MainStreet Bancshares, Inc. — Q1 2021 Form 10-Q
Reporting period: Three months ended March 31, 2021. Unaudited consolidated results include MainStreet Bancshares and its wholly owned bank subsidiary. The company serves Northern Virginia and the greater Washington, D.C. area.
Financial results and position
Amounts are in millions of dollars unless otherwise indicated.
| Metric | Q1 2021 / March 31, 2021 | Comparable period / prior date |
|---|---|---|
| Net interest income | $13.5; net interest margin 3.41% | $10.3; 3.26% in Q1 2020 |
| Net income | $5.45 | $3.47 in Q1 2020 |
| Net income available to common shareholders | $4.91; basic and diluted EPS $0.65 | $3.47; EPS $0.42 in Q1 2020 |
| Provision for loan losses | $0.32 | $0.35 in Q1 2020 |
| Cash flow from operations | $44.0 | $5.5 in Q1 2020 |
| Total assets | $1,743.0 | $1,643.2 at December 31, 2020 |
| Net loans | $1,299.2 | $1,230.4 at December 31, 2020 |
| Deposits | $1,538.1 | $1,438.2 at December 31, 2020 |
| Cash and cash equivalents | $170.0 | $107.5 at December 31, 2020 |
| Subordinated debt, net | $14.8 | $14.8 at December 31, 2020 |
Changes and operating performance
- Net income increased about 57% year over year, chiefly as net interest income rose 30.8%. Lower deposit costs more than offset lower yields on earning assets; average deposit cost fell to 1.03% from 2.03%.
- Average earning assets grew to $1.60 billion from $1.27 billion, while their average yield declined to 4.13% from 4.79%. Reported NIM was 3.41%; excluding PPP income and average PPP loans, management’s non-GAAP NIM was 3.20%, down from 3.26%.
- Noninterest income was $1.45 million, including $344,000 in loan-sale gains; this was partly offset by the absence of $403,000 of loan-swap fee income recorded in Q1 2020. Noninterest expense increased 9.3% to $7.81 million, including higher compensation and operating costs.
- Gross loans increased to $1.32 billion. PPP loans totaled $179.8 million at quarter-end, including $87.3 million in 572 additional loans originated after the program reopened. Commercial real estate and commercial and industrial lending also increased. Consumer loans declined as management allowed that portfolio to run off.
- Deposits rose 6.9% from year-end. Noninterest-bearing deposits increased to $492.5 million; money-market deposits declined to $342.5 million as the company pursued lower funding costs. Management reported core deposits of $1.07 billion.
- Cash flow from operations included $31.3 million of loan-sale proceeds and a $10.9 million positive change in other assets; investing activities used $80.9 million and financing activities provided $99.4 million. Cash flow therefore reflects significant balance-sheet movements, not just recurring earnings.
Credit, liquidity, capital, and risks
- The allowance for loan losses was $13.2 million, or 1.00% of gross loans and 1.16% excluding PPP loans. There were no charge-offs in Q1; recoveries were $18,000. Nonperforming loans were $149,000 and nonperforming assets were $1.33 million, or 0.08% of assets.
- Criticized credit warrants attention: substandard loans were $20.5 million at March 31, versus $2.1 million at December 31, 2020. Management said four loans made up 85.4% of the substandard pool, had been downgraded out of caution amid the pandemic, and were not expected to incur losses. Special-mention loans were $2.2 million. No TDRs were reported.
- Cash and cash equivalents were $170.0 million; available-for-sale securities were $180.0 million. The Bank had no FHLB advances outstanding, $410.7 million of unused FHLB borrowing capacity, and the ability to borrow up to $104.0 million from other financial institutions. Management stated liquidity was sufficient. Certificates of deposit totaling $257.2 million were due within one year.
- The Bank was classified as well capitalized. At March 31, its total capital-to-risk-weighted-assets ratio was 15.43%, common equity Tier 1 ratio 14.38%, and Tier 1 leverage ratio 10.83%.
- Off-balance-sheet commitments included $227.0 million of loan commitments and $672,000 of standby letters of credit. The filing notes these commitments may be drawn and could affect liquidity.
- COVID-19 remains a source of uncertainty for borrowers, collateral values, loan demand, operations, interest rates and liquidity. Management incorporated a COVID-19 qualitative factor into its loan-loss assessment and said additional provisions could be required as conditions evolve. PPP-related operational, regulatory and litigation exposures are also discussed.
- Other risks include geographic concentration, deposit competition, interest-rate and securities-market changes, cybersecurity and third-party service disruptions, and the transition away from LIBOR. Management gave no numerical earnings or growth guidance; it cautioned that quarterly results are not necessarily indicative of full-year results.
- Subsequent event: On April 6, 2021, the company agreed to issue $30.0 million of 3.75% fixed-to-floating subordinated notes due 2031; on April 20, it extinguished $3.6 million of prior subordinated debt.
Most important facts for investors to verify
- Whether the increase in substandard loans, especially the four concentrated credits, results in losses or higher provisions.
- PPP forgiveness, fee recognition and runoff effects on future loan growth, net interest income and reported margins.
- Deposit retention and pricing, including the $257.2 million of certificates due within one year and the effect of ongoing deposit-cost competition.
- The quality and sustainability of Q1 cash flow, given loan-sale proceeds and substantial changes in other assets and liabilities.
- The impact of the $30.0 million note issuance and debt extinguishment on future interest expense, capital and liquidity.