MainStreet Bancshares, Inc. — Q3 2020 Form 10-Q
Business context and reporting period. Unaudited results cover the three and nine months ended September 30, 2020, compared with the corresponding 2019 periods. MainStreet is a Virginia bank holding company serving individuals and small and medium-sized businesses, primarily in Northern Virginia and the Washington, D.C. area. Unless noted otherwise, amounts below are in millions of dollars.
Financial performance and condition
| Metric | Q3 2020 | Q3 2019 | 9M 2020 | 9M 2019 |
|---|---|---|---|---|
| Net interest income | $11.9 | $10.0 | $32.9 | $29.2 |
| Provision for loan losses | $0.6 | $0.2 | $6.6 | $1.3 |
| Noninterest income | $2.9 | $1.4 | $5.6 | $3.7 |
| Noninterest expense | $7.6 | $6.5 | $22.1 | $18.7 |
| Net income available to common shareholders | $5.2 | $3.7 | $8.0 | $10.4 |
| Diluted EPS | $0.63 | $0.45 | $0.97 | $1.26 |
| Net interest margin | 3.22% | 3.48% | 3.17% | 3.50% |
- Balance sheet at September 30: total assets were $1.63 billion; gross loans $1.30 billion and net loans $1.28 billion; deposits $1.42 billion; cash and cash equivalents $127.6 million; and stockholders’ equity $173.3 million.
- Credit: allowance for loan losses was $14.3 million, or 1.10% of gross loans (1.27% excluding PPP loans). Nine-month net charge-offs were $1.8 million. Nonaccrual loans were $1.2 million; nonperforming assets were $2.8 million, or 0.17% of assets.
- Debt and capital: no FHLB advances remained outstanding at quarter-end; subordinated debt was $14.8 million. The Bank reported 13.39% total risk-based capital, 12.27% CET1, and a 10.19% Tier 1 leverage ratio, and stated it exceeded regulatory requirements.
- Cash flow, nine months: operating cash flow was $11.7 million; investing cash outflow was $281.1 million, including $256.4 million net loan growth; financing cash inflow was $332.1 million. Cash and cash equivalents increased $62.7 million to $127.6 million.
Material changes versus comparable periods
- Q3 net income rose $1.5 million year over year, primarily reflecting higher loan-swap fee income and net interest income. Nine-month net income fell $2.4 million, chiefly because loan-loss provision increased by $5.3 million year over year.
- Net interest income increased, supported by loan growth and lower funding costs, while net interest margin declined as asset yields fell. Average interest-earning asset yield in Q3 was 4.23%, down from 5.25%; average deposit cost fell to 1.46% from 2.32%.
- Loan-swap fee income was $1.9 million in Q3 and $2.7 million for nine months, versus $0.4 million and $0.9 million, respectively, in 2019. Management described this as an area of expanded fee-income focus.
- Total assets grew 27.6% from year-end 2019. Net loans rose $249.5 million, including $173.1 million of PPP loans; deposits grew $345.4 million. Noninterest-bearing deposits increased $163.9 million, while time deposits declined $50.4 million.
Outlook, commentary, risks and unusual items
- No quantified earnings or financial guidance is provided. Management cautioned that interim results are not necessarily indicative of full-year results.
- COVID-19 and economic uncertainty drove a higher provision and a new qualitative allowance factor. Management warned that further provision expense may be required as conditions and borrower information evolve.
- The Bank originated more than 1,000 PPP loans totaling just over $173 million. Management disclosed potential SBA repayment/guarantee risks if loans were originated, funded, or serviced deficiently, as well as litigation and compliance risks related to PPP and the Main Street Lending Program.
- COVID-related relief included a first phase in which 195 borrowers participated and a second phase involving 42 borrowers. At September 30, 16 borrowers had $46.7 million of deferred amounts remaining, according to the filing. The Bank’s hotel portfolio comprised 15 hotels totaling $92.4 million; hospitality exposure and borrower performance warrant attention.
- On September 15, the Company issued preferred shares and later exercised the full over-allotment option, raising $27.5 million net. The preferred depositary shares carry an initial 7.50% annual dividend rate. On October 22, the Board authorized a new common-stock repurchase program of up to $17 million.
- Liquidity disclosures included $382 million of unused FHLB borrowing capacity, up to $92 million available from other financial institutions, and $269.7 million of certificates of deposit due within one year. Outstanding loan commitments were $254.0 million, with $0.7 million of standby letters of credit.
- Management reported no material pending legal proceedings and said disclosure controls were effective, with no material quarterly change in internal control over financial reporting.
Important facts for investors to verify
- Whether COVID-19 borrower relief, especially remaining deferrals and hotel-related exposures, leads to higher delinquencies, nonaccrual loans, or additional loan-loss provisions.
- The adequacy of the $14.3 million allowance, given nine-month provision expense of $6.6 million, charge-offs of $1.8 million, and growth in criticized commercial and industrial loans.
- The outlook for PPP balances, forgiveness and fee recognition, and any associated SBA compliance or guarantee exposure.
- Whether elevated loan-swap fees are sustainable and how further low interest rates affect net interest margin and profitability.
- Deposit retention and funding costs, including renewal of certificates due within one year, and the use of available borrowing capacity and loan commitments.
- The cost and capital impact of the preferred stock and the announced $17 million repurchase authorization; also confirm the terms applicable to the preferred shares.