MainStreet Bancshares, Inc. — Q3 2019 Form 10-Q
Reporting period: Unaudited quarter and nine months ended September 30, 2019; comparisons are with the corresponding 2018 periods unless otherwise stated. MainStreet is a Virginia bank holding company whose subsidiary, MainStreet Bank, serves businesses, professionals and consumers primarily in Northern Virginia and the Washington, D.C. metropolitan area.
Financial results and key metrics
- Q3 profit: Net income was $3.7 million, up from $2.4 million; diluted EPS was $0.45 versus $0.35. Nine-month net income was $10.4 million versus $5.5 million; diluted EPS was $1.26 versus $0.90.
- Interest performance: Q3 net interest income rose 25.5% to $10.0 million; net interest margin was 3.48%, compared with 3.20%. For nine months, net interest income rose 31.4% to $29.2 million and margin was 3.50%, compared with 3.41%.
- Other income and expenses: Q3 noninterest income increased to $1.4 million from $0.7 million, including $407,000 in loan-swap fees and $303,000 in gains on sales of guaranteed SBA loan portions. Nine-month noninterest income was $3.7 million versus $1.8 million, including $878,000 in swap fees and $566,000 in SBA loan-sale gains. Noninterest expense rose 25.8% in Q3 to $6.5 million and 27.9% for nine months to $18.7 million.
- Balance sheet at September 30: Total assets were $1.234 billion, up 12.1% from year-end 2018. Net loans were $992.6 million, up 8.2%; deposits were $1.065 billion, up 15.7%; and stockholders’ equity was $133.2 million.
- Funding and debt: Time deposits were $602.6 million, up $144.3 million from year-end; management attributed growth partly to brokered deposits used to fund lending. FHLB advances were $10.0 million, down from $40.0 million; subordinated debt was $14.8 million. Average deposit costs increased to 2.32% in Q3 from 1.94% and to 2.28% for nine months from 1.61%.
- Liquidity and cash flow: Cash and cash equivalents were $72.0 million; available-for-sale securities were $88.2 million. Nine-month operating cash flow was $11.9 million, investing cash outflow $112.4 million, and financing cash inflow $114.4 million; ending cash was $72.0 million. The Bank reported $285.9 million of unused FHLB borrowing capacity and additional stated borrowing availability at four other banks.
- Credit and capital: Allowance for loan losses was $9.37 million, or 0.93% of gross loans. Nine-month provision was $1.26 million versus $2.63 million; net charge-offs were $721,000. Nonperforming loans were $115,000 (0.01% of gross loans), while nonperforming assets were $1.32 million (0.11% of assets), including $1.21 million of other real estate owned. The Bank reported capital ratios above regulatory minimums and was “well capitalized”; total capital to risk-weighted assets was 13.66%.
Material changes versus comparable periods
- Loan growth and higher loan yields drove much of the increase in interest income: average loans rose to $996.8 million in Q3 from $842.6 million, while the average loan yield increased to 5.70% from 5.25%.
- Higher funding costs, especially on time deposits, absorbed part of the revenue growth. Q3 interest expense increased to $5.1 million from $3.9 million; nine-month expense increased to $14.6 million from $8.5 million.
- Q3 provision fell to $185,000 from $600,000. Management cited lower loan originations and reduced nonperforming loans following foreclosure of a previously nonperforming loan. The foreclosure resulted in $1.21 million of OREO and a $733,000 charge against the allowance.
- Gross loans increased $76.5 million from year-end, led by commercial real estate and construction lending; consumer loans declined $19.3 million. Available-for-sale securities rose $32.2 million.
- Operating lease accounting adoption resulted in recognition of a $2.7 million right-of-use asset and lease liability at January 1, 2019. At September 30, lease liabilities were $2.54 million.
Outlook, commentary and risks
- No formal earnings or financial guidance is provided. Management said it expected similar opportunities in loan-swap fees and SBA loan sales during 2019; these items contributed materially to noninterest income and should be assessed for repeatability.
- Management stated that liquidity was sufficient for expected needs. However, $338.9 million of certificates of deposit were due within one year; if they do not renew, replacement funding could cost more. The filing also identifies competition for deposits and interest-rate changes as risks.
- A seventh branch at 1130 Connecticut Avenue in Washington, D.C. was scheduled to open in December 2019.
- Credit indicators were mixed: nonperforming loans declined sharply, but criticized commercial and industrial exposures included $5.2 million classified as special mention and $3.3 million as substandard; management linked increases principally to individual relationships and cited collateral support. The filing reports $265.8 million in outstanding loan commitments and $672,000 in standby letters of credit.
- The Company was assessing the impact of the expected-credit-loss standard (CECL) and had begun compiling data with a third party. It was also evaluating whether to adopt the community bank leverage ratio framework. Management identified the LIBOR transition as an operational and business risk and described an enterprise-wide transition initiative.
- Management concluded disclosure controls were effective and reported no material change in internal control over financial reporting during the quarter. Routine legal proceedings were described as immaterial; no material governmental proceedings were pending or known to be threatened.
Investor facts to verify
- How much of deposit growth came from brokered or rate-sensitive deposits, and what portion of the $338.9 million maturing within a year renews?
- Whether the swap-fee and SBA loan-sale income continues, and how much Q3 and year-to-date earnings growth depends on these sources.
- Performance, collateral and allowance needs for criticized commercial relationships, recent charge-offs, and the foreclosed property held as OREO.
- Whether loan growth can be funded without further increases in deposit costs, and how the recent Federal Reserve rate cuts affect net interest margin.
- Progress and costs for the Washington, D.C. branch, CECL implementation and the LIBOR transition.