MainStreet Bancshares, Inc. — Q3 2022 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2022. Figures are unaudited; balance-sheet comparisons are with December 31, 2021. Dollar amounts below are in millions unless noted.
Business context
MainStreet Bancshares is a Virginia bank holding company operating MainStreet Bank, which serves Northern Virginia and the greater Washington, D.C. area. The bank focuses on consumers, small and medium-sized businesses, and professionals. The company is also developing Avenu, its banking-as-a-service platform, and operates a certified community development entity.
Key financial metrics
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Total interest income | $21.9 | $15.8 | $58.1 | $48.0 |
| Net interest income | $18.1 | $13.2 | $49.4 | $39.7 |
| Provision for loan losses | $0.0 | $0.3 | $1.3 | ($1.5) recovery |
| Non-interest income | $1.3 | $1.5 | $3.8 | $4.5 |
| Non-interest expense | $9.9 | $8.5 | $28.3 | $24.1 |
| Net income | $7.7 | $4.8 | $19.1 | $17.4 |
| Net income per common share, diluted | $0.97 | $0.56 | $2.31 | $2.09 |
Q3 net interest margin was 4.14% on a fully taxable-equivalent basis, compared with 3.30% a year earlier; the nine-month margin was 4.01%, versus 3.31%. Q3 spread increased to 3.57% from 2.91%. The filing does not present a conventional company-wide revenue or operating margin measure.
At September 30, total assets were $1.86 billion, net loans $1.45 billion, deposits $1.55 billion, subordinated debt net $72.1 million, and stockholders’ equity $190.0 million. Cash and cash equivalents were $104.7 million. For the first nine months, operating activities provided $22.9 million; investing activities used $186.2 million; financing activities provided $174.9 million. Cash increased $11.5 million to $104.7 million.
Material changes versus comparable periods
- Q3 net income rose $3.0 million year over year, while nine-month net income increased $1.7 million. Higher loan yields and growth, along with increased interest income on federal funds, lifted net interest income.
- Loans, net, increased $106.3 million, or 7.9%, from year-end 2021. Growth was concentrated in commercial real estate and residential real estate; commercial and industrial balances fell, partly reflecting PPP loan forgiveness and repayment.
- Deposits increased $142.0 million, or 10.1%, from year-end. Time deposits rose $126.6 million. Q3 deposit costs rose as rates and competition increased.
- Available-for-sale securities increased to $162.3 million from $99.9 million at year-end, but their fair value was $12.4 million below amortized cost. Accumulated other comprehensive loss moved to $9.8 million from income of $0.2 million, principally due to interest-rate-driven securities declines. Management said it did not consider the losses credit-related or other than temporary.
- Non-interest expense increased, driven principally by salaries and benefits, advertising, and technology/Avenu-related outside services. Non-interest income declined over nine months as mortgage and other loan fees fell, partly offset by $0.6 million of loan-swap fees.
Outlook, risks, contingencies and unusual items
- No formal earnings or financial guidance is provided. Management said rate increases and inflation could affect customers, credit quality, securities values, and margins; the future effects were uncertain. It expected the impact of rate increases to continue to emerge, while noting that higher deposit costs and competition are pressures.
- Management considered the allowance adequate based on information available but stated that additional provisions may be required. The allowance was $13.0 million, or 0.89% of gross loans. There were no nonperforming loans or nonaccrual loans at quarter-end. Substandard loans totaled $11.3 million; management reported that 78% were associated with hospitality and did not expect losses on those credits.
- The company sold a loan note tied to a customer in bankruptcy on September 22, 2022, recording a $211,000 loss. It reported no loan charge-offs for the quarter and $12,000 in recoveries.
- Liquidity sources included $104.7 million of cash and equivalents, $162.3 million of available-for-sale securities, $448.4 million of unused FHLB capacity, and up to $104.0 million of borrowing capacity from other financial institutions. Management said liquidity was sufficient. Certificates of deposit totaling $424.3 million were due within one year; replacement funding could cost more if they do not renew. Outstanding loan commitments were $393.4 million.
- The Bank exceeded regulatory capital requirements and was classified as well capitalized. Its total risk-based capital ratio was 16.39% and common equity tier 1 ratio was 15.59% at September 30, 2022.
- Avenu’s software was still in development; a soft launch was scheduled around year-end 2022. The company had capitalized $7.3 million of software development costs and had not begun amortization.
- Key disclosed risks include economic deterioration, inflation and interest-rate movements, deposit competition, credit quality, concentration in the Washington-area market, cybersecurity, third-party reliance, and execution of new business initiatives. The filing reports no material pending legal proceedings and no material change in internal control during the quarter.
Important facts for investors to verify
- Whether loan growth and higher yields can offset rising deposit costs and preserve net interest margin.
- Deposit mix, retention and repricing, particularly the $424.3 million of certificates of deposit due within one year.
- Credit performance of commercial real estate and hospitality exposures, including the substandard portfolio and adequacy of the allowance.
- Whether securities unrealized losses remain interest-rate-related and how changes in rates affect tangible capital and liquidity.
- Avenu’s launch timing, further development costs, and ability to generate recurring fee income or deposits.
- Capital and liquidity effects of loan commitments, subordinated debt, and the company’s stock repurchases and dividends.