PART I [Business](index=4&type=section&id=Item%201.%20Business) MainStreet Bancshares, Inc. is a commercial bank holding company operating MainStreet Bank, serving businesses and retail customers in the D.C. metro area with diverse banking services and FinTech payment solutions - MainStreet Bancshares, Inc. is a commercial bank holding company that owns **100%** of MainStreet Bank, a community bank focused on serving small to medium-sized businesses, professional practices, and retail customers in Northern Virginia and the greater Washington, D.C. metropolitan area[10](index=10&type=chunk)[12](index=12&type=chunk)[15](index=15&type=chunk) - The company offers a full range of banking services through both traditional and electronic delivery, including business and consumer checking, savings, certificates of deposit, commercial, real estate, and consumer loans, with advanced online and mobile banking solutions[13](index=13&type=chunk)[14](index=14&type=chunk)[26](index=26&type=chunk) - MainStreet Bancshares, Inc. qualifies as an '**emerging growth company**' under the JOBS Act, allowing for reduced reporting requirements, but has elected not to use the extended transition period for new accounting standards[17](index=17&type=chunk)[18](index=18&type=chunk)[19](index=19&type=chunk) Key Financial Metrics (as of December 31, 2020) | Metric | Value | | :----- | :---- | | Total Consolidated Assets | $1.6 billion | | Total Net Loans | $1.3 billion | | Total Deposits | $1.4 billion | | Total Stockholders' Equity | $167.7 million | | Return on Average Assets | 1.05% | | Return on Average Equity | 10.54% | | Net Charge-offs to Average Loans | 0.03% | | Non-performing Loans | $150,000 | | Non-performing Assets | $1.3 million (0.08% of total assets) | - The company's primary market area, the Washington, D.C. Metropolitan Statistical Area, is characterized by **high median household income** and **consistent population growth**, providing a strong economic environment for its growth strategies[36](index=36&type=chunk)[37](index=37&type=chunk)[40](index=40&type=chunk) - Competitive strengths include a **community banking philosophy** with local decision-making, a **disciplined credit culture**, a **strong capital position** (Bank exceeds 'well capitalized' guidelines), investment in **advanced banking technology**, and opportunities for organic growth, strategic branching, and potential acquisitions[42](index=42&type=chunk)[43](index=43&type=chunk)[44](index=44&type=chunk)[45](index=45&type=chunk)[46](index=46&type=chunk)[47](index=47&type=chunk) - The loan portfolio is **diversified**, primarily consisting of commercial business, owner-occupied and investment commercial real estate loans, and residential real estate loans. The Bank conducts quarterly stress tests on its loan portfolio[48](index=48&type=chunk)[49](index=49&type=chunk)[50](index=50&type=chunk)[52](index=52&type=chunk) - The Bank expanded into **payment service solutions (Banking as a Service - BaaS)** for Financial Technology (FinTech) companies in 2016, aiming to secure additional **low-cost deposits and fee income**, while developing a robust risk management infrastructure for this business line[72](index=72&type=chunk)[73](index=73&type=chunk)[75](index=75&type=chunk)[76](index=76&type=chunk) - The Bank was classified as '**well-capitalized**' as of December 31, 2020, meeting all regulatory capital standards, and has elected not to opt into the Community Bank Leverage Ratio (CBLR) framework[100](index=100&type=chunk)[102](index=102&type=chunk) [Risk Factors](index=16&type=section&id=Item%201A.%20Risk%20Factors) The company faces significant credit, interest rate, operational, and regulatory risks, exacerbated by the COVID-19 pandemic and intense competition - The COVID-19 pandemic poses **significant risks**, impacting the global economy, financial markets, interest rates, and potentially leading to **increased credit losses, operational disruptions, and liquidity challenges**[128](index=128&type=chunk)[129](index=129&type=chunk)[130](index=130&type=chunk) - The company has significant exposure to credit risk, particularly from commercial and residential real estate loans (**11.4% owner-occupied, 26.0% investment, 26.0% construction, 14.7% residential at Dec 31, 2020**), and loans to small-to-midsized businesses, which are more vulnerable to economic downturns[132](index=132&type=chunk)[135](index=135&type=chunk)[137](index=137&type=chunk)[138](index=138&type=chunk) - The allowance for loan losses may **not be adequate** to cover future losses, and the implementation of the CECL accounting standard could require a **significant increase** in credit loss allowance[141](index=141&type=chunk)[145](index=145&type=chunk)[146](index=146&type=chunk) - Changes in interest rates, including the uncertainty surrounding the future of LIBOR, could **negatively affect net interest income**, the value of financial instruments, and the ability to fund operations[151](index=151&type=chunk)[154](index=154&type=chunk)[155](index=155&type=chunk)[156](index=156&type=chunk) - Operational risks include challenges with new lines of business (like payment services for FinTechs), reliance on technological infrastructure and third-party vendors, and the potential for **system failures, cyber-attacks, and fraudulent activities**[162](index=162&type=chunk)[163](index=163&type=chunk)[164](index=164&type=chunk)[166](index=166&type=chunk)[170](index=170&type=chunk)[180](index=180&type=chunk) - The company operates in a **highly regulated environment**, making it susceptible to changes in laws and regulations, including **more stringent capital requirements** (Basel III) and the unanticipated impacts of tax legislation like the Tax Cuts and Jobs Act[196](index=196&type=chunk)[197](index=197&type=chunk)[199](index=199&type=chunk)[201](index=201&type=chunk)[202](index=202&type=chunk) - Risks associated with common stock include **market price volatility**, subordination to preferred stock and subordinated notes, and the potential for **reduced investor attractiveness** due to its 'emerging growth company' status and associated reduced disclosure requirements[204](index=204&type=chunk)[205](index=205&type=chunk)[206](index=206&type=chunk)[207](index=207&type=chunk) [Unresolved Staff Comments](index=28&type=section&id=Item%201B.%20Unresolved%20Staff%20Comments) There are no unresolved staff comments from the SEC regarding the company's filings - **No unresolved staff comments** were reported[218](index=218&type=chunk) [Properties](index=29&type=section&id=Item%202.%20Properties) The company's properties, including seven branches, had a net book value of **$9.5 million** for office properties and **$894,000** for equipment as of December 31, 2020 Property Net Book Values (as of December 31, 2020) | Asset Category | Net Book Value (in thousands) | | :------------- | :---------------------------- | | Office Properties | $9,500 | | Furniture, Fixtures, and Equipment | $894 | - The company operates **seven Bank branches** located in Herndon, Fairfax, Fairfax City, McLean, Clarendon, Leesburg Virginia, and one in Washington D.C., with a mix of owned and leased properties[15](index=15&type=chunk)[221](index=221&type=chunk) [Legal Proceedings](index=29&type=section&id=Item%203.%20Legal%20Proceedings) The company is involved in various litigation matters that are incidental to its ordinary business operations, but management does not anticipate any of these proceedings to have a material adverse impact on its financial condition or results of operations - The company is a party to various litigation matters incidental to its ordinary conduct of business[222](index=222&type=chunk) - Management believes that none of these legal proceedings, individually or in the aggregate, will have a **material adverse impact** on the results of operations or financial condition of the Company[222](index=222&type=chunk) [Mine Safety Disclosures](index=29&type=section&id=Item%204.%20Mine%20Safety%20Disclosures) This item is not applicable to the company - The disclosure requirement for Mine Safety is **not applicable** to MainStreet Bancshares, Inc[223](index=223&type=chunk) PART II [Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities](index=30&type=section&id=Item%205.%20Market%20for%20Registrant's%20Common%20Equity,%20Related%20Stockholder%20Matters%20and%20Issuer%20Purchases%20of%20Equity%20Securities) The company's common and preferred stock trade on Nasdaq; no common dividends have been paid, while a **$17.0 million** stock repurchase program was authorized in October 2020, with **$13.8 million** repurchased - The company's common stock is traded on the Nasdaq Capital Market under the symbol '**MNSB**', with approximately **268 shareholders** of record as of December 31, 2020[224](index=224&type=chunk) - **No cash dividends** have been paid on common stock to date. Future dividend policy depends on economic conditions, financial performance, capital requirements, banking regulations, and the Bank's ability to pay dividends to the Company, with preferred stock having priority dividend rights[225](index=225&type=chunk)[226](index=226&type=chunk) Securities Authorized for Issuance Under Equity Compensation Plans (as of December 31, 2020) | Category | Securities to be issued upon exercise of outstanding options, warrants and rights | Weighted average exercise price of outstanding options, warrants and rights | Securities remaining and available for future issuance | | :-------------------------- | :----------------------------------------------------------------------- | :-------------------------------------------------------- | :----------------------------------------------------- | | Plans approved by shareholders | 161,435 | $— | 558,805 | | Plans not approved by shareholders | — | — | — | | **Total** | **161,435** | **$—** | **558,805** | - The company issued **2,368,421 shares** of common stock at **$19.00 per share** for a total of **$49,999,999** to accredited investors on August 24, 2018, relying on Section 4(a)(2) and Rule 506 of Regulation D[230](index=230&type=chunk) - A new common stock repurchase program was authorized on October 22, 2020, allowing for the repurchase of up to **$17.0 million** of outstanding common stock. During the year ended December 31, 2020, the company repurchased **895,785 shares** for approximately **$13.8 million**[234](index=234&type=chunk)[235](index=235&type=chunk)[598](index=598&type=chunk) - The company completed a public offering of **1,000,000 depositary shares** (representing 7.50% Series A Fixed-Rate Non-Cumulative Perpetual Preferred Stock) on September 15, 2020, with an additional **150,000 shares** sold via over-allotment. These depositary shares began trading on Nasdaq under '**MNSBP**' on September 16, 2020[237](index=237&type=chunk)[238](index=238&type=chunk)[597](index=597&type=chunk) [Selected Financial Data](index=32&type=section&id=Item%206.%20Selected%20Financial%20Data) This section presents summarized historical consolidated financial data for MainStreet Bancshares, Inc. for 2018-2020, covering financial condition, operating results, performance, capital, and asset quality ratios Selected Financial Condition Data (in thousands) | Metric | Dec 31, 2020 | Dec 31, 2019 | Dec 31, 2018 | | :-------------------------- | :----------- | :----------- | :----------- | | Total assets | $1,643,165 | $1,277,358 | $1,100,613 | | Total cash and cash equivalents | $107,528 | $64,844 | $58,076 | | Total investment securities | $169,934 | $116,705 | $82,157 | | Loans receivable, net | $1,230,379 | $1,030,425 | $917,125 | | Total deposits | $1,438,246 | $1,071,623 | $920,137 | | Subordinated debt | $14,834 | $14,805 | $14,776 | | Total stockholders' equity | $167,665 | $137,034 | $121,251 | Selected Operating Data (in thousands) | Metric | 2020 | 2019 | 2018 | | :-------------------------------- | :----- | :----- | :----- | | Interest income | $62,072 | $58,813 | $43,835 | | Interest expense | $16,095 | $19,377 | $12,666 | | Net interest income | $45,977 | $39,436 | $31,169 | | Provision for loan losses | $3,610 | $1,618 | $3,126 | | Total non-interest income | $7,493 | $4,862 | $3,239 | | Total non-interest expenses | $30,300 | $25,376 | $19,979 | | Net income | $15,717 | $13,950 | $9,209 | | Net income available to common shareholders | $15,082 | $13,950 | $9,209 | | Basic and diluted net income per common share | $1.85 | $1.69 | $1.38 | Performance Ratios | Metric | 2020 | 2019 | 2018 | | :-------------------------------------------------- | :----- | :----- | :----- | | Return on average assets | 1.05% | 1.19% | 0.97% | | Return on average equity | 10.54% | 10.79% | 10.38% | | Net interest margin | 3.21% | 3.50% | 3.41% | | Efficiency ratio | 56.67% | 57.28% | 58.07% | | Common equity tier 1 (CET1) capital to risk-weighted assets | 13.61% | 12.68% | 12.90% | | Allowance for loan losses as a percentage of total loans | 1.03% | 0.92% | 0.95% | | Net charge-offs to average outstanding loans during the period | 0.03% | 0.09% | 0.00% | | Non-performing assets as a percentage of total assets | 0.08% | 0.09% | 0.18% | [Management's Discussion and Analysis of Financial Condition and Results of Operations](index=35&type=section&id=Item%207.%20Management's%20Discussion%20and%20Analysis%20of%20Financial%20Condition%20and%20Results%20of%20Operations) This section analyzes the company's 2020 and 2019 financial performance, highlighting COVID-19 impacts, increased net income driven by net interest income growth, asset and deposit expansion, and maintained strong asset quality and capital - The COVID-19 pandemic **significantly impacted** the company's business, affecting credit risk (loan repayment, collateral values), operational risk (remote work, cybersecurity), interest rate risk (volatility), and liquidity (payment deferrals, PPP loans)[249](index=249&type=chunk)[250](index=250&type=chunk)[254](index=254&type=chunk)[256](index=256&type=chunk)[258](index=258&type=chunk) - Net income increased by **$1.7 million (12.67%)** to **$15.7 million** in 2020, primarily driven by a **$6.5 million** increase in net interest income due to higher loan volume and lower interest rates on deposits, partially offset by a **$2.0 million** increase in provision for loan losses and higher non-interest expenses[278](index=278&type=chunk) Net Interest Income and Margin | Metric | 2020 | 2019 | Change (YoY) | | :------------------ | :----- | :----- | :----------- | | Net Interest Income | $45,977K | $39,436K | +16.59% | | Net Interest Margin | 3.21% | 3.50% | -0.29 pp | | Loan Portfolio Yield | 4.89% | 5.61% | -0.72 pp | | Investment Securities Yield | 2.63% | 3.09% | -0.46 pp | | Interest-Bearing Deposits Cost | 1.58% | 2.25% | -0.67 pp | - Provision for loan losses increased to **$3.6 million** in 2020 from **$1.6 million** in 2019, primarily due to additional provisions in response to the COVID-19 pandemic and increased loan originations, including **$173.1 million** in PPP loans[296](index=296&type=chunk) Non-Interest Income (in thousands) | Category | 2020 | 2019 | % Change | | :-------------------------- | :----- | :----- | :------- | | Deposit account service charges | $1,916 | $1,668 | 14.87% | | Bank owned life insurance income | $779 | $498 | 56.43% | | Loan swap fee income | $3,510 | $989 | 254.90% | | Total Non-Interest Income | $7,493 | $4,862 | 54.11% | Non-Interest Expense (in thousands) | Category | 2020 | 2019 | % Change | | :-------------------------- | :----- | :----- | :------- | | Salaries and employee benefits | $17,937 | $15,776 | 13.70% | | FDIC insurance | $1,329 | $680 | 95.44% | | Other real estate expenses, net | $459 | $62 | 640.32% | | Total Non-Interest Expense | $30,258 | $25,376 | 19.24% | - Total assets increased by **$365.8 million (28.6%)** to **$1.6 billion** at December 31, 2020, driven by increases in gross loans receivable (**$257.0 million**) and available-for-sale securities (**$53.2 million**)[303](index=303&type=chunk) - Net loans increased by **$207.3 million** to **$1.2 billion** at December 31, 2020, primarily due to growth in commercial and industrial loans (including PPP) and the construction portfolio. The company reclassified **$57.0 million** of commercial real estate loans to loans held for sale[323](index=323&type=chunk) - Total deposits increased by **$309.7 million** in 2020, largely due to increases in non-interest bearing demand deposits and money market deposits, influenced by the PPP initiative. Brokered deposits totaled **$279.9 million** at year-end 2020[351](index=351&type=chunk)[353](index=353&type=chunk) - The Bank was categorized as '**well capitalized**' by the Federal Reserve Bank of Richmond as of December 31, 2020, meeting all capital adequacy requirements[382](index=382&type=chunk)[384](index=384&type=chunk) [Forward-Looking Statements](index=35&type=section&id=Forward-Looking%20Statements) The report contains forward-looking statements that are subject to risks and uncertainties, including the impact of COVID-19, economic conditions, and regulatory changes, which could cause actual results to differ materially - The report contains forward-looking statements based on management's beliefs and assumptions, which are subject to various risks and uncertainties that could cause **actual results to differ materially**[246](index=246&type=chunk)[247](index=247&type=chunk) - Key factors that could cause actual results to differ include the **impact of COVID-19**, **general economic conditions**, competition, inflation, interest rate environment, **changes in laws/regulations**, ability to attract/retain employees, and **cyber threats**[247](index=247&type=chunk) [COVID-19 Pandemic](index=36&type=section&id=COVID-19%20Pandemic) The COVID-19 pandemic significantly disrupted the company's operations, impacting credit, operational, interest rate, and liquidity risks, while prompting participation in the PPP and forbearance programs, alongside regulatory adjustments - The COVID-19 pandemic has created **significant disruption**, impacting credit risk (loan repayment, collateral values), business continuity (workforce access, third-party services), operational risk (remote work, cybersecurity), interest rate risk (volatility), liquidity (payment deferrals, PPP loans), and litigation risk[249](index=249&type=chunk)[250](index=250&type=chunk)[254](index=254&type=chunk)[256](index=256&type=chunk)[258](index=258&type=chunk)[259](index=259&type=chunk) - The company participated in the **Paycheck Protection Program (PPP)** and instituted **forbearance programs** for commercial customers, offering payment deferrals or interest-only payments to preserve borrower liquidity[251](index=251&type=chunk)[258](index=258&type=chunk)[290](index=290&type=chunk)[390](index=390&type=chunk)[391](index=391&type=chunk)[394](index=394&type=chunk) - Regulatory responses to COVID-19 included the Federal Reserve **reducing reserve requirements to zero**, temporary lowering of the **Community Bank Leverage Ratio (CBLR)**, and guidance on not automatically classifying COVID-19 related loan modifications as Troubled Debt Restructurings (TDRs)[399](index=399&type=chunk)[401](index=401&type=chunk)[405](index=405&type=chunk)[406](index=406&type=chunk) [Critical Accounting Policies](index=37&type=section&id=Critical%20Accounting%20Policies) The company's critical accounting policies, including allowance for loan losses, fair value of financial instruments, and income taxes, require significant estimates and judgments - The company's critical accounting policies include the allowance for loan losses, fair value of financial instruments, income taxes, derivative financial instruments, and other real estate owned, all requiring **significant estimates and judgments**[263](index=263&type=chunk)[264](index=264&type=chunk)[269](index=269&type=chunk)[272](index=272&type=chunk)[274](index=274&type=chunk)[276](index=276&type=chunk) - The allowance for loan losses is maintained at a level **sufficient to absorb estimated probable incurred losses**, determined through periodic reviews, historical loss experience, economic conditions, and specific impaired loans[264](index=264&type=chunk)[266](index=266&type=chunk)[267](index=267&type=chunk) - Fair value of financial instruments is generally based on **quoted market prices or internally developed models** using observable market-based parameters, with valuation adjustments for credit quality and other factors[269](index=269&type=chunk)[270](index=270&type=chunk) [Analysis of Results of Operations for the Years Ended December 31, 2020 and 2019](index=39&type=section&id=Analysis%20of%20Results%20of%20Operations%20for%20the%20Years%20Ended%20December%2031,%202020%20and%202019) Net income increased by **12.67%** in 2020, driven by a **16.59%** rise in net interest income and **54.11%** growth in non-interest income, despite a **123.11%** increase in provision for loan losses and higher non-interest expenses Net Income Components (in thousands) | Metric | 2020 | 2019 | % Change | | :-------------------------------- | :----- | :----- | :------- | | Interest income | $62,072 | $58,813 | 5.54% | | Interest expense | $16,095 | $19,377 | -16.94% | | Net interest income | $45,977 | $39,436 | 16.59% | | Provision for loan losses | $3,610 | $1,618 | 123.11% | | Non-interest income | $7,493 | $4,862 | 54.11% | | Non-interest expense | $30,300 | $25,376 | 19.40% | | Net income | $15,717 | $13,950 | 12.67% | | Net income available to common shareholders | $15,082 | $13,950 | 8.11% | - Net interest income increased by **$6.5 million (16.59%)** to **$46.0 million** in 2020, driven by increased loan production and a decrease in interest rates on interest-bearing deposits[278](index=278&type=chunk)[280](index=280&type=chunk) - The net interest margin decreased to **3.21%** in 2020 from **3.50%** in 2019, primarily due to lower average rates earned on the loan portfolio and investments, partially offset by decreasing rates on the cost of funds[281](index=281&type=chunk) Rate/Volume Analysis of Net Interest Income Change (2020 vs 2019, in thousands) | Component | Change Due to Volume | Change Due to Rate | Total Change | | :-------------------------- | :------------------- | :----------------- | :----------- | | Interest-earning assets | $12,956 | $(9,697) | $3,259 | | Interest-bearing liabilities | $1,142 | $(4,424) | $(3,282) | | **Change in Net Interest Income** | **$11,814** | **$(5,273)** | **$6,541** | - Non-interest income increased by **$2.6 million (54.1%)** to **$7.5 million** in 2020, mainly due to higher deposit account service charges, increased bank-owned life insurance income, and a significant rise in loan swap fee income (up **255%**)[298](index=298&type=chunk) - Non-interest expense increased by **$4.9 million (19.4%)** to **$30.3 million** in 2020, primarily driven by increases in salaries and employee benefits (due to supporting customer-facing staff during the pandemic), FDIC insurance, and other operating expenses (professional/consulting fees, technology investments, OREO writedown)[301](index=301&type=chunk) - Income tax expense increased by **$489,000 (14.6%)** to **$3.8 million** in 2020, reflecting the increase in income before income taxes. The effective federal tax rate was **19.6%** in 2020[302](index=302&type=chunk) [Comparison of Statements of Financial Condition at December 31, 2020 and at December 31, 2019](index=44&type=section&id=Comparison%20of%20Statements%20of%20Financial%20Condition%20at%20December%2031,%202020%20and%20at%20December%2031,%202019) Total assets grew by **28.6%** to **$1.6 billion** in 2020, driven by increases in gross loans and available-for-sale securities, while deposits rose by **$309.7 million**, and stockholders' equity increased by **$30.6 million** - Total assets increased by **$365.8 million (28.6%)** to **$1.6 billion** at December 31, 2020, primarily driven by growth in gross loans receivable (**$257.0 million**) and available-for-sale securities (**$53.2 million**)[303](index=303&type=chunk) - The total investment securities portfolio increased by **$53.2 million** to **$169.9 million** at December 31, 2020, with **$147.4 million** in available-for-sale securities and **$22.5 million** in held-to-maturity securities. No securities were sold in 2020[307](index=307&type=chunk)[308](index=308&type=chunk) Loan Portfolio by Segment (in thousands) | Loan Type | Dec 31, 2020 Amount | Dec 31, 2020 Percent | Dec 31, 2019 Amount | Dec 31, 2019 Percent | | :-------------------------- | :------------------ | :------------------- | :------------------ | :------------------- | | Residential real estate | $182,499 | 14.61% | $150,848 | 14.47% | | Commercial real estate (Owner occupied) | $141,813 | 11.35% | $134,116 | 12.87% | | Commercial real estate (Non-owner occupied) | $326,117 | 26.10% | $287,754 | 27.61% | | Construction and land development | $324,906 | 26.00% | $272,620 | 26.16% | | Commercial and industrial (incl. PPP) | $230,027 | 18.41% | $121,225 | 11.63% | | Consumer – non-real estate | $44,073 | 3.53% | $75,583 | 7.26% | | **Total gross loans** | **$1,249,435** | **100.00%** | **$1,042,146** | **100.00%** | - Asset quality remained strong, with nonperforming assets totaling **$1.2 million** at December 31, 2020, representing **0.08%** of total assets. Nonaccrual loans were **$149,000** at year-end 2020[324](index=324&type=chunk)[327](index=327&type=chunk)[330](index=330&type=chunk) - The allowance for loan losses increased to **$12.9 million** at December 31, 2020, from **$9.6 million** in 2019, primarily due to a general qualitative factor added in response to the COVID-19 pandemic and provision expense on newly originated loans. Net charge-offs were **$317,000** in 2020[343](index=343&type=chunk) - Total deposits increased by **$309.7 million** to **$1.4 billion** at December 31, 2020, driven by increases in non-interest bearing demand deposits and money market deposits, largely related to the PPP initiative[351](index=351&type=chunk)[353](index=353&type=chunk) - Federal Home Loan Bank (FHLB) advances decreased to **$0** at December 31, 2020, from **$40.0 million** in 2019. Subordinated debt remained stable at approximately **$14.8 million**[241](index=241&type=chunk)[359](index=359&type=chunk) - Stockholders' equity increased by **$30.6 million** to **$167.7 million** at December 31, 2020, due to net income and a preferred stock issuance, partially offset by common share repurchases[362](index=362&type=chunk) [Liquidity and Capital Resources](index=57&type=section&id=Liquidity%20and%20Capital%20Resources) The company actively manages daily liquidity through monitoring and stress testing, maintaining sufficient sources from debt securities, loan payments, deposits, and borrowings, while the Bank remains 'well capitalized' under Basel III requirements - The company manages liquidity daily using a **sophisticated monitoring system and stress testing** under various market conditions, maintaining sufficient sources of liquidity through unencumbered debt securities, loan payments, deposits, and FHLB/other borrowings[363](index=363&type=chunk)[364](index=364&type=chunk)[365](index=365&type=chunk)[366](index=366&type=chunk)[370](index=370&type=chunk) Cash Flows (in thousands) | Activity | 2020 | 2019 | | :-------------------------- | :----- | :----- | | Net cash provided by operating activities | $17,016 | $16,692 | | Net cash used in investing activities | $(313,786) | $(161,410) | | Net cash provided by financing activities | $339,454 | $151,486 | | Increase in Cash and Cash Equivalents | $42,684 | $6,768 | | Cash and Cash Equivalents, end of period | $107,528 | $64,844 | - Off-balance sheet arrangements include commitments to extend credit totaling **$219.4 million** and standby/commercial letters of credit totaling **$1.1 million** at December 31, 2020[375](index=375&type=chunk)[376](index=376&type=chunk) - The Bank is subject to Basel III capital requirements and was '**well capitalized**' at December 31, 2020. The Company, with consolidated assets less than **$3 billion**, is not currently subject to consolidated capital requirements[377](index=377&type=chunk)[379](index=379&type=chunk)[381](index=381&type=chunk)[382](index=382&type=chunk) [Non-GAAP Measures](index=62&type=section&id=Non-GAAP%20Measures) The company provides supplemental non-GAAP performance measures, such as 'Net interest margin excluding PPP loans,' to offer additional insight into financial performance, particularly regarding the impact of the Paycheck Protection Program - The company provides supplemental non-GAAP performance measures, such as '**Net interest margin excluding PPP loans**' and '**Allowance for loan losses, excluding PPP to total loans**,' to offer additional insight into financial performance, particularly regarding the impact of the Paycheck Protection Program[413](index=413&type=chunk)[414](index=414&type=chunk)[415](index=415&type=chunk) Non-GAAP Reconciliation (in thousands, except percentages) | Metric | 2020 | 2019 | 2018 | | :-------------------------------------------------- | :----- | :----- | :----- | | Loans held for investment, excluding PPP (non-GAAP) | $1,114,255 | $1,042,146 | $927,437 | | Net interest income, excluding PPP income (non-GAAP) | $42,212 | $39,436 | $31,170 | | Net interest margin, excluding PPP (non-GAAP) | 3.21% | 3.50% | 3.41% | | Allowance for loan losses to total loans, excluding PPP (non-GAAP) | 1.16% | 0.92% | 0.95% | [Quantitative and Qualitative Disclosures About Market Risk](index=62&type=section&id=Item%207A.%20Quantitative%20and%20Qualitative%20Disclosures%20About%20Market%20Risk) The company's primary market risk is interest rate risk, managed by the Asset/Liability Committee to minimize adverse effects on net interest income and asset fair values, utilizing sensitivity analysis and derivative instruments - The company's most significant market risk exposure is **interest rate risk**, managed by the Asset/Liability Committee to minimize adverse effects on net interest income and the fair value of financial instruments[417](index=417&type=chunk)[418](index=418&type=chunk) Net Interest Income Sensitivity (Year 1 Change from Level, in thousands) | Interest Rates Year 1 Forecast | Change from Level | | :-------------------------- | :---------------- | | +400 bps | 52.13% ($32,947) | | +300 bps | 40.81% ($30,496) | | +200 bps | 25.58% ($27,198) | | +100 bps | 11.53% ($24,155) | | Level | — ($21,658) | | -100 bps | -4.14% ($20,761) | | -200 bps | -10.42% ($19,400) | Economic Value of Equity (EVE) Sensitivity (as of December 31, 2020, in thousands) | Basis Point Change in Interest Rates | Estimated EVE | Estimated Increase (Decrease) EVE Amount | Estimated Increase (Decrease) EVE Percent | | :--------------------------------- | :------------ | :--------------------------------------- | :---------------------------------------- | | +400 | $201,437 | $43,017 | 27.15% | | +300 | $195,988 | $37,567 | 23.71% | | +200 | $186,031 | $27,611 | 17.43% | | +100 | $174,005 | $15,584 | 9.84% | | Level | $158,420 | — | — | | -100 | $140,750 | $(17,671) | (11.15)% | | -200 | $141,980 | $(16,441) | (10.38)% | - The company is currently **asset sensitive** as of December 31, 2020, and uses derivative financial instruments, such as interest rate loan swaps, to manage interest rate risk[427](index=427&type=chunk)[428](index=428&type=chunk) [Financial Statements and Supplementary Data](index=64&type=section&id=Item%208.%20Financial%20Statements%20and%20Supplementary%20Data) This section provides the audited consolidated financial statements for 2020 and 2019, including statements of financial condition, income, comprehensive income, stockholders' equity, and cash flows, along with detailed notes on accounting policies and regulatory matters - The consolidated financial statements for the years ended December 31, 2020 and 2019, have been audited by Yount, Hyde & Barbour, P.C., who issued an **unqualified opinion**[433](index=433&type=chunk)[437](index=437&type=chunk) Consolidated Statements of Financial Condition (in thousands) | Asset/Liability | Dec 31, 2020 | Dec 31, 2019 | | :---------------------------------------------------------------- | :----------- | :----------- | | Total Assets | $1,643,165 | $1,277,358 | | Cash and cash equivalents | $107,528 | $64,844 | | Investment securities available-for-sale, at fair value | $147,414 | $92,791 | | Loans, net of allowance for loan losses | $1,230,379 | $1,030,425 | | Total Deposits | $1,438,246 | $1,071,623 | | Federal Home Loan Bank advances | $— | $40,000 | | Subordinated debt, net | $14,834 | $14,805 | | Total Stockholders' Equity | $167,665 | $137,034 | Consolidated Statements of Income (in thousands) | Income/Expense | 2020 | 2019 | | :-------------------------------- | :----- | :----- | | Total Interest Income | $62,072 | $58,813 | | Total Interest Expense | $16,095 | $19,377 | | Net interest income | $45,977 | $39,436 | | Provision for Loan Losses | $3,610 | $1,618 | | Total Non-Interest Income | $7,451 | $4,862 | | Total Non-Interest Expense | $30,258 | $25,376 | | Net Income | $15,717 | $13,950 | | Net Income per common share (Basic & Diluted) | $1.85 | $1.69 | Consolidated Statements of Cash Flows (in thousands) | Cash Flow Activity | 2020 | 2019 | | :---------------------------------------- | :----- | :----- | | Net cash provided by operating activities | $17,016 | $16,692 | | Net cash used in investing activities | $(313,786) | $(161,410) | | Net cash provided by financing activities | $339,454 | $151,486 | | Increase in Cash and Cash Equivalents | $42,684 | $6,768 | | Cash and Cash Equivalents, end of period | $107,528 | $64,844 | - The notes to the financial statements provide **detailed information on accounting policies**, including the impact of recently issued accounting pronouncements like CECL and reference rate reform (LIBOR transition)[495](index=495&type=chunk)[501](index=501&type=chunk) - The Bank's regulatory capital ratios as of December 31, 2020, demonstrate it is '**well capitalized**' under Basel III requirements, with a Total capital ratio of **14.60%** and a Tier 1 leverage ratio of **10.78%**[566](index=566&type=chunk)[567](index=567&type=chunk) [Changes in and Disagreements With Accountants on Accounting and Financial Disclosure](index=104&type=section&id=Item%209.%20Changes%20in%20and%20Disagreements%20With%20Accountants%20on%20Accounting%20and%20Financial%20Disclosure) The company reported no changes in or disagreements with its independent accountants on accounting and financial disclosure matters - There were **no changes in or disagreements** with accountants on accounting and financial disclosure[610](index=610&type=chunk) [Controls and Procedures](index=104&type=section&id=Item%209A.%20Controls%20and%20Procedures) Management, including the CEO and CFO, concluded that the company's disclosure controls and internal control over financial reporting were effective as of December 31, 2020, with no material changes reported - Management, with the participation of the CEO and CFO, evaluated and concluded that the company's disclosure controls and procedures were **effective** as of December 31, 2020[611](index=611&type=chunk) - Management assessed the effectiveness of the company's internal control over financial reporting as of December 31, 2020, using the COSO framework, and concluded it was **effective**[612](index=612&type=chunk)[613](index=613&type=chunk) - The company's annual report **does not include an attestation report** from its independent registered public accounting firm regarding internal control over financial reporting, as it is permitted for non-accelerated filers, but it remains subject to FDICIA requirements[502](index=502&type=chunk)[614](index=614&type=chunk) - **No changes** in the company's internal control over financial reporting materially affected, or are reasonably likely to materially affect, internal control over financial reporting during the fourth quarter ended December 31, 2020[616](index=616&type=chunk) [Other Information](index=104&type=section&id=Item%209B.%20Other%20Information) There is no other information required to be disclosed under this item - No other information was reported under this item[617](index=617&type=chunk) PART III [Directors, Executive Officers and Corporate Governance](index=105&type=section&id=Item%2010.%20Directors,%20Executive%20Officers%20and%20Corporate%20Governance) Information on directors, executive officers, and corporate governance is incorporated by reference from the 2021 Annual Meeting of Shareholders proxy statement - Information required for this item is **incorporated by reference** to the company's definitive proxy statement for its 2021 Annual Meeting of Shareholders[619](index=619&type=chunk) [Executive Compensation](index=105&type=section&id=Item%2011.%20Executive%20Compensation) Executive compensation details are incorporated by reference from the 2021 Annual Meeting of Shareholders proxy statement - Information required for this item is **incorporated by reference** to the company's definitive proxy statement for its 2021 Annual Meeting of Shareholders[620](index=620&type=chunk) [Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters](index=105&type=section&id=Item%2012.%20Security%20Ownership%20of%20Certain%20Beneficial%20Owners%20and%20Management%20and%20Related%20Stockholder%20Matters) Security ownership information for beneficial owners and management is incorporated by reference from the 2021 Annual Meeting of Shareholders proxy statement - Information required for this item is **incorporated by reference** to the company's definitive proxy statement for its 2021 Annual Meeting of Shareholders[621](index=621&type=chunk) [Certain Relationships and Related Transactions, and Director Independence](index=105&type=section&id=Item%2013.%20Certain%20Relationships%20and%20Related%20Transactions,%20and%20Director%20Independence) Details on certain relationships, related transactions, and director independence are incorporated by reference from the 2021 Annual Meeting of Shareholders proxy statement - Information required for this item is **incorporated by reference** to the company's definitive proxy statement for its 2021 Annual Meeting of Shareholders[622](index=622&type=chunk) [Principal Accountant Fees and Services](index=105&type=section&id=Item%2014.%20Principal%20Accountant%20Fees%20and%20Services) Principal accountant fees and services information is incorporated by reference from the 2021 Annual Meeting of Shareholders proxy statement - Information required for this item is **incorporated by reference** to the company's definitive proxy statement for its 2021 Annual Meeting of Shareholders[623](index=623&type=chunk) PART IV [Exhibits, Financial Statement Schedules](index=105&type=section&id=Item%2015.%20Exhibits,%20Financial%20Statement%20Schedules) This section lists all exhibits and financial statement schedules filed with the 10-K report, encompassing organizational documents, equity agreements, and certifications - The section provides a **comprehensive list of exhibits**, including the Agreement and Plan of Reorganization, Restated Articles of Incorporation, Bylaws, forms of stock certificates, Subordinated Note Purchase Agreement, Equity Incentive Plans, Employment Agreements, and various certifications[625](index=625&type=chunk) [Form 10-K Summary](index=106&type=section&id=Item%2016.%20Form%2010-K%20Summary) This item indicates that a Form 10-K Summary is not applicable for this filing - The Form 10-K Summary is **not applicable**[626](index=626&type=chunk) [Signatures](index=107&type=section&id=Signatures) The report concludes with the required signatures of the registrant's authorized officers and directors, certifying its submission - The report is **signed by the Registrant's Chairman & Chief Executive Officer, Senior Executive Vice President and Chief Financial Officer, President, Vice President and Chief Accounting Officer, and other directors**, certifying its submission[628](index=628&type=chunk)

UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q (Mark One) ☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 2020 OR ☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to to (State or Other Jurisdiction of Incorporation or Organization) Commission file number: 001-38817 10089 Fairfax Boulevard, Fairfax, VA 22030 (Address ...

PART I – FINANCIAL INFORMATION [Item 1 – Consolidated Financial Statements](index=3&type=section&id=Item%201%20%E2%80%93%20Consolidated%20Financial%20Statements) This section presents the unaudited consolidated financial statements, including the balance sheet, income statement, comprehensive income, stockholders' equity, and cash flows, along with detailed notes explaining accounting policies, investment securities, loans, derivatives, fair value measurements, earnings per share, accumulated other comprehensive income, and leases [Consolidated Statements of Financial Condition](index=3&type=section&id=Consolidated%20Statements%20of%20Financial%20Condition) The company's total assets significantly increased to $1.53 billion as of June 30, 2020, from $1.28 billion at December 31, 2019, primarily driven by a substantial rise in net loans and deposits Consolidated Statements of Financial Condition | Metric | June 30, 2020 (in thousands) | December 31, 2019 (in thousands) | |:---|:---|:---| | Total Assets | $1,528,867 | $1,277,358 | | Loans, net | $1,259,012 | $1,030,425 | | Total Deposits | $1,342,332 | $1,071,623 | | Total Liabilities | $1,388,697 | $1,140,324 | | Total Stockholders' Equity | $140,170 | $137,034 | [Unaudited Consolidated Statements of Income](index=4&type=section&id=Unaudited%20Consolidated%20Statements%20of%20Income) The company reported a net loss of $634,000 for the three months ended June 30, 2020, a significant decline from a net income of $3.43 million in the prior year, primarily due to a substantial increase in the provision for loan losses Unaudited Consolidated Statements of Income (Three Months) | Metric | Three Months Ended June 30, 2020 (in thousands) | Three Months Ended June 30, 2019 (in thousands) | |:---|:---|:---| | Total Interest Income | $14,904 | $14,867 | | Total Interest Expense | $4,178 | $4,982 | | Net Interest Income | $10,726 | $9,885 | | Provision for Loan Losses | $5,575 | $750 | | Total Non-Interest Income | $1,318 | $1,341 | | Total Non-Interest Expense | $7,360 | $6,177 | | Income (Loss) before income taxes | $(891) | $4,299 | | Income Tax Expense (Benefit) | $(257) | $868 | | Net Income (Loss) | $(634) | $3,431 | | Basic EPS | $(0.08) | $0.42 | | Diluted EPS | $(0.08) | $0.42 | Unaudited Consolidated Statements of Income (Six Months) | Metric | Six Months Ended June 30, 2020 (in thousands) | Six Months Ended June 30, 2019 (in thousands) | |:---|:---|:---| | Net Income (Loss) | $2,836 | $6,678 | | Basic EPS | $0.34 | $0.81 | | Diluted EPS | $0.34 | $0.81 | [Unaudited Consolidated Statements of Comprehensive Income (Loss)](index=5&type=section&id=Unaudited%20Consolidated%20Statements%20of%20Comprehensive%20Income%20%28Loss%29) Comprehensive income for the three months ended June 30, 2020, was a loss of $508,000, a decrease from a gain of $3.80 million in the prior year, reflecting the net loss partially offset by other comprehensive income from unrealized gains on available-for-sale securities Unaudited Consolidated Statements of Comprehensive Income (Loss) (Three Months) | Metric | Three Months Ended June 30, 2020 (in thousands) | Three Months Ended June 30, 2019 (in thousands) | |:---|:---|:---| | Net Income (Loss) | $(634) | $3,431 | | Other comprehensive income | $126 | $366 | | Comprehensive Income (Loss) | $(508) | $3,797 | Unaudited Consolidated Statements of Comprehensive Income (Loss) (Six Months) | Metric | Six Months Ended June 30, 2020 (in thousands) | Six Months Ended June 30, 2019 (in thousands) | |:---|:---|:---| | Net Income (Loss) | $2,836 | $6,678 | | Other comprehensive income | $531 | $581 | | Comprehensive Income (Loss) | $3,367 | $7,259 | [Unaudited Consolidated Statements of Stockholders' Equity](index=6&type=section&id=Unaudited%20Consolidated%20Statements%20of%20Stockholders%27%20Equity) Total stockholders' equity increased to $140.17 million as of June 30, 2020, from $137.03 million at December 31, 2019, primarily due to net income and other comprehensive income, partially offset by common stock repurchases Unaudited Consolidated Statements of Stockholders' Equity | Metric | June 30, 2020 (in thousands) | December 31, 2019 (in thousands) | |:---|:---|:---| | Common Stock | $32,433 | $32,397 | | Capital Surplus | $74,850 | $75,117 | | Retained Earnings | $31,933 | $29,097 | | Accumulated Other Comprehensive Income | $954 | $423 | | Total Stockholders' Equity | $140,170 | $137,034 | - Net income for the six months ended June 30, 2020, contributed **$2,836,000** to retained earnings[12](index=12&type=chunk) - Common stock repurchases amounted to **$990,000** for the six months ended June 30, 2020[12](index=12&type=chunk) [Unaudited Consolidated Statements of Cash Flows](index=7&type=section&id=Unaudited%20Consolidated%20Statements%20of%20Cash%20Flows) Cash and cash equivalents increased by $11.51 million for the six months ended June 30, 2020, driven by significant cash provided by financing activities (primarily deposits) which offset substantial cash used in investing activities (mainly loan originations) Unaudited Consolidated Statements of Cash Flows | Metric | Six Months Ended June 30, 2020 (in thousands) | Six Months Ended June 30, 2019 (in thousands) | |:---|:---|:---| | Net cash provided by operating activities | $4,510 | $6,731 | | Net cash used in investing activities | $(232,772) | $(70,990) | | Net cash provided by financing activities | $239,772 | $70,994 | | Increase in Cash and Cash Equivalents | $11,510 | $6,735 | | Cash and Cash Equivalents, end of period | $76,354 | $64,811 | [Notes to Unaudited Consolidated Financial Statements](index=8&type=section&id=Notes%20to%20Unaudited%20Consolidated%20Financial%20Statements) This section provides detailed disclosures on the company's organization, accounting policies, and the impact of recent accounting pronouncements, including specific notes on investment securities, loans, derivatives, fair value measurements, earnings per share, accumulated other comprehensive income, and leases [Note 1. Organization, Basis of Presentation and Impact of Recently Issued Accounting Pronouncements](index=8&type=section&id=Note%201.%20Organization%2C%20Basis%20of%20Presentation%20and%20Impact%20of%20Recently%20Issued%20Accounting%20Pronouncements) This note outlines the company's structure as a bank holding company and its subsidiary, MainStreet Bank, detailing its regulatory status as an 'emerging growth company' and 'smaller reporting company'. It also discusses the basis of financial statement presentation and the ongoing assessment of recently issued accounting pronouncements, particularly ASU 2016-13 (CECL) and the temporary relief for COVID-19 related loan modifications - MainStreet Bancshares, Inc. is a bank holding company, and MainStreet Bank is its wholly-owned subsidiary, operating in Fairfax, Virginia, and the Washington, D.C. metropolitan area[16](index=16&type=chunk)[18](index=18&type=chunk) - The company is classified as an 'emerging growth company' and a 'smaller reporting company', allowing for reduced public company reporting requirements[17](index=17&type=chunk)[69](index=69&type=chunk) - The company is currently assessing the impact of ASU 2016-13 (CECL) on its consolidated financial statements, with required application for fiscal years beginning after December 15, 2022[62](index=62&type=chunk)[63](index=63&type=chunk) - Short-term loan modifications made in good faith in response to COVID-19 to current borrowers are not to be considered Troubled Debt Restructurings (TDRs) per interagency guidance and the CARES Act[70](index=70&type=chunk)[71](index=71&type=chunk) [Note 2. Investment Securities](index=19&type=section&id=Note%202.%20Investment%20Securities) This note provides a detailed breakdown of the company's investment securities, classifying them as available-for-sale or held-to-maturity, and reports their amortized cost, unrealized gains/losses, and fair values. It confirms no other-than-temporary impairment was recognized Investment Securities | Security Type | June 30, 2020 (Fair Value, in thousands) | December 31, 2019 (Fair Value, in thousands) | |:---|:---|:---| | Investment securities available-for-sale | $91,823 | $92,791 | | Investment securities held-to-maturity | $23,843 (Amortized Cost) | $23,914 (Amortized Cost) | | Total Investment Securities | $115,666 | $116,705 | - No securities were sold from the available-for-sale portfolio for the six months ended June 30, 2020[73](index=73&type=chunk) - The Bank does not consider any securities in its available-for-sale or held-to-maturity portfolios to be other-than-temporarily impaired at June 30, 2020, or December 31, 2019[75](index=75&type=chunk) [Note 3. Loans Receivable](index=21&type=section&id=Note%203.%20Loans%20Receivable) This note details the composition of the loan portfolio, highlighting significant growth in commercial and industrial loans due to the Paycheck Protection Program (PPP). It also provides a summary of the allowance for loan losses, which increased substantially due to COVID-19 related provisions, and information on impaired and nonaccrual loans Loan Portfolio Composition | Loan Type | June 30, 2020 (in thousands) | December 31, 2019 (in thousands) | |:---|:---|:---| | Residential Real Estate | $171,411 | $150,848 | | Commercial Real Estate | $497,279 | $421,870 | | Construction and Land Development | $283,971 | $272,620 | | Commercial – Non Real-Estate (C&I) | $268,290 | $121,225 | | Consumer – Non Real-Estate | $59,551 | $75,583 | | Total Gross Loans | $1,280,502 | $1,042,146 | | Allowance for Loan Losses | $(13,731) | $(9,584) | | Net Loans | $1,259,012 | $1,030,425 | - Commercial and industrial loans at June 30, 2020, included **$171.6 million** in Paycheck Protection Program (PPP) loans[77](index=77&type=chunk) Allowance for Loan Losses Activity | Metric | Six Months Ended June 30, 2020 (in thousands) | Six Months Ended June 30, 2019 (in thousands) | |:---|:---|:---| | Beginning Balance (Allowance for Loan Losses) | $9,584 | $8,831 | | Provision for Loan Losses | $5,925 | $1,075 | | Ending Balance (Allowance for Loan Losses) | $13,731 | $9,185 | Nonaccrual Loans | Nonaccrual Loans | June 30, 2020 (in thousands) | December 31, 2019 (in thousands) | |:---|:---|:---| | Residential Real Estate | $150 | $0 | | Commercial Real Estate | $1,097 | $0 | | Consumer | $58 | $0 | | Total Nonaccrual Loans | $1,305 | $0 | - The company had no loans classified as Troubled Debt Restructuring (TDR) as of June 30, 2020, down from **$1.5 million** at December 31, 2019, after removing the designation from its only TDR loan following modification[29](index=29&type=chunk)[93](index=93&type=chunk)[94](index=94&type=chunk) [Note 4. Derivatives and Risk Management Activities](index=27&type=section&id=Note%204.%20Derivatives%20and%20Risk%20Management%20Activities) This note describes the company's use of derivative financial instruments, specifically interest rate loan swaps, which are entered into with commercial loan customers and simultaneously with dealer counterparties to manage interest rate risk. These back-to-back swaps result in net-zero fair value changes Matched Interest Rate Swaps | Derivative Type | June 30, 2020 (Notional Amount, in thousands) | December 31, 2019 (Notional Amount, in thousands) | |:---|:---|:---| | Matched interest rate swap with borrower | $108,880 | $71,860 | | Matched interest rate swap with counterparty | $108,880 | $71,860 | Interest Rate Swap Fee Income (Three Months) | Metric | Three Months Ended June 30, 2020 (in thousands) | Three Months Ended June 30, 2019 (in thousands) | |:---|:---|:---| | Interest rate swap fee income | $423 | $181 | Interest Rate Swap Fee Income (Six Months) | Metric | Six Months Ended June 30, 2020 (in thousands) | Six Months Ended June 30, 2019 (in thousands) | |:---|:---|:---| | Interest rate swap fee income | $826 | $471 | [Note 5. Fair Value Presentation](index=29&type=section&id=Note%205.%20Fair%20Value%20Presentation) This note outlines the company's fair value measurement methodologies, categorizing financial instruments into a three-level hierarchy based on observability of inputs. It indicates that available-for-sale securities and derivatives are primarily Level 2, while impaired loans and other real estate owned (OREO) are largely Level 3 due to significant unobservable inputs - Available-for-sale securities and derivative assets/liabilities are classified as Level 2, with valuations based on observable market data[104](index=104&type=chunk)[105](index=105&type=chunk) - Impaired loans and Other Real Estate Owned (OREO) are primarily classified as Level 3, with fair values determined using appraisals and discounted cash flows that may involve significant unobservable inputs or adjustments[107](index=107&type=chunk)[109](index=109&type=chunk)[110](index=110&type=chunk) Assets Measured at Fair Value on a Nonrecurring Basis | Asset Type | June 30, 2020 (Fair Value, in thousands) | |:---|:---| | Impaired Loans | $62 | | Other Real Estate Owned | $1,175 | | Total Assets measured at fair value on a nonrecurring basis | $1,237 | [Note 6. Earnings (Losses) Per Common Share](index=34&type=section&id=Note%206.%20Earnings%20%28Losses%29%20Per%20Common%20Share) This note presents the basic and diluted earnings per share calculations, reporting a net loss per common share for the three months ended June 30, 2020, and noting the absence of potentially dilutive securities Earnings (Losses) Per Common Share (Three Months) | Metric | Three Months Ended June 30, 2020 | Three Months Ended June 30, 2019 | |:---|:---|:---| | Net Income (Loss) per common share: Basic | $(0.08) | $0.42 | | Net Income (Loss) per common share: Diluted | $(0.08) | $0.42 | Earnings (Losses) Per Common Share (Six Months) | Metric | Six Months Ended June 30, 2020 | Six Months Ended June 30, 2019 | |:---|:---|:---| | Net Income (Loss) per common share: Basic | $0.34 | $0.81 | | Net Income (Loss) per common share: Diluted | $0.34 | $0.81 | - There were no potentially dilutive securities outstanding at June 30, 2020, or December 31, 2019[115](index=115&type=chunk)[117](index=117&type=chunk) [Note 7. Accumulated Other Comprehensive Income](index=34&type=section&id=Note%207.%20Accumulated%20Other%20Comprehensive%20Income) This note details the cumulative balances of accumulated other comprehensive income, primarily consisting of unrealized gains on securities, net of deferred taxes Accumulated Other Comprehensive Income | Component | June 30, 2020 (in thousands) | December 31, 2019 (in thousands) | |:---|:---|:---| | Unrealized gain on securities | $1,268 | $609 | | Unrealized loss on securities transferred to HTM | $(69) | $(81) | | Securities gains included in net income | $0 | $5 | | Tax effect | $(245) | $(110) | | Total accumulated other comprehensive income | $954 | $423 | [Note 8. Leases](index=34&type=section&id=Note%208.%20Leases) This note provides information on the company's operating lease liabilities and corresponding right-of-use assets, including their weighted-average remaining lease term and discount rate Lease Information | Metric | June 30, 2020 (in thousands) | |:---|:---| | Lease liabilities | $6,764 | | Right-of-use assets | $6,386 | | Weighted-average remaining lease term (in months) | 193.6 | | Weighted-average discount rate | 3.12% | - Cash paid for amounts included in the measurement of lease liabilities during the six months ended June 30, 2020, was **$92,000**[121](index=121&type=chunk) - The company recognized operating lease expense of **$147,000** for the six months ended June 30, 2020[121](index=121&type=chunk) [Item 2 – Management's Discussion and Analysis of Financial Condition and Results of Operations](index=36&type=section&id=Item%202%20%E2%80%93%20Management%27s%20Discussion%20and%20Analysis%20of%20Financial%20Condition%20and%20Results%20of%20Operations) This section provides management's perspective on the company's financial performance and condition, including an overview of its business, the significant impact of the COVID-19 pandemic, regulatory responses, critical accounting policies, and detailed comparisons of income statements and financial condition for the reported periods. It also covers liquidity, capital resources, off-balance sheet arrangements, and non-GAAP financial measures [Forward-Looking Statements](index=36&type=section&id=Forward-Looking%20Statements) This section cautions readers that the report contains forward-looking statements and identifies various factors that could cause actual results to differ materially, including the highly uncertain impact of the COVID-19 pandemic, general economic conditions, competition, interest rate fluctuations, and regulatory changes - The impact of the COVID-19 outbreak and measures taken in response are highly uncertain and difficult to predict, posing a significant risk[127](index=127&type=chunk) - Key risk factors include general economic conditions, competition, inflation, interest rate environment, adverse changes in securities markets, and changes in laws or government regulations[127](index=127&type=chunk) - Other risks mentioned are cyber threats, fraud, reliance on third parties, deterioration of asset quality, and the effectiveness of internal controls[127](index=127&type=chunk) [Overview](index=37&type=section&id=Overview) MainStreet Bancshares, Inc., through MainStreet Bank, operates as a community bank serving small to medium-sized businesses, professional practices, and retail customers in the Washington, D.C. metropolitan area, distinguishing itself through responsive, personalized services and advanced banking technology - MainStreet Bank focuses on serving small to medium-sized businesses, professional practices, and retail customers in Northern Virginia and the greater Washington, D.C. metropolitan area[130](index=130&type=chunk)[132](index=132&type=chunk) - The bank emphasizes responsive, personalized services, local decision-making, and advanced banking technologies, including online business banking solutions and mobile apps, to compete with larger institutions[130](index=130&type=chunk)[132](index=132&type=chunk)[133](index=133&type=chunk) - Products and services include business and consumer checking, savings, certificates of deposit, and a broad array of commercial, real estate, and consumer loans[134](index=134&type=chunk) [COVID-19 Economic Impact](index=37&type=section&id=COVID-19%20Economic%20Impact) The company responded to the COVID-19 pandemic by transitioning most employees to remote work, implementing two phases of loan forbearance programs for commercial customers, and actively participating in the Paycheck Protection Program (PPP), processing nearly $172 million in loans. These actions led to significant provisions for loan losses to address the pandemic's impact - Nearly all employees transitioned to work from home due to the pandemic, supported by advanced technology[140](index=140&type=chunk) - The bank implemented a two-phase loan deferment program for borrowers, with Phase 1 seeing 195 borrowers (**22.5% of total loans**) participating, including 14 hotels[144](index=144&type=chunk)[145](index=145&type=chunk)[146](index=146&type=chunk)[147](index=147&type=chunk) - The bank processed 1,071 Paycheck Protection Program (PPP) loans totaling nearly **$172 million**[148](index=148&type=chunk) - Phase 2 of the loan deferment program is estimated to involve 42 borrowers (**7.4% of total loans**), with **60% of hotels** requesting additional deferrals[152](index=152&type=chunk) - A general qualitative factor of **$2.76 million** was added to the allowance for loan losses calculation during Q2 2020 to address the ongoing impact of the COVID-19 pandemic, in addition to a **$1.76 million** charge-off for one commercial borrower[153](index=153&type=chunk)[154](index=154&type=chunk) [Regulatory easing for COVID-19 pandemic](index=41&type=section&id=Regulatory%20easing%20for%20COVID-19%20pandemic) Regulatory bodies introduced measures to ease the burden on financial institutions during the COVID-19 pandemic, including reducing Federal Reserve reserve requirements to zero, temporarily lowering the Community Bank Leverage Ratio (CBLR) to 8%, and providing guidance that short-term, good-faith loan modifications for current borrowers are not automatically considered Troubled Debt Restructurings (TDRs) - The Federal Reserve Board reduced reserve requirement ratios to zero percent, effective March 26, 2020, eliminating reserve requirements for all depository institutions[156](index=156&type=chunk) - The Community Bank Leverage Ratio (CBLR) was temporarily lowered to **8%** from Q2 2020 through year-end, with a gradual increase to **8.5%** in 2021 and **9%** by January 1, 2022[158](index=158&type=chunk)[159](index=159&type=chunk) - The CARES Act allows financial institutions to suspend TDR accounting principles for COVID-19 related loan modifications for loans that were current as of December 31, 2019[162](index=162&type=chunk)[163](index=163&type=chunk) - The Federal Reserve established a Paycheck Protection Program Lending Facility (PPPL Facility) to provide non-recourse funding to banks participating in the PPP, taking PPP loans as collateral[167](index=167&type=chunk) [Critical Accounting Policies](index=44&type=section&id=Critical%20Accounting%20Policies) The company's critical accounting policies, including those for loan losses, fair value, derivatives, income taxes, and OREO, remain consistent with the prior annual report, with ongoing assessment of new pronouncements and an enterprise-wide initiative to manage the transition away from LIBOR - Critical accounting policies include the allowance for loan losses, fair value of financial instruments, derivative financial instruments, income taxes, and other real estate owned[52](index=52&type=chunk)[170](index=170&type=chunk) - The company has established an enterprise-wide initiative led by senior management to identify, assess, and monitor risks associated with the expected discontinuation of LIBOR and transition to alternative reference rates (ARRs)[171](index=171&type=chunk)[172](index=172&type=chunk) [Comparison of Statements of Income for the Three Months Ended June 30, 2020 and 2019](index=44&type=section&id=Comparison%20of%20Statements%20of%20Income%20for%20the%20Three%20Months%20Ended%20June%2030%2C%202020%20and%202019) For the three months ended June 30, 2020, the company reported a net loss, primarily driven by a significant increase in the provision for loan losses due to the COVID-19 pandemic, despite an increase in net interest income. Non-interest expense also rose, while non-interest income slightly decreased [General](index=44&type=section&id=General) Net income decreased by $4.1 million, resulting in a net loss of $634,000 for the three months ended June 30, 2020, compared to a net income of $3.4 million in the prior year, primarily due to a $4.8 million increase in the provision for loan losses General (Three Months) | Metric | Q2 2020 (in thousands) | Q2 2019 (in thousands) | |:---|:---|:---| | Net Income (Loss) | $(634) | $3,431 | | Provision for Loan Losses | $5,575 | $750 | | Net Interest Income | $10,726 | $9,885 | [Interest Income](index=44&type=section&id=Interest%20Income) Total interest income remained relatively flat, increasing by $37,000, as a $522,000 increase in interest and fees on loans (driven by a $235.0 million increase in average loans, including $135.2 million from PPP loans) was largely offset by decreases in interest from federal funds sold and investment securities due to lower market interest rates Interest Income (Three Months) | Metric | Q2 2020 (in thousands) | Q2 2019 (in thousands) | |:---|:---|:---| | Total Interest Income | $14,904 | $14,867 | | Interest and fees on loans | $14,399 | $13,877 | | Interest on federal funds sold | $9 | $375 | | Interest on investment securities | $496 | $615 | - Average yield on interest-earning assets decreased **107 basis points** to **4.22%** for Q2 2020 from **5.29%** for Q2 2019, primarily due to lower market rates and **1% rate on PPP loans**[175](index=175&type=chunk) - Average loans outstanding increased by **$235.0 million**, including **$135.2 million** attributable to average PPP loans[176](index=176&type=chunk) [Interest Expense](index=46&type=section&id=Interest%20Expense) Total interest expense decreased by $804,000 to $4.2 million for the three months ended June 30, 2020, primarily due to lower average interest-bearing deposit yields and a decrease in Federal Home Loan Bank advances, despite an increase in average deposit balances Interest Expense (Three Months) | Metric | Q2 2020 (in thousands) | Q2 2019 (in thousands) | |:---|:---|:---| | Total Interest Expense | $4,178 | $4,982 | | Interest expense on deposits | $3,893 | $4,579 | | Interest on Federal Home Loan Bank advances | $44 | $162 | - The average cost of deposits decreased to **167 basis points** for Q2 2020 from **231 basis points** for Q2 2019[182](index=182&type=chunk) - Average interest-bearing deposit balances increased by **$140.4 million** to **$932.1 million**, driven by a **$180.0 million** increase in money market deposits, largely from PPP loan-related accounts[182](index=182&type=chunk) [Net Interest Income](index=46&type=section&id=Net%20Interest%20Income) Net interest income increased by $841,000, or 8.5%, to $10.7 million for the three months ended June 30, 2020, primarily due to a $161.1 million increase in net interest-earning assets, despite a decrease in both the interest rate spread and net interest margin Net Interest Income (Three Months) | Metric | Q2 2020 (in thousands) | Q2 2019 (in thousands) | |:---|:---|:---| | Net Interest Income | $10,726 | $9,885 | | Interest rate spread | 2.47% | 2.89% | | Net interest margin | 3.04% | 3.51% | - Net interest-earning assets increased **$161.1 million** to **$455.7 million** for Q2 2020 from **$294.6 million** for Q2 2019[184](index=184&type=chunk) [Average Balances, Net Interest Income, Yields Earned and Rates Paid (Three Months)](index=47&type=section&id=Average%20Balances%2C%20Net%20Interest%20Income%2C%20Yields%20Earned%20and%20Rates%20Paid%20%28Three%20Months%29) This table provides a detailed breakdown of average interest-earning assets and interest-bearing liabilities, along with their respective interest income/expense, yields, and costs, for the three months ended June 30, 2020 and 2019 Average Balances, Net Interest Income, Yields Earned and Rates Paid (Three Months) | Metric | Q2 2020 (Avg Balance, in thousands) | Q2 2020 (Income/Expense, in thousands) | Q2 2020 (Yield/Cost) | Q2 2019 (Avg Balance, in thousands) | Q2 2019 (Income/Expense, in thousands) | Q2 2019 (Yield/Cost) | |:---|:---|:---|:---|:---|:---|:---| | Loans | $1,213,250 | $14,399 | 4.75% | $978,282 | $13,877 | 5.67% | | Investment securities | $73,186 | $496 | 2.71% | $73,218 | $615 | 3.36% | | Federal funds and interest-bearing deposits | $126,164 | $9 | 0.03% | $73,494 | $375 | 2.04% | | Total interest-earning assets | $1,412,600 | $14,904 | 4.22% | $1,124,994 | $14,867 | 5.29% | | Total interest-bearing liabilities | $956,903 | $4,178 | 1.75% | $830,435 | $4,982 | 2.40% | | Net interest income | | $10,726 | | | $9,885 | | | Interest rate spread | | | 2.47% | | | 2.89% | | Net interest margin | | | 3.04% | | | 3.51% | [Rate/Volume Analysis (Three Months)](index=48&type=section&id=Rate%2FVolume%20Analysis%20%28Three%20Months%29) This analysis shows that for the three months ended June 30, 2020, the increase in net interest income was primarily driven by volume growth in interest-earning assets and a decrease in interest-bearing liabilities, which offset the negative impact of declining interest rates Rate/Volume Analysis (Three Months) | Category | Volume Increase (Decrease) (in thousands) | Rate Increase (Decrease) (in thousands) | Total Increase (Decrease) (in thousands) | |:---|:---|:---|:---| | Interest-earning assets | $12,145 | $(12,108) | $37 | | Interest-bearing liabilities | $1,883 | $(2,687) | $(804) | | Change in net interest income | $10,262 | $(9,421) | $841 | [Provision for Loan Losses (Three Months)](index=48&type=section&id=Provision%20for%20Loan%20Losses%20%28Three%20Months%29) The provision for loan losses increased significantly by $4.8 million to $5.6 million for the three months ended June 30, 2020, primarily due to additional provisions related to the COVID-19 pandemic, including a qualitative factor for heightened stress and a $1.7 million charge-off for one borrower - Provision for loan losses increased by **$4.8 million** to **$5.6 million** for Q2 2020 from **$750,000** for Q2 2019, primarily due to COVID-19 related provisions[196](index=196&type=chunk) - A COVID-19 qualitative factor was incorporated into the allowance for loan losses calculation to monitor heightened stress on borrowers[191](index=191&type=chunk) - Charge-offs of **$1.7 million**, related to one borrower, were recorded during Q2 2020, which was fully reserved[196](index=196&type=chunk) [Non-Interest Income (Three Months)](index=50&type=section&id=Non-Interest%20Income%20%28Three%20Months%29) Non-interest income slightly decreased by $23,000, or 1.7%, to $1.3 million for the three months ended June 30, 2020. This was primarily due to decreases in gains on sale of loans and other fee activity, partially offset by increases in loan swap fee income and bank-owned life insurance income Non-Interest Income (Three Months) | Metric | Q2 2020 (in thousands) | Q2 2019 (in thousands) | |:---|:---|:---| | Total Non-Interest Income | $1,318 | $1,341 | | Loan swap fee income | $423 | $181 | | Bank owned life insurance income | $198 | $106 | | Net gain on sale of loans | $0 | $263 | [Non-Interest Expense (Three Months)](index=50&type=section&id=Non-Interest%20Expense%20%28Three%20Months%29) Non-interest expense increased by $1.2 million, or 19.2%, to $7.4 million for the three months ended June 30, 2020, driven by higher salaries and employee benefits (including increased pay for customer-facing staff during the pandemic) and increased other operating expenses, such as professional fees, technology investments, and FDIC insurance premiums Non-Interest Expense (Three Months) | Metric | Q2 2020 (in thousands) | Q2 2019 (in thousands) | |:---|:---|:---| | Total Non-Interest Expense | $7,360 | $6,177 | | Salaries and employee benefits | $4,263 | $3,847 | | Other operating expenses | $1,713 | $1,150 | | FDIC insurance premiums | $430 | $210 | - Salaries and employee benefits increased due to supporting customer-facing employees during the pandemic and adding one employee[198](index=198&type=chunk) [Income Tax Expense (Three Months)](index=50&type=section&id=Income%20Tax%20Expense%20%28Three%20Months%29) The company reported an income tax benefit of $257,000 for the three months ended June 30, 2020, a decrease of $1.1 million from a tax expense of $868,000 in the prior year, reflecting the pre-tax loss Income Tax Expense (Three Months) | Metric | Q2 2020 (in thousands) | Q2 2019 (in thousands) | |:---|:---|:---| | Income Tax Expense (Benefit) | $(257) | $868 | | Income (Loss) before income taxes | $(891) | $4,299 | | Effective federal tax rate (benefit) | 28.8% | 20.2% | [Comparison of Statements of Income for the Six Months Ended June 30, 2020 and 2019](index=50&type=section&id=Comparison%20of%20Statements%20of%20Income%20for%20the%20Six%20Months%20Ended%20June%2030%2C%202020%20and%202019) For the six months ended June 30, 2020, net income decreased significantly due to a substantial increase in the provision for loan losses related to the COVID-19 pandemic. This was partially offset by growth in net interest income and non-interest income, while non-interest expenses also rose [General](index=50&type=section&id=General) Net income decreased by $3.8 million to $2.8 million for the six months ended June 30, 2020, from $6.7 million in the prior year, primarily due to an increased provision for loan losses in response to the COVID-19 pandemic General (Six Months) | Metric | YTD 2020 (in thousands) | YTD 2019 (in thousands) | |:---|:---|:---| | Net Income | $2,836 | $6,678 | | Provision for Loan Losses | $5,925 | $1,075 | | Net Interest Income | $21,025 | $19,233 | | Non-Interest Income | $2,732 | $2,267 | [Interest Income](index=50&type=section&id=Interest%20Income) Total interest income increased by $1.3 million, or 4.7%, to $30.0 million for the six months ended June 30, 2020, driven by an $1.8 million increase in interest and fees on loans, despite lower yields on federal funds sold and investment securities due to reduced interest rates Interest Income (Six Months) | Metric | YTD 2020 (in thousands) | YTD 2019 (in thousands) | |:---|:---|:---| | Total Interest Income | $30,020 | $28,684 | | Interest and fees on loans | $28,619 | $26,793 | | Interest on federal funds sold | $404 | $720 | | Interest on investment securities | $997 | $1,171 | - Average yield on interest-earning assets decreased **75 basis points** to **4.48%** for YTD 2020 from **5.23%** for YTD 2019[203](index=203&type=chunk) - Average loans outstanding increased by **$178.5 million** to **$1.14 billion** for YTD 2020[204](index=204&type=chunk) [Interest Expense](index=52&type=section&id=Interest%20Expense) Total interest expense decreased by $456,000 to $9.0 million for the six months ended June 30, 2020, primarily due to lower average interest-bearing deposit yields and reduced Federal Home Loan Bank advances, despite an increase in average interest-bearing deposit balances Interest Expense (Six Months) | Metric | YTD 2020 (in thousands) | YTD 2019 (in thousands) | |:---|:---|:---| | Total Interest Expense | $8,995 | $9,451 | | Interest expense on deposits | $8,419 | $8,591 | | Interest on Federal Home Loan Bank advances | $94 | $380 | - The average cost of deposits decreased to **184 basis points** for YTD 2020 from **226 basis points** for YTD 2019[208](index=208&type=chunk) - Average interest-bearing deposit balances increased by **$153.3 million** to **$912.8 million**, driven by a **$133.2 million** increase in money market deposits (from PPP loans) and a **$49.5 million** increase in time deposits[208](index=208&type=chunk) [Net Interest Income](index=52&type=section&id=Net%20Interest%20Income) Net interest income increased by $1.8 million, or 9.3%, to $21.0 million for the six months ended June 30, 2020, driven by a $108.7 million increase in net interest-earning assets, despite a decrease in both the interest rate spread and net interest margin Net Interest Income (Six Months) | Metric | YTD 2020 (in thousands) | YTD 2019 (in thousands) | |:---|:---|:---| | Net Interest Income | $21,025 | $19,233 | | Interest rate spread | 2.56% | 2.88% | | Net interest margin | 3.14% | 3.50% | - Net interest-earning assets increased **$108.7 million** to **$403.0 million** for YTD 2020 from **$294.3 million** for YTD 2019[210](index=210&type=chunk) [Average Balances, Net Interest Income, Yields Earned and Rates Paid (Six Months)](index=54&type=section&id=Average%20Balances%2C%20Net%20Interest%20Income%2C%20Yields%20Earned%20and%20Rates%20Paid%20%28Six%20Months%29) This table provides a detailed breakdown of average interest-earning assets and interest-bearing liabilities, along with their respective interest income/expense, yields, and costs, for the six months ended June 30, 2020 and 2019 Average Balances, Net Interest Income, Yields Earned and Rates Paid (Six Months) | Metric | YTD 2020 (Avg Balance, in thousands) | YTD 2020 (Income/Expense, in thousands) | YTD 2020 (Yield/Cost) | YTD 2019 (Avg Balance, in thousands) | YTD 2019 (Income/Expense, in thousands) | YTD 2019 (Yield/Cost) | |:---|:---|:---|:---|:---|:---|:---| | Loans | $1,135,995 | $28,619 | 5.04% | $957,457 | $26,793 | 5.60% | | Investment securities | $73,512 | $997 | 2.71% | $70,897 | $1,171 | 3.30% | | Federal funds and interest-bearing deposits | $131,239 | $404 | 0.62% | $69,242 | $720 | 2.08% | | Total interest-earning assets | $1,340,746 | $30,020 | 4.48% | $1,097,596 | $28,684 | 5.23% | | Total interest-bearing liabilities | $937,786 | $8,995 | 1.92% | $803,329 | $9,451 | 2.35% | | Net interest income | | $21,025 | | | $19,233 | | | Interest rate spread | | | 2.56% | | | 2.88% | | Net interest margin | | | 3.14% | | | 3.50% | [Rate/Volume Analysis (Six Months)](index=55&type=section&id=Rate%2FVolume%20Analysis%20%28Six%20Months%29) This analysis indicates that for the six months ended June 30, 2020, the increase in net interest income was primarily driven by volume growth in interest-earning assets and a decrease in interest-bearing liabilities, which collectively outweighed the negative impact of declining interest rates Rate/Volume Analysis (Six Months) | Category | Volume Increase (Decrease) (in thousands) | Rate Increase (Decrease) (in thousands) | Total Increase (Decrease) (in thousands) | |:---|:---|:---|:---| | Interest-earning assets | $9,238 | $(7,902) | $1,336 | | Interest-bearing liabilities | $2,411 | $(2,867) | $(456) | | Change in net interest income | $6,827 | $(5,035) | $1,792 | [Provision for Loan Losses (Six Months)](index=55&type=section&id=Provision%20for%20Loan%20Losses%20%28Six%20Months%29) The provision for loan losses increased significantly by $4.9 million to $5.9 million for the six months ended June 30, 2020, primarily due to additional provisions related to the COVID-19 pandemic. This occurred alongside a decrease in loan originations (excluding PPP) and an increase in non-performing loans - Provision for loan losses increased by **$4.9 million** to **$5.9 million** for YTD 2020 from **$1.1 million** for YTD 2019, primarily due to the COVID-19 pandemic[218](index=218&type=chunk) - Non-performing loans increased by **$1.3 million** to **$1.3 million** as of June 30, 2020, with **$1.1 million** related to one borrower[218](index=218&type=chunk) - Total charge-offs for YTD 2020 were **$1.8 million**, with recoveries of **$16,000**[218](index=218&type=chunk) [Non-Interest Income (Six Months)](index=55&type=section&id=Non-Interest%20Income%20%28Six%20Months%29) Non-interest income increased by $465,000, or 20.5%, to $2.7 million for the six months ended June 30, 2020, primarily driven by higher loan fees from interest rate swaps and bank-owned life insurance income, partially offset by decreased gains on sale of loans Non-Interest Income (Six Months) | Metric | YTD 2020 (in thousands) | YTD 2019 (in thousands) | |:---|:---|:---| | Total Non-Interest Income | $2,732 | $2,267 | | Loan fees from loan interest rate swaps | $826 | $471 | | Bank owned life insurance income | $397 | $211 | | Gains on sale of loans | $0 | $263 | [Non-Interest Expense (Six Months)](index=56&type=section&id=Non-Interest%20Expense%20%28Six%20Months%29) Non-interest expense increased by $2.3 million, or 19.0%, to $14.5 million for the six months ended June 30, 2020, primarily due to increases in salaries and employee benefits (including pandemic support), other operating expenses (professional/consulting fees, technology), and FDIC insurance premiums Non-Interest Expense (Six Months) | Metric | YTD 2020 (in thousands) | YTD 2019 (in thousands) | |:---|:---|:---| | Total Non-Interest Expense | $14,502 | $12,185 | | Salaries and employee benefits | $8,696 | $7,707 | | Other operating expenses | $3,005 | $2,201 | | FDIC insurance premiums | $710 | $410 | - Salaries and employee benefits increased due to increased pay for customer-facing employees during the pandemic and the addition of one employee[221](index=221&type=chunk) [Income Tax Expense (Six Months)](index=56&type=section&id=Income%20Tax%20Expense%20%28Six%20Months%29) Income tax expense decreased by $1.1 million, or 68.4%, to $494,000 for the six months ended June 30, 2020, reflecting a significant decrease in income before income taxes Income Tax Expense (Six Months) | Metric | YTD 2020 (in thousands) | YTD 2019 (in thousands) | |:---|:---|:---| | Income Tax Expense | $494 | $1,562 | | Income before income taxes | $3,330 | $8,240 | | Effective federal tax rate | 14.8% | 19.0% | [Comparison of Statements of Financial Condition at June 30, 2020 and at December 31, 2019](index=56&type=section&id=Comparison%20of%20Statements%20of%20Financial%20Condition%20at%20June%2030%2C%202020%20and%20at%20December%2031%2C%202019) The company's financial condition at June 30, 2020, showed significant growth in total assets and deposits, primarily driven by PPP loans and core deposit increases. Net loans also expanded, while nonperforming assets saw an increase [Total Assets](index=56&type=section&id=Total%20Assets) Total assets increased by $251.2 million, or 19.7%, to $1.5 billion at June 30, 2020, from $1.3 billion at December 31, 2019, primarily driven by increases in PPP loans, other gross loans receivable, and loan interest rate swaps - Total assets increased by **$251.2 million** (**19.7%**) to **$1.5 billion** at June 30, 2020[223](index=223&type=chunk) - Key drivers of asset growth included **$171.6 million** in PPP loans, **$55.7 million** in other gross loans receivable, and **$8.9 million** in loan interest rate swaps[223](index=223&type=chunk) [Investment Securities](index=56&type=section&id=Investment%20Securities) Investment securities decreased slightly by $1.0 million, or 0.9%, to $115.7 million at June 30, 2020, primarily due to a decrease in the available-for-sale portfolio, particularly mortgage-backed securities Investment Securities | Metric | June 30, 2020 (in millions) | December 31, 2019 (in millions) | |:---|:---|:---| | Total Investment Securities | $115.7 | $116.7 | | Held-to-maturity portfolio | $23.8 | $23.9 | | Available-for-sale portfolio | $91.8 | $92.8 | [Net Loans](index=56&type=section&id=Net%20Loans) Net loans increased substantially by $228.6 million, or 22.2%, to $1.3 billion at June 30, 2020, primarily driven by $171.6 million in PPP loans and increases in commercial real estate and construction loans, while consumer loans decreased - Net loans increased by **$228.6 million** (**22.2%**) to **$1.3 billion** at June 30, 2020[225](index=225&type=chunk) - Commercial and industrial loans increased by **$147.1 million**, including **$171.6 million** from PPP loans[225](index=225&type=chunk) - Commercial real estate loans increased by **$75.4 million**, and construction loans increased by **$11.4 million**[225](index=225&type=chunk) - Consumer loans decreased by **$16.0 million**[225](index=225&type=chunk) [Allowance for Loan Losses](index=56&type=section&id=Allowance%20for%20Loan%20Losses) The allowance for loan losses increased significantly to $13.73 million at June 30, 2020, from $9.58 million at December 31, 2019, primarily due to a substantial provision for loan losses in response to the COVID-19 pandemic Allowance for Loan Losses | Metric | June 30, 2020 (in thousands) | December 31, 2019 (in thousands) | |:---|:---|:---| | Balance at end of period | $13,731 | $9,584 | | Provision for loan losses (YTD) | $5,925 | $1,618 | | Net charge-offs (YTD) | $(1,778) | $(865) | - The allowance for loan losses to gross loans at June 30, 2020, was **1.07%**, or **1.24%** excluding PPP loans[227](index=227&type=chunk) [Deposits](index=57&type=section&id=Deposits) Total deposits increased substantially by $270.7 million, or 25.3%, to $1.34 billion at June 30, 2020, primarily driven by a significant increase in core deposits, especially non-interest bearing demand and money market deposits, largely due to accounts generated in connection with PPP loans - Total deposits increased by **$270.7 million** (**25.3%**) to **$1.34 billion** at June 30, 2020[228](index=228&type=chunk) - Core deposits increased by **$285.3 million** (**43.6%**) to **$939.5 million**, primarily driven by PPP loan-related accounts[228](index=228&type=chunk) - Non-interest bearing demand deposits increased by **$135.4 million** (**53.6%**), and money market deposits increased by **$190.9 million** (**135.1%**)[228](index=228&type=chunk) - Certificates of deposit decreased by **$23.0 million**, or **4.1%**, as core deposits replaced this funding[228](index=228&type=chunk) [Nonperforming Assets](index=57&type=section&id=Nonperforming%20Assets) Total nonperforming assets increased to $2.48 million at June 30, 2020, from $1.21 million at December 31, 2019, primarily due to an increase in non-accrual loans, particularly in residential and commercial real estate Nonperforming Assets | Metric | June 30, 2020 (in thousands) | December 31, 2019 (in thousands) | |:---|:---|:---| | Total non-accrual loans | $1,305 | $0 | | Other real estate owned | $1,175 | $1,207 | | Total non-performing assets | $2,480 | $1,207 | - Total non-performing assets to total assets increased to **0.16%** at June 30, 2020, from **0.09%** at December 31, 2019[229](index=229&type=chunk) [Liquidity and Capital Resources](index=58&type=section&id=Liquidity%20and%20Capital%20Resources) The company maintains a strong liquidity position, primarily funded by deposits and supplemented by FHLB advances, and actively manages its cash flows. MainStreet Bank also exceeds all regulatory capital requirements, being considered 'well capitalized' under Basel III, though it has not opted into the CBLR framework [Liquidity Management](index=58&type=section&id=Liquidity%20Management) The company manages its liquidity to meet financial obligations, primarily through deposits, supplemented by FHLB advances and other borrowings. It monitors liquidity daily and maintains sufficient funds, with cash and cash equivalents totaling $76.4 million and available-for-sale securities of $91.8 million at June 30, 2020 - Deposits are the primary source of funds, supplemented by wholesale deposits, FHLB advances, and other short-term borrowings[230](index=230&type=chunk) - At June 30, 2020, FHLB advances outstanding were **$10.0 million** with an unused borrowing capacity of **$332.6 million**[230](index=230&type=chunk) - Cash and cash equivalents totaled **$76.4 million**, and available-for-sale securities totaled **$91.8 million** at June 30, 2020[233](index=233&type=chunk) Cash Flow Activity | Cash Flow Activity (Six Months Ended June 30) | 2020 (in thousands) | 2019 (in thousands) | |:---|:---|:---| | Net cash provided by operating activities | $4,510 | $6,731 | | Net cash used in investing activities | $(232,772) | $(70,990) | | Net cash provided by financing activities | $239,772 | $70,994 | [Capital Management](index=58&type=section&id=Capital%20Management) MainStreet Bank adheres to Basel III capital requirements and is considered 'well capitalized' under regulatory guidelines, exceeding all minimum capital ratios as of June 30, 2020. The bank has not opted into the Community Bank Leverage Ratio (CBLR) framework - MainStreet Bank exceeded all regulatory capital requirements and was considered 'well capitalized' under regulatory guidelines as of June 30, 2020[236](index=236&type=chunk)[240](index=240&type=chunk) - The bank has not opted into the Community Bank Leverage Ratio (CBLR) framework at this time[243](index=243&type=chunk) [Regulatory Capital](index=58&type=section&id=Regulatory%20Capital) The table below presents the Bank's actual capital amounts and ratios as of June 30, 2020, demonstrating its strong capital position well above the minimum requirements for capital adequacy and the 'well capitalized' thresholds under the Prompt Corrective Action provisions Regulatory Capital (June 30, 2020) | Capital Ratio (June 30, 2020) | Actual Amount (in thousands) | Actual Ratio | Minimum for Capital Adequacy (Amount, in thousands) | Minimum for Capital Adequacy (Ratio) | Minimum for Well Capitalized (Amount, in thousands) | Minimum for Well Capitalized (Ratio) | |:---|:---|:---|:---|:---|:---|:---| | Total capital (to risk-weighted assets) | $165,236 | 13.26% | $99,690 | ≥ 8.0% | $124,613 | > 10.0% | | Common equity tier 1 capital (to risk-weighted assets) | $151,529 | 12.16% | $56,076 | ≥ 4.5% | $99,690 | > 8.0% | | Tier 1 capital (to risk-weighted assets) | $151,529 | 12.16% | $74,767 | ≥ 6.0% | $99,690 | > 8.0% | | Tier 1 capital (to average assets) | $151,537 | 10.23% | $59,252 | ≥ 4.0% | $74,065 | > 5.0% | [Off-Balance Sheet Arrangements and Contractual Obligations](index=60&type=section&id=Off-Balance%20Sheet%20Arrangements%20and%20Contractual%20Obligations) The company engages in off-balance sheet financial instruments, primarily commitments to extend credit and standby letters of credit, and anticipates having sufficient funds to meet these future cash requirements - Outstanding loan commitments totaled **$264.3 million** at June 30, 2020[245](index=245&type=chunk) - Outstanding stand-by letters of credit totaled **$672,000** at June 30, 2020[245](index=245&type=chunk) [Use of Certain Non-GAAP Financial Measures](index=60&type=section&id=Use%20of%20Certain%20Non-GAAP%20Financial%20Measures) Management uses certain non-GAAP financial measures, such as adjusted net income, to supplement the evaluation of the company's operating performance by excluding non-recurring items, enhancing comparability with other periods and institutions Non-GAAP Financial Measures | Metric | Q2 2020 (in thousands) | Q2 2019 (in thousands) | YTD 2020 (in thousands) | YTD 2019 (in thousands) | |:---|:---|:---|:---|:---| | Net income (loss), as reported | $(634) | $3,431 | $2,836 | $6,678 | | Tax expense (benefit) | $(257) | $868 | $494 | $1,562 | | Provision for loan losses | $5,575 | $750 | $5,925 | $1,075 | | Adjusted net income | $4,684 | $5,049 | $9,255 | $9,315 | - Adjusted net income is used to provide meaningful information about operating performance by excluding the effects of items that do not reflect ongoing operations[247](index=247&type=chunk) [Item 3 – Quantitative and Qualitative Disclosures about Market Risk](index=61&type=section&id=Item%203%20%E2%80%93%20Quantitative%20and%20Qualitative%20Disclosures%20about%20Market%20Risk) This section is not required for smaller reporting companies - This disclosure is not required for smaller reporting companies[249](index=249&type=chunk) [Item 4 – Controls and Procedures](index=61&type=section&id=Item%204%20%E2%80%93%20Controls%20and%20Procedures) Management, including the Chief Executive Officer and Chief Financial Officer, concluded that the company's disclosure controls and procedures were effective as of June 30, 2020, and there were no material changes to internal control over financial reporting despite the transition to a remote work environment - Disclosure controls and procedures were evaluated and deemed effective as of June 30, 2020[249](index=249&type=chunk) - No material changes occurred in internal control over financial reporting during the second fiscal quarter of 2020, even with the transition to a remote work environment[250](index=250&type=chunk) PART II – OTHER INFORMATION [Item 1 – Legal Proceedings](index=62&type=section&id=Item%201%20%E2%80%93%20Legal%20Proceedings) The company is not involved in any material legal proceedings beyond routine matters occurring in the ordinary course of business, and no material proceedings are pending or threatened by governmental authorities - The company was not involved in any material pending legal proceedings at June 30, 2020[252](index=252&type=chunk) - No material proceedings are pending or known to be threatened or contemplated against the company by governmental authorities[252](index=252&type=chunk) [Item 1A – Risk Factors](index=62&type=section&id=Item%201A%20%E2%80%93%20Risk%20Factors) This section details various risks, with a primary focus on the adverse impacts of the COVID-19 pandemic on credit quality, business continuity, operations, interest rates, liquidity, and litigation, particularly concerning participation in government-backed loan programs like PPP and MSLP [COVID-19 Pandemic Impact](index=62&type=section&id=COVID-19%20Pandemic%20Impact) The COVID-19 pandemic has caused significant disruption to the global economy and financial markets, adversely impacting the company's business and financial results, with the scope, duration, and full effect remaining highly uncertain - The COVID-19 pandemic has created significant disruption of the global economy and financial markets[253](index=253&type=chunk) - The pandemic and related containment efforts have adversely impacted the company's business and financial results, with future effects highly uncertain[254](index=254&type=chunk) [Credit Risk](index=62&type=section&id=Credit%20Risk) The COVID-19 pandemic increases credit risk due to potential borrower repayment shortfalls, declining collateral values, and regulatory changes that may limit remediation actions. Participation in the PPP also introduces repayment risk if borrowers fail to qualify for forgiveness or if SBA finds origination/servicing deficiencies - Business shutdowns, unemployment, and economic instability may cause customers to be unable to make scheduled loan payments, leading to delinquencies and credit losses[255](index=255&type=chunk) - The value of collateral supporting loans may be negatively affected, and regulatory changes may slow or prevent remediation actions[255](index=255&type=chunk) - PPP loans carry repayment risk if borrowers fail to qualify for forgiveness or if the SBA determines deficiencies in origination, funding, or servicing[256](index=256&type=chunk) [Business Continuity Planning Risk](index=62&type=section&id=Business%20Continuity%20Planning%20Risk) The pandemic introduces risks to business continuity, including reduced demand for financial products and potential declines in loan originations due to economic uncertainty and rapidly changing governmental actions - The COVID-19 pandemic has significantly increased economic and demand uncertainty, potentially leading to reduced demand for banking products and a decline in loan originations[257](index=257&type=chunk) [Operational Risk](index=63&type=section&id=Operational%20Risk) Remote work arrangements implemented in response to COVID-19 introduce operational risks, such as limitations on customer service, increased cybersecurity threats, and potential disruptions from reliance on third-party service providers with limited capacities - Current and future restrictions on workforce access to facilities could limit customer service and adversely affect operations[258](index=258&type=chunk) - Remote work measures introduce additional operational risks, including increased cybersecurity risk[258](index=258&type=chunk) - Reliance on third-party service providers poses risks if their availability and access are limited for prolonged periods[259](index=259&type=chunk) [Interest Rate Risk](index=63&type=section&id=Interest%20Rate%20Risk) Volatility in interest rates caused by COVID-19, including the Federal Reserve's rate cuts, negatively affects net interest income, funding costs, and the fair value of the investment portfolio, potentially leading to higher income volatility - The Federal Reserve lowered its target range for the federal funds rate to **0 to 0.25 percent** due to COVID-19 concerns[260](index=260&type=chunk) - A prolonged period of volatile market conditions could increase funding costs and negatively affect market risk mitigation strategies[260](index=260&type=chunk) - Fluctuations in interest rates will impact income, expenses, and the market value of interest-earning assets and liabilities[260](index=260&type=chunk) [Liquidity Risk](index=63&type=section&id=Liquidity%20Risk) The company's liquidity could be negatively impacted by widespread payment deferrals and other loan relief offered to COVID-19 affected customers. Additionally, the significant loan growth from PPP is expected to end in the near-term - The company's liquidity could be negatively impacted if a significant number of customers apply for or request additional payment deferrals due to COVID-19[261](index=261&type=chunk) - The significant loan growth experienced during Q2 2020, largely from PPP loans, is likely to end in the near-term[261](index=261&type=chunk) [Litigation Risk](index=63&type=section&id=Litigation%20Risk) Participation in the PPP and the Federal Reserve's Main Street Lending Program (MSLP) exposes the company to increased litigation risk from clients, non-clients, and regulatory authorities regarding loan origination, processing, servicing, and potential guaranty denials or rescissions of participation interests - Participation in the PPP exposes the company to litigation risk regarding its application processing procedures and potential SBA denials of loan guaranties due to deficiencies[262](index=262&type=chunk)[265](index=265&type=chunk)[266](index=266&type=chunk) - Participation in the MSLP also carries litigation risk from clients and non-clients, and the Federal Reserve may rescind participation interests or file claims if deficiencies are found in loan origination or servicing[268](index=268&type=chunk)[269](index=269&type=chunk) - Concerns exist regarding possible employee lawsuits for tort claims related to COVID-19, alleging unsafe workplaces[263](index=263&type=chunk) [Item 6 – Exhibits](index=65&type=section&id=Item%206%20%E2%80%93%20Exhibits) This section lists the exhibits filed with the Form 10-Q, including certifications from the Chief Executive Officer and Chief Financial Officer, and XBRL (eXtensible Business Reporting Language) documents - Exhibits include Rule 13a-14(a) Certifications of the Chief Executive Officer and Chief Financial Officer, Section 1350 Certification, and various XBRL Taxonomy documents[272](index=272&type=chunk) SIGNATURES [SIGNATURES](index=66&type=section&id=SIGNATURES) This section contains the official signatures of the registrant's Chairman & Chief Executive Officer and Senior Executive Vice President and Chief Financial Officer, certifying the report on behalf of MainStreet Bancshares, Inc - The report was duly signed on August 12, 2020, by Jeff W. Dick, Chairman & Chief Executive Officer, and Thomas J. Chmelik, Senior Executive Vice President and Chief Financial Officer[274](index=274&type=chunk)[275](index=275&type=chunk)

UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q (Mark One) ☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended March 31, 2020 OR ☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to to Commission file number: 001-38817 MainStreet Bancshares, Inc. (Exact Name of Registrant as Specified in Its Charter) (State or Other Jurisdiction of Inc ...

UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K (Mark One) ☒ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 2019 OR ☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM TO Commission File Number 001-38817 MainStreet Bancshares, Inc. (Exact name of Registrant as specified in its Charter) | Virginia | 81-2871064 | | --- | --- | | ( ...

Table of Contents UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 OR ☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to to Commission file number: 001-38817 MainStreet Bancshares, Inc. FORM 10-Q (Mark One) ☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 2019 (Exact Name of Registrant as Specified in Its Charter) (State or Oth ...

PART I – FINANCIAL INFORMATION This section presents the unaudited consolidated financial statements, notes, and management's discussion and analysis for the reporting period [Consolidated Financial Statements](index=3&type=section&id=Item%201%20%E2%80%93%20Consolidated%20Financial%20Statements) The unaudited consolidated financial statements detail the company's financial position, operations, and cash flows, highlighting significant growth in net income and asset base [Consolidated Statements of Financial Condition](index=3&type=section&id=Consolidated%20Statements%20of%20Financial%20Condition) This statement provides a snapshot of the company's assets, liabilities, and equity at specific points in time Financial Position Comparison (in thousands USD) | Metric | June 30, 2019 (unaudited) | December 31, 2018 | | :--- | :--- | :--- | | **Total Assets** | **$1,184,764** | **$1,100,613** | | Loans, net | $983,574 | $917,125 | | **Total Liabilities** | **$1,055,728** | **$979,362** | | Total deposits | $1,011,131 | $920,137 | | **Total Stockholders' Equity** | **$129,036** | **$121,251** | - Total assets grew by **7.6%** to **$1.18 billion** in the first six months of 2019, primarily driven by a **7.2% increase in net loans**, funded by a **9.9% increase in total deposits**[8](index=8&type=chunk) [Consolidated Statements of Income](index=4&type=section&id=Consolidated%20Statements%20of%20Income) This statement reports the company's revenues, expenses, and net income over specific periods Income Statement Highlights (in thousands USD, except per share data) | Metric | Q2 2019 | Q2 2018 | H1 2019 | H1 2018 | | :--- | :--- | :--- | :--- | :--- | | Net Interest Income | $9,885 | $7,508 | $19,233 | $14,283 | | Provision for Loan Losses | $750 | $1,395 | $1,075 | $2,030 | | **Net Income** | **$3,431** | **$1,503** | **$6,678** | **$3,189** | | Diluted EPS | $0.42 | $0.26 | $0.81 | $0.55 | - Net income for the second quarter of 2019 more than doubled to **$3.4 million** compared to **$1.5 million** in Q2 2018, driven by a **31.7% increase in net interest income** and a significant reduction in the provision for loan losses[10](index=10&type=chunk) [Consolidated Statements of Comprehensive Income](index=5&type=section&id=Consolidated%20Statements%20of%20Comprehensive%20Income) This statement presents net income and other comprehensive income components, reflecting total non-owner changes in equity Comprehensive Income (in thousands USD) | Metric | Q2 2019 | Q2 2018 | H1 2019 | H1 2018 | | :--- | :--- | :--- | :--- | :--- | | Net Income | $3,431 | $1,503 | $6,678 | $3,189 | | Other comprehensive income (loss) | $366 | $(132) | $581 | $(265) | | **Comprehensive Income** | **$3,797** | **$1,371** | **$7,259** | **$2,924** | [Consolidated Statements of Stockholders' Equity](index=6&type=section&id=Consolidated%20Statements%20of%20Stockholders%27%20Equity) This statement details changes in the company's equity accounts over specific periods - Total stockholders' equity increased from **$121.3 million** at year-end 2018 to **$129.0 million** as of June 30, 2019, primarily due to **$6.7 million in net income** and **$0.6 million in other comprehensive income**[12](index=12&type=chunk) [Consolidated Statements of Cash Flows](index=7&type=section&id=Consolidated%20Statements%20of%20Cash%20Flows) This statement summarizes the cash inflows and outflows from operating, investing, and financing activities Cash Flow Summary for Six Months Ended June 30 (in thousands USD) | Cash Flow Category | 2019 | 2018 | | :--- | :--- | :--- | | Net cash provided by operating activities | $6,731 | $3,912 | | Net cash used in investing activities | $(70,990) | $(135,322) | | Net cash provided by financing activities | $70,994 | $125,184 | | **Increase (Decrease) in Cash** | **$6,735** | **$(6,226)** | - For the first six months of 2019, the company experienced a net increase in cash and cash equivalents of **$6.7 million**, primarily funded by a **$91.0 million net increase in deposits**[14](index=14&type=chunk) [Notes to Consolidated Financial Statements](index=8&type=section&id=Notes%20to%20Consolidated%20Financial%20Statements) This section provides detailed explanations of accounting policies and financial data, covering investment securities, loans, derivatives, fair value, and lease accounting [Note 1: Organization and Accounting Policies](index=8&type=section&id=Note%201.%20Organization%2C%20Basis%20of%20Presentation%20and%20Impact%20of%20Recently%20Issued%20Accounting%20Pronouncements) This note outlines the company's organizational structure, basis of financial statement presentation, and impact of new accounting pronouncements - On April 22, 2019, the Company's common stock was approved for listing on the **Nasdaq Capital Market** under the symbol "MNSB"[18](index=18&type=chunk) - The Company is classified as an **"emerging growth company"** and a **"smaller reporting company,"** which allows it to comply with certain reduced public company reporting requirements[18](index=18&type=chunk) - The Company is preparing for the adoption of ASU No. 2016-13 (CECL), effective for fiscal years beginning after December 15, 2019, which requires the measurement of all expected credit losses for financial assets[64](index=64&type=chunk) [Note 2: Investment Securities](index=18&type=section&id=Note%202.%20Investment%20Securities) This note details the composition and fair value of the company's investment securities portfolio Investment Securities Portfolio (in thousands USD) | Category | June 30, 2019 (Fair Value) | Dec 31, 2018 (Fair Value) | | :--- | :--- | :--- | | Available-for-sale | $60,079 | $55,979 | | Held-to-maturity (Amortized Cost) | $24,946 | $26,178 | | **Total** | **$85,025** | **$82,157** | - The company does not consider any securities in its portfolio to be **other-than-temporarily impaired** at June 30, 2019, with unrealized losses primarily attributed to changes in interest rates, not credit deterioration[73](index=73&type=chunk)[74](index=74&type=chunk) [Note 3: Loans Receivable](index=20&type=section&id=Note%203.%20Loans%20Receivable) This note provides a breakdown of the loan portfolio, including credit quality and nonaccrual status Gross Loan Portfolio Composition (in thousands USD) | Loan Category | June 30, 2019 | Dec 31, 2018 | | :--- | :--- | :--- | | Commercial Real Estate | $425,862 | $377,761 | | Construction and Land Development | $203,873 | $183,551 | | Residential Real Estate | $158,406 | $149,627 | | Commercial & Industrial | $117,905 | $114,221 | | Consumer – Non Real Estate | $88,421 | $102,277 | | **Total Gross Loans** | **$994,467** | **$927,437** | - Troubled Debt Restructurings (TDRs) decreased significantly to **$1.5 million** as of June 30, 2019, from **$3.4 million** at December 31, 2018[87](index=87&type=chunk) - Nonaccrual loans decreased to **zero** as of June 30, 2019, down from **$1.9 million** at year-end 2018[85](index=85&type=chunk) [Note 4: Derivatives and Risk Management](index=26&type=section&id=Note%204.%20Derivatives%20and%20Risk%20Management%20Activities) This note describes the company's use of derivative instruments for risk management and related income - The notional amount of interest rate swaps used to assist commercial loan customers with their risk management increased to **$51.2 million** at June 30, 2019, from **$36.6 million** at December 31, 2018[89](index=89&type=chunk)[91](index=91&type=chunk) - The company generated loan swap fee income of **$181,000** for Q2 2019 and **$471,000** for H1 2019, with no such income recorded in the same periods of 2018[91](index=91&type=chunk) [Note 5: Fair Value Presentation](index=27&type=section&id=Note%205.%20Fair%20Value%20Presentation) This note explains the fair value measurements of financial instruments, categorized by valuation inputs - The company's entire portfolio of available-for-sale securities and derivative instruments are classified as **Level 2** in the fair value hierarchy, meaning their values are derived from observable market data for similar assets[96](index=96&type=chunk)[98](index=98&type=chunk) - Assets measured at fair value on a nonrecurring basis include Other Real Estate Owned (OREO), which totaled **$1.2 million** at June 30, 2019, and are classified as **Level 3**[100](index=100&type=chunk)[101](index=101&type=chunk) [Note 6: Earnings Per Common Share](index=30&type=section&id=Note%206.%20Earnings%20Per%20Common%20Share) This note details the calculation of basic and diluted earnings per common share Earnings Per Share Calculation | Metric | Q2 2019 | Q2 2018 | H1 2019 | H1 2018 | | :--- | :--- | :--- | :--- | :--- | | Net income (in thousands) | $3,431 | $1,503 | $6,678 | $3,189 | | Weighted average shares | 8,250,210 | 5,810,383 | 8,246,562 | 5,801,541 | | **Basic and diluted EPS** | **$0.42** | **$0.26** | **$0.81** | **$0.55** | [Note 8: Leases](index=31&type=section&id=Note%208.%20Leases) This note discusses the adoption of the new lease accounting standard and its impact on the financial statements - On January 1, 2019, the Company adopted the new lease accounting standard (ASC 842), resulting in the recognition of a **$2.7 million right-of-use asset** and a corresponding lease liability[110](index=110&type=chunk) Lease Balances as of June 30, 2019 (in thousands USD) | Item | Amount | | :--- | :--- | | Lease liabilities | $2,599 | | Right-of-use assets | $2,583 | [Management's Discussion and Analysis (MD&A)](index=33&type=section&id=Item%202%20%E2%80%93%20Management%27s%20Discussion%20and%20Analysis%20of%20Financial%20Condition%20and%20Results%20of%20Operations) Management discusses the strong first-half performance driven by loan growth, increased net interest income, new non-interest income streams, and improved credit quality, while maintaining strong liquidity and capital [Results of Operations](index=36&type=section&id=Results%20of%20Operations) This section analyzes the company's financial performance, including net income, interest margin, and expense trends - Net income for Q2 2019 increased by **$1.9 million** to **$3.4 million** year-over-year, driven by increased interest income from loan growth, a **$758,000 increase in non-interest income**, and a **$645,000 decrease in the provision for loan losses**[130](index=130&type=chunk) Net Interest Margin and Spread Comparison (Q2) | Metric | Q2 2019 | Q2 2018 | | :--- | :--- | :--- | | Net Interest Margin | 3.51% | 3.54% | | Interest Rate Spread | 2.89% | 3.12% | - Non-interest income for Q2 2019 grew **130.0% year-over-year**, boosted by new revenue from **$181,000 in loan swap fees** and **$263,000 in gains from the sale of guaranteed portions of SBA loans**[148](index=148&type=chunk) - Non-interest expense for Q2 2019 increased **26.9% year-over-year**, mainly due to a **$1.0 million rise in salaries and benefits** from hiring seventeen new employees and related costs[149](index=149&type=chunk) [Financial Condition](index=47&type=section&id=Financial%20Condition) This section reviews the company's balance sheet, focusing on asset growth, deposit funding, and credit quality - Total assets increased by **$84.2 million (7.6%)** to **$1.2 billion** at June 30, 2019, from year-end 2018, driven by a **$66.4 million (7.2%) increase in net loans**[174](index=174&type=chunk)[176](index=176&type=chunk) - Total deposits grew by **$91.0 million (9.9%)** to over **$1.0 billion**, with certificates of deposit increasing by **$108.7 million**, partly from brokered deposits used to fund loan growth[180](index=180&type=chunk) Nonperforming Assets (in thousands USD) | Metric | June 30, 2019 | Dec 31, 2018 | | :--- | :--- | :--- | | Total non-performing loans | $34 | $1,950 | | Other real estate owned | $1,207 | $0 | | **Total non-performing assets** | **$1,241** | **$1,950** | | NPA to Total Assets Ratio | 0.10% | 0.18% | [Liquidity and Capital Resources](index=49&type=section&id=Liquidity%20and%20Capital%20Resources) This section assesses the company's ability to meet financial obligations and maintain adequate capital levels - The company maintains multiple sources of liquidity, including **$20.0 million in FHLB advances outstanding** with an additional unused borrowing capacity of **$286.4 million** as of June 30, 2019[182](index=182&type=chunk) - As of June 30, 2019, both the Company and the Bank exceeded all regulatory capital requirements and were considered **"well capitalized"** under regulatory guidelines[188](index=188&type=chunk)[191](index=191&type=chunk) - The company had outstanding loan commitments of **$281.7 million** and standby letters of credit of **$672,000** as of June 30, 2019[192](index=192&type=chunk) [Quantitative and Qualitative Disclosures about Market Risk](index=42&type=section&id=Item%203%20%E2%80%93%20Quantitative%20and%20Qualitative%20Disclosures%20about%20Market%20Risk) This disclosure is not required for smaller reporting companies, hence no information is provided - Disclosure is not required for smaller reporting companies[193](index=193&type=chunk) [Controls and Procedures](index=42&type=section&id=Item%204%20%E2%80%93%20Controls%20and%20Procedures) Management concluded that disclosure controls and procedures were effective as of June 30, 2019, with no material changes to internal control over financial reporting - Management concluded that as of June 30, 2019, the company's disclosure controls and procedures were effective[193](index=193&type=chunk) - No material changes were made to the internal control over financial reporting during the second quarter of 2019[194](index=194&type=chunk) PART II – OTHER INFORMATION This section covers legal proceedings, risk factors, and exhibits related to the company's operations [Legal Proceedings](index=43&type=section&id=Item%201%20%E2%80%93%20Legal%20Proceedings) As of June 30, 2019, the Company was not involved in any material legal proceedings beyond routine business matters - The Company is not involved in any pending legal proceedings other than routine matters occurring in the ordinary course of business, which are not expected to be material[196](index=196&type=chunk) [Risk Factors](index=43&type=section&id=Item%201A%20%E2%80%93%20Risk%20Factors) This section is not required for smaller reporting companies, with reference made to the previously filed Form 10 for risk factors - Disclosure is not required for smaller reporting companies; reference is made to the Form 10 filed on February 15, 2019[197](index=197&type=chunk) [Exhibits](index=44&type=section&id=Item%206%20%E2%80%93%20Exhibits) This section lists the exhibits filed with the report, including CEO and CFO certifications and XBRL data - The report includes CEO and CFO certifications under Rule 13a-14(a) and Section 1350, as well as XBRL instance and taxonomy documents[201](index=201&type=chunk)

Table of Contents UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q (Mark One) ☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended March 31, 2019 OR ☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to to Commission file number: 001-38817 MainStreet Bancshares, Inc. (Exact Name of Registrant as Specified in Its Charter) Virginia 81-28710 ...