MainStreet Bancshares, Inc. — Q1 2023 Form 10-Q
Reporting period: Three months ended March 31, 2023; financial statements are unaudited. MainStreet is a Virginia bank holding company whose subsidiary serves consumers, businesses and professionals in the Washington, D.C. metropolitan area.
Financial performance and position
| Metric | Q1 2023 | Comparable / change |
|---|---|---|
| Total revenue | $29.6 million | Up $11.1 million year over year |
| Net interest income | $21.1 million | Up 38.8% from $15.2 million |
| Net interest margin | 4.69% FTE | Up 76 basis points year over year |
| Net income | $8.2 million | Up from $5.4 million |
| Net income available to common shareholders / diluted EPS | $7.6 million / $1.01 | Up from $4.9 million / $0.64 |
| Provision for loan credit losses | $415,000 | Down from $800,000 |
| Non-interest expense | $11.7 million | Up 30.6% from $9.0 million |
| Operating cash flow | $8.8 million | Up from $7.3 million |
| Total assets | $2.06 billion | Up 6.7% from year-end 2022 |
| Net loans | $1.62 billion | Up $37.3 million from year-end |
| Deposits | $1.63 billion | Up $119.4 million from year-end |
| Cash and cash equivalents | $225.3 million | Up from $130.6 million at year-end |
Interest income rose 65.1%, driven by loan growth and higher yields as rates increased. Funding costs rose sharply: total interest expense increased to $7.6 million from $2.2 million, and average deposit cost increased to 2.27% from 0.76%. Non-interest income declined 13.7% to $1.0 million. Salaries and benefits rose $2.1 million, partly reflecting 29 additional employees; advertising and marketing also increased.
At March 31, total borrowings included $60.7 million of federal funds borrowed, $45.0 million of FHLB advances and $72.3 million of subordinated debt. The Bank reported regulatory capital ratios of 16.35% total capital, 15.49% common equity Tier 1 and 14.69% Tier 1 leverage, and stated it was “well capitalized.”
Material changes and notable items
- Loan growth was concentrated in commercial real estate and construction: commercial real estate rose $36.3 million and construction loans rose $21.3 million from year-end. Total gross loans were $1.64 billion.
- Non-interest-bearing deposits fell $62.8 million, while time deposits increased $121.9 million. Certificates of deposit totaling $419.7 million mature within one year.
- CECL was adopted January 1, 2023. The transition increased loan and off-balance-sheet credit reserves by $2.2 million and reduced retained earnings, net of tax, by $1.7 million. The quarter-end loan allowance was $15.4 million; the off-balance-sheet allowance was $1.2 million.
- Available-for-sale securities had $10.0 million of gross unrealized losses and a $7.7 million accumulated other comprehensive loss, primarily attributed by management to higher rates rather than credit deterioration. Management said it did not expect to sell the securities and expected recovery as they approach maturity.
- Net cash from financing was $123.8 million, including $182.2 million net growth in interest-bearing deposits and $60.7 million in federal funds borrowing, partly offset by $55.0 million repayment of FHLB advances. Cash increased $94.7 million during the quarter.
Outlook, risks and contingencies
The filing gives no quantified earnings or balance-sheet guidance. Management said it expects sufficient liquidity for current needs and lending commitments, while noting that deposit retention and replacement funding costs depend on market conditions. The Bank reported $436.1 million of additional secured borrowing capacity, access to up to $129.0 million from other financial institutions, and $63.2 million of available-for-sale securities. Outstanding loan commitments were $429.0 million; no standby letters of credit were outstanding.
Management warned that inflation, interest rates, deposit competition, economic conditions and securities-market changes may pressure margins, funding, asset values and borrowers’ repayment ability. Other stated risks include credit deterioration, CRE and construction exposure, concentration in the Northern Virginia/Washington, D.C. market, cyber and operational risks, third-party reliance, and potential banking-sector contagion or adverse media and social-media speculation.
Asset quality indicators were low: reported nonperforming assets were $15,000, with no loans on nonaccrual and no foreclosures in process. The filing reports $10.2 million of substandard loans; 83% were associated with hospitality, which management said had improving cash flows and occupancy and was not expected to produce losses. Management cautioned that additional credit-loss provisions may be required as conditions and information change. No material legal proceedings were reported. Avenu’s SaaS solution was in beta testing, with a soft launch planned for Q2 2023; the company’s NMTC allocation award was expected in Q4 2023.
Important facts for investors to verify
- Deposit stability and pricing, especially the $419.7 million of certificates maturing within one year and the shift away from non-interest-bearing deposits.
- Loan growth, underwriting and collateral quality in commercial real estate and construction, as well as hospitality-linked criticized credits.
- Whether higher deposit and borrowing costs continue to offset asset-yield gains and affect net interest margin.
- Unrealized securities losses, liquidity availability under stress, and management’s ability to avoid selling securities at a loss.
- CECL reserve assumptions and subsequent changes in the loan and unfunded-commitment allowances.
- Execution, costs and revenue contribution from Avenu, including whether the planned soft launch occurred.