MainStreet Bancshares, Inc. — Q2 2020 Form 10-Q
Business context and period. The unaudited filing covers the quarter and six months ended June 30, 2020. MainStreet Bancshares is a Virginia bank holding company serving businesses and consumers in Northern Virginia and the greater Washington, D.C. area. The quarter’s results reflect COVID-19 disruption, loan payment-relief programs, and substantial Paycheck Protection Program (PPP) lending. Amounts below are in U.S. dollars; financial statement amounts are converted from thousands to millions where shown.
Key financial results
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Total interest income | $14.9 million | $14.9 million | $30.0 million | $28.7 million |
| Net interest income | $10.7 million | $9.9 million | $21.0 million | $19.2 million |
| Provision for loan losses | $5.6 million | $0.8 million | $5.9 million | $1.1 million |
| Net income (loss) | $(0.6) million | $3.4 million | $2.8 million | $6.7 million |
| Diluted earnings (loss) per share | $(0.08) | $0.42 | $0.34 | $0.81 |
| Net interest margin | 3.04% | 3.51% | 3.14% | 3.50% |
- Management reported pre-tax, pre-provision income of $4.7 million for Q2 and $9.3 million for the first half. Its company-defined adjusted net income, which adds back the provision and tax expense or benefit, was $4.7 million for Q2 and $9.3 million for the first half; this is a non-GAAP measure, not reported net income.
- At June 30, total assets were $1.529 billion, up 19.7% from year-end 2019. Gross loans were $1.281 billion, including $171.6 million of PPP loans; deposits were $1.342 billion. Stockholders’ equity was $140.2 million.
- Cash and cash equivalents were $76.4 million. Six-month operating cash flow was $4.5 million, investing cash outflow was $232.8 million, and financing cash inflow was $239.8 million.
- Debt included $10.0 million of FHLB advances and $14.8 million of subordinated debt, net, versus $40.0 million of FHLB advances at December 31, 2019. The Bank reported $332.6 million of unused FHLB borrowing capacity and access to up to $92.0 million from other financial institutions.
- The Bank reported regulatory capital ratios of 13.26% total capital to risk-weighted assets, 12.16% common equity tier 1, and 10.23% tier 1 capital to average assets. It stated that it exceeded requirements and was “well capitalized.”
Material changes and credit developments
- Q2 net loss compared with prior-year profit, principally because the loan-loss provision rose by $4.8 million year over year to $5.6 million. For the first half, net income declined by $3.8 million to $2.8 million, mainly due to the higher provision.
- Net interest income rose as loan and deposit balances grew and funding costs fell, but lower market rates and low-rate PPP loans compressed margins. Q2 average earning-asset yield fell to 4.22% from 5.29%; average deposit cost fell to 1.67% from 2.31%.
- Noninterest expense rose 19.2% in Q2, including higher employee costs and other operating expenses. Management cited increased compensation for customer-facing staff, professional and consulting fees, technology investment, and FDIC insurance premiums.
- Deposits increased $270.7 million from year-end, with growth in noninterest-bearing and money-market accounts. Management attributed much of the deposit growth to accounts associated with PPP activity; certificates of deposit declined $23.0 million.
- The allowance for loan losses increased to $13.7 million from $9.6 million at year-end; it was 1.07% of gross loans, or 1.24% excluding PPP loans. Six-month net charge-offs were $1.8 million. Nonaccrual loans were $1.3 million, and total nonperforming assets were $2.5 million, including $1.2 million of other real estate owned.
- One C&I borrower’s $1.76 million loan was charged off in Q2. Management said the quarter’s provision included COVID-related qualitative factors and an indirect-auto portfolio provision. It warned further provision expense may be required as pandemic effects become clearer.
Outlook, risks, and contingencies
- The filing provides no quantified earnings or margin guidance. Management said results for the periods reported are not necessarily indicative of full-year results.
- COVID-19 relief: Phase 1 deferrals covered 195 borrowers and $286.6 million, or 22.5% of loans. Phase 2 participation was estimated at 42 borrowers and $94.0 million; this was a planned estimate, not a reported completed balance. Fourteen of the Bank’s 15 hotel borrowers requested Phase 1 relief; hospitality exposure was identified as particularly affected.
- The Bank originated 1,071 PPP loans totaling nearly $172 million. PPP loans generally carry a 1% rate and depend on borrower eligibility, program compliance, and potential SBA forgiveness/guarantees. The filing identifies possible repayment, regulatory, litigation, and reputational risks if loans are found deficient or borrowers do not qualify for forgiveness.
- Other material risks include prolonged economic weakness, borrower repayment and collateral deterioration, commercial real estate and hotel exposure, possible additional deferrals and liquidity needs, low interest rates and margin pressure, operational and cybersecurity risks from remote work and third parties, and uncertainty in the transition from LIBOR.
- The Company said it had sufficient liquidity and funding sources at quarter-end. It had $264.3 million in loan commitments and $672,000 in standby letters of credit. Certificates of deposit totaling $301.6 million were due within one year.
- COVID-related short-term modifications for qualifying current borrowers may be excluded from TDR treatment under applicable guidance. The filing says the financial-statement impact of loan modifications could be material but could not be quantified. The Bank’s sole TDR at year-end was removed from TDR status during the first half.
- Management reported effective disclosure controls, no material change in internal control over financial reporting, and no material pending legal proceedings beyond routine matters.
Important facts for investors to verify
- Subsequent credit performance, extensions or outcomes of Phase 1 and Phase 2 deferrals, and any additional COVID-related provision or charge-offs.
- Concentrations and performance in commercial real estate, hotels, construction, and C&I loans; also reconcile PPP balances, forgiveness, and any SBA eligibility or servicing exposure.
- Whether deposit growth associated with PPP activity persists, how the $301.6 million of near-term certificate maturities are retained or replaced, and the Bank’s actual use of available borrowing facilities.
- Future net interest margin and funding costs as low rates continue, and the impact of loan and deposit repricing.
- Regulatory capital and liquidity trends, including how rapid balance-sheet growth and credit conditions affect those measures.