MainStreet Bancshares, Inc. — 2021 Form 10-K
Business context and reporting period. This annual report covers the fiscal year ended December 31, 2021; it does not provide standalone fourth-quarter results. MainStreet Bancshares is a Virginia bank holding company whose principal subsidiary, MainStreet Bank, serves businesses, professionals and consumers in Northern Virginia and the greater Washington, D.C. area. The Company operates six branches and reported consolidated assets of $1.65 billion. It elected financial holding company status in October 2021.
Financial performance and condition
| Metric | 2021 | 2020 | Change or context |
|---|---|---|---|
| Interest income | $64.2 million | $62.1 million | Up 3.4% |
| Net interest income | $53.5 million | $46.0 million | Up 16.4%; lower funding costs and loan growth contributed |
| Net interest margin | 3.33% | 3.21% | Excluding PPP, 3.19% versus 3.21% |
| Provision for loan losses | $(1.2) million | $3.6 million | Recovery of prior COVID-related provision |
| Noninterest income | $6.1 million | $7.5 million | Down 18.0%, largely reflecting lower loan-swap fees |
| Noninterest expense | $32.9 million | $30.3 million | Up 8.6%, including higher staffing, marketing and outside services |
| Net income | $22.2 million | $15.7 million | Up 41.1% |
| Net income available to common shareholders | $20.0 million | $15.1 million | Basic and diluted EPS: $2.65 versus $1.85 |
| Return on average assets / equity | 1.32% / 12.38% | 1.05% / 10.54% | Both improved |
| Total assets | $1.647 billion | $1.643 billion | Up 0.3% |
| Gross loans | $1.359 billion | $1.249 billion | Up $109.5 million |
| Total deposits | $1.412 billion | $1.438 billion | Down $26.3 million per the balance sheets |
| Stockholders’ equity | $188.8 million | $167.7 million | Total equity to assets was 11.46% |
- Cash flow: Operating activities provided $60.4 million, investing activities used $60.5 million and financing activities used $14.2 million. Cash and cash equivalents ended the year at $93.2 million, down from $107.5 million.
- Liquidity and funding: Available-for-sale securities were $99.9 million. The Bank had no FHLB advances or correspondent-bank borrowings outstanding; disclosed FHLB capacity was about $414 million, with an additional $104 million of correspondent-bank availability. Brokered deposits were about $245 million at year-end.
- Debt and capital: Subordinated debt, net, was $29.3 million. The Bank was classified as well capitalized: CET1 and Tier 1 risk-based ratios were 15.23%, total risk-based capital was 16.06%, and Tier 1 leverage was 12.90%.
- Credit quality: The Company reported no nonperforming loans, $775,000 of nonperforming assets (0.05% of assets), an $11.7 million allowance (0.86% of gross loans), and net charge-offs of approximately $5,000. Substandard loans increased to $5.3 million; special-mention loans increased by $15.5 million, attributed primarily to one hospitality relationship under active management.
Material changes versus 2020
- Net income rose as net interest income increased and the Company recorded a loan-loss provision recovery rather than provision expense. The allowance declined from $12.9 million to $11.7 million.
- Loan growth was led by multifamily residential real estate and non-owner-occupied commercial real estate. The portfolio includes $337.2 million of construction and land-development loans and $361.1 million of non-owner-occupied commercial real estate loans.
- Deposit mix shifted toward noninterest-bearing demand balances, while time deposits and money-market balances changed. However, reported year-end deposit totals declined; the MD&A separately says total deposits increased $146.2 million, a conflict requiring reconciliation.
- Noninterest income fell principally because loan-swap fees dropped from $3.5 million to $83,000; service charges and loan-sale gains increased. Operating expenses rose, including salaries and benefits, which increased to $19.3 million.
- The Company issued $30 million of fixed-to-floating subordinated notes in April 2021 at a 3.75% fixed rate through April 2026, and used proceeds in part to call its prior notes. It made no common-stock repurchases in 2021, after repurchasing $13.8 million in 2020.
Outlook, commentary, risks and unusual items
- Management stated that it expects to build on core performance and continue profitable growth, with priorities including business relationships, core deposits, profitable lending and noninterest income. The filing gives no quantified earnings, growth or margin guidance.
- Avenu, introduced in October 2021, is the Bank’s FinTech banking-as-a-service initiative. It reported $81,000 of 2021 pretax income, excluding transfer pricing attributed to $68.7 million of noninterest-bearing deposits. Its software platform was under development, with deployment expected in 2022; execution, compliance and operational risks remain.
- MainStreet Community Capital was formed in August 2021 to pursue New Markets Tax Credit activity and was certified as a registered community development entity in January 2022.
- Interest-rate risk is material. Management described the Company as asset sensitive; its model estimated year-one net interest income would rise 15.25% under a +100-basis-point shock and decline 5.24% under a −100-basis-point shock. These are model estimates, not forecasts, and depend on assumptions.
- Key risks include real-estate and construction lending concentrations, a relatively young and rapidly grown loan portfolio, reliance in part on brokered and other rate-sensitive deposits, $304.3 million of unfunded loan commitments, local economic concentration, COVID-19 effects, cybersecurity and third-party service-provider risks, and the transition away from LIBOR. The Company said it was preparing for CECL, effective for it in 2023, but could not determine the eventual impact.
- Preferred stock carries a 7.50% noncumulative dividend. The Company declared its first common-stock cash dividend in January 2022, payable in February. In March 2022, after year-end, it issued an additional $43.8 million of subordinated notes; this is a subsequent event, not 2021 year-end debt.
- The auditor gave an unqualified opinion on the financial statements. Management stated disclosure controls and internal control over financial reporting were effective; the auditor did not attest to internal controls, consistent with the Company’s emerging-growth-company status.
Important facts for investors to verify
- Reconcile the deposit disclosures: the balance-sheet totals show a $26.3 million decline in 2021, while MD&A says deposits increased $146.2 million. Confirm the relevant definition, period or data presentation.
- Assess recurring earnings and margins excluding PPP-related income: the filing reports $6.2 million of PPP fees and interest recognized in 2021 and a 3.19% PPP-excluded net interest margin.
- Review credit quality and concentration trends, especially the hospitality relationship, construction and commercial real estate exposures, classified loans, and the adequacy of the allowance after its reduction.
- Evaluate deposit stability, including brokered funding, uninsured balances, certificate maturities and the reported conflict in deposit trends; consider whether funding costs could rise faster than asset yields.
- Track Avenu platform delivery, customer growth, compliance controls and actual contribution to fees and low-cost deposits against management’s 2022 deployment expectation.
- Confirm the effects of the March 2022 subordinated-note issuance, the common dividend, and CECL adoption on capital, earnings and shareholder distributions.