MainStreet Bancshares, Inc. — Q2 2021 Form 10-Q
Business context and reporting period. MainStreet Bancshares is a Virginia bank holding company serving individuals and small and midsize businesses, principally in Northern Virginia and the Washington, D.C. metropolitan area. This unaudited filing covers the three and six months ended June 30, 2021; balance-sheet comparisons are with December 31, 2020. Amounts below are in U.S. dollars; financial figures are in millions unless noted.
Financial results and position
| Metric | Q2 2021 | Q2 2020 | Six months 2021 | Six months 2020 |
|---|---|---|---|---|
| Interest income | $15.9 | $14.9 | $32.2 | $30.0 |
| Net interest income | $13.0 | $10.7 | $26.5 | $21.0 |
| Provision for (recovery of) loan losses | $(2.1) recovery | $5.6 expense | $(1.8) recovery | $5.9 expense |
| Noninterest income | $1.6 | $1.3 | $3.0 | $2.7 |
| Noninterest expense | $7.9 | $7.4 | $15.7 | $14.5 |
| Net income (loss) | $7.1 | $(0.6) | $12.6 | $2.8 |
| Net income (loss) available to common shareholders | $6.6 | $(0.6) | $11.5 | $2.8 |
| Diluted earnings (loss) per common share | $0.87 | $(0.08) | $1.53 | $0.34 |
- Margins: Q2 net interest margin was 3.18%, versus 3.05% a year earlier; excluding PPP income, management reported 3.10% versus 3.08%. Six-month margin was 3.29% versus 3.16%; excluding PPP, 3.15% versus 3.18%.
- Balance sheet at June 30: assets were $1.708 billion, up 3.9% from year-end; net loans were $1.256 billion, up 2.1%; deposits were $1.465 billion, up 1.9%; stockholders’ equity was $179.6 million.
- Funding and liquidity: cash and cash equivalents were $176.3 million, compared with $107.5 million at year-end. Six-month operating cash flow was $49.1 million; investing activities used $31.6 million and financing activities provided $51.2 million. The Bank reported $435.9 million of unused FHLB borrowing capacity and access to up to $104.0 million from other financial institutions; management said liquidity was sufficient for anticipated needs.
- Debt and capital: subordinated debt, net, was $40.6 million versus $14.8 million at year-end, following a new $30 million issuance in Q2. The Bank reported a 16.25% total risk-based capital ratio, 15.40% common equity tier 1 ratio, and 11.78% leverage ratio, and was classified as well capitalized.
- Credit: the allowance for loan losses was $11.1 million, or 0.87% of gross loans (0.97% excluding PPP loans), down from $12.9 million at year-end. Nonperforming loans were zero; nonperforming assets were $1.2 million, all OREO. The filing reported no TDRs.
Material changes and management commentary
- Q2 net income improved by $7.8 million year over year, reflecting $2.3 million higher net interest income and a $2.1 million provision recovery, versus a $5.6 million provision expense in Q2 2020. Management attributed the provision change to stronger-than-feared portfolio performance after pandemic-related reserves were added in 2020.
- Net interest income benefited from loan and earning-asset growth and lower deposit costs. The yield on earning assets declined, which management attributed to low market rates and 1% PPP loans; the average cost of deposits fell to 0.93% in Q2 from 1.68% a year earlier.
- Loans grew $26.1 million from year-end. Commercial real estate loans increased $36.6 million, while consumer loans declined $10.4 million as the indirect lending portfolio ran off. PPP loans totaled $124.6 million at quarter-end; the Company originated 572 additional PPP loans totaling $87.3 million after the program reopened.
- Credit classifications warrant attention: watch loans rose to $88.5 million from $71.8 million at year-end; special mention loans were $16.4 million versus $1.3 million; and substandard loans were $24.9 million versus $2.1 million. Management said 87.9% of substandard loans were tied to hospitality, had been downgraded cautiously, and were not expected to result in losses. It also cautioned that further pandemic-related provision expense may be needed as conditions evolve.
- Management cited higher salaries and benefits, advertising, and outside services as drivers of increased operating expense. Eight employees were added in the first half. The Company also bought $10.0 million of bank-owned life insurance during the period.
Outlook, risks, contingencies, and unusual items
- The filing provides no numerical earnings, growth, margin, or credit-loss guidance. Management’s results discussion says first-half performance is not necessarily indicative of full-year results.
- Key stated risks include COVID-19 effects on borrowers and collateral, loan quality and demand, deposit competition and funding costs, interest-rate and liquidity exposure, concentration in the Washington-area economy, cybersecurity and third-party service disruption, and regulatory or legal consequences related to PPP participation.
- Certificates of deposit totaling $267.3 million were due within one year. Management said a significant portion was expected to remain, but replacement funding could cost more. Outstanding loan commitments were $275.7 million, plus $190,000 of standby letters of credit.
- Available-for-sale securities had $788,000 of gross unrealized losses; management attributed these mainly to interest-rate movements rather than credit deterioration and reported no other-than-temporary impairment. The Company continued assessing the future CECL credit-loss standard, effective for it in fiscal years beginning after December 15, 2022, and was preparing models and data.
- The Company planned to close its Fairfax City branch on August 27, 2021, transferring customers and staff to a nearby headquarters branch. It reported no material pending legal proceedings and no common-share repurchases in Q2.
Important facts for investors to verify
- Whether hospitality-related substandard loans and the increase in criticized classifications lead to delinquencies, losses, or additional allowance needs.
- How quickly PPP loans are forgiven or repaid, and the resulting effects on loan balances, fee income, and deposits.
- Whether core deposits remain after PPP-related balances normalize, and the cost of renewing or replacing the $267.3 million of CDs due within a year.
- Whether net interest margin and earnings remain resilient as low rates, asset yields, and the larger subordinated-debt balance affect results.
- Progress on CECL implementation and any changes in management’s loss estimates, assumptions, or required reserves.