MainStreet Bancshares, Inc. — Q3 2023 Form 10-Q
Business context and reporting period. This unaudited filing covers the quarter and nine months ended September 30, 2023. MainStreet is a Virginia bank holding company serving individuals and businesses in the Northern Virginia and Washington, D.C. area, primarily through MainStreet Bank. Amounts below are in U.S. dollars; financial statement amounts are generally in millions unless noted.
Financial performance and position
- Q3 earnings: Net interest income was $18.6 million, up 2.7% from $18.1 million a year earlier. Net income was $6.3 million versus $7.7 million; net income available to common shareholders was $5.8 million, or $0.77 per diluted share, versus $7.2 million, or $0.97 per share.
- First nine months: Net interest income was $58.9 million, up 19.3% from $49.4 million. Net income rose to $21.4 million from $19.1 million; diluted earnings per share increased to $2.64 from $2.31.
- Revenue and expenses: Q3 total revenue, as described by management, was $32.7 million versus $23.3 million. Higher loan interest income was partly offset by sharply higher deposit interest expense, increased salaries and benefits, and lower noninterest income. For the first nine months, total revenue was $93.8 million versus $61.8 million.
- Margins: Q3 net interest margin was 3.97% on a fully tax-equivalent basis, down 17 basis points year over year; the interest rate spread narrowed 73 basis points to 2.84%. Nine-month net interest margin was 4.28%, up from 4.01%.
- Balance sheet: Total assets were $2.02 billion at September 30, up 5.0% from year-end 2022. Net loans increased 6.4% to $1.68 billion; deposits increased 11.3% to $1.68 billion. Stockholders’ equity was $213.7 million.
- Funding costs and debt: Q3 average cost of deposits rose to 3.86% from 1.21% a year earlier. The balance sheet had no FHLB advances at quarter-end, versus $100 million at year-end 2022, and $72.5 million of subordinated debt.
- Liquidity and cash flow: Cash and cash equivalents were $121.2 million, down from $130.6 million at year-end. For the first nine months, operating cash flow was $26.3 million, investing cash outflow was $102.1 million, and financing cash inflow was $66.4 million. The Bank reported $689.3 million of available secured and unsecured borrowing capacity, including $560.3 million of additional secured capacity.
- Credit and capital: The loan-loss allowance was $15.6 million, or 0.92% of gross loans; the allowance for off-balance-sheet credit exposure was $1.6 million. Nonperforming loans were $325,000, or 0.02% of gross loans. The Bank reported regulatory capital ratios of 16.89% total capital to risk-weighted assets and 15.95% common equity Tier 1, and said it exceeded requirements to be well capitalized.
Material changes versus comparable periods
- Q3 loan interest and fees increased $9.5 million year over year, reflecting higher average loan balances and yields. Total interest expense increased $9.3 million, largely from time and money-market deposits. The resulting increase in net interest income was modest, while pretax income fell to $7.9 million from $9.6 million.
- Q3 noninterest income declined to $963,000 from $1.3 million, including the absence of prior-year loan-swap fees. Noninterest expense rose to $11.4 million from $9.9 million, primarily due to staffing and other operating expenses. Management cited 28 additional employees.
- At quarter-end, noninterest-bearing deposits had fallen $155.8 million from year-end 2022, while money-market deposits rose $238.9 million and time deposits rose $95.8 million. Management attributed the shift to higher rates, competition, and customers seeking interest-bearing options.
- Net loans grew $101.5 million from year-end, led by residential real estate, commercial real estate, and construction and land development. Commercial and industrial loans declined $23.5 million.
- Accumulated other comprehensive loss was $10.8 million, compared with $8.5 million at year-end, primarily reflecting unrealized losses on available-for-sale securities. Management attributed the decline in securities values mainly to interest rates and said it did not expect the losses to be other than temporary.
Outlook, commentary, risks, and unusual items
- Management said the balance sheet is asset-sensitive and expected it to continue benefiting from the rate environment, while also describing significant deposit-cost pressure. The filing provides no specific earnings or full-year financial guidance.
- Management said it believed liquidity was sufficient. However, $470.8 million of certificates of deposit were due within one year; replacement funding could cost more if those deposits do not remain. Outstanding loan commitments were $361.8 million, in addition to $586,000 of standby letters of credit.
- Credit monitoring remains important: one $16.0 million loan was downgraded to special mention in Q3. Watch-list loans were reported at $56.3 million at quarter-end. Substandard and doubtful loans totaled approximately $10.7 million; management said 79% of substandard loans were tied to hospitality and did not expect losses on those credits. Management warned that additional credit-loss provisions may be needed as conditions evolve.
- The portfolio has material commercial real estate and construction exposure: $734.6 million of commercial real estate and $426.7 million of construction and land-development loans. Rising rates, borrower repayment capacity, local economic conditions, deposit competition, liquidity, and securities values are identified risk factors. The filing also highlights banking-system contagion and adverse media or social-media speculation.
- The Company adopted CECL on January 1, 2023, recording a $1.7 million after-tax reduction to retained earnings. It reported $13.4 million of capitalized software development costs, with amortization expected to begin when the software is placed in service, anticipated in Q1 2024. New Market Tax Credit investment operating losses were $87,000 in Q3 and $176,000 year to date. Potential state tax liability assessments were $212,000 for Q3 and $675,000 year to date.
- Management reported effective disclosure controls and procedures and no material change in internal control over financial reporting during the quarter. No material legal proceedings were reported.
Important facts for investors to verify
- Whether deposit repricing, deposit mix, and the $470.8 million of certificates maturing within a year will sustain funding costs and liquidity.
- Whether loan growth and asset yields can offset continued pressure on net interest margin and interest expense.
- Developments in the $16.0 million special-mention credit, watch-list and hospitality exposures, and the adequacy of loan and unfunded-commitment allowances.
- The effect of commercial real estate and construction concentrations, borrower performance, and local economic conditions on future asset quality.
- Whether securities-related unrealized losses, borrowing capacity, and the timing or costs of capitalized software development affect liquidity, capital, or reported earnings.