Mainstreet Bancshares, Inc. quarterly report, Q1 FY2022

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MainStreet Bancshares, Inc. — Q1 2022 Form 10-Q

Reporting period: Three months ended March 31, 2022; balance sheet comparisons are to December 31, 2021. The filing is unaudited. MainStreet Bancshares is a Virginia-based bank holding company whose MainStreet Bank serves Northern Virginia and the Washington, D.C. metropolitan area.

Financial performance and condition

  • Earnings: Net interest income rose 12.8% year over year to $15.2 million. Net income was $5.42 million, down slightly from $5.45 million; net income available to common shareholders was $4.88 million, or $0.64 per diluted share, versus $4.91 million, or $0.65.
  • Interest income and margins: Interest income increased 6.2% to $17.35 million, while interest expense fell 24.9% to $2.15 million. Net interest margin increased to 3.91% from 3.41%; excluding PPP income, the company-reported non-GAAP margin was 3.65%, versus 3.20%. Net interest spread was 3.56%, compared with 3.02%.
  • Credit costs and noninterest items: Provision for loan losses increased to $800,000 from $320,000. Noninterest income declined 19.6% to $1.16 million, largely because the prior-year period included a loan-sale gain. Noninterest expense increased 14.8% to $8.96 million, including higher salaries and marketing costs. Effective tax rate was 17.8%, versus 19.8%.
  • Assets and lending: Total assets grew 6.9% from year-end to $1.76 billion. Net loans increased 5.3% to $1.41 billion; gross loans were $1.43 billion. Growth was concentrated in residential and commercial real estate lending. PPP loans declined to $18.8 million from $58.3 million at year-end.
  • Deposits and liquidity: Deposits rose 1.6% to $1.43 billion. Cash and cash equivalents were $101.7 million, and available-for-sale securities were $123.8 million. The bank had $40 million of FHLB advances outstanding, $371.6 million of unused FHLB capacity, and reported potential borrowing capacity of $104 million from other financial institutions. Management said liquidity was sufficient for anticipated needs. Certificates of deposit totaling $317.5 million were due within one year.
  • Cash flow: Operating activities provided $7.3 million, investing activities used $102.2 million, and financing activities provided $103.4 million. Cash and cash equivalents increased $8.5 million during the quarter.
  • Debt and capital: Subordinated debt, net, increased to $72.0 million from $29.3 million at year-end; FHLB advances were $40 million. The bank reported well-capitalized status: total risk-based capital ratio 16.44%, CET1 ratio 15.63%, and Tier 1 leverage ratio 14.47% at March 31.
  • Equity and securities valuation: Stockholders’ equity was $188.8 million, essentially unchanged from year-end. Other comprehensive income moved from a $197,000 gain to a $3.60 million loss, largely reflecting unrealized available-for-sale securities losses as interest rates rose.

Material changes versus comparable periods

  • Versus Q1 2021, net interest income and net interest margin improved, but provision expense and operating costs increased; net income was nearly flat.
  • Average interest-earning assets declined year over year, while the average yield rose to 4.47% from 4.13%. Management attributed improvement to loan growth, repayment of low-yielding PPP loans, and the first-quarter Federal Reserve rate increase.
  • From December 31, 2021, total assets and loans grew, deposits increased modestly, and the company added FHLB advances and subordinated debt. Available-for-sale securities increased in carrying value, but their unrealized loss position widened.
  • The allowance for loan losses rose to $12.5 million; allowance to gross loans was 0.87% (0.89% excluding PPP), versus 0.86% at year-end (0.90% excluding PPP).

Outlook, commentary, risks and unusual items

  • Outlook: The filing provides no formal earnings or financial guidance. Management noted that the rate increase late in Q1 would be more fully reflected in Q2, and said the quarter’s results are not necessarily indicative of full-year results.
  • Growth initiatives: Avenu, the bank’s Banking-as-a-Service offering for fintech customers, was in late-stage development. MainStreet Community Capital received certification as a community development entity in January 2022.
  • Credit quality: No loans were on nonaccrual and nonperforming assets were zero at March 31. Special-mention loans were $17.2 million; substandard loans were $5.2 million, of which 72% were connected to hospitality. Management said it did not expect losses on those hospitality credits, citing improving cash flows and occupancy. No charge-offs were recorded in Q1; recoveries were $3,000.
  • Market and operating risks: Management highlighted inflation and rising interest rates, deposit competition, economic conditions, credit quality and loan-loss estimates, securities-market changes, cyber and third-party risks, and concentration in the Washington-area market. The company also identified uncertainties associated with transitioning away from LIBOR.
  • Commitments and contingencies: Outstanding loan commitments were $372.1 million and standby letters of credit were $40,000. The company reported no material pending legal proceedings and no TDRs at March 31, 2022.
  • Other items: The company repurchased 50,000 shares for an average $25.25 per share, with $2.958 million remaining under the repurchase authorization. The board declared its first common dividend in January 2022 and said future dividends would be considered quarterly. Management reported effective disclosure controls and no material Q1 change in internal control over financial reporting.

Key facts investors should verify

  1. Whether loan growth and improved net interest margin persist as interest rates rise, and how quickly deposit costs respond.
  2. Credit performance in commercial real estate, construction, and hospitality exposures; monitor special-mention and substandard balances and future loan-loss provisions.
  3. Liquidity and funding costs as $317.5 million of certificates of deposit mature within one year, alongside increased use of FHLB advances and subordinated debt.
  4. The scale and timing of Avenu’s launch, customer adoption, and contribution to fee income and low-cost deposits.
  5. The effect of further rate changes on available-for-sale securities values and accumulated other comprehensive income, and the company’s CECL readiness ahead of its expected adoption after December 15, 2022.