MainStreet Bancshares, Inc. — 2019 Form 10-K
Reporting period: Fiscal year ended December 31, 2019; this is an annual report, not a standalone fourth-quarter filing. MainStreet is a Virginia bank holding company operating MainStreet Bank, serving Northern Virginia and the Washington, D.C. metropolitan area. The bank focuses on commercial, real estate and consumer lending, deposits, and payment-services relationships. Figures below are in U.S. dollars; financial statement amounts are in millions unless noted.
Financial performance and condition
| Metric | 2019 | 2018 | Change |
|---|---|---|---|
| Total assets, year-end | $1,277.4 | $1,100.6 | +16.1% |
| Net loans, year-end | $1,030.4 | $917.1 | +12.4% |
| Deposits, year-end | $1,071.6 | $920.1 | +16.5% |
| Net interest income | $39.4 | $31.2 | +26.5% |
| Provision for loan losses | $1.6 | $3.1 | -48.2% |
| Non-interest income | $4.9 | $3.2 | +50.1% |
| Non-interest expense | $25.4 | $20.0 | +27.0% |
| Net income | $14.0 | $9.2 | +51.5% |
| Diluted earnings per share | $1.69 | $1.38 | +22.5% |
- Profitability and margins: Return on average assets was 1.19% versus 0.97%; return on average equity was 10.79% versus 10.38%. Net interest margin improved to 3.50% from 3.41%, while the interest-rate spread narrowed to 2.88% from 2.94%. The efficiency ratio improved to 57.28% from 58.07%.
- Drivers: Management attributed higher earnings principally to loan growth and increased net interest income. Loan yield rose to 5.61% from 5.19%; the cost of interest-bearing deposits rose to 2.25% from 1.75%. Net interest income increased $8.3 million, while salaries and benefits increased $3.9 million as staffing grew.
- Cash flow: Operating activities provided $16.7 million, investing activities used $161.4 million, and financing activities provided $151.5 million. Cash and cash equivalents ended the year at $64.8 million, up from $58.1 million.
- Liquidity and funding: Available-for-sale securities were $92.8 million; held-to-maturity securities were $23.9 million. The bank reported $40.0 million in FHLB advances and $14.8 million in subordinated debt. Brokered deposits were $236.9 million, up from $140.8 million. Certificates of deposit totaling $279.6 million were due within one year.
- Capital: Stockholders’ equity was $137.0 million, or 10.73% of assets. The bank’s CET1 and total risk-based capital ratios were 12.68% and 13.50%, respectively; it was categorized as well capitalized.
- Credit quality: Non-performing loans were zero at year-end, compared with $2.0 million in 2018. Non-performing assets were $1.2 million, or 0.09% of assets, including foreclosed real estate. Net charge-offs were $865,000, or 0.09% of average loans; the allowance was $9.6 million, or 0.92% of gross loans.
Material changes versus 2018
- Assets, loans, deposits and equity expanded; the branch network grew from six to seven locations, and full-time employees increased from 110 to 126.
- Gross loans rose to $1.04 billion from $927.4 million. Construction and land-development loans increased to $272.6 million from $183.6 million; owner-occupied and non-owner-occupied commercial real estate loans totaled $421.9 million.
- Loan originations declined to $230.8 million from $396.2 million, while the portfolio still grew through net loan activity.
- Non-interest income growth included higher deposit service charges and loan-swap fees, as well as $566,000 in gains on loan sales, versus none reported in 2018.
- The bank foreclosed on a previously troubled commercial real estate loan, charged off its $733,000 specific reserve, and recorded $1.2 million of other real estate owned. One accruing residential troubled debt restructuring remained, with a $1.5 million balance.
- Accumulated other comprehensive income improved by $790,000, primarily reflecting higher fair values of available-for-sale securities.
Outlook, risks and unusual items
- Management stated it expects continued profitable growth, with a focus on business relationships, core deposits, profitable loans and non-interest income. It cited continued opportunities in merchant/payment services, processing fees and SBA loan sales, but gave no quantified earnings or growth guidance.
- The company reported that the bank applied in February 2020 to convert from a Virginia-chartered institution to a national bank; approval and completion were not assured in the filing.
- Key exposures include commercial real estate and construction lending, geographic concentration in the D.C. region, interest-rate and funding-cost changes, reliance on brokered and other rate-sensitive deposits, and the risk that rapid growth strains staffing and infrastructure. Commercial real estate and construction loans together represented a substantial share of the portfolio.
- Unfunded commitments to extend credit were $251.5 million; standby and commercial letters of credit were $672,000. Draws could increase funding needs.
- The filing identified cybersecurity, third-party service-provider, payment-processing compliance, and potential pandemic-related disruption risks. It specifically discussed the potential spread of COVID-19 as a risk, not as a reported 2019 financial impact.
- The $15.0 million subordinated notes bear fixed interest of 6.25% through December 31, 2021, then float at three-month LIBOR plus 425 basis points through maturity in 2026. The filing warned that LIBOR’s potential cessation after 2021 could affect costs and hedge accounting.
- The company had not paid cash dividends. A $10.0 million share repurchase program was authorized in September 2019; no shares were repurchased during 2019.
- The independent auditor issued an unqualified opinion on the consolidated financial statements. Management reported effective disclosure controls and internal control over financial reporting; the auditor did not provide an internal-control attestation, consistent with the company’s reporting exemptions.
Important facts for investors to verify
- Whether 2020 loan growth, credit performance and the allowance remain sound, particularly in construction and commercial real estate exposures, and how management assesses the remaining troubled debt restructuring and foreclosed property.
- Deposit stability and pricing: brokered deposits increased to $236.9 million, and $279.6 million of certificates matured within one year; verify renewal rates, replacement funding costs and liquidity capacity.
- Whether rising operating costs—especially compensation, franchise tax and technology spending—are matched by revenue growth and continued efficiency improvements.
- Potential effects of the proposed bank charter conversion, the planned adoption of expected-credit-loss accounting, and the LIBOR transition on regulation, capital, earnings and debt costs.
- Subsequent-period developments and any realized impact from COVID-19, which was discussed as a forward-looking risk in this filing.
- Trading liquidity and shareholder returns: the stock began Nasdaq trading in 2019, the filing cautioned that an active market might not persist, and no cash dividend had been paid.