MainStreet Bancshares, Inc. — 2020 Form 10-K Summary
Business context and reporting period
MainStreet Bancshares is a Virginia bank holding company whose subsidiary, MainStreet Bank, serves businesses, professionals and consumers in Northern Virginia and the Washington, D.C. metropolitan area. The filing covers the fiscal year ended December 31, 2020, with comparisons primarily to 2019. The company operates seven branches and emphasizes commercial and real estate lending, relationship banking, digital services and payment solutions.
Financial performance and condition
- Scale and growth: Total assets rose 28.6% to $1.643 billion. Net loans were $1.230 billion, deposits $1.438 billion and stockholders’ equity $167.7 million at year-end.
- Earnings: Net income increased 12.7% to $15.7 million. Net income available to common shareholders was $15.1 million after $635,000 of preferred dividends; diluted earnings per common share were $1.85, versus $1.69 in 2019.
- Interest income and margin: Net interest income increased 16.6% to $46.0 million as loan growth and lower deposit costs more than offset lower asset yields. Net interest margin declined to 3.21% from 3.50%; the average loan yield fell to 4.89% from 5.61%.
- Other income and expenses: Non-interest income rose to $7.5 million, notably from $3.5 million in loan-swap fees. Non-interest expense increased 19.4% to $30.3 million, led by salaries, FDIC insurance and other operating costs. The efficiency ratio improved to 56.67% from 57.28%.
- Returns: Return on average assets was 1.05% versus 1.19%; return on average equity was 10.54% versus 10.79%.
- Credit quality: The allowance for loan losses increased to $12.9 million from $9.6 million, or 1.03% of gross loans (1.16% excluding PPP loans). Net charge-offs were 0.03% of average loans. Nonperforming assets were $1.329 million, or 0.08% of assets; nonaccrual loans were $149,000.
- Cash flow and liquidity: Operating cash flow was $17.0 million; investing activities used $313.8 million and financing activities provided $339.5 million. Cash and equivalents ended at $107.5 million, and available-for-sale securities were $147.4 million. Deposits increased to $1.438 billion; brokered deposits were about $279.5 million. The company reported no year-end FHLB advances, with borrowing capacity of approximately $407.6 million, plus $104 million of correspondent-bank availability.
- Debt and capital: Subordinated debt was $14.8 million, with a 6.25% fixed coupon through December 31, 2021, then a floating rate tied to LIBOR plus 425 basis points through 2026. The Bank’s year-end CET1 and total risk-based capital ratios were 13.61% and 14.60%, respectively; it was categorized as well capitalized.
Material changes versus 2019
- Loans grew about $207 million, including $135.2 million of PPP loans at year-end. The Bank originated over 1,000 PPP loans totaling just over $173 million during 2020.
- Deposits increased approximately $367 million on the balance sheet; the filing attributes growth largely to non-interest-bearing and money-market balances associated with PPP activity. Total investment securities rose to $169.9 million.
- The Bank repaid its $40 million of year-end 2019 FHLB advances. It issued preferred stock for net proceeds of $27.3 million and repurchased approximately $13.8 million of common stock, repurchasing 895,785 shares during 2020.
- Commercial loan-swap fee income increased substantially. The loan-swap notional amount rose to $210.3 million from $71.9 million.
- The provision for loan losses more than doubled to $3.6 million, primarily reflecting pandemic-related qualitative reserves and loan growth. The allowance rose despite lower net charge-offs.
- The Bank reclassified $57.0 million of commercial real estate loans as loans held for sale as part of a regulatory risk strategy; the filing does not describe a completed sale by year-end.
Outlook, commentary, risks and unusual items
- Management says it intends to pursue organic growth, build core deposits and profitable loans, and expand non-interest income. It expected similar opportunities in service fees and loan-swap activity during 2021, but provided no quantified earnings or financial guidance.
- COVID-19 created material uncertainty around borrower repayment, collateral values, customer demand, liquidity, operations and interest rates. The Bank offered payment relief; 42 borrowers representing 7.4% of loans participated in Phase 2 deferrals, and borrowers with previously reported deferrals were scheduled to resume monthly payments by December 31, 2020.
- Hospitality exposure merits attention: the Bank financed 15 operating hotels totaling $92.4 million; 14 sought Phase 1 deferrals. Management reported a $68.1 million increase in watchlist loans, attributable to five hospitality relationships, and said it believed no loss then existed while monitoring them closely.
- Other key risks include commercial real estate and construction concentrations, a relatively unseasoned and rapidly growing loan portfolio, dependence on brokered and other interest-sensitive deposits, competition, cybersecurity and third-party service-provider risks, and uncertainty in the LIBOR transition. CECL was expected to become effective for the company in 2023; its impact was not yet determined.
- Common shareholders received no cash dividend in 2020. The company issued 7.50% non-cumulative perpetual preferred shares, which have priority over common equity for dividends. The filing reports no material litigation and an unmodified audit opinion on the financial statements. Management assessed disclosure controls and internal control over financial reporting as effective; the auditor did not attest to internal-control effectiveness.
Important facts for investors to verify
- Track subsequent performance of hospitality-related watchlist credits, pandemic accommodations and the allowance for loan losses.
- Confirm the status, terms and realized value of the $57.0 million of loans held for sale and the Bank’s commercial real estate risk strategy.
- Assess the durability of PPP-related deposit growth, brokered funding and the cost of replacing large or maturing certificates of deposit.
- Review whether loan-swap fees and other non-interest income persist, and whether operating expenses and the lower net interest margin affect future profitability.
- Monitor the subordinated notes’ benchmark transition, preferred dividend requirements, common-stock repurchases and the limits on dividends from the Bank to the parent.
- Reconcile reported measures where the filing text varies: for example, non-interest income is shown as $7.493 million in selected operating data and $7.451 million in the financial statements; non-interest expense is reported as $30.300 million and $30.258 million, respectively. The source text does not explain these differences clearly.