MainStreet Bancshares(MNSB) - 2021 Q3 - Quarterly Report

PART I – FINANCIAL INFORMATION Consolidated Financial Statements MainStreet Bancshares, Inc.'s unaudited consolidated financial statements for periods ending September 30, 2021, provide a snapshot of the company's financial health and performance Notes to Consolidated Financial Statements Detailed notes supporting the consolidated financial statements cover accounting policies, financial statement line items, and key developments like the establishment of a community development entity and a Banking as a Service (BaaS) division - On October 12, 2021, the Company became a financial holding company to engage in nonbanking activities, also establishing MainStreet Community Capital, LLC in August 2021 as a community development entity and introducing AvenuTM, a Banking as a Service (BaaS) division, on October 25, 2021[19][22][23] - The company is preparing for the adoption of ASU 2016-13 (CECL), which becomes effective after December 15, 2022, with a committee working with a third party to develop and test models[33] - As of September 30, 2021, Commercial & Industrial loans included $88.5 million in Paycheck Protection Program (PPP) loans[51] - The company had no Troubled Debt Restructurings (TDRs) as of September 30, 2021, or December 31, 2020[66] Loan Portfolio Composition (September 30, 2021) | Loan Category | Amount (in thousands) | | :--- | :--- | | Commercial Real Estate | $494,766 | | Construction and Land Development | $327,004 | | Residential Real Estate | $223,029 | | Commercial & Industrial | $191,281 | | Consumer | $27,740 | | Total Gross Loans | $1,263,820 | Consolidated Statement of Financial Condition Highlights | Metric | At September 30, 2021 (unaudited) | At December 31, 2020 | | :--- | :--- | :--- | | Total Assets | $1,657,199 thousand | $1,643,165 thousand | | Total Loans, net | $1,246,331 thousand | $1,230,379 thousand | | Total Deposits | $1,414,366 thousand | $1,438,246 thousand | | Total Liabilities | $1,473,170 thousand | $1,475,500 thousand | | Total Stockholders' Equity | $184,029 thousand | $167,665 thousand | Consolidated Statement of Income Highlights | Metric | Three Months Ended Sep 30, 2021 | Three Months Ended Sep 30, 2020 | Nine Months Ended Sep 30, 2021 | Nine Months Ended Sep 30, 2020 | | :--- | :--- | :--- | :--- | :--- | | Net Interest Income | $13,203 thousand | $11,886 thousand | $39,669 thousand | $32,912 thousand | | Net Income | $4,783 thousand | $5,172 thousand | $17,358 thousand | $8,008 thousand | | Diluted EPS | $0.56 | $0.63 | $2.09 | $0.97 | Consolidated Statement of Cash Flows Highlights (Nine Months Ended Sep 30) | Cash Flow Activity | 2021 (in thousands) | 2020 (in thousands) | | :--- | :--- | :--- | | Net cash provided by operating activities | $56,370 | $11,788 | | Net cash used in investing activities | ($30,321) | ($281,037) | | Net cash provided by financing activities | $140 | $331,959 | | Increase in Cash and Cash Equivalents | $26,189 | $62,710 | Management's Discussion and Analysis of Financial Condition and Results of Operations Management's discussion analyzes the company's financial condition and results of operations, including performance drivers, balance sheet, liquidity, capital resources, and the impact of COVID-19 and new business initiatives - The company is focusing on organic growth by serving small to medium-sized businesses in the Northern Virginia and Washington, D.C. metropolitan area, leveraging technology and personalized service[105][106][107] - Strategic initiatives include becoming a financial holding company (Oct 2021), creating a community development entity (Aug 2021), and launching AvenuTM, a Banking as a Service (BaaS) division, to tap into Fintech markets for low-cost deposits and fee income[104][112][113] - The company continues to manage risks from the COVID-19 pandemic, including credit, operational, and interest rate risks, and originated an additional 572 PPP loans totaling $87.3 million since the program's expansion in December 2020[116][117][118] Comparison of Results of Operations (Q3 2021 vs. Q3 2020) Third quarter 2021 net income decreased to $4.8 million from $5.2 million in Q3 2020, primarily due to lower loan swap fee income despite increased net interest income and an improved net interest margin - The decrease in net income was primarily due to a $1.9 million decline in fees from individual interest rate swaps compared to the same period in 2020[133] - Net interest margin increased to 3.28% from 3.20% in Q3 2020, while the interest rate spread widened by 22 basis points to 2.89%[142][145] Q3 2021 vs. Q3 2020 Performance | Metric | Q3 2021 (in millions) | Q3 2020 (in millions) | Change (in millions) | | :--- | :--- | :--- | :--- | | Net Income | $4.8 | $5.2 | ($0.4) | | Net Interest Income | $13.2 | $11.9 | +$1.3 | | Provision for Loan Losses | $0.29 | $0.64 | ($0.35) | | Non-Interest Income | $1.5 | $2.9 | ($1.4) | Comparison of Results of Operations (Nine Months 2021 vs. 2020) Net income for the nine months ended September 30, 2021, more than doubled to $17.4 million, driven by $6.8 million growth in net interest income and a favorable $8.0 million swing in the provision for loan losses - The provision for loan losses shifted from a $6.6 million expense in 2020 to a $1.5 million recovery in 2021, a $8.0 million decrease, attributed to the strong credit profile and reversal of special provisions[174] - Net interest income increased by 20.5%, driven by growth in average interest-earning assets and a 29 basis point increase in the interest rate spread to 2.90%[166][167] Nine Months 2021 vs. 2020 Performance | Metric | Nine Months 2021 (in millions) | Nine Months 2020 (in millions) | Change (in millions) | | :--- | :--- | :--- | :--- | | Net Income | $17.4 | $8.0 | +$9.4 | | Net Interest Income | $39.7 | $32.9 | +$6.8 | | Provision for Loan Losses | ($1.5) Recovery | $6.6 Provision | ($8.0) | | Non-Interest Income | $4.5 | $5.6 | ($1.1) | Comparison of Financial Condition (Sep 30, 2021 vs. Dec 31, 2020) Total assets grew to $1.7 billion as of September 30, 2021, with net loans increasing by $16.0 million, while a strategic shift led to $51.9 million growth in core deposits despite an overall deposit decrease - A strategic shift in deposit mix occurred: core deposits increased by $51.9 million, driven by a $104.7 million (28.2%) increase in non-interest bearing deposits, while higher-cost money market and time deposits decreased[182] - The allowance for loan losses decreased to $11.4 million from $12.9 million, representing 0.90% of gross loans (or 0.97% excluding PPP loans)[181] Balance Sheet Changes (Sep 30, 2021 vs. Dec 31, 2020) | Account | Sep 30, 2021 (in millions) | Dec 31, 2020 (in millions) | Change (in millions) | | :--- | :--- | :--- | :--- | | Total Assets | $1,700.0 | $1,600.0 | +$14.0 | | Net Loans | $1,250.0 | $1,230.0 | +$16.0 | | Total Deposits | $1,410.0 | $1,440.0 | ($23.9) | | Nonperforming Assets | $1.2 | $1.3 | ($0.1) | Liquidity and Capital Resources The company maintains a strong liquidity position with $133.7 million in cash and $426.9 million in unused FHLB borrowing capacity, while all regulatory capital ratios significantly exceed 'well capitalized' thresholds - As of September 30, 2021, the company had multiple sources of liquidity, including $133.7 million in cash and cash equivalents, $171.6 million in available-for-sale securities, and $426.9 million in unused FHLB borrowing capacity[185][188] - Off-balance sheet commitments included $278.0 million in outstanding loan commitments and $230,000 in standby letters of credit as of September 30, 2021[195] Regulatory Capital Ratios (Bank Level, Sep 30, 2021) | Ratio | Actual | Well Capitalized Requirement | | :--- | :--- | :--- | | Total Capital Ratio | 16.55% | > 10.0% | | Tier 1 Capital Ratio | 15.68% | > 8.0% | | Common Equity Tier 1 Ratio | 15.68% | > 8.0% | | Tier 1 Leverage Ratio | 12.23% | > 5.0% | Quantitative and Qualitative Disclosures about Market Risk This disclosure is not required for smaller reporting companies - As a smaller reporting company, MainStreet Bancshares, Inc. is not required to provide this disclosure[201] Controls and Procedures Management concluded that disclosure controls and procedures were effective as of September 30, 2021, with no material changes to internal control over financial reporting during the third quarter - The Chief Executive Officer and Chief Financial Officer concluded that the company's disclosure controls and procedures were effective as of September 30, 2021[201] - No changes occurred during the third fiscal quarter of 2021 that materially affected, or are reasonably likely to materially affect, the company's internal control over financial reporting[202] PART II – OTHER INFORMATION Legal Proceedings As of September 30, 2021, the company was not involved in any material pending legal proceedings beyond routine business matters - The company reports no involvement in pending legal proceedings other than routine matters considered immaterial to its financial condition and operations[203] Risk Factors This section is not required for smaller reporting companies and refers to risk factors disclosed in the 2020 Form 10-K - This disclosure is not required for smaller reporting companies, with reference made to the 'Risk Factors' section in the company's 2020 Form 10-K[204] Unregistered Sales of Equity Securities and Use of Proceeds The company did not repurchase any common shares during the three months ended September 30, 2021 - The Company did not repurchase any common shares during the third quarter of 2021[205] Other Information The company elected to become a financial holding company, providing increased flexibility for engaging in permissible nonbanking activities - The Company has elected to become a financial holding company to provide increased flexibility for engaging in permissible nonbanking activities[206] Exhibits This section lists exhibits filed with the Form 10-Q, including CEO/CFO certifications and XBRL data files - The report includes standard filings such as CEO/CFO certifications and XBRL instance documents as exhibits[209]