MainStreet Bancshares, Inc. — Q1 2024 Form 10-Q
Reporting period: Three months ended March 31, 2024. Balance-sheet comparisons are with December 31, 2023; operating results and cash flows are compared with Q1 2023. Amounts are in U.S. dollars; financial statement amounts are generally in millions unless stated otherwise.
Business context and reporting period
MainStreet Bancshares is a Virginia bank holding company operating MainStreet Bank, serving individuals and businesses primarily in Northern Virginia and the Washington, D.C. metropolitan area. It also operates Avenu, its Banking-as-a-Service business, and a community development subsidiary. The quarter’s statements are unaudited.
Financial performance and condition
- Revenue and earnings: Total revenue was approximately $33.3 million, up from $29.6 million. Net income fell to $3.3 million from $8.2 million; net income available to common shareholders was $2.8 million versus $7.6 million. Basic and diluted EPS were $0.36 versus $1.01.
- Net interest income and margins: GAAP net interest income declined 27.1% to $15.4 million, despite a 13.0% increase in interest income to $32.4 million. Interest expense more than doubled, rising to $17.0 million from $7.6 million. GAAP net interest margin was 3.22%, down from 4.72%; fully tax-equivalent margin was 3.24% versus 4.73%.
- Expenses and credit costs: Noninterest expense increased 5.3% to $12.3 million. Loan-loss provision was $164,000 versus $415,000; the company recorded a $359,000 recovery on off-balance-sheet credit exposures. The allowance for loan losses was $16.5 million, or 0.95% of gross loans.
- Cash flow: Operating cash flow was $3.6 million versus $8.8 million. Investing used $23.3 million and financing provided $29.9 million, resulting in a $10.2 million increase in cash and cash equivalents to $124.7 million.
- Assets and lending: Total assets rose 1.7% to $2.07 billion. Net loans increased 1.3% to $1.73 billion. Commercial real estate loans increased to $813.4 million; construction and land-development loans declined to $408.9 million.
- Deposits and liquidity: Deposits increased 2.8% to $1.73 billion. Noninterest-bearing demand deposits were $348.9 million, down from $364.6 million. Time deposits rose to $725.5 million. Cash and cash equivalents were $124.7 million; available-for-sale securities were $58.7 million. The company reported $636.8 million of available secured and unsecured borrowing capacity, including $507.8 million of secured capacity.
- Debt and capital: Subordinated debt, net, was $72.7 million. No federal funds purchased were outstanding at quarter-end. The Bank’s total risk-based capital ratio was 17.05%, common equity tier 1 was 16.12%, and leverage ratio was 14.54%; the Bank reported that it exceeded regulatory well-capitalized requirements.
Material changes versus the prior comparable period
- Higher loan balances and yields lifted interest income, but substantially higher deposit funding costs drove the sharp decline in net interest income and earnings. Average cost of deposits rose to 4.82% from 2.27%; management attributed funding-cost pressure to rate levels and competition for deposits.
- Nonperforming loans rose to $9.3 million, or 0.53% of gross loans, from $1.0 million, or 0.06%, at year-end. The increase was largely attributable to one construction and land-development loan. The allowance for credit losses was 1.78 times nonperforming loans, versus 16.44 times at year-end.
- Deposits grew overall, but the mix shifted toward interest-bearing funding: interest-bearing deposits were 79.9% of deposits, compared with 78.4% at year-end. Management reported $420.5 million in wholesale deposit funding; regulatory reporting also included reciprocal deposits, bringing the stated regulatory-defined wholesale amount to $599.8 million.
- Accumulated other comprehensive loss increased to $7.9 million from $7.5 million, primarily reflecting unrealized losses on available-for-sale securities. Management attributed these declines mainly to interest rates and market conditions, not credit deterioration, and said it did not expect them to result in earnings write-downs.
Outlook, commentary, risks and unusual items
- The filing provides no formal earnings or financial guidance. Management cautions that Q1 results are not necessarily indicative of full-year results.
- The Avenu SaaS software program was expected to be deployed in Q2 2024. The company had capitalized $15.7 million of software development costs and expected amortization to begin when the software was placed in service, anticipated in Q2.
- Commercial real estate concentration is a key risk: construction, land development and other land loans equaled 130.1% of consolidated risk-based capital; CRE loans under the cited supervisory definition equaled 364.7%. The CRE portfolio had grown 56% over the prior 36 months. Management described heightened underwriting, stress testing and internal limits. Its disclosed stress test showed post-stress capital ratios remaining above stated targets and regulatory benchmarks.
- Liquidity risks include competition for deposits and the potential repricing or departure of maturing funding. Certificates of deposit totaling $543.7 million were due within one year. Outstanding loan commitments were $339.7 million, with $311,000 in standby letters of credit.
- Other cited risks include interest-rate and securities-market changes, credit deterioration, economic weakness in the company’s concentrated Washington-area market, cybersecurity and fraud, third-party service reliance, regulatory actions, and execution risks in new businesses. Management said the allowance reflects its current assessment but additional provisions may be required as conditions or information change.
- The company repurchased 22,866 shares during the quarter for an average $18.20 per share. It reported no material pending legal proceedings; routine matters were considered immaterial.
Important facts for investors to verify
- Track deposit pricing, deposit mix, wholesale and reciprocal funding, and the effect of deposit competition on net interest margin.
- Monitor the $8.3 million nonaccrual construction loan, other criticized loans, and whether the allowance remains adequate as credit conditions evolve.
- Review CRE and construction concentration, portfolio performance by property type and geography, and the assumptions behind management’s stress tests.
- Confirm the timing and operating impact of the Avenu software launch, including when capitalized costs begin amortizing and whether deployment produces expected revenue or deposits.
- Assess the $543.7 million of CDs maturing within one year, available borrowing capacity, and the ability to fund $339.7 million of loan commitments without materially higher costs.
- Reconcile management’s deposit-growth discussion with the balance-sheet figures: the filing’s MD&A says noninterest-bearing deposits “increased” by $155.7 million, but reported balances show a decrease of $15.7 million, from $364.6 million to $348.9 million. The reported balance figures are consistent with the cash-flow statement.