MainStreet Bancshares, Inc. — Q2 2019 Form 10-Q
Business context and reporting period. Unaudited consolidated results for the quarter and six months ended June 30, 2019; comparisons are with the same 2018 periods unless otherwise noted. MainStreet is a community bank holding company serving Northern Virginia and the greater Washington, D.C. area. It operated six branches and expected to open a seventh, in Washington, D.C., in Q4 2019. Dollar amounts below are in millions unless stated.
Financial performance and position
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Interest income | $14.87 | $10.17 | $28.68 | $18.93 |
| Net interest income | $9.89 | $7.51 | $19.23 | $14.28 |
| Provision for loan losses | $0.75 | $1.40 | $1.08 | $2.03 |
| Noninterest income | $1.34 | $0.58 | $2.27 | $1.09 |
| Noninterest expense | $6.18 | $4.87 | $12.19 | $9.45 |
| Net income | $3.43 | $1.50 | $6.68 | $3.19 |
| Diluted earnings per share | $0.42 | $0.26 | $0.81 | $0.55 |
Margins and drivers. Q2 net interest margin was 3.51%, versus 3.54%; six-month margin was 3.50%, versus 3.54%. Q2 net interest income rose 31.7%, with growth in average earning assets more than offsetting higher funding costs. Average deposit cost rose to 2.31% in Q2 from 1.54%; average loan yield increased to 5.67% from 5.07%.
June 30 balance sheet. Total assets were $1,184.8, up 7.6% from year-end 2018. Net loans were $983.6, up 7.2%; gross loans were $994.5. Deposits were $1,011.1, up 9.9%, including $567.0 of time deposits, up $108.7 since year-end. Stockholders’ equity was $129.0. Cash and cash equivalents were $64.8; available-for-sale securities were $60.1.
Debt, liquidity and capital. FHLB advances were $20.0, down from $40.0 at year-end; subordinated debt, net, was $14.8. The Bank reported $286.4 of unused FHLB borrowing capacity and additional stated borrowing capacity at other banks. Management said liquidity was sufficient for expected needs. The Bank exceeded regulatory capital requirements and was classified as well capitalized: total capital ratio 13.41%, common equity Tier 1 12.59%, Tier 1 risk-based 12.59%, and Tier 1 leverage 12.07%.
Cash flow, six months. Operating activities provided $6.7; investing activities used $71.0, primarily reflecting loan growth and securities activity; financing activities provided $71.0, mainly from deposit growth, partly offset by $20.0 of FHLB repayments. Cash and cash equivalents increased $6.7 to $64.8.
Material changes and credit quality
- Net income more than doubled in Q2 and rose to $6.7 for the half year. Higher loan interest income, fee income and lower loan-loss provisions contributed.
- Loan growth was concentrated in commercial real estate and construction: commercial real estate loans rose $48.1 and construction loans rose $20.3 from year-end. Consumer loans declined $13.9.
- Interest expense increased as deposit balances and rates rose; time-deposit expense was a major driver. Management attributed deposit growth to retail strategies and brokered deposits obtained through a reciprocal placement network.
- Allowance for loan losses was $9.2, or 0.92% of gross loans. Six-month net charge-offs were $0.72. Nonperforming loans were $34,000; nonperforming assets were $1.24, including $1.21 of foreclosed real estate. One performing residential TDR totaled $1.49, down from two TDRs totaling $3.45 at year-end.
- Loans rated substandard totaled $5.15; management said the increase primarily involved two relationships and was cautionary due to temporary conditions. The filing reports no loans past due over 90 days at June 30, apart from the stated nonperforming consumer balance.
Outlook, risks and unusual items
- No formal earnings or financial forecast was provided. Management expected further opportunities in loan-swap fees and SBA loan sales during 2019 and scheduled a seventh branch opening for Q4 2019.
- Q2 noninterest income included $0.18 in loan-swap fees and $0.26 in gains from sale of guaranteed SBA loan portions. Six-month loan-swap fees were $0.47. The Bank began these swap contracts in Q4 2018; matched customer and dealer swaps had $51.2 notional at quarter-end.
- The Bank foreclosed on a previously troubled loan and recorded $1.21 of other real estate owned; a $0.73 specific reserve on the loan was charged off. Management cited $0.76 of Q2 charge-offs overall.
- Management identified risks including competition for deposits, interest-rate and margin changes, economic weakness in its concentrated market, credit quality and allowance estimates, liquidity, regulatory change, and its ability to sustain growth. Certificates of deposit totaling $309.6 matured within one year; management noted replacement funding could cost more if deposits leave. Outstanding loan commitments were $281.7, plus $0.67 of standby letters of credit.
- The company adopted lease accounting in January 2019, recognizing a $2.6 lease liability at June 30; it also disclosed $3.8 of future payments for an executed lease not yet recognized because control of the property had not transferred. Management included assessments for potential state tax liabilities in 2019 tax expense.
- Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter. No material legal proceedings were reported. The filing states results for the first half are not necessarily indicative of full-year results.
Important facts for investors to verify
- Whether loan and deposit growth can continue without further pressure on deposit costs, net interest margin, or capital.
- The composition, pricing and renewal behavior of time and brokered deposits, particularly the $309.6 maturing within one year.
- Credit performance of the commercial real estate, construction and commercial-and-industrial portfolios, including the two relationships driving substandard classifications and the foreclosed property’s carrying value.
- Sustainability of noninterest income from swap fees and SBA loan sales, and the expense impact of staffing, technology investment and the new branch.
- Management’s assessment of future expected-credit-loss accounting under CECL; the company was still evaluating its impact and implementation.