> 5.87
<LOANS-NON> 1,655,000
<LOANS-PAST> 1,015,000
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 5,849,997
<CHARGE-OFFS> 352,000
<RECOVERIES> 182,000
<ALLOWANCE-CLOSE> 6,215,284
<ALLOWANCE-DOMESTIC> 6,215,284
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>