MainStreet Bancshares, Inc. — Q2 2023 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2023. Amounts are in U.S. dollars; financial statement amounts are generally in millions unless stated otherwise.
Business context
MainStreet Bancshares is a Virginia bank holding company operating MainStreet Bank, a community commercial bank serving Northern Virginia and the greater Washington, D.C. area. Its lending is concentrated in real estate, including construction and commercial real estate. The company also operates Avenu, its Banking-as-a-Service initiative, and a community development subsidiary.
Financial performance and condition
| Metric | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| Total revenue, as reported by management | $31.5 | $20.1 | $61.2 | $38.6 |
| Net interest income (GAAP) | $19.3 | $16.1 | $40.4 | $31.3 |
| Net income | $6.9 | $5.9 | $15.1 | $11.4 |
| Net income available to common shareholders | $6.4 | $5.4 | $14.0 | $10.3 |
| Diluted earnings per common share | $0.85 | $0.71 | $1.86 | $1.35 |
| Net interest margin, fully tax-equivalent | 4.21% | 3.95% | 4.45% | 3.94% |
Q2 interest income was $30.7 million and interest expense was $11.4 million. The provision for loan credit losses was $617,000; noninterest income was $810,000 and noninterest expense was $10.9 million. Six-month operating cash flow was $16.7 million; investing activities used $57.1 million and financing activities provided $7.9 million. Cash and cash equivalents declined $32.6 million during the half to $98.0 million.
At June 30, total assets were $1.95 billion, net loans were $1.64 billion, deposits were $1.59 billion, and stockholders’ equity was $210.5 million. Gross loans were $1.66 billion, including $421.3 million in construction and land development loans and $727.8 million in commercial real estate loans. The allowance for loan losses was $16.0 million, or 0.97% of gross loans.
Deposits increased $80.5 million from year-end, but the mix shifted: noninterest-bearing deposits fell $161.7 million to $389.0 million, while money market deposits rose $158.0 million to $380.5 million and time deposits rose $93.1 million to $701.3 million. The bank had $30.0 million of federal funds borrowed and no FHLB advances at quarter-end; subordinated debt, net, was $72.4 million.
The bank reported regulatory capital ratios of 16.79% total capital to risk-weighted assets, 15.83% common equity tier 1, and 14.81% tier 1 capital to average assets, and was classified as well capitalized. Available-for-sale securities had $10.9 million of gross unrealized losses and a $60.6 million fair value; accumulated other comprehensive loss was $8.3 million.
Material changes versus comparable periods
- Q2 net income increased $1.0 million year over year; first-half net income increased $3.7 million.
- Higher loan balances and yields drove growth in interest income. Q2 average loan balances rose $214.4 million year over year, while average loan yield increased to 7.02% from 5.02%.
- Funding costs rose sharply: Q2 interest expense increased $8.7 million year over year, largely from time and money market deposits. Average cost of interest-bearing deposits rose to 3.50% from 0.82%. The interest-rate spread narrowed, even as net interest margin improved.
- Noninterest income declined 35.9% in Q2, mainly due to lower mortgage origination and other fee income. Noninterest expense rose 14.3%, including higher compensation associated with 33 additional employees.
- Loans grew $57.5 million from December 31, 2022. Total deposits grew, but the substantial decline in noninterest-bearing deposits and increases in rate-sensitive deposits changed the funding mix.
- The company adopted CECL on January 1, 2023, recording a $1.7 million after-tax reduction to retained earnings and increasing loan and off-balance-sheet credit allowances.
Outlook, management commentary, and risks
- Management said the balance sheet is asset-sensitive and expects it to continue benefiting from the prevailing rate environment. No formal quantitative earnings or revenue guidance is provided; results to date are not presented as necessarily indicative of the full year.
- Management reported no nonperforming loans at June 30, 2023. Substandard and doubtful loans totaled approximately $11.0 million; 81% of substandard loans were tied to hospitality. Management attributed downgrades to cautious monitoring and stated it did not expect losses on these credits. Watch-list loans, which management classifies as pass credits, increased $65.0 million during Q2 and $68.0 million during the half.
- Management considers liquidity sufficient. Sources included $98.0 million in cash and cash equivalents, $60.6 million in available-for-sale securities, and $593.1 million of stated secured and unsecured borrowing availability. Certificates of deposit of $475.6 million mature within one year; replacement funding could cost more if deposits do not remain.
- Interest-rate sensitivity modeling estimated first-year net interest income changes of +9.28% under an immediate, sustained 400-basis-point rate increase and -14.18% under a 400-basis-point decrease. These are model outputs based on assumptions, not forecasts.
- Risks include deposit competition and repricing, inflation and interest-rate changes, credit deterioration, commercial real estate and construction exposure, regional economic conditions, banking-sector contagion and social-media speculation, cybersecurity, fraud, and reliance on third parties. Management noted unrealized securities losses were primarily rate-related and did not indicate credit deterioration.
- Unusual or notable items include an $88,000 operating loss on a New Markets Tax Credit investment during the first half, a $1.2 million allowance for off-balance-sheet credit exposures, and $12.3 million of capitalized software development costs. Software amortization was expected to begin in Q3 2023. Management also recorded $462,000 of state tax assessments for potential liabilities during the first half.
- The filing reported no material pending legal proceedings. Management concluded disclosure controls were effective and reported no material second-quarter change in internal control over financial reporting.
Important facts for investors to verify
- Whether deposit retention and pricing stabilize, particularly given the fall in noninterest-bearing deposits and $475.6 million of certificates maturing within one year.
- Whether loan yields continue to outpace deposit-cost increases and how rate changes affect net interest margin and funding needs.
- Credit quality trends in hospitality-related loans, the growing watch list, commercial real estate, and construction lending; also monitor allowance adequacy under CECL.
- The assumptions and limitations behind the interest-rate sensitivity model and management’s asset-sensitivity outlook.
- Potential effects of unrealized securities losses, including the company’s liquidity flexibility and ability to avoid selling securities before recovery.
- Execution, costs, and future amortization of the Avenu/software investment, along with any subsequent New Markets Tax Credit allocation outcome.