MainStreet Bancshares, Inc. — Q2 2022 Form 10-Q
Business context and reporting period. MainStreet Bancshares is a Virginia bank holding company whose subsidiary, MainStreet Bank, serves individuals and businesses in the Washington, D.C. metropolitan area. This unaudited report covers the quarter and six months ended June 30, 2022; comparisons below are with the corresponding 2021 periods unless noted.
Financial results and condition
| Metric | Q2 2022 | Q2 2021 | Six months 2022 | Six months 2021 |
|---|---|---|---|---|
| Total interest income | $18.8 million | $15.9 million | $36.2 million | $32.2 million |
| Net interest income | $16.1 million | $13.0 million | $31.3 million | $26.5 million |
| Provision for (recovery of) loan losses | $0.5 million | ($2.1 million) | $1.3 million | ($1.8 million) |
| Noninterest income | $1.3 million | $1.6 million | $2.4 million | $3.0 million |
| Noninterest expense | $9.5 million | $7.9 million | $18.5 million | $15.7 million |
| Net income | $5.9 million | $7.1 million | $11.4 million | $12.6 million |
| Net income per common share, diluted | $0.71 | $0.87 | $1.35 | $1.53 |
| Net interest margin, fully taxable equivalent | 3.95% | 3.20% | 3.94% | 3.31% |
- Balance sheet at June 30: Total assets were $1.79 billion; net loans $1.42 billion; deposits $1.50 billion; and stockholders’ equity $188.4 million.
- Loan growth and credit: Gross loans were $1.43 billion, up $75.5 million from year-end 2021. The allowance for loan losses was $13.0 million, or 0.91% of gross loans. The company reported no nonaccrual loans, nonperforming loans, or nonperforming assets at quarter-end.
- Liquidity and funding: Cash and cash equivalents were $102.6 million and available-for-sale securities were $143.2 million. The Bank reported $441.2 million of unused FHLB borrowing capacity and access to up to $104.0 million from other financial institutions. No FHLB advances were outstanding at quarter-end, although advances were used during the period.
- Debt and capital: Subordinated debt, net, was $72.0 million, versus $29.3 million at year-end 2021. The Bank was reported well capitalized; its total capital ratio was 16.23%, common equity Tier 1 ratio 15.42%, and Tier 1 leverage ratio 14.34%.
- Cash flow, six months: Operating activities provided $14.0 million; investing activities used $129.2 million, principally reflecting loan growth and securities purchases; financing activities provided $124.7 million. Cash and cash equivalents increased $9.5 million to $102.6 million.
Material changes versus prior periods
- Quarterly net interest income increased 24.1%; management attributed the improvement to higher loan balances and yields, rate increases, and lower deposit costs. The FTE net interest margin rose 75 basis points year over year.
- Net income declined despite higher net interest income, principally because Q2 2021 included a $2.1 million loan-loss provision recovery; Q2 2022 instead recorded a $0.5 million provision. Higher staffing and operating costs also weighed on earnings.
- For the first half, net income fell to $11.4 million from $12.6 million, as the prior-year period included a $1.8 million provision recovery. Net interest income increased $4.9 million, while noninterest expense rose $2.8 million.
- From December 31, 2021, deposits increased $88.2 million and net loans increased $75.1 million. Time deposits grew $116.8 million; management said core deposits declined $13.7 million as it used short-term wholesale funding to support loan growth.
- Available-for-sale securities had $8.3 million of gross unrealized losses at June 30, primarily attributed by management to interest-rate changes rather than credit deterioration. Accumulated other comprehensive loss was $6.6 million, compared with $0.2 million of income at year-end.
Outlook, commentary, risks and unusual items
- The filing gives no specific earnings, growth, or margin guidance. Management said higher Federal Reserve rates could support asset yields, but warned that inflation and rising rates may affect margins, financial-instrument values, customers’ repayment capacity, and demand for banking products. The timing and impact are uncertain.
- Management considered the allowance adequate based on information available, but said additional provisions may be required as economic and portfolio information changes. Criticized loans included $13.8 million classified substandard; 79% of that balance was connected to hospitality. Management said those credits had improved cash flows and occupancy and did not expect losses, while noting they had been downgraded cautiously after pandemic impacts.
- Q2 operating expenses included higher salaries and benefits, partly associated with 17 additional employees, and higher outside-service costs related to technology and Avenu. Avenu, the Bank’s Banking-as-a-Service offering for fintech customers, remained in late-stage development; software development costs capitalized reached $5.0 million, with no amortization recorded yet.
- The company continued repurchases under its $17 million authorization: 119,693 shares were repurchased during Q2 at an average $25.14 per share. The filing reported no remaining authorization after the May purchases. The Board said future common dividends would be considered quarterly.
- Other stated risks include deposit competition and possible higher renewal or replacement funding costs; concentration in Northern Virginia and the greater Washington, D.C. area; cyber and third-party service risks; and execution risks in new businesses. Certificates of deposit totaling $415.3 million were due within one year.
- The company was preparing to adopt CECL, effective for it after December 15, 2022, and said preliminary analysis indicated no significant impact to the allowance; model validation was scheduled for Q3 2022. The filing also notes transition risks related to LIBOR and alternative reference rates.
- The company reported effective disclosure controls and no material change in internal control over financial reporting during the quarter. It disclosed no material pending legal proceedings.
Key facts for investors to verify
- Whether loan growth, higher rates, and the widening net interest margin persist as deposit competition and funding costs evolve.
- Trends in hospitality-related substandard loans, criticized balances, and the allowance for loan losses, particularly as CECL adoption approaches.
- The composition, pricing, and retention of deposits—including the substantial time-deposit balance and near-term maturities—and the Bank’s access to contingent liquidity.
- The scale and interest-rate sensitivity of unrealized securities losses and their effect on equity and capital.
- Avenu’s development costs, launch progress, customer adoption, and ability to produce recurring fee income.
- The capital and liquidity implications of subordinated debt, share repurchases, and future dividends.