MainStreet Bancshares, Inc. — Q3 2021 Form 10-Q
Business context and reporting period. Unaudited results cover the three and nine months ended September 30, 2021; balance-sheet comparisons are with December 31, 2020. MainStreet is a Virginia-based financial holding company whose bank serves Northern Virginia and the greater Washington, D.C. area, focusing on small and medium-sized businesses, professional practices and retail customers. Amounts below are in U.S. dollars; financial figures are in millions unless stated otherwise.
Key financial results
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Interest income | $15.8 | $15.6 | $48.0 | $45.6 |
| Net interest income | $13.2 | $11.9 | $39.7 | $32.9 |
| Provision for (recovery of) loan losses | $0.3 | $0.6 | $(1.5) | $6.6 |
| Noninterest income | $1.5 | $2.9 | $4.5 | $5.6 |
| Noninterest expense | $8.5 | $7.6 | $24.1 | $22.1 |
| Net income | $4.8 | $5.2 | $17.4 | $8.0 |
| Net income available to common shareholders | $4.2 | $5.2 | $15.7 | $8.0 |
| Diluted earnings per common share | $0.56 | $0.63 | $2.09 | $0.97 |
- Q3 net income fell about 8% year over year, chiefly because the prior-year quarter included $1.9 million in loan-swap fees; Q3 2021 recorded no such fees. Higher net interest income was partly offset by higher operating expenses and preferred dividends of $0.5 million.
- Nine-month net income more than doubled, primarily reflecting the $8.0 million year-over-year swing from loan-loss provision expense to a provision recovery, plus $6.8 million of higher net interest income.
- Q3 net interest margin was 3.28% in 2021 versus 3.20% in 2020 in the comparative table. The filing’s accompanying narrative reverses those values while describing an increase, an apparent inconsistency. Margin excluding PPP income was 3.14% versus 3.29%. Nine-month margin was 3.29% versus 3.18%; excluding PPP, 3.15% versus 3.22%.
Financial position, cash flow and liquidity
- At September 30, 2021, total assets were $1.657 billion, up from $1.643 billion at year-end 2020. Net loans were $1.246 billion, compared with $1.230 billion; deposits were $1.414 billion, compared with $1.438 billion.
- Cash and cash equivalents were $133.7 million, and available-for-sale securities were $171.6 million. Stockholders’ equity was $184.0 million, up from $167.7 million.
- Subordinated debt, net, rose to $40.6 million from $14.8 million, reflecting a 2021 issuance. The Bank had no FHLB advances outstanding and reported $426.9 million of unused FHLB borrowing capacity, plus borrowing capacity of up to $104.0 million from other financial institutions.
- For the first nine months, operating activities provided $56.4 million of cash, investing activities used $30.3 million, and financing activities provided $0.1 million. Cash and cash equivalents increased by $26.2 million to $133.7 million.
- Management said it believed liquidity was sufficient. Certificates of deposit totaling $230.5 million were due within one year; replacement funding, if needed, could cost more.
Material changes, asset quality and capital
- Loan growth was uneven: residential real estate and commercial real estate increased, while commercial and industrial loans declined to $191.3 million, including $88.5 million of PPP loans. Consumer loans fell to $27.7 million as the indirect lending portfolio amortized.
- The allowance for loan losses declined to $11.4 million from $12.9 million; it equaled 0.90% of gross loans, or 0.97% excluding PPP loans. Management attributed the nine-month recovery to improved performance and release of pandemic-related reserves. No loan charge-offs were recorded in Q3; nine-month net recoveries were $21,000.
- Nonperforming loans were zero at September 30, versus $0.1 million at year-end; nonperforming assets were $1.2 million, consisting of other real estate owned. However, Watch, Special Mention and Substandard loans totaled approximately $120.5 million, up from $75.3 million at year-end. Substandard balances were $24.3 million versus $2.1 million, while Special Mention balances were $16.3 million versus $1.3 million.
- The Bank exceeded regulatory capital requirements and was categorized as well capitalized. At September 30, total capital to risk-weighted assets was 16.55%, common equity Tier 1 was 15.68%, and Tier 1 capital to average assets was 12.23%.
Outlook, management commentary and risks
- The filing gives no formal earnings or financial guidance. Management noted the continuing uncertainty from COVID-19, interest rates, inflation, deposit competition, credit conditions, cybersecurity and third-party operational dependencies.
- Management said loan performance remained strong and that it had recovered a substantial portion of its COVID-related provision, but further provisions could be required if borrower conditions deteriorate. It reported that 80.4% of Substandard loans as of June 30, 2021 were connected to hospitality; management said it did not expect losses on those credits.
- PPP loans were $88.5 million at quarter-end. The filing discusses possible repayment, compliance, litigation and reputational risks related to PPP lending, including the risk that borrowers may not qualify for forgiveness.
- In August 2021, the Company established MainStreet Community Capital, LLC to pursue New Markets Tax Credit activity; certification and related steps were still in progress. On October 12, it elected financial holding company status to broaden permissible nonbanking activities. On October 25, it introduced Avenu, a Banking-as-a-Service offering that was still in development.
- Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter. No material legal proceedings were reported; routine matters were described as immaterial.
Important facts for investors to verify
- Reconcile the Q3 net interest margin figures: the comparative table shows 3.28% for 2021 and 3.20% for 2020, while the narrative states the reverse.
- Track the growth in criticized loans, especially Special Mention and Substandard balances, hospitality exposure, and the adequacy of the allowance as pandemic effects evolve.
- Assess the sustainability of earnings after the release of COVID-related reserves and given the absence of Q3 loan-swap fees; compare reported and PPP-excluded net interest margins.
- Monitor deposit retention and funding costs as deposits due within one year mature, and follow progress, costs and risks for the CDE and Avenu initiatives.