MainStreet Bancshares, Inc. — 2022 Form 10-K
Reporting period: Fiscal year ended December 31, 2022; comparisons are generally with 2021. This is an annual filing, not a standalone fourth-quarter report. The company is a Virginia bank holding company operating MainStreet Bank, focused on community banking in Northern Virginia and the Washington, D.C. area.
Financial performance and position
| Metric | 2022 | 2021 |
|---|---|---|
| Total assets, year-end | $1.926 billion | $1.647 billion |
| Net loans, year-end | $1.580 billion | $1.342 billion |
| Deposits, year-end | $1.513 billion | $1.412 billion |
| Net interest income | $70.0 million | $53.5 million |
| Net income | $26.7 million | $22.2 million |
| Net income available to common shareholders | $24.5 million | $20.0 million |
| Basic and diluted EPS | $3.26 | $2.65 |
| Net interest margin, fully tax-equivalent | 4.19% | 3.35% |
| Efficiency ratio | 52.19% | 55.10% |
| Cash and cash equivalents, year-end | $130.6 million | $93.2 million |
| Total stockholders’ equity, year-end | $198.3 million | $188.8 million |
Net interest income increased 30.8%, reflecting loan growth and higher rates; net income rose 20.3%. Interest income increased 30.6%, while interest expense rose 29.8%. Provision for loan losses was $2.4 million, versus a $1.2 million recovery in 2021. Non-interest income declined 20.9% to $4.8 million, while non-interest expense increased 18.8% to $39.1 million, principally due to higher staffing, marketing and outside-service costs. Return on average assets improved to 1.53% from 1.32%, and return on average equity to 13.98% from 12.38%.
Net cash provided by operating activities was $33.5 million. Investing activities used $228.7 million, principally reflecting loan growth; financing activities provided $232.6 million, including deposit growth, $100 million of FHLB advances and subordinated debt issuance. Cash and cash equivalents increased $37.4 million during the year.
At year-end, the Bank had $100 million of FHLB advances, due in 2023, and the company reported $72.2 million of subordinated debt. Deposits included $317.3 million of brokered deposits. Deposits exceeding the standard $250,000 FDIC insurance limit totaled $486.9 million; $331.3 million of large-denomination certificates of deposit matured within one year. Management stated that available liquidity sources were adequate, including $365 million of FHLB availability and $104 million of correspondent-bank availability.
The Bank remained well-capitalized: CET1 and Tier 1 risk-based capital ratios were each 15.47%, total risk-based capital was 16.27%, and Tier 1 leverage was 15.05%. The total equity-to-assets ratio declined to 10.30% from 11.46%. The available-for-sale securities portfolio had $11.1 million of gross unrealized losses at year-end; accumulated other comprehensive income moved from $0.2 million positive to $8.5 million negative, primarily reflecting rate-driven securities valuation changes.
Material changes and notable items
- Total assets grew 16.9%; net loans increased $240.7 million, with growth in multifamily, owner-occupied and investment commercial real estate lending.
- Gross loans were $1.600 billion; commercial real estate and construction together represented substantial portfolio exposures. Investment commercial real estate was 29.5% of loans, construction 24.6%, and owner-occupied commercial real estate 14.3%.
- Non-performing assets fell to $21,000 from $775,000, as the prior-year other real estate owned property was sold. The filing reports no nonaccrual loans; 2022 net charge-offs were 0.00% of average loans.
- The allowance for loan losses increased to $14.1 million from $11.7 million, or 0.88% of gross loans. Watch-list loans declined to $25.0 million, while substandard loans increased to $9.5 million.
- The company issued $43.8 million of fixed-to-floating subordinated notes in March 2022, carrying a 4.00% fixed rate through March 2027 and then a SOFR-based floating rate. It also repurchased 284,693 common shares during 2022 and paid $0.25 per common share in dividends.
- MainStreet Bank’s Avenu division recorded a $433,000 pretax loss as it invested in its payments and embedded-banking business. The company had capitalized $9.1 million of software development costs by year-end; Avenu’s platform was targeted for deployment in 2023.
Outlook, risks and contingencies
Management described a strategy of growing core deposits, profitable lending and fee income, and expressed confidence in continued profitable growth, but the filing provides no quantified earnings, margin or growth guidance. Management expected the Avenu software platform to be deployed in 2023. MainStreet Community Capital applied for a 2022 New Markets Tax Credit allocation, with awards expected in the fourth quarter of 2023.
Management noted that rising rates helped asset yields in 2022 but could increase deposit and wholesale funding costs and pressure margins. The company described itself as asset-sensitive; its modeled one-year net interest income increased 17.25% under a 100-basis-point rate rise and declined 17.65% under a 100-basis-point fall. These are model estimates, not guidance, and depend on assumptions about deposit behavior, prepayments and reinvestment.
Key risks include concentration in local real estate lending, including commercial real estate and construction; deterioration in property values or borrower cash flows; competition for deposits and reliance on brokered and rate-sensitive funding; rapid interest-rate changes; and unfunded commitments of $435.8 million. Other risks include cybersecurity and third-party service-provider exposure, execution and compliance risks in the growing Avenu/BaaS business, and economic weakness in the company’s concentrated Washington-area market. The company reported that ordinary-course litigation was not expected to have a material adverse effect.
The company adopted CECL on January 1, 2023. The filing reports a $2.2 million transition increase in credit-loss allowances and reserves for unfunded commitments, with a corresponding reduction in retained earnings; it states that regulatory capital was not affected. The independent auditor issued an unqualified opinion on the financial statements. The auditor did not attest to internal control over financial reporting; management reported its assessment as effective.
Investor verification points
- Review loan concentrations, construction exposure, criticized-loan trends, collateral values and the adequacy of the allowance as the economic and rate environment changes.
- Track deposit retention, pricing, brokered funding, large certificates maturing in 2023, uninsured deposits and the company’s use of FHLB borrowings.
- Reconcile reported asset sensitivity and projected margin effects with actual deposit-cost repricing and subsequent net interest margin results.
- Assess Avenu’s deployment progress, software investment, compliance controls, deposit contribution and path to profitability.
- Monitor the effect of CECL adoption and the significant unrealized losses on available-for-sale securities, including implications for capital and liquidity.
- Confirm the filing’s rounded asset-quality metrics: it reports $21,000 of non-performing assets and no nonaccrual loans, while the non-performing-assets-to-total-assets ratio is shown as 0.00%.