MainStreet Bancshares(MNSB) - 2022 Q3 - Quarterly Report

PART I – FINANCIAL INFORMATION Item 1 – Consolidated Financial Statements This section presents the unaudited consolidated financial statements of MainStreet Bancshares, Inc. and its subsidiary for the periods ended September 30, 2022, and December 31, 2021 (for balance sheet) or September 30, 2021 (for income, comprehensive income, equity, and cash flow statements) Consolidated Statements of Financial Condition The Consolidated Statements of Financial Condition show an increase in total assets, primarily driven by growth in loans and investment securities, alongside corresponding increases in total liabilities, particularly deposits and subordinated debt | Metric | Sep 30, 2022 (Thousands) | Dec 31, 2021 (Thousands) | Change (Thousands) | % Change | | :--------------------------------- | :----------------------- | :----------------------- | :----------------- | :------- | | Total Assets | $1,860,115 | $1,647,402 | $212,713 | 12.91% | | Total Liabilities | $1,670,115 | $1,458,614 | $211,501 | 14.50% | | Total Stockholders' Equity | $190,000 | $188,788 | $1,212 | 0.64% | | Loans, net | $1,448,071 | $1,341,760 | $106,311 | 7.92% | | Investment securities AFS | $162,319 | $99,913 | $62,406 | 62.46% | | Total Deposits | $1,553,924 | $1,411,963 | $141,961 | 10.05% | | Subordinated debt, net | $72,146 | $29,294 | $42,852 | 146.29% | | Accumulated other comprehensive loss | $(9,756) | $197 | $(9,953) | -5052.28%| Unaudited Consolidated Statements of Income The Unaudited Consolidated Statements of Income show significant growth in net interest income and net income for both the three and nine months ended September 30, 2022, compared to the prior year | Metric (Thousands) | 3 Months Ended Sep 30, 2022 | 3 Months Ended Sep 30, 2021 | 9 Months Ended Sep 30, 2022 | 9 Months Ended Sep 30, 2021 | | :--------------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | Total Interest Income | $21,913 | $15,785 | $58,073 | $47,996 | | Total Interest Expense | $3,817 | $2,582 | $8,660 | $8,327 | | Net Interest Income | $18,096 | $13,203 | $49,413 | $39,669 | | Provision for Loan Losses | $0 | $290 | $1,280 | $(1,470) | | Total Non-Interest Income | $1,348 | $1,486 | $3,773 | $4,487 | | Total Non-Interest Expense | $9,893 | $8,461 | $28,349 | $24,144 | | Net Income | $7,743 | $4,783 | $19,095 | $17,358 | | Net Income Available to Common Shareholders | $7,204 | $4,244 | $17,478 | $15,741 | | Basic EPS | $0.97 | $0.56 | $2.31 | $2.09 | | Diluted EPS | $0.97 | $0.56 | $2.31 | $2.09 | Unaudited Consolidated Statements of Comprehensive Income The Unaudited Consolidated Statements of Comprehensive Income indicate a significant other comprehensive loss for both the three and nine months ended September 30, 2022, primarily due to unrealized losses on available-for-sale securities | Metric (Thousands) | 3 Months Ended Sep 30, 2022 | 3 Months Ended Sep 30, 2021 | 9 Months Ended Sep 30, 2022 | 9 Months Ended Sep 30, 2021 | | :--------------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | Net Income | $7,743 | $4,783 | $19,095 | $17,358 | | Other comprehensive loss, net of tax | $(3,195) | $(344) | $(9,953) | $(745) | | Comprehensive Income | $4,548 | $4,439 | $9,142 | $16,613 | Unaudited Consolidated Statements of Stockholders' Equity The Unaudited Consolidated Statements of Stockholders' Equity show a slight increase in total equity from December 31, 2021, to September 30, 2022, primarily due to net income, partially offset by common stock repurchases, dividends, and a significant accumulated other comprehensive loss | Metric (Thousands) | Balance Dec 31, 2021 | Balance Sep 30, 2022 | | :--------------------------------- | :------------------- | :------------------- | | Preferred Stock | $27,263 | $27,263 | | Common Stock | $29,466 | $28,728 | | Capital Surplus | $67,668 | $63,231 | | Retained Earnings | $64,194 | $80,534 | | Accumulated Other Comprehensive Income (Loss) | $197 | $(9,756) | | Total Stockholders' Equity | $188,788 | $190,000 | - Common stock repurchased for the nine months ended September 30, 2022, totaled $6.918 million[13] - Net income for the nine months ended September 30, 2022, was $19.095 million[13] Unaudited Consolidated Statements of Cash Flows The Unaudited Consolidated Statements of Cash Flows indicate that for the nine months ended September 30, 2022, operating activities provided cash, while investing activities used a significant amount of cash, primarily for loan growth and securities purchases | Cash Flow Activity (Thousands) | 9 Months Ended Sep 30, 2022 | 9 Months Ended Sep 30, 2021 | | :--------------------------------- | :-------------------------- | :-------------------------- | | Net cash provided by operating activities | $22,870 | $25,066 | | Net cash provided by (used in) investing activities | $(186,246) | $983 | | Net cash provided by financing activities | $174,911 | $140 | | Increase in Cash and Cash Equivalents | $11,535 | $26,189 | | Cash and Cash Equivalents, end of period | $104,734 | $133,717 | Notes to Consolidated Financial Statements This section provides detailed disclosures and explanations for the financial statements, covering the company's organization, significant accounting policies, investment securities, loan portfolio, intangible assets, derivatives, fair value measurements, earnings per share, accumulated other comprehensive income, and lease obligations Note 1. Organization, Basis of Presentation and Impact of Recently Issued Accounting Pronouncements MainStreet Bancshares, Inc. is a bank holding company operating MainStreet Bank, a community commercial bank in the Washington, D.C. metropolitan area, expanding with Avenu™ (BaaS) and MainStreet Community Capital, LLC (CDE) - MainStreet Bancshares, Inc. is a bank holding company for MainStreet Bank, incorporated in Virginia, and operates as a financial holding company since October 2021[17] - The company is an 'emerging growth company' and 'smaller reporting company' under SEC regulations[18] - MainStreet Community Capital, LLC, a wholly-owned subsidiary, was certified as a Community Development Entity (CDE) in January 2022 to provide loans and investments in Low-Income Communities[21] - Avenu™, a division of MainStreet Bank, was formally introduced in October 2021 to provide embedded banking (BaaS) solutions for fintechs, with a soft launch scheduled around the end of 2022[22] - Preliminary analysis indicates that the adoption of ASU 2016-13 (CECL) for credit losses will not have a significant impact on the current allowance for loan losses[28] Note 2. Investment Securities The company's investment securities portfolio significantly increased, with available-for-sale (AFS) securities experiencing substantial unrealized losses primarily due to rising interest rates, not credit deterioration | Investment Securities (Thousands) | Sep 30, 2022 | Dec 31, 2021 | | :-------------------------------- | :----------- | :----------- | | Available-for-sale, at fair value | $162,319 | $99,913 | | Held-to-maturity, at amortized cost | $17,670 | $20,349 | | Total Investment Securities | $179,989 | $120,262 | | Unrealized Losses (AFS) (Thousands) | Sep 30, 2022 | Dec 31, 2021 | | :---------------------------------- | :----------- | :----------- | | Collateralized Mortgage Backed | $(4,798) | $(790) |\ | Subordinated Debt | $(1,024) | $(47) |\ | Municipal Securities (Taxable) | $(2,718) | $(160) |\ | Municipal Securities (Tax-exempt) | $(3,784) | $(17) |\ | U.S. Governmental Agencies | $(35) | $(98) |\ | Total Unrealized Losses (AFS) | $(12,359) | $(1,112) | - Unrealized losses are primarily due to current financial market conditions and changes in interest rates, not credit deterioration, and no securities are considered other-than-temporarily impaired[38][39] Note 3. Loans Receivable The loan portfolio experienced significant growth, particularly in residential and commercial real estate, while commercial & industrial loans decreased due to PPP loan payoffs and a strategic reduction in indirect lending | Loan Category (Thousands) | Sep 30, 2022 | Dec 31, 2021 | Change (Thousands) | % Change | | :-------------------------------- | :----------- | :----------- | :----------------- | :------- | | Residential Real Estate | $373,055 | $300,390 | $72,665 | 24.19% | | Commercial Real Estate | $638,110 | $534,187 | $103,923 | 19.45% | | Construction and Land Development | $366,689 | $337,173 | $29,516 | 8.75% | | Commercial & Industrial | $74,482 | $164,014 | $(89,532) | -54.59% | | Consumer | $13,628 | $23,171 | $(9,543) | -41.18% | | Total Gross Loans | $1,465,964 | $1,358,935 | $107,029 | 7.88% | | Allowance for Loan Losses | $12,994 | $11,697 | $1,297 | 11.09% | - Commercial and industrial loans include $1.8 million in Paycheck Protection Program (PPP) loans at September 30, 2022, down from $58.3 million at December 31, 2021[42] - The company had no nonaccrual loans as of September 30, 2022, and December 31, 2021[49] - No Troubled Debt Restructurings (TDRs) were reported as of September 30, 2022, and December 31, 2021[57] Note 4. Intangible Assets The carrying amount of computer software developed significantly increased, reflecting ongoing capitalization of development costs, with amortization anticipated to begin once the software is placed in service | Intangible Asset (Thousands) | Sep 30, 2022 | Dec 31, 2021 | | :--------------------------- | :----------- | :----------- | | Computer software, net | $7,258 | $2,493 | - The company is still in the development stage of computer software, with capitalization ceasing when the software is substantially complete and ready for its intended use[59] - Amortization for intangible computer software is anticipated to be ten years once placed in service, with no amortization recorded as of September 30, 2022[59] Note 5. Derivatives and Risk Management Activities The company uses matched interest rate loan swaps to manage commercial loan customer risk, resulting in net zero fair value changes and generating loan swap fee income | Derivative Instruments (Thousands) | Sep 30, 2022 Notional Amount | Dec 31, 2021 Notional Amount | | :--------------------------------- | :--------------------------- | :--------------------------- | | Matched interest rate swap with borrower | $252,284 | $210,793 | | Matched interest rate swap with counterparty | $252,284 | $210,793 | | Loan Swap Fee Income (Thousands) | 3 Months Ended Sep 30, 2022 | 9 Months Ended Sep 30, 2022 | | :------------------------------- | :-------------------------- | :-------------------------- | | Loan swap fee income | $518 | $619 | Note 6. Fair Value Presentation The company measures certain financial assets and liabilities at fair value on a recurring basis, primarily classifying investment securities available-for-sale and derivative instruments as Level 2 - Fair value measurements are categorized into a three-level hierarchy: Level 1 (quoted prices in active markets), Level 2 (observable inputs other than Level 1 quoted prices), and Level 3 (unobservable inputs)[66][67] | Recurring Fair Value Assets (Thousands) | Sep 30, 2022 (Level 2) | Dec 31, 2021 (Level 2) | | :-------------------------------------- | :--------------------- | :--------------------- | | Investment securities available-for-sale | $162,319 | $99,913 | | Derivative asset – interest rate swap on loans | $27,972 | $2,097 | | Recurring Fair Value Liabilities (Thousands) | Sep 30, 2022 (Level 2) | Dec 31, 2021 (Level 2) | | :----------------------------------------- | :--------------------- | :--------------------- | | Derivative liability – interest rate swap on loans | $27,972 | $2,097 | - As of September 30, 2022, the company did not have any assets measured at fair value on a nonrecurring basis[74] Note 7. Earnings Per Common Share Basic and diluted earnings per common share are calculated by dividing net income available to common shareholders by the weighted average number of common shares outstanding | EPS Metric | 3 Months Ended Sep 30, 2022 | 3 Months Ended Sep 30, 2021 | 9 Months Ended Sep 30, 2022 | 9 Months Ended Sep 30, 2021 | | :--------------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | Net income available to common shareholders (Thousands) | $7,204 | $4,244 | $17,478 | $15,741 | | Weighted average common shares outstanding | 7,463,719 | 7,571,214 | 7,561,567 | 7,547,254 | | Basic and Diluted EPS | $0.97 | $0.56 | $2.31 | $2.09 | Note 8. Accumulated Other Comprehensive Income (Loss) Accumulated other comprehensive income (loss) shifted from a gain at December 31, 2021, to a significant loss at September 30, 2022, primarily due to unrealized losses on securities, net of tax benefit | Component (Thousands) | Sep 30, 2022 | Dec 31, 2021 | | :-------------------------------- | :----------- | :----------- | | Unrealized (loss) gain on securities | $(12,606) | $265 | | Unrealized loss on securities transferred to HTM | $(13) | $(29) | | Tax benefit (expense) | $2,863 | $(39) | | Total accumulated other comprehensive (loss) income | $(9,756) | $197 | Note 9. Leases The company's lease obligations are classified as operating leases, with lease liabilities and corresponding right-of-use assets recorded on the balance sheet | Lease Information (Thousands) | Sep 30, 2022 | | :---------------------------- | :----------- | | Lease liabilities | $7,447 | | Right-of-use assets | $6,806 | | Weighted-average remaining lease term (months) | 165.4 | | Weighted-average discount rate | 2.80% | | Operating lease cost (9 months ended Sep 30, 2022) | $363 | - The company is also a lessor for three operating leases, generating approximately $6,000 in rent income per month[88] Item 2 – Management's Discussion and Analysis of Financial Condition and Results of Operations This section provides management's perspective on the company's financial performance and condition, highlighting key drivers of revenue and expense changes, balance sheet shifts, liquidity, and capital management Forward-Looking Statements This section contains forward-looking statements based on management's beliefs and assumptions, which are subject to various risks and uncertainties, and the company disclaims any obligation to update them - Forward-looking statements are based on management's beliefs and assumptions and are subject to risks such as general economic conditions, competition, inflation, interest rate environment, regulatory changes, and cybersecurity threats[92][100] - The company disclaims any obligation to revise or update forward-looking statements[94] Overview MainStreet Bancshares, Inc. operates MainStreet Bank, a community commercial bank focused on personalized services, and has expanded with Avenu™ (BaaS) and MainStreet Community Capital, LLC (CDE), while facing impacts from rising inflation and Federal Reserve rate hikes - MainStreet Bank emphasizes responsive, personalized services and advanced banking technologies to compete with larger institutions in the Washington, D.C. metropolitan area[99][102] - Avenu™ is the company's Banking as a Service (BaaS) solution, designed for Fintech customers, providing embedded banking and a proprietary subledger with high-touch compliance training[106] - MainStreet Community Capital, LLC is a certified Community Development Entity (CDE) focused on providing loans and investments in Low-Income Communities through the New Market Tax Credit program[107] - Rising inflation and Federal Reserve interest rate hikes are expected to impact the Bank's customers' ability to repay obligations and their appetite for banking products, affecting the Bank's business and financial results[108][109] Comparison of Statements of Income (Three Months Ended September 30, 2022 vs. 2021) For the three months ended September 30, 2022, total revenue and net income increased significantly, driven by a substantial rise in net interest income from loans and federal funds sold, despite higher non-interest expenses | Metric (Thousands) | 3 Months Ended Sep 30, 2022 | 3 Months Ended Sep 30, 2021 | Change (Thousands) | % Change | | :--------------------------------- | :-------------------------- | :-------------------------- | :----------------- | :------- | | Total Revenue | $23,300 | $17,300 | $6,000 | 34.68% | | Net Income | $7,700 | $4,800 | $2,900 | 60.42% | | Net Interest Income | $18,096 | $13,203 | $4,893 | 37.06% | | Interest and fees on loans | $20,261 | $15,162 | $5,099 | 33.63% | | Interest on federal funds sold | $1,013 | $38 | $975 | 2565.79% | | Total Non-Interest Income | $1,348 | $1,486 | $(138) | -9.29% | | Total Non-Interest Expense | $9,893 | $8,461 | $1,432 | 16.92% | | Salaries and employee benefits | $5,874 | $4,847 | $1,027 | 21.19% | | Outside services | $611 | $292 | $319 | 109.25% | | Income Tax Expense | $1,808 | $1,155 | $653 | 56.54% | | Net Interest Margin (FTE) | 3 Months Ended Sep 30, 2022 | 3 Months Ended Sep 30, 2021 | | :------------------------ | :-------------------------- | :-------------------------- | | Interest Rate Spread | 3.57% | 2.91% | | Net Interest Margin | 4.14% | 3.30% | - The provision for loan losses decreased to $0 for the three months ended September 30, 2022, from $290 thousand in the prior year, reflecting management's assessment of the loan portfolio's quality[10][131] - A $211 thousand loss on the sale of a loan was incurred due to a customer's bankruptcy, which had previously identified weaknesses[132] Comparison of Statements of Income (Nine Months Ended September 30, 2022 vs. 2021) For the nine months ended September 30, 2022, net income increased due to a substantial rise in net interest income, driven by higher interest income from loans and federal funds sold, despite increased non-interest expenses | Metric (Thousands) | 9 Months Ended Sep 30, 2022 | 9 Months Ended Sep 30, 2021 | Change (Thousands) | % Change | | :--------------------------------- | :-------------------------- | :-------------------------- | :----------------- | :------- | | Net Income | $19,100 | $17,400 | $1,700 | 9.77% | | Net Interest Income | $49,413 | $39,669 | $9,744 | 24.56% | | Interest and fees on loans | $54,900 | $46,211 | $8,689 | 18.80% | | Interest on federal funds sold | $1,241 | $73 | $1,168 | 1600.00% | | Total Non-Interest Income | $3,773 | $4,487 | $(714) | -15.91% | | Total Non-Interest Expense | $28,349 | $24,144 | $4,205 | 17.42% | | Salaries and employee benefits | $17,025 | $14,276 | $2,749 | 19.26% | | Advertising and marketing | $1,684 | $1,115 | $569 | 51.03% | | Income Tax Expense | $4,462 | $4,124 | $338 | 8.19% | | Net Interest Margin (FTE) | 9 Months Ended Sep 30, 2022 | 9 Months Ended Sep 30, 2021 | | :------------------------ | :-------------------------- | :-------------------------- | | Interest Rate Spread | 3.56% | 2.92% | | Net Interest Margin | 4.01% | 3.31% | - Provision for loan losses increased by $2.8 million to $1.3 million for the nine months ended September 30, 2022, compared to a recovery of $1.5 million in the prior year, reflecting normal provisioning for loan growth[10][156] Comparison of Statements of Financial Condition (September 30, 2022 vs. December 31, 2021) Total assets increased by $212.7 million, driven by significant growth in the loan portfolio and investment securities, alongside increased deposits, while nonperforming assets remained at zero | Balance Sheet Item (Thousands) | Sep 30, 2022 | Dec 31, 2021 | Change (Thousands) | % Change | | :----------------------------- | :----------- | :----------- | :----------------- | :------- | | Total Assets | $1,860,115 | $1,647,402 | $212,713 | 12.91% | | Investment Securities | $180,000 | $120,300 | $59,700 | 49.63% | | Net Loans | $1,448,071 | $1,341,760 | $106,311 | 7.92% | | Allowance for Loan Losses | $12,994 | $11,697 | $1,297 | 11.09% | | Total Deposits | $1,553,924 | $1,411,963 | $141,961 | 10.05% | | Non-interest bearing deposits | $566,016 | $530,678 | $35,338 | 6.66% | | Time deposits | $585,783 | $459,148 | $126,635 | 27.58% | | Nonperforming Assets | $0 | $775 | $(775) | -100.00% | - Commercial and industrial loans decreased by $89.5 million, primarily due to Paycheck Protection Program (PPP) loan payoffs and a strategic decision to amortize the indirect lending portfolio[164][165] Liquidity and Capital Resources The company maintains strong liquidity through deposits, loan and investment maturities, and available borrowing capacity, while remaining 'well capitalized' under regulatory guidelines despite an accumulated other comprehensive loss - MainStreet Bank had unused borrowing capacity of $448.4 million from the Federal Home Loan Bank (FHLB) and an additional $104.0 million from other financial institutions as of September 30, 2022[169] - Cash and cash equivalents totaled $104.7 million, and available-for-sale securities, providing additional liquidity, totaled $162.3 million at September 30, 2022[172] - An accumulated other comprehensive loss of approximately $9.8 million was recorded due to rising interest rates negatively affecting available-for-sale securities, offsetting equity growth from net earnings[175] | Capital Ratio | Sep 30, 2022 Actual | Sep 30, 2022 Minimum for Capital Adequacy | Sep 30, 2022 Minimum for Well Capitalized | | :-------------------------------- | :------------------ | :---------------------------------------- | :---------------------------------------- | | Total capital (to risk-weighted assets) | 16.39% | ≥ 8.0% | > 10.0% | | Common equity tier 1 capital (to risk-weighted assets) | 15.59% | ≥ 4.5% | > 8.0% | | Tier 1 capital (to risk-weighted assets) | 15.59% | ≥ 6.0% | > 8.0% | | Tier 1 capital (to average assets) | 14.01% | ≥ 4.0% | > 5.0% | Off-Balance Sheet Arrangements and Contractual Obligations The company is party to various financial instruments with off-balance-sheet risks, primarily commitments to extend credit, totaling $393.4 million as of September 30, 2022 - Outstanding loan commitments totaled $393.4 million at September 30, 2022[181] - No outstanding stand-by letters of credit were reported at September 30, 2022[181] Use of Certain Non-GAAP Financial Measures Management uses certain non-GAAP financial measures, such as adjusted net interest income and net interest margin (fully-taxable equivalent, FTE), to supplement the evaluation of the company's performance and enhance comparability | Metric (Thousands) | 3 Months Ended Sep 30, 2022 | 3 Months Ended Sep 30, 2021 | 9 Months Ended Sep 30, 2022 | 9 Months Ended Sep 30, 2021 | | :--------------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | Net interest income (GAAP) | $18,096 | $13,203 | $49,413 | $39,669 | | FTE adjustment on tax-exempt securities | $69 | $71 | $212 | $213 | | Net interest income (FTE) (non-GAAP) | $18,165 | $13,274 | $49,625 | $39,882 | | Net interest margin (GAAP) | 4.12% | 3.28% | 3.99% | 3.29% | | Net interest margin (FTE) (non-GAAP) | 4.14% | 3.30% | 4.01% | 3.31% | Item 3 – Quantitative and Qualitative Disclosures about Market Risk This item is not required for smaller reporting companies - Quantitative and Qualitative Disclosures about Market Risk are not required for smaller reporting companies[185] Item 4 – Controls and Procedures Management, including the CEO and CFO, evaluated the effectiveness of disclosure controls and procedures as of September 30, 2022, concluding they are designed and operating effectively - Disclosure controls and procedures were evaluated as effective by management, CEO, and CFO as of September 30, 2022[185] - No material changes in internal control over financial reporting occurred during the third fiscal quarter of 2022, including due to the transition to a remote/work-from-home environment[186] PART II – OTHER INFORMATION Item 1 – Legal Proceedings The company was not involved in any material legal proceedings as of September 30, 2022, beyond routine matters in the ordinary course of business - The company was not involved in any material legal proceedings at September 30, 2022[188] Item 1A – Risk Factors This item is not required for smaller reporting companies, with risk factors discussed in the company's Annual Report on Form 10-K - Risk Factors are not required for smaller reporting companies in Form 10-Q[189] Item 2 – Unregistered Sales of Equity Securities and Use of Proceeds The Board of Directors authorized a new plan to repurchase up to $7.5 million of common stock, with 115,000 shares repurchased during the three months ended September 30, 2022 - A new stock repurchase program authorized up to $7.5 million of common stock repurchases[190] | Period | Total Number of Shares Purchased | Average Price Paid per Share | | :-------------------------- | :----------------------------- | :--------------------------- | | July 1, 2022 - July 31, 2022 | 115,000 | $23.04 | | August 1, 2022 - August 31, 2022 | — | $— | | September 1, 2022 - September 30, 2022 | — | $— | | Total | 115,000 | $23.04 | Item 6 – Exhibits This section lists the exhibits filed as part of the Quarterly Report on Form 10-Q, including certifications, XBRL documents, and financial statements - Key exhibits include Rule 13a-14(a) Certifications of the CEO and CFO, Section 1350 Certification, and Inline XBRL documents for financial statements[192] SIGNATURES The report is duly signed on behalf of MainStreet Bancshares, Inc. by its Chairman & Chief Executive Officer and Senior Executive Vice President and Chief Financial Officer - The report was signed by Jeff W. Dick, Chairman & Chief Executive Officer, and Thomas J. Chmelik, Senior Executive Vice President and Chief Financial Officer, on November 10, 2022[195]