MainStreet Bancshares, Inc. — Q1 2019 Form 10-Q
Business context and reporting period
Unaudited consolidated results for the three months ended March 31, 2019, compared with Q1 2018; balance-sheet comparisons are to December 31, 2018. MainStreet is a Virginia community bank holding company serving businesses, professionals, and retail customers in the Washington, D.C. metropolitan area. It became subject to Exchange Act reporting on April 18, 2019, and its shares began trading on Nasdaq under MNSB on April 22.
Key financial metrics
Amounts below are in millions, except per-share data and ratios.
| Metric | Q1 2019 / March 31, 2019 | Comparable period / prior year-end |
|---|---|---|
| Total assets | $1,146.1 | $1,100.6 at Dec. 31, 2018 |
| Gross loans / net loans | $954.6 / $943.7 | $927.4 / $917.1 at Dec. 31, 2018 |
| Total deposits | $966.8 | $920.1 at Dec. 31, 2018 |
| Interest income | $13.8 | $8.8 in Q1 2018 |
| Net interest income | $9.35 | $6.78 in Q1 2018 |
| Net interest margin | 3.50% | 3.53% in Q1 2018 |
| Provision for loan losses | $0.33 | $0.64 in Q1 2018 |
| Noninterest income / expense | $0.93 / $6.01 | $0.51 / $4.58 in Q1 2018 |
| Net income; diluted EPS | $3.25; $0.39 | $1.69; $0.29 in Q1 2018 |
| Cash and cash equivalents | $59.8 | $58.1 at Dec. 31, 2018 |
| Stockholders’ equity | $125.0 | $121.3 at Dec. 31, 2018 |
Q1 operating cash flow was $4.5 million, investing cash flow was negative $39.5 million, and financing cash flow was positive $36.7 million; cash increased $1.7 million. At quarter-end, borrowings included $30.0 million of FHLB advances and $14.8 million of subordinated debt. The allowance for loan losses was $9.19 million, or 0.96% of gross loans. The Bank reported regulatory capital ratios above minimums and was “well capitalized”; its total capital ratio was 13.45% and common equity Tier 1 ratio was 12.61%.
Material changes versus comparable periods
- Net income rose about 93% year over year, driven by higher loan interest income, higher noninterest income, and a lower loan-loss provision.
- Interest income increased 57.8%; average interest-earning assets grew to $1.07 billion from $767.5 million, and their average yield rose to 5.17% from 4.56%.
- Interest expense more than doubled to $4.47 million. Average deposit cost rose to 2.21% from 1.24%; higher time-deposit and money-market costs contributed to margin pressure. Net interest margin slipped three basis points.
- Noninterest expense increased 31.3%, chiefly reflecting $1.1 million higher salaries and benefits, following the addition of 13 employees, and higher operating expenses.
- Quarter-over-quarter, loans grew $26.6 million and deposits $46.7 million. Core deposits declined $19.6 million while time deposits increased $46.0 million; management attributed time-deposit growth partly to brokered deposits used to fund loan growth. FHLB advances declined $10 million.
- Available-for-sale securities increased to $69.3 million from $56.0 million. Unrealized securities losses were attributed primarily to interest-rate movements, not credit deterioration, and management did not consider the securities other-than-temporarily impaired.
Outlook, risks, contingencies, and unusual items
- No formal earnings or financial guidance was provided. Management said it expected sufficient liquidity for current needs and anticipated continued use of its interest-rate swap product; Q1 swap fees were $290,000.
- Liquidity sources included $59.8 million of cash and cash equivalents, $69.3 million of available-for-sale securities, and $275 million of unused FHLB borrowing capacity. The company also reported additional borrowing capacity at other banks. Certificates of deposit totaling $346.2 million mature within one year; retention or replacement funding costs are uncertain.
- Credit exposures included two troubled debt restructurings totaling $3.44 million, one of which ($1.94 million) was nonaccrual. Nonperforming loans were $1.97 million, or 0.21% of gross loans. Substandard loans increased $4.5 million during the quarter, concentrated in two relationships; management described the downgrades as precautionary and stated it saw no expected loss risk in those relationships.
- On April 9, 2019, the Bank took possession of a commercial property through foreclosure. A $733,000 difference between the loan balance and estimated property value was charged to the allowance; a specific reserve for that amount had already been recorded. This occurred after quarter-end.
- Loan commitments were $292.8 million and standby letters of credit were $712,000. Management expected available funds to meet current commitments.
- Key stated risks include local economic conditions, deposit competition and funding costs, interest-rate changes and securities valuations, loan quality and allowance estimates, regulatory actions, liquidity, and concentration in the Washington, D.C. market. The filing notes that actual results may differ from forward-looking statements.
- The company adopted lease accounting guidance effective January 1, 2019, recognizing a $2.7 million right-of-use asset and lease liability. It was assessing the impact of the expected credit-loss standard (CECL), effective for it in fiscal 2020.
- Management concluded disclosure controls were effective and reported no material first-quarter change in internal control over financial reporting. The filing reports no material legal proceedings.
Important facts for investors to verify
- Whether deposit growth can be sustained without continued reliance on higher-cost time or brokered deposits, and how upcoming CD maturities affect funding cost and liquidity.
- Whether loan growth and pricing can offset deposit-cost increases and preserve net interest margin.
- Developments in the $3.44 million of TDRs, the foreclosed commercial property, and the two criticized lending relationships; also verify subsequent allowance and asset-quality trends.
- The eventual CECL allowance impact and whether rapid loan growth changes credit-loss estimates.
- Whether the reported Q1 earnings improvement, including swap fee income and the lower provision, proves sustainable; the filing cautions that the quarter is not necessarily indicative of full-year results.