MainStreet Bancshares, Inc. — Q1 2020 Form 10-Q
Business context and reporting period
Unaudited results cover the three months ended March 31, 2020; balance-sheet comparisons are with December 31, 2019. MainStreet Bancshares is a Virginia bank holding company whose subsidiary, MainStreet Bank, serves businesses, professionals and retail customers in the Washington, D.C. metropolitan area. Unless noted, amounts below are in millions of dollars.
Financial performance and condition
- Profit and income: Net income was $3.47 million, up 6.9% from $3.25 million in Q1 2019. Diluted earnings per share were $0.42 versus $0.39. Total interest income increased 9.4% to $15.12 million; noninterest income rose 52.7% to $1.41 million. Net interest income increased 10.2% to $10.30 million.
- Margins and expenses: Net interest margin declined to 3.25% from 3.50%; interest-rate spread fell to 2.67% from 2.87%. Noninterest expense increased 18.9% to $7.14 million, including higher salary and benefits costs. Provision for loan losses was $350,000 versus $325,000.
- Assets and loans: Total assets were $1.330 billion, up 4.1% from year-end. Gross loans were $1.072 billion, up $30.0 million; growth was concentrated in commercial real estate and construction lending. The allowance for loan losses was $9.90 million, or 0.93% of gross loans, compared with $9.58 million, or 0.96%, at year-end.
- Credit quality: Nonaccrual loans totaled $208,000; nonperforming assets were $1.42 million, including $1.21 million of other real estate owned. The filing reports $1.48 million in one performing troubled-debt-restructured loan. Commercial and industrial loans included $14.60 million classified Watch, Special Mention or Substandard.
- Deposits, debt and liquidity: Deposits rose 6.7% to $1.143 billion; cash and cash equivalents were $72.8 million and available-for-sale securities were $102.2 million. FHLB advances fell to $10.0 million from $40.0 million; subordinated debt was $14.8 million. Management reported $309 million of unused FHLB borrowing capacity and the ability to borrow up to $49 million from other financial institutions. Certificates of deposit totaling $297.5 million mature within one year.
- Cash flow: Operating activities provided $5.5 million; investing activities used $38.2 million; financing activities provided $40.6 million. Cash and cash equivalents increased $7.9 million to $72.8 million.
- Capital: The Bank reported a 13.20% total risk-based capital ratio, 12.39% common equity Tier 1 ratio and 11.45% Tier 1 leverage ratio, and was considered well capitalized. It did not elect the community bank leverage ratio framework.
Material changes versus the prior comparable period
- Loan growth and higher average interest-earning assets lifted interest income, but lower market rates reduced asset yields and net interest margin.
- Interest expense increased 7.8% to $4.82 million, principally because of higher time-deposit balances and costs; lower FHLB borrowing expense partly offset the increase.
- Noninterest income increased by $488,000, including higher swap fees, deposit service charges and other fee income. Noninterest expense rose by $1.14 million, including $573,000 more in salaries and benefits; the Bank cited 12 additional employees.
- Compared with year-end, core deposits increased, while time deposits were slightly lower. The company repurchased 60,000 shares for $990,000 during the quarter and said it had no plans for further repurchases at that time.
Outlook, COVID-19, risks and unusual items
- Management said the pandemic’s effects were uncertain and that it was premature at March 31 to estimate potential COVID-19 loan losses objectively. It warned that additional loan-loss provision expense during Q2 and the remainder of 2020 may be required. No specific earnings or other financial guidance was provided.
- As of April 30, the Bank had processed forbearance requests for 158 commercial borrowers, representing about 37% of the dollar value of commercial term-debt relationships, and consumer deferral requests for fewer than 4% of consumer loans. These are post-quarter figures. The Bank also reported processing 761 PPP applications totaling $167.9 million by April 30.
- The filing states COVID-related short-term modifications may qualify for relief from TDR accounting, but the overall financial-statement impact of the Bank’s forbearance program could not then be quantified. PPP and Main Street Lending Program participation also brings potential litigation, compliance, guarantee and credit risks.
- Management described daily liquidity monitoring and said it expected sufficient funding. However, deposit competition, the maturity of certificates of deposit, economic disruption and deterioration in borrowers’ ability to repay remain risks. The Bank operates primarily in the Northern Virginia and greater Washington, D.C. area.
- The Bank applied in February 2020 to convert from a Virginia state charter to a national charter; approval and completion were pending. The company also recorded $60,000 of assessments for potential state tax liabilities in Q1.
- Management reported effective disclosure controls 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
- Subsequent-quarter allowance levels, charge-offs, delinquencies, criticized loans and actual performance of COVID-related modifications.
- PPP loan originations, forgiveness and SBA guarantee eligibility, as well as any program-related litigation or servicing exposure.
- Deposit retention and renewal rates, funding costs and the concentration of certificates of deposit maturing within one year.
- Whether loan growth, lower interest rates and deposit pricing continue to pressure net interest margin and earnings.
- Progress and any regulatory conditions on the proposed national bank charter conversion.