Form 10-Q MainStreet Bancshares, For: Jun 30
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
(Mark One)
For the quarterly period ended
OR
For the transition period from to to
Commission file number:
MainStreet Bancshares, Inc.
(Exact Name of Registrant as Specified in Its Charter)
| | | |
| (State or Other Jurisdiction of Incorporation or Organization) | (I.R.S. Employer Identification No.) |
(Address of Principal Executive Offices and Zip Code)
(
(Registrant’s Telephone Number, Including Area Code)
Not applicable
(Former name, former address and former fiscal year, if changed since last report)
Securities registered pursuant to Section 12(b) of the Act.
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||
| | | The | ||
| | The |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. ☒
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). ☒
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer”, “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| Large accelerated filer | ☐ | Accelerated filer | ☐ | |||
| | ☒ | Smaller reporting company | | |||
| Emerging growth company | | |||||
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: As of August 8, 2022, there were
PART I – FINANCIAL INFORMATION
Item 1 – Consolidated Financial Statements – Unaudited
MAINSTREET BANCSHARES, INC. AND SUBSIDIARY
Consolidated Statements of Financial Condition as of June 30, 2022 and December 31, 2021 (Dollars in thousands, except share and per share data)
| At June 30, 2022 (unaudited) | At December 31, 2021 (*) | |||||||
| Assets | ||||||||
| Cash and due from banks | $ | $ | ||||||
| Federal funds sold | ||||||||
| Cash and cash equivalents | ||||||||
| Investment securities available-for-sale, at fair value | ||||||||
| Investment securities held-to-maturity, at amortized cost | ||||||||
| Restricted securities, at cost | ||||||||
| Loans, net of allowance for loan losses of $ and $, respectively | ||||||||
| Premises and equipment, net | ||||||||
| Other real estate owned, net | ||||||||
| Accrued interest and other receivables | ||||||||
| Bank owned life insurance | ||||||||
| Computer software, net of amortization | ||||||||
| Other assets | ||||||||
| Total Assets | $ | $ | ||||||
| Liabilities and Stockholders’ Equity | ||||||||
| Liabilities | ||||||||
| Non-interest bearing deposits | $ | $ | ||||||
| Interest bearing demand deposits | ||||||||
| Savings and NOW deposits | ||||||||
| Money market deposits | ||||||||
| Time deposits | ||||||||
| Total deposits | ||||||||
| Subordinated debt, net | ||||||||
| Other liabilities | ||||||||
| Total Liabilities | ||||||||
| Stockholders’ Equity | ||||||||
| Preferred stock, $ par value, shares authorized; shares issued and outstanding as of June 30, 2022 and December 31, 2021 | ||||||||
| Common stock, $ par value, shares authorized; issued and outstanding shares (including nonvested shares) for June 30, 2022 and shares (including nonvested shares) for December 31, 2021 | ||||||||
| Capital surplus | ||||||||
| Retained earnings | ||||||||
| Accumulated other comprehensive income (loss) | ( | ) | ||||||
| Total Stockholders’ Equity | ||||||||
| Total Liabilities and Stockholders’ Equity | $ | $ | ||||||
* Derived from audited consolidated financial statements.
See Notes to the Unaudited Consolidated Financial Statements
MAINSTREET BANCSHARES, INC. AND SUBSIDIARY
Unaudited Consolidated Statements of Income for the Three and Six months ended June 30, 2022 and 2021 (Dollars in thousands, except per share data)
| For the Three Months Ended June 30, | For the Six Months Ended June 30, | |||||||||||||||
| 2022 | 2021 | 2022 | 2021 | |||||||||||||
| Interest Income | ||||||||||||||||
| Interest and fees on loans | $ | $ | $ | $ | ||||||||||||
| Interest on investments securities | ||||||||||||||||
| Taxable securities | ||||||||||||||||
| Tax-exempt securities | ||||||||||||||||
| Interest on federal funds sold | ||||||||||||||||
| Total Interest Income | ||||||||||||||||
| Interest Expense | ||||||||||||||||
| Interest on interest bearing DDA deposits | ||||||||||||||||
| Interest on savings and NOW deposits | ||||||||||||||||
| Interest on money market deposits | ||||||||||||||||
| Interest on time deposits | ||||||||||||||||
| Interest on Federal Home Loan Bank advances and other borrowings | ||||||||||||||||
| Interest on subordinated debt | ||||||||||||||||
| Total Interest Expense | ||||||||||||||||
| Net Interest Income | ||||||||||||||||
| Provision for (recovery of) Loan Losses | ( | ) | ( | ) | ||||||||||||
| Net Interest Income After Provision For Loan Losses | ||||||||||||||||
| Non-Interest Income | ||||||||||||||||
| Deposit account service charges | ||||||||||||||||
| Bank owned life insurance income | ||||||||||||||||
| Loan swap fee income | ||||||||||||||||
| Net gain on held-to-maturity securities | ||||||||||||||||
| Net gain on sale of loans | ||||||||||||||||
| Other fee income | ||||||||||||||||
| Total Non-Interest Income | ||||||||||||||||
| Non-Interest Expense | ||||||||||||||||
| Salaries and employee benefits | ||||||||||||||||
| Furniture and equipment expenses | ||||||||||||||||
| Advertising and marketing | ||||||||||||||||
| Occupancy expenses | ||||||||||||||||
| Outside services | ||||||||||||||||
| Administrative expenses | ||||||||||||||||
| Other operating expenses | ||||||||||||||||
| Total Non-Interest Expense | ||||||||||||||||
| Income Before Income Taxes | ||||||||||||||||
| Income Tax Expense | ||||||||||||||||
| Net Income | $ | $ | $ | $ | ||||||||||||
| Preferred Stock Dividends | ||||||||||||||||
| Net Income Available To Common Shareholders | $ | $ | $ | $ | ||||||||||||
| Net Income Per Common Share: | ||||||||||||||||
| Basic | $ | $ | $ | $ | ||||||||||||
| Diluted | $ | $ | $ | $ | ||||||||||||
See Notes to the Unaudited Consolidated Financial Statements
MAINSTREET BANCSHARES, INC. AND SUBSIDIARY
Unaudited Consolidated Statements of Comprehensive Income for the Six Months Ended June 30, 2022 and 2021 (Dollars in thousands)
| For the Three Months Ended June 30, | For the Six Months Ended June 30, | |||||||||||||||
| 2022 | 2021 | 2022 | 2021 | |||||||||||||
| Comprehensive Income, net of taxes | ||||||||||||||||
| Net Income | $ | $ | $ | $ | ||||||||||||
| Other comprehensive loss, net of tax: | ||||||||||||||||
| Unrealized gains (losses) on available for sale securities arising during the period (net of tax (benefit) expense, ($) and $, respectively, for the three months ended June 30, and ($) and ($), respectively for the six months ended June 30). | ( | ) | ( | ) | ( | ) | ||||||||||
| Add: reclassification adjustment for amortization of unrealized losses on securities transferred from available for sale to held to maturity (net of tax, $ and $, respectively, for the three months ended June 30, and $ and $, respectively, for the six months ended June 30). | ||||||||||||||||
| Other comprehensive loss | ( | ) | ( | ) | ( | ) | ||||||||||
| Comprehensive Income | $ | $ | $ | $ | ||||||||||||
See Notes to the Unaudited Consolidated Financial Statements
MAINSTREET BANCSHARES, INC. AND SUBSIDIARY
Unaudited Consolidated Statements of Stockholders’ Equity for the Three and Six months ended June 30, 2022 and 2021 (Dollars in thousands)
| Accumulated Other |
||||||||||||||||||||||||
| Preferred |
Common |
Capital |
Retained |
Comprehensive |
||||||||||||||||||||
| Stock |
Stock |
Surplus |
Earnings |
Income (Loss) |
Total |
|||||||||||||||||||
| Balance, March 31, 2022 |
$ | $ | $ | $ | $ | ( |
) | $ | ||||||||||||||||
| Vesting of restricted stock |
( |
) | ||||||||||||||||||||||
| Stock based compensation expense |
||||||||||||||||||||||||
| Common stock repurchased |
( |
) | ( |
) | ( |
) | ||||||||||||||||||
| Dividends on preferred stock |
( |
) | ( |
) | ||||||||||||||||||||
| Dividends on common stock |
( |
) | ( |
) | ||||||||||||||||||||
| Net income |
||||||||||||||||||||||||
| Other comprehensive loss |
( |
) | ( |
) | ||||||||||||||||||||
| Balance, June 30, 2022 |
$ | $ | $ | $ | $ | ( |
) | $ | ||||||||||||||||
| Accumulated Other |
||||||||||||||||||||||||
| Preferred |
Common |
Capital |
Retained |
Comprehensive |
||||||||||||||||||||
| Stock |
Stock |
Surplus |
Earnings |
Income (Loss) |
Total |
|||||||||||||||||||
| Balance, December 31, 2021 |
$ | $ | $ | $ | $ | $ | ||||||||||||||||||
| Vesting of restricted stock |
( |
) | ||||||||||||||||||||||
| Stock based compensation expense |
||||||||||||||||||||||||
| Common stock repurchased |
( |
) | ( |
) | ( |
) | ||||||||||||||||||
| Dividends on preferred stock |
( |
) | ( |
) | ||||||||||||||||||||
| Dividends on common stock |
( |
) | ( |
) | ||||||||||||||||||||
| Net income |
||||||||||||||||||||||||
| Other comprehensive loss |
( |
) | ( |
) | ||||||||||||||||||||
| Balance, June 30, 2022 |
$ | $ | $ | $ | $ | ( |
) | $ | ||||||||||||||||
| Accumulated Other |
||||||||||||||||||||||||
| Preferred |
Common |
Capital |
Retained |
Comprehensive |
||||||||||||||||||||
| Stock |
Stock |
Surplus |
Earnings |
Income |
Total |
|||||||||||||||||||
| Balance, March 31, 2021 |
$ | $ | $ | $ | $ | $ | ||||||||||||||||||
| Vesting of restricted stock |
( |
) | ||||||||||||||||||||||
| Stock based compensation expense |
||||||||||||||||||||||||
| Dividends on preferred stock |
( |
) | ( |
) | ||||||||||||||||||||
| Net income |
||||||||||||||||||||||||
| Other comprehensive income |
||||||||||||||||||||||||
| Balance, June 30, 2021 |
$ | $ | $ | $ | $ | $ | ||||||||||||||||||
| Accumulated Other |
||||||||||||||||||||||||
| Preferred |
Common |
Capital |
Retained |
Comprehensive |
||||||||||||||||||||
| Stock |
Stock |
Surplus |
Earnings |
Income (Loss) |
Total |
|||||||||||||||||||
| Balance, December 31, 2020 |
$ | $ | $ | $ | $ | $ | ||||||||||||||||||
| Vesting of restricted stock |
( |
) | ||||||||||||||||||||||
| Stock based compensation expense |
||||||||||||||||||||||||
| Dividends on preferred stock |
( |
) | ( |
) | ||||||||||||||||||||
| Net income |
||||||||||||||||||||||||
| Other comprehensive loss |
( |
) | ( |
) | ||||||||||||||||||||
| Balance, June 30, 2021 |
$ | $ | $ | $ | $ | $ | ||||||||||||||||||
See Notes to the Unaudited Consolidated Financial Statements
MAINSTREET BANCSHARES, INC. AND SUBSIDIARY
Unaudited Consolidated Statements of Cash Flows (Dollars in thousands)
| For the six months ended June 30, |
2022 |
2021 |
||||||
| Cash Flows from Operating Activities |
||||||||
| Net income |
$ | $ | ||||||
| Adjustments to reconcile net income to net cash provided by operating activities: |
||||||||
| Depreciation, amortization, and accretion, net |
||||||||
| Deferred income tax expense (benefit) |
( |
) | ||||||
| Provision for (recovery of) loan losses |
( |
) | ||||||
| Writedown of other real estate owned |
||||||||
| Loss on sale of other real estate owned |
||||||||
| Gain on sale of SBA loans |
( |
) | ( |
) | ||||
| Stock based compensation expense |
||||||||
| Income from bank owned life insurance |
( |
) | ( |
) | ||||
| Subordinated debt amortization expense |
||||||||
| Gain on disposal of premises and equipment |
( |
) | ||||||
| Gain on call of held-to-maturity securities |
( |
) | ( |
) | ||||
| Amortization of operating lease right-of-use assets |
||||||||
| Change in: |
||||||||
| Accrued interest receivable and other receivables |
||||||||
| Other assets |
( |
) | ||||||
| Other liabilities |
||||||||
| Net cash provided by operating activities |
||||||||
| Cash Flows from Investing Activities |
||||||||
| Activity in available-for-sale securities: |
||||||||
| Payments |
||||||||
| Maturities |
||||||||
| Purchases |
( |
) | ( |
) | ||||
| Activity in held-to-maturity securities: |
||||||||
| Purchases |
( |
) | ||||||
| Called |
||||||||
| Purchases of equity securities |
( |
) | ||||||
| Proceeds on sale of loans |
||||||||
| Proceeds on sale of other real estate owned |
||||||||
| Purchases of restricted investment in bank stock |
( |
) | ( |
) | ||||
| Redemption of restricted investment in bank stock |
||||||||
| Net (increase) decrease in loan portfolio |
( |
) | ||||||
| Purchase of bank owned life insurance |
( |
) | ||||||
| Computer software developed |
( |
) | ||||||
| Proceeds from sale of premises and equipment |
||||||||
| Purchases of premises and equipment |
( |
) | ( |
) | ||||
| Net cash used in investing activities |
( |
) | ( |
) | ||||
| Cash Flows from Financing Activities |
||||||||
| Net increase in non-interest deposits |
||||||||
| Net increase (decrease) in interest bearing demand, savings, and time deposits |
( |
) | ||||||
| Net increase in subordinated debt, net issuance costs |
||||||||
| Cash dividends paid on preferred stock |
( |
) | ( |
) | ||||
| Cash dividends paid on common stock |
( |
) | ||||||
| Repurchases of common stock |
( |
) | ||||||
| Net cash provided by financing activities |
||||||||
| Increase in Cash and Cash Equivalents |
||||||||
| Cash and Cash Equivalents, beginning of period |
||||||||
| Cash and Cash Equivalents, end of period |
$ | $ | ||||||
| Supplementary Disclosure of Cash Flow Information |
||||||||
| Cash paid during the period for interest |
$ | $ | ||||||
| Cash paid during the period for income taxes |
$ | $ | ||||||
| Right of use assets obtained in exchange for new operating lease liabilities |
$ | $ | ||||||
See Notes to the Unaudited Consolidated Financial Statements
MAINSTREET BANCSHARES, INC. AND SUBSIDIARY
Notes to Unaudited Consolidated Financial Statements
Note 1. Organization, Basis of Presentation and Impact of Recently Issued Accounting Pronouncements
Organization
MainStreet Bancshares, Inc. (the “Company”) is a bank holding company incorporated under the laws of the Commonwealth of Virginia whose primary activity is the ownership and management of MainStreet Bank (the “Bank”). On October 12, 2021, the Company filed an election with the Federal Reserve Board to be a financial holding company in order to engage in a broader range of financial activities than are permitted for bank holding companies generally. The Company is authorized to issue
On April 18, 2019, the Company completed the registration of its common stock with the Securities Exchange Commission (the “SEC”) through its filing of a General Form for Registration of Securities on Form 10 (“Form 10”), pursuant to Section 12(b) of the Securities Exchange Act of 1934. The Company is considered an “emerging growth company” under the Jumpstart Our Business Startups Act of 2012, or the “JOBS Act,” and as defined in Section 2(a) of the Securities Act of 1933, as amended, or the “Securities Act.” We are also a “smaller reporting company” as defined in Exchange Act Rule 12b-2. As such, we may elect to comply with certain reduced public company reporting requirements in future reports that we file with the Securities and Exchange Commission, or the “SEC.”
The Company was approved to list shares of our common stock on the Nasdaq Capital Market under our current symbol “MNSB” as of April 22, 2019. We were approved to list depositary shares of preferred stock on the Nasdaq Capital Market under the symbol “MNSBP” as of September 16, 2020. Each depositary share represents a
The Bank is headquartered in Fairfax, Virginia where it also operates a branch. The Bank was incorporated on March 28, 2003 and received its charter from the Bureau of Financial Institutions of the Commonwealth of Virginia (the “Bureau”) on March 16, 2004. The Bank commenced regular operations on May 26, 2004 and is supervised by the Bureau and the Federal Reserve. The Bank is a member of the Federal Reserve System and the Federal Deposit Insurance Corporation. The Bank places special emphasis on serving the needs of individuals, and small and medium-sized business and professional concerns in the Washington, D.C. metropolitan area.
In August 2021, MainStreet Bancshares, Inc. established MainStreet Community Capital, LLC, a wholly owned subsidiary, to be a community development entity (“CDE”). This CDE will be an intermediary vehicle for the provision of loans and investments in Low-Income Communities (“LICs”). In January 2022, the Community Development Financial Institutions Fund (“CDFI”) of the United States Department of the Treasury certified MainStreet Community Capital, LLC as a registered CDE.
On October 25, 2021, MainStreet Bancshares, Inc. formally introduced AvenuTM, a division of MainStreet Bank. AvenuTM represents the Company’s suite of Banking as a Service (“BaaS”) solutions designed to meet the banking needs of Fintech customers. Our SaaS solution is in the late stage of development. A major component of the BaaS solution includes a fintech core, which is Software as a Service (SaaS).
Basis of Presentation
The accompanying financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America (“US GAAP”) for interim information and with the instructions to the Quarterly Report on Form 10-Q, as applicable to a smaller reporting company. Accordingly, they do not include all the information and footnotes required by US GAAP for complete financial statements.
The financial statements are unaudited; but in the opinion of management include all adjustments (consisting only of normal recurring adjustments) necessary for a fair presentation thereof. The balances as of December 31, 2021 have been derived from the audited consolidated financial statements. These financial statements should be read in conjunction with the audited consolidated financial statements and accompanying notes thereto contained in the Form 10-K filed by the Company with the SEC on March 23, 2022. The results of operations for the three and six months ended June 30, 2022 are not necessarily indicative of the results that may be expected for the year ending December 31, 2022, or any other period.
Use of estimates – The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America, requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of income and expenses during the reporting period. Actual results could differ from the estimates.
The Company’s critical accounting policies relate (1) the allowance for loan losses, (2) fair value of financial instruments, (3) derivative financial instruments, (4) computer software, and (5) income taxes. These critical accounting policies require the use of estimates, assumptions and judgments which are based on information available as of the date of the financial statements. Accordingly, as this information changes, future financial statements could reflect the use of different estimates, assumptions, and judgments. Certain determinations inherently have a greater reliance on the use of estimates, assumptions, and judgments and, as such, have a greater possibility of producing results that could be materially different than originally reported. In connection with the determination of the allowances for losses on loans management obtains independent appraisals for significant properties.
Impact of Recently Issued Accounting Pronouncements
In June 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2016-13, “Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments.” The amendments in this ASU, among other things, require the measurement of all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. Financial institutions and other organizations will now use forward-looking information to better inform their credit loss estimates. Many of the loss estimation techniques applied today will still be permitted, although the inputs to those techniques will change to reflect the full amount of expected credit losses. In addition, the ASU amends the accounting for credit losses on available-for-sale debt securities and purchased financial assets with credit deterioration. The FASB has issued multiple updates to ASU 2016-13 as codified in Topic 326, including ASU’s 2019-04, 2019-05, 2019-10, 2019-11, 2020-02, and 2020-03. These ASU’s have provided for various minor technical corrections and improvements to the codification as well as other transition matters. Smaller reporting companies who file with the SEC and all other entities who do not file with the SEC are required to apply the guidance for fiscal years, and interim periods within those years, beginning after December 15, 2022. The Company is working with a third party to develop our methodology using historical and qualitative data based on the requirements of ASU 2016-13 and have begun to test parallel models. We have scheduled third party to perform a model validation of our methodology and assumptions to be completed by the third quarter of 2022. We are in the process of assessing new internal controls to be placed as well as policies and procedures that need to be developed with the new model. Preliminary analysis shows that there will not be a significant impact to our current allowance for loan losses upon adoption.
Effective November 25, 2019, the SEC adopted Staff Accounting Bulletin (SAB) 119. SAB 119 updated portions of SEC interpretative guidance to align with FASB ASC 326, “Financial Instruments – Credit Losses.” It covers topics including (1) measuring current expected credit losses; (2) development, governance, and documentation of a systematic methodology; (3) documenting the results of a systematic methodology; and (4) validating a systematic methodology.
In March 2020, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2020-04 “Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting.” These amendments provide temporary optional guidance to ease the potential burden in accounting for reference rate reform. The ASU provides optional expedients and exceptions for applying generally accepted accounting principles to contract modifications and hedging relationships, subject to meeting certain criteria, that reference LIBOR or another reference rate expected to be discontinued. It is intended to help stakeholders during the global market-wide reference rate transition period. The guidance is effective for all entities as of March 12, 2020 through December 31, 2022. Subsequently, in January 2021, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2021-01 “Reference Rate Reform (Topic 848): Scope.” This ASU clarifies that certain optional expedients and exceptions in Topic 848 for contract modifications and hedge accounting apply to derivatives that are affected by the discounting transition. The ASU also amends the expedients and exceptions in Topic 848 to capture the incremental consequences of the scope clarification and to tailor the existing guidance to derivative instruments affected by the discounting transition. An entity may elect to apply ASU No. 2021-01 on contract modifications that change the interest rate used for margining, discounting, or contract price alignment retrospectively as of any date from the beginning of the interim period that includes March 12, 2020, or prospectively to new modifications from any date within the interim period that includes or is subsequent to January 7, 2021, up to the date that financial statements are available to be issued. An entity may elect to apply ASU No. 2021-01 to eligible hedging relationships existing as of the beginning of the interim period that includes March 12, 2020, and to new eligible hedging relationships entered into after the beginning of the interim period that includes March 12, 2020. The Company is monitoring developments into rates that may be acceptable alternatives to LIBOR and working with those we have a relationship with that could be impacted by a change in reference rate from LIBOR. The Company is assessing ASU 2020-04 and its impact on the Company’s transition away from LIBOR for its loan and other financial instruments.
In August 2020, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2020-06 “Debt – Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging – Contracts in Entity’s Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity.” The ASU simplifies accounting for convertible instruments by removing major separation models required under current U.S. GAAP. Consequently, more convertible debt instruments will be reported as a single liability instrument and more convertible preferred stock as a single equity instrument with no separate accounting for embedded conversion features. The ASU removes certain settlement conditions that are required for equity contracts to qualify for the derivative scope exception, which will permit more equity contracts to qualify for it. The ASU also simplifies the diluted earnings per share (EPS) calculation in certain areas. In addition, the amendment updates the disclosure requirements for convertible instruments to increase the information transparency. For public business entities, excluding smaller reporting companies, the amendments in the ASU are effective for fiscal years beginning after December 15, 2021, and interim periods within those fiscal years. For all other entities, the standard will be effective for fiscal years beginning after December 15, 2023, including interim periods within those fiscal years. Early adoption is permitted. The Company does not expect the adoption of ASU 2020-06 to have a material impact on its consolidated financial statements.
In March 2022, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2022-02, “Financial Instruments-Credit Losses (Topic 326), Troubled Debt Restructurings and Vintage Disclosures.” ASU 2022-02 addresses areas identified by the FASB as part of its post-implementation review of the credit losses standard (ASU 2016-13) that introduced the CECL model. The amendments eliminate the accounting guidance for troubled debt restructurings by creditors that have adopted the CECL model and enhance the disclosure requirements for loan refinancings and restructurings made with borrowers experiencing financial difficulty. In addition, the amendments require a public business entity to disclose current-period gross write-offs for financing receivables and net investment in leases by year of origination in the vintage disclosures. The amendments in this ASU should be applied prospectively, except for the transition method related to the recognition and measurement of TDRs, an entity has the option to apply a modified retrospective transition method, resulting in a cumulative-effect adjustment to retained earnings in the period of adoption. For entities that have adopted ASU 2016-13, ASU 2022-02 is effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. For entities that have not yet adopted ASU 2016-13, the effective dates for ASU 2022-02 are the same as the effective dates in ASU 2016-13. Early adoption is permitted if an entity has adopted ASU 2016-13. An entity may elect to early adopt the amendments about TDRs and related disclosure enhancements separately from the amendments related to vintage disclosures. The Company is currently assessing the impact that ASU 2022-02 will have on its consolidated financial statements.
In March 2022, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2022-01, “Derivatives and Hedging (Topic 815), Fair Value Hedging—Portfolio Layer Method.” ASU 2022-01 clarifies the guidance in ASC 815 on fair value hedge accounting of interest rate risk for portfolios of financial assets and is intended to better align hedge accounting with an organization’s risk management strategies. In 2017, FASB issued ASU 2017-12 to better align the economic results of risk management activities with hedge accounting. One of the major provisions of that standard was the addition of the last-of-layer hedging method. For a closed portfolio of fixed-rate prepayable financial assets or one or more beneficial interests secured by a portfolio of prepayable financial instruments, such as mortgages or mortgage-backed securities, the last-of-layer method allows an entity to hedge its exposure to fair value changes due to changes in interest rates for a portion of the portfolio that is not expected to be affected by prepayments, defaults, and other events affecting the timing and amount of cash flows. ASU 2022-01 renames that method the portfolio layer method. For public business entities, ASU 2022-01 is effective for fiscal years beginning after December 15, 2022, and interim periods within those fiscal years. The Company does not expect the adoption of ASU 2022-01 to have a material impact on its consolidated financial statements.
Recently Adopted Accounting Developments
In May 2021, the FASB issued ASU 2021-04, “Earnings Per Share (Topic 260), Debt - Modifications and Extinguishments (Subtopic 470-50), Compensation - Stock Compensation (Topic 718), and Derivatives and Hedging – Contracts in Entity’s Own Equity (Subtopic 815-40): Issuer’s Accounting for Certain Modifications or Exchanges of Freestanding Equity – Classified Written Call Options (a consensus of the FASB Emerging Issues Task Force).” The ASU addresses how an issuer should account for modifications or an exchange of freestanding written call options classified as equity that is not within the scope of another Topic. Early adoption is permitted. ASU 2021-04 was effective for the Company on January 1, 2022. There was no material impact on the Company’s consolidated financial statements.
Note 2. Investment Securities
Investment securities available-for-sale was comprised of the following:
| June 30, 2022 |
||||||||||||||||
| (Dollars in thousands) |
Amortized Cost |
Gross Unrealized Gains |
Gross Unrealized Losses |
Fair Value |
||||||||||||
| U.S. Treasury Securities |
$ | $ | $ | ( |
) | $ | ||||||||||
| Collateralized Mortgage Backed |
( |
) | ||||||||||||||
| Subordinated Debt |
( |
) | ||||||||||||||
| Municipal Securities |
||||||||||||||||
| Taxable |
( |
) | ||||||||||||||
| Tax-exempt |
( |
) | ||||||||||||||
| U.S. Governmental Agencies |
( |
) | ||||||||||||||
| Total |
$ | $ | $ | ( |
) | $ | ||||||||||
Investment securities held-to-maturity was comprised of the following:
| June 30, 2022 |
||||||||||||||||
| (Dollars in thousands) |
Amortized Cost |
Gross Unrealized Gains |
Gross Unrealized Losses |
Fair Value |
||||||||||||
| Municipal Securities |
||||||||||||||||
| Tax-exempt |
$ | $ | $ | ( |
) | $ | ||||||||||
| Subordinated Debt |
||||||||||||||||
| Total |
$ | $ | $ | ( |
) | $ | ||||||||||
Investment securities available-for-sale was comprised of the following:
| December 31, 2021 |
||||||||||||||||
| (Dollars in thousands) |
Amortized |
Gross |
Gross |
Fair Value |
||||||||||||
| U.S. Treasury Securities |
$ | $ | $ | $ | ||||||||||||
| Collateralized Mortgage Backed |
( |
) | ||||||||||||||
| Subordinated Debt |
( |
) | ||||||||||||||
| Municipal Securities |
||||||||||||||||
| Taxable |
( |
) | ||||||||||||||
| Tax-exempt |
( |
) | ||||||||||||||
| U.S. Governmental Agencies |
( |
) | ||||||||||||||
| Total |
$ | $ | $ | ( |
) | $ | ||||||||||
Investment securities held-to-maturity was comprised of the following:
| December 31, 2021 |
||||||||||||||||
| (Dollars in thousands) |
Amortized |
Gross |
Gross |
Fair Value |
||||||||||||
| Municipal Securities |
$ | $ | $ | $ | ||||||||||||
| Subordinated Debt |
||||||||||||||||
| Total |
$ | $ | $ | $ | ||||||||||||
The scheduled maturities of securities available-for-sale and held-to-maturity at June 30, 2022 were as follows:
| June 30, 2022 |
||||||||||||||||
| Available-for-Sale |
Held-to-Maturity |
|||||||||||||||
| (Dollars in thousands) |
Amortized Cost |
Fair Value |
Amortized Cost |
Fair Value |
||||||||||||
| Due in one year or less |
$ | $ | $ | $ | ||||||||||||
| Due from one to five years |
||||||||||||||||
| Due from after five to ten years |
||||||||||||||||
| Due after ten years |
||||||||||||||||
| Total |
$ | $ | $ | $ | ||||||||||||
Securities with a fair value of $
The following tables summarize the unrealized loss positions of securities available-for-sale and held-to-maturity as of June 30, 2022 and December 31, 2021:
| June 30, 2022 |
||||||||||||||||||||||||
| Less than 12 Months |
12 Months or Longer |
Total |
||||||||||||||||||||||
| (Dollars in thousands) |
Fair Value |
Unrealized Loss |
Fair Value |
Unrealized Loss |
Fair Value |
Unrealized Loss |
||||||||||||||||||
| Available-for-sale: |
||||||||||||||||||||||||
| U.S. Treasury Securities |
$ | $ | ( |
) | $ | $ | $ | $ | ( |
) | ||||||||||||||
| Collateralized Mortgage Backed |
( |
) | ( |
) | ( |
) | ||||||||||||||||||
| Subordinated Debt |
( |
) | ( |
) | ||||||||||||||||||||
| Municipal securities |
||||||||||||||||||||||||
| Taxable |
( |
) | ( |
) | ( |
) | ||||||||||||||||||
| Tax-exempt |
( |
) | ( |
) | ( |
) | ||||||||||||||||||
| U.S Governmental Agencies |
( |
) | ( |
) | ||||||||||||||||||||
| Total |
$ | $ | ( |
) | $ | $ | ( |
) | $ | $ | ( |
) | ||||||||||||
| Held-to-maturity: |
||||||||||||||||||||||||
| Municipal securities |
||||||||||||||||||||||||
| Tax-exempt |
( |
) | ( |
) | ||||||||||||||||||||
| Total |
$ | $ | ( |
) | $ | $ | $ | $ | ( |
) | ||||||||||||||
| December 31, 2021 |
||||||||||||||||||||||||
| Less than 12 Months |
12 Months or Longer |
Total |
||||||||||||||||||||||
| (Dollars in thousands) |
Fair |
Unrealized |
Fair |
Unrealized |
Fair |
Unrealized |
||||||||||||||||||
| Available-for-sale: |
||||||||||||||||||||||||
| Collateralized Mortgage Backed |
$ | $ | ( |
) | $ | $ | ( |
) | $ | $ | ( |
) | ||||||||||||
| Subordinated Debt |
( |
) | ( |
) | ||||||||||||||||||||
| Municipal Securities |
||||||||||||||||||||||||
| Taxable |
( |
) | ( |
) | ( |
) | ||||||||||||||||||
| Tax-exempt |
( |
) | ( |
) | ||||||||||||||||||||
| U.S Government Agencies |
( |
) | ( |
) | ||||||||||||||||||||
| Total |
$ | $ | ( |
) | $ | $ | ( |
) | $ | $ | ( |
) | ||||||||||||
The factors considered in evaluating securities for impairment include whether the Bank intends to sell the security, whether it is more likely than not that the Bank will be required to sell the security before recovery of its amortized cost basis, and whether the Bank expects to recover the security’s entire amortized cost basis. These unrealized losses are primarily attributable to current financial market conditions for these types of investments, particularly changes in interest rates, causing bond prices to decline, and are not attributable to credit deterioration.
At June 30, 2022, there were collateralized mortgage backed securities with fair values totaling $
Certain municipal securities originally purchased as available for sale were transferred to held to maturity during 2013. The unrealized loss on the securities transferred to held to maturity is being amortized over the expected life of the securities. The unamortized, unrealized loss, before tax, at June 30, 2022 and December 31, 2021 was $
Note 3. Loans Receivable
Loans receivable were comprised of the following:
| (Dollars in thousands) | June 30, 2022 | December 31, 2021 | ||||||
| Residential Real Estate: | ||||||||
| Single family | $ | $ | ||||||
| Multifamily | ||||||||
| Farmland | ||||||||
| Commercial Real Estate: | ||||||||
| Owner-occupied | ||||||||
| Non-owner occupied | ||||||||
| Construction and Land Development | ||||||||
| Commercial – Non Real-Estate: | ||||||||
| Commercial & Industrial | ||||||||
| Consumer – Non Real-Estate: | ||||||||
| Unsecured | ||||||||
| Secured | ||||||||
| Total Gross Loans | ||||||||
| Less: unearned fees, net | ( | ) | ( | ) | ||||
| Less: allowance for loan losses | ( | ) | ( | ) | ||||
| Net Loans | $ | $ | ||||||
The unsecured consumer loans above include $
The commercial and industrial loans above include $
The following tables summarize the activity in the allowance for loan losses by loan class for the three and six months ended June 30, 2022 and 2021.
Allowance for Credit Losses By Portfolio Segment
| Real Estate | ||||||||||||||||||||||||
| For the three months ended June 30, 2022 | Residential | Commercial | Construction | Consumer | Commercial | Total | ||||||||||||||||||
| (Dollars in thousands) | ||||||||||||||||||||||||
| Beginning Balance | $ | $ | $ | $ | $ | $ | ||||||||||||||||||
| Recoveries | ||||||||||||||||||||||||
| Provision | ( | ) | ( | ) | ||||||||||||||||||||
| Ending Balance | $ | $ | $ | $ | $ | $ | ||||||||||||||||||
| Ending Balance: | ||||||||||||||||||||||||
| Individually evaluated for Impairment | $ | $ | $ | $ | $ | $ | ||||||||||||||||||
| Collectively evaluated for Impairment | $ | $ | $ | $ | $ | $ | ||||||||||||||||||
| For the six months ended June 30, 2022 | ||||||||||||||||||||||||
| Beginning Balance | $ | $ | $ | $ | $ | $ | ||||||||||||||||||
| Recoveries | ||||||||||||||||||||||||
| Provision | ( | ) | ( | ) | ||||||||||||||||||||
| Ending Balance | $ | $ | $ | $ | $ | $ | ||||||||||||||||||
| Ending Balance: | ||||||||||||||||||||||||
| Individually evaluated for Impairment | $ | $ | $ | $ | $ | $ | ||||||||||||||||||
| Collectively evaluated for Impairment | $ | $ | $ | $ | $ | $ | ||||||||||||||||||
| Real Estate | ||||||||||||||||||||||||
| For the three months ended June 30, 2021 | Residential | Commercial | Construction | Consumer | Commercial | Total | ||||||||||||||||||
| (Dollars in thousands) | ||||||||||||||||||||||||
| Beginning Balance | $ | $ | $ | $ | $ | $ | ||||||||||||||||||
| Charge-offs | ( | ) | $ | ( | ) | |||||||||||||||||||
| Recoveries | ||||||||||||||||||||||||
| Provision | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||
| Ending Balance | $ | $ | $ | $ | $ | $ | ||||||||||||||||||
| Ending Balance: | ||||||||||||||||||||||||
| Individually evaluated for Impairment | $ | $ | $ | $ | $ | $ | ||||||||||||||||||
| Collectively evaluated for Impairment | $ | $ | $ | $ | $ | $ | ||||||||||||||||||
| For the six months ended June 30, 2021 | ||||||||||||||||||||||||
| Beginning Balance | $ | $ | $ | $ | $ | $ | ||||||||||||||||||
| Charge-offs | ( | ) | ( | ) | ||||||||||||||||||||
| Recoveries | ||||||||||||||||||||||||
| Provision | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||
| Ending Balance | $ | $ | $ | $ | $ | $ | ||||||||||||||||||
| Ending Balance: | ||||||||||||||||||||||||
| Individually evaluated for Impairment | $ | $ | $ | $ | $ | $ | ||||||||||||||||||
| Collectively evaluated for Impairment | $ | $ | $ | $ | $ | $ | ||||||||||||||||||
The Company maintains a general allowance for loan losses based on evaluating known and inherent risks in the loan portfolio, including management’s continuing analysis of the factors underlying the quality of the loan portfolio. These factors include changes in the size and composition of the loan portfolio, actual loan loss experience, and current and anticipated economic conditions. The reserve is an estimate based upon factors and trends identified by management at the time the financial statements are prepared.
The following tables summarize information in regards to the recorded investment in loans receivable by loan class as of June 30, 2022 and December 31, 2021:
| June 30, 2022 | ||||||||||||
| Loans Receivable | ||||||||||||
| (Dollars in thousands) | Ending Balance | Ending Balance: Individually Evaluated for Impairment | Ending Balance: Collectively Evaluated for Impairment | |||||||||
| Residential Real Estate | $ | $ | $ | |||||||||
| Commercial Real Estate | ||||||||||||
| Construction and Land Development | ||||||||||||
| Commercial & Industrial | ||||||||||||
| Consumer | ||||||||||||
| Total | $ | $ | $ | |||||||||
| December 31, 2021 | ||||||||||||
| Loans Receivable | ||||||||||||
| (Dollars in thousands) | Ending | Ending | Ending | |||||||||
| Residential Real Estate | $ | $ | $ | |||||||||
| Commercial Real Estate | ||||||||||||
| Construction and Land Development | ||||||||||||
| Commercial & Industrial | ||||||||||||
| Consumer | ||||||||||||
| Total | $ | $ | $ | |||||||||
The following table summarizes information in regard to impaired loans by loan portfolio class as of June 30, 2022 and December 31, 2021:
| June 30, 2022 | December 31, 2021 | |||||||||||||||||||||||
| (Dollars in thousands) | Recorded Investment | Unpaid Principal Balance | Related Allowance | Recorded Investment | Unpaid Principal Balance | Related Allowance | ||||||||||||||||||
| With no related allowance recorded | ||||||||||||||||||||||||
| Residential Real Estate: | ||||||||||||||||||||||||
| Single family | $ | $ | $ | — | $ | $ | $ | — | ||||||||||||||||
| Commercial Real Estate | ||||||||||||||||||||||||
| Non-owner Occupied | — | — | ||||||||||||||||||||||
| Commercial & Industrial | — | — | ||||||||||||||||||||||
| Total | $ | $ | $ | — | $ | $ | $ | — | ||||||||||||||||
The following table presents additional information regarding the impaired loans for the three and six months ended June 30, 2022 and 2021:
| Three Months Ended June 30, | ||||||||||||||||
| 2022 | 2021 | |||||||||||||||
| (Dollars in thousands) | Average Record Investment | Interest Income Recognized | Average Record Investment | Interest Income Recognized | ||||||||||||
| With no related allowance recorded | ||||||||||||||||
| Residential Real Estate: | ||||||||||||||||
| Single family | $ | $ | $ | $ | ||||||||||||
| Commercial Real Estate | ||||||||||||||||
| Non-owner Occupied | ||||||||||||||||
| Commercial & Industrial | ||||||||||||||||
| Total | $ | $ | $ | $ | ||||||||||||
| With an allowance recorded | ||||||||||||||||
| Construction and Land Development | $ | $ | $ | $ | ||||||||||||
| Total | $ | $ | $ | $ | ||||||||||||
| Six Months Ended June 30, | ||||||||||||||||
| 2022 | 2021 | |||||||||||||||
| (Dollars in thousands) | Average Record Investment | Interest Income Recognized | Average Record Investment | Interest Income Recognized | ||||||||||||
| With no related allowance recorded | ||||||||||||||||
| Residential Real Estate: | ||||||||||||||||
| Single family | $ | $ | $ | $ | ||||||||||||
| Commercial Real Estate | ||||||||||||||||
| Non-owner Occupied | ||||||||||||||||
| Commercial & Industrial | ||||||||||||||||
| Total | ||||||||||||||||
| With an allowance recorded | ||||||||||||||||
| Construction and Land Development | $ | $ | $ | $ | ||||||||||||
| Total | $ | $ | $ | $ | ||||||||||||
There were
Credit quality risk ratings include regulatory classifications of Pass, Watch, Special Mention, Substandard, Doubtful and Loss. Loans classified as Pass have quality metrics to support that the loan will be repaid according to the terms established. Loans classified as Watch have similar characteristics as Pass loans with some emerging signs of financial weaknesses that should be monitored closer. Loans classified as Special Mention have potential weaknesses that deserve management’s close attention. If uncorrected, the potential weaknesses may result in deterioration of prospects for repayment. Loans classified substandard have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They include loans that are inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. Loans classified doubtful have all the weaknesses inherent in loans classified substandard with the added characteristic that collection or liquidation in full, based on current conditions and facts, is highly improbable. Loans classified as a loss are considered uncollectible and are charged to the allowance for loan losses. Loans not classified are rated pass.
The following tables summarize the aggregate Pass and criticized categories of Watch, Special Mention, and Substandard within the Company’s internal risk rating system as of June 30, 2022 and December 31, 2021:
| June 30, 2022 | ||||||||||||||||||||
| (Dollars in thousands) | Pass | Watch | Special Mention | Substandard | Total | |||||||||||||||
| Residential Real Estate: | ||||||||||||||||||||
| Single Family | $ | $ | $ | $ | $ | |||||||||||||||
| Multifamily | ||||||||||||||||||||
| Farmland | ||||||||||||||||||||
| Commercial Real Estate: | ||||||||||||||||||||
| Owner occupied | ||||||||||||||||||||
| Non-owner occupied | ||||||||||||||||||||
| Construction & Land Development | ||||||||||||||||||||
| Commercial – Non Real Estate: | ||||||||||||||||||||
| Commercial & Industrial | ||||||||||||||||||||
| Consumer – Non Real Estate: | ||||||||||||||||||||
| Unsecured | ||||||||||||||||||||
| Secured | ||||||||||||||||||||
| Total | $ | $ | $ | $ | $ | |||||||||||||||
| December 31, 2021 | ||||||||||||||||||||
| (Dollars in thousands) | Pass | Watch | Special | Substandard | Total | |||||||||||||||
| Residential Real Estate: | ||||||||||||||||||||
| Single Family | $ | $ | $ | $ | $ | |||||||||||||||
| Multifamily | ||||||||||||||||||||
| Farmland | ||||||||||||||||||||
| Commercial Real Estate: | ||||||||||||||||||||
| Owner occupied | ||||||||||||||||||||
| Non-owner occupied | ||||||||||||||||||||
| Construction & Land Development | ||||||||||||||||||||
| Commercial – Non Real Estate: | ||||||||||||||||||||
| Commercial & Industrial | ||||||||||||||||||||
| Consumer – Non Real Estate: | ||||||||||||||||||||
| Unsecured | ||||||||||||||||||||
| Secured | ||||||||||||||||||||
| Total | $ | $ | $ | $ | $ | |||||||||||||||
The following tables present the segments of the loan portfolio summarized by aging categories as of June 30, 2022 and December 31, 2021:
| June 30, 2022 | ||||||||||||||||||||||||||||
| (Dollars in thousands) | 30-59 Days Past Due | 60-89 Days Past Due | Greater than 90 Days | Total Past Due | Current | Total Loans Receivable | Nonaccrual | |||||||||||||||||||||
| Residential Real Estate: | ||||||||||||||||||||||||||||
| Single Family | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||
| Multifamily | ||||||||||||||||||||||||||||
| Farmland | ||||||||||||||||||||||||||||
| Commercial Real Estate: | ||||||||||||||||||||||||||||
| Owner occupied | ||||||||||||||||||||||||||||
| Non-owner occupied | ||||||||||||||||||||||||||||
| Construction & Land Development | ||||||||||||||||||||||||||||
| Commercial – Non Real Estate: | ||||||||||||||||||||||||||||
| Commercial & Industrial | ||||||||||||||||||||||||||||
| Consumer – Non Real Estate: | ||||||||||||||||||||||||||||
| Unsecured | ||||||||||||||||||||||||||||
| Secured | ||||||||||||||||||||||||||||
| Total | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||
| December 31, 2021 | ||||||||||||||||||||||||||||
| (Dollars in thousands) | 30-59 | 60-89 | Greater | Total Past | Current | Total | Nonaccrual | |||||||||||||||||||||
| Residential Real Estate: | ||||||||||||||||||||||||||||
| Single Family | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||
| Multifamily | ||||||||||||||||||||||||||||
| Farmland | ||||||||||||||||||||||||||||
| Commercial Real Estate: | ||||||||||||||||||||||||||||
| Owner occupied | ||||||||||||||||||||||||||||
| Non-owner occupied | ||||||||||||||||||||||||||||
| Construction & Land Development | ||||||||||||||||||||||||||||
| Commercial – Non Real Estate: | ||||||||||||||||||||||||||||
| Commercial & Industrial | ||||||||||||||||||||||||||||
| Consumer – Non Real Estate: | ||||||||||||||||||||||||||||
| Unsecured | ||||||||||||||||||||||||||||
| Secured | ||||||||||||||||||||||||||||
| Total | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||
The Company may grant a concession or modification for economic or legal reasons related to a borrower’s financial condition that it would not otherwise consider resulting in a modified loan that is then identified as a troubled debt restructuring (“TDR”). The Company may modify loans through rate reductions, extensions of maturity, interest only payments, or payment modifications to better match the timing of cash flows due under the modified terms with the cash flows from the borrowers’ operations. Loan modifications are intended to minimize the economic loss and to avoid foreclosure or repossession of the collateral. TDRs are considered impaired loans for purposes of calculating the Company’s allowance for loan losses. TDRs are restored to accrual status when the obligation is brought current, has performed in accordance with the modified contractual terms for a reasonable period, generally six months, and the ultimate collectability of the total contractual principal and interest is no longer in doubt.
Troubled Debt Restructuring
According to United States generally accepted accounting principles, restructuring a debt constitutes a TDR if the creditor, for economic or legal reasons related to the debtor’s financial difficulties, grants a concession to the debtor that it would not otherwise consider. The CARES Act states that from March 1, 2020, until the end of the year (unless the President terminates the COVID-19 emergency declaration sooner), financial institutions may elect to suspend the TDR accounting principles for loan modifications related to COVID-19. The Consolidated Appropriations Act of 2021, enacted in December 2020, extended this relief to the earlier of January 1, 2022 or the first day of a bank’s fiscal year that begins after the national emergency ends.
The Company may identify loans for potential restructure primarily through direct communication with the borrower and evaluation of the borrower’s financial statements, revenue projections, tax returns, and credit reports. Even if the borrower is not presently in default, management will consider the likelihood that cash flow shortages, adverse economic conditions and negative trends may result in a payment default in the near future.
As of June 30, 2022, and December 31, 2021, the Company did have any TDRs.
Note 4. Intangible Assets
The carrying amount of computer software developed was $
| As of June 30, 2022 |
As of December 31, 2021 |
|||||||||||||||
| (Dollars in thousands) |
Gross Carrying Amount |
Accumulated Amortization |
Gross Carrying Amount |
Accumulated Amortization |
||||||||||||
| Amortizable intangible assets: |
||||||||||||||||
| Computer software |
$ | $ | $ | $ | ||||||||||||
| Total |
$ | $ | $ | |||||||||||||
The Company is still in the development stage of the computer software where costs are capitalized. Capitalization ceases when the software is substantially complete and ready for its intended use. At that time the intangible asset will be amortized on a straight-line bases over the estimated useful life of the asset. As of June 30, 2022, the Company has recorded any amortization on its intangible computer software.
Note 5. Derivatives and Risk Management Activities
The Company uses derivative financial instruments (“derivatives”) primarily to assist customers with their risk management objectives. The Company classifies these items as free standing derivatives consisting of customer accommodation interest rate loan swaps (“interest rate loan swaps”). The Company enters into interest rate swaps with certain qualifying commercial loan customers to meet their interest rate risk management needs. The Company simultaneously enters into interest rate swaps with dealer counterparties, with identical notional amounts and terms. The net result of these interest rate swaps is that the customer pays a fixed rate of interest and the Company receives a floating rate. These back-to-back interest rate loan swaps qualify as financial derivatives with fair values reported in “Other assets” and “Other liabilities” in the consolidated financial statements. Changes in fair value are recorded in other noninterest expense and net to zero because of the identical amounts and terms of the interest rate loan swaps.
The following tables summarize key elements of the Company’s derivative instruments as of June 30, 2022 and December 31, 2021.
| June 30, 2022 | ||||||||||||||||||||
| Customer-related interest rate contracts | ||||||||||||||||||||
| Dollars in thousands) | Notional Amount | Positions | Assets | Liabilities | Collateral Pledges | |||||||||||||||
| Matched interest rate swap with borrower | $ | $ | $ | |||||||||||||||||
| Matched interest rate swap with counterparty | $ | $ | $ | |||||||||||||||||
| December 31, 2021 | ||||||||||||||||||||
| Customer-related interest rate contracts | ||||||||||||||||||||
| Dollars in thousands) | Notional | Positions | Assets | Liabilities | Collateral | |||||||||||||||
| Matched interest rate swap with borrower | $ | $ | $ | |||||||||||||||||
| Matched interest rate swap with counterparty | $ | $ | $ | |||||||||||||||||
The Company is able to recognize fee income upon execution of the interest rate swap contract. The Company recorded interest rate swap fee income of $
Note 6. Fair Value Presentation
In accordance with FASB ASC 820, “Fair Value Measurements and Disclosure”, the Bank uses fair value measurements to record fair value adjustments to certain assets and liabilities and to determine fair value disclosures. The fair value of a financial instrument is the price that would be received to sell an asset or paid to transfer a liability (“an exit price”) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants at the measurement date. Fair value is best determined based upon quoted market prices. However, in many instances, there are no quoted market prices for the Bank’s various financial instruments. In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques. Those techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. Accordingly, the fair value estimates may not be realized in an immediate settlement of the instrument.
The fair value guidance provides a consistent definition of fair value, which focuses on exit price in the principal or most advantageous market for the asset or liability in an orderly transaction (that is, not a forced liquidation or distressed sale) between market participants at the measurement date under current market conditions. If there has been a significant decrease in the volume and level of activity for the asset or liability, a change in valuation technique or the use of multiple valuation techniques may be appropriate. In such instances, determining the price at which willing market participants would transact at the measurement date under current market conditions depends on the facts and circumstances and requires the use of significant judgment. The fair value is a reasonable point within the range that is the most representative of fair value under current market conditions.
In accordance with the guidance, a hierarchy of valuation techniques is based on whether the inputs to those valuation techniques are observable or unobservable. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect the Bank’s market assumptions. The three levels of the fair value hierarchy under FASB ASC 820 based on these two types of inputs are as follows:
Level 1 –Valuation is based on quoted prices in active markets for identical assets and liabilities that the reporting entity has the ability to access at the measurement date.
Level 2 –Valuation is based on observable inputs including quoted prices in active markets for similar assets and liabilities, quoted prices for identical or similar assets and liabilities in less active markets, and model-based valuation techniques for which significant assumptions can be derived primarily from or corroborated by observable data in the market.
Level 3 –Valuation is based on model-based techniques that use one or more significant inputs or assumptions that are unobservable in the market.
The following describes the valuation techniques used by the Bank to measure certain financial assets and liabilities recorded at fair value on a recurring basis in the financial statements:
Securities available for sale
Securities available for sale are recorded at fair value on a recurring basis. Fair value measurement is based upon quoted market prices, when available (Level 1). If quoted market prices are not available, fair values are measured utilizing independent valuation techniques of identical or similar securities for which significant assumptions are derived primarily from or corroborated by observable market data. Third party vendors compile prices from various sources and may determine the fair value of identical or similar securities by using pricing models that consider observable market data (Level 2). In certain cases where there is limited activity or less transparency around inputs to the valuation, securities are classified within Level 3 of the valuation hierarchy. As of June 30, 2022, and December 31, 2021, the Bank’s entire portfolio of available for sale securities are considered to be Level 2 securities.
Derivative asset (liability) – interest rate swaps on loans
As discussed in “Note 5: “Derivative Financial Instruments”, the Bank recognizes interest rate swaps at fair value on a recurring basis. The Bank has contracted with a third party vendor to provide valuations for these interest rate swaps using standard valuation techniques and therefore classifies such interest rate swaps as Level 2.
The following tables provide the fair value for assets required to be measured and reported at fair value on a recurring basis as of June 30, 2022 and December 31, 2021:
| June 30, 2022 |
||||||||||||||||
| (Dollars in thousands) |
Level 1 |
Level 2 |
Level 3 |
Total |
||||||||||||
| Assets: |
||||||||||||||||
| Investment securities available-for-sale: |
||||||||||||||||
| U.S. Treasury Securities |
$ | $ | $ | $ | ||||||||||||
| Collateralized Mortgage Backed |
||||||||||||||||
| Subordinated Debt |
||||||||||||||||
| Municipal Securities |
||||||||||||||||
| Taxable |
||||||||||||||||
| Tax-exempt |
||||||||||||||||
| U.S. Government Agencies |
||||||||||||||||
| Derivative asset – interest rate swap on loans |
||||||||||||||||
| Total |
$ | $ | $ | $ | ||||||||||||
| Liabilities: |
||||||||||||||||
| Derivative liability – interest rate swap on loans |
||||||||||||||||
| Total |
$ | $ | $ | $ | ||||||||||||
| December 31, 2021 |
||||||||||||||||
| (Dollars in thousands) |
Level 1 |
Level 2 |
Level 3 |
Total |
||||||||||||
| Assets: |
||||||||||||||||
| Investment securities available-for-sale: |
||||||||||||||||
| U.S. Treasury Securities |
$ | $ | $ | $ | ||||||||||||
| Collateralized Mortgage Backed |
||||||||||||||||
| Subordinated Debt |
||||||||||||||||
| Municipal Securities |
||||||||||||||||
| Taxable |
||||||||||||||||
| Tax-exempt |
||||||||||||||||
| U.S. Government Agencies |
||||||||||||||||
| Derivative asset – interest rate swap on loans |
||||||||||||||||
| Total |
$ | $ | $ | $ | ||||||||||||
| Liabilities: |
||||||||||||||||
| Derivative liability – interest rate swap on loans |
||||||||||||||||
| Total |
$ | $ | $ | $ | ||||||||||||
Certain assets are measured at fair value on a nonrecurring basis in accordance with GAAP. Adjustments to the fair value of these assets usually result from the application of lower-of-cost-or-market accounting or write-downs of individual assets.
The following describes the valuation techniques used by the Bank to measure certain assets recorded at fair value on a nonrecurring basis in the financial statements:
Impaired loans
Loans are designated as impaired when, in the judgment of management based on current information and events, it is probable that all amounts due according to the contractual terms of the loan agreement will not be collected when due. The measurement of loss associated with impaired loans can be based on either the observable market price of the loan or the fair value of the collateral. Collateral may be in the form of real estate or business assets including equipment, inventory, and accounts receivable. Most of the collateral is real estate. The value of real estate collateral is determined utilizing an income or market valuation approach based on an appraisal conducted by an independent, licensed appraiser outside of the Bank using observable market data (Level 2). However, if the collateral value is significantly adjusted due to differences in the comparable properties, or is discounted by the Bank because of marketability, then the fair value is considered Level 3. The value of business equipment is based upon an outside appraisal if deemed significant, or the net book value on the applicable business’ financial statements if not considered significant. Likewise, values for inventory and accounts receivables collateral are based on financial statement balances or aging reports (Level 3). Impaired loans allocated to the Allowance for Loan Losses are measured at fair value on a nonrecurring basis. Any fair value adjustments are recorded in the period incurred as provision for loan losses on the Statements of Income.
Other real estate owned
Other real estate owned (“OREO”) is measured at fair value less cost to sell, based on an appraisal conducted by an independent, licensed appraiser outside of the Bank. If the collateral value is significantly adjusted due to differences in the comparable properties, or is discounted by the Bank because of marketability, then the fair value is considered Level 3. OREO is measured at fair value on a nonrecurring basis. Any initial fair value adjustment is charged against the Allowance for Loan Losses. Subsequent fair value adjustments are recorded in the period incurred and included in other noninterest expense on the Statements of Income.
The Company did have any assets that were measured at fair value on a nonrecurring basis as of June 30, 2022. The following table summarizes the value of the Bank’s assets as of December 31, 2021 that were measured at fair value on a nonrecurring basis during the period:
| December 31, 2021 |
||||||||||||||||
| (Dollars in thousands) |
Level 1 |
Level 2 |
Level 3 |
Total |
||||||||||||
| Assets: |
||||||||||||||||
| Other Real Estate Owned |
$ | $ | $ | $ | ||||||||||||
| Total |
$ | $ | $ | $ | ||||||||||||
The following table presents quantitative information about Level 3 fair value measurements for financial assets measured at fair value on a nonreoccuring basis as of December 31, 2021.
| Fair Value Measurements at December 31, 2021 |
||||||||||
| (Dollars in thousands) |
Fair Value |
Valuation Technique(s) |
Unobservable Inputs |
Range of |
||||||
| Other Real Estate Owned, net |
$ | Appraisals |
Discount to reflect current market |
|||||||
| Total |
$ | |||||||||
Fair Value of Financial Instruments
FASB ASC 825, Financial Instruments, requires disclosure about fair value of financial instruments, including those financial assets and financial liabilities that are not required to be measured and reported at fair value on a recurring or nonrecurring basis. ASC 825 excludes certain financial instruments and all nonfinancial instruments from its disclosure requirements. Accordingly, the aggregate fair value amounts presented may not necessarily represent the underlying fair value of the Company. In accordance with ASU 2016-01, the Company uses the exit price notion, rather than the entry price notion, in calculating the fair values of financial instruments not measured at fair value on a recurring basis.
The following tables reflect the carrying amounts and estimated fair values of the Company’s financial instruments whether or not recognized on the Consolidated Balance Sheets at fair value.
| June 30, 2022 |
Carrying |
Estimated |
Quoted Prices in Active Markets for Identical Assets |
Significant Other Observable Inputs |
Significant Unobservable Inputs |
|||||||||||||||
| (Dollars in thousands) |
Amount |
Fair Value |
Level 1 |
Level 2 |
Level 3 |
|||||||||||||||
| Assets: |
||||||||||||||||||||
| Cash and cash equivalents |
$ | $ | $ | $ | $ | |||||||||||||||
| Restricted equity securities |
||||||||||||||||||||
| Securities: |
||||||||||||||||||||
| Available for sale |
||||||||||||||||||||
| Held to maturity |
||||||||||||||||||||
| Loans, net |
||||||||||||||||||||
| Derivative asset – interest rate swap on loans |
||||||||||||||||||||
| Bank owned life insurance |
||||||||||||||||||||
| Accrued interest receivable |
||||||||||||||||||||
| Liabilities: |
||||||||||||||||||||
| Deposits |
$ | $ | $ | $ | $ | |||||||||||||||
| Subordinated debt, net |
||||||||||||||||||||
| Derivative liability – interest rate swaps on loans |
||||||||||||||||||||
| Accrued interest payable |
||||||||||||||||||||
| December 31, 2021 |
Carrying |
Estimated |
Quoted |
Significant |
Significant |
|||||||||||||||
| (Dollars in thousands) |
Amount |
Fair Value |
Level 1 |
Level 2 |
Level 3 |
|||||||||||||||
| Assets: |
||||||||||||||||||||
| Cash and cash equivalents |
$ | $ | $ | $ | $ | |||||||||||||||
| Restricted equity securities |
||||||||||||||||||||
| Securities: |
||||||||||||||||||||
| Available for sale |
||||||||||||||||||||
| Held to maturity |
||||||||||||||||||||
| Loans, net |
||||||||||||||||||||
| Derivative asset – interest rate swap on loans |
||||||||||||||||||||
| Bank owned life insurance |
||||||||||||||||||||
| Accrued interest receivable |
||||||||||||||||||||
| Liabilities: |
||||||||||||||||||||
| Deposits |
$ | $ | $ | $ | $ | |||||||||||||||
| Subordinated debt, net |
||||||||||||||||||||
| Derivative liability – interest rate swaps on loans |
||||||||||||||||||||
| Accrued interest payable |
||||||||||||||||||||
The above information should not be interpreted as an estimate of the fair value of the entire Company since a fair value calculation is only provided for a limited portion of the Company’s assets and liabilities. Due to a wide range of valuation techniques and the degree of subjectivity used in making the estimates, comparisons between the Company’s disclosures and those of other companies may not be meaningful. There were no changes in methodologies or transfers between levels at June 30, 2022 and December 31, 2021.
Note 7. Earnings Per Common Share
Basic earnings per common share excludes dilution and is computed by dividing net income available to common shareholders by the weighted average number of common shares outstanding for the period. Diluted earnings per share reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock which then shared in the earnings of the Bank. There were
The weighted average number of shares used in the calculation of basic and diluted earnings per common share includes unvested restricted shares of the Company’s common stock outstanding. Applicable guidance requires that outstanding un-vested share-based payment awards that contain voting rights and rights to non-forfeitable dividends participate in undistributed earnings with common shareholders.
| For the Three Months Ended June 30, | For the Six Months Ended June 30, | |||||||||||||||
| (Dollars in thousands, except for per share data) | 2022 | 2021 | 2022 | 2021 | ||||||||||||
| Net income | $ | $ | $ | $ | ||||||||||||
| Preferred stock dividends | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Net income available to common shareholders | $ | $ | $ | $ | ||||||||||||
| Weighted average number of common shares issued, basic and diluted | ||||||||||||||||
| Net income per common share: | ||||||||||||||||
| Basic and diluted income available per common share | $ | $ | $ | $ | ||||||||||||
Note 8. Accumulated Other Comprehensive Income (Loss)
The following table presents the cumulative balances of the components of accumulated other comprehensive income, net of deferred taxes, as of June 30, 2022 and December 31, 2021:
| June 30, 2022 |
December 31, 2021 |
|||||||
| Unrealized (loss) gain on securities |
$ | ( |
) | $ | ||||
| Unrealized loss on securities transferred to HTM |
( |
) | ( |
) | ||||
| Tax benefit (expense) |
( |
) | ||||||
| Total accumulated other comprehensive (loss) income |
$ | ( |
) | $ | ||||
Note 9. Leases
Right-of-use assets and lease liabilities are included in other assets and other liabilities, respectively, in the Consolidated Statements of Financial Condition. Lease liabilities represent the Company’s obligation to make lease payments and are presented at each reporting date as the net present value of the remaining contractual cash flows. Cash flows are discounted at the Company’s incremental borrowing rate in effect at the commencement date of the lease. The incremental borrowing rate was equal to the rate of borrowing from the FHLB that aligned with the term of the lease contract. Right-of-use assets represent the Company’s right to use the underlying asset for the lease term and are calculated as the sum of the lease liability and if applicable, prepaid rent, initial direct costs, and any incentives received from the lessor.
The Company’s long-term lease agreements are classified as operating leases. Certain of these leases offer the option to extend the lease term and the Company has included such extensions in its calculation of the lease liabilities to the extent the options are reasonably assured of being exercised. The lease agreements do not provide for residual value guarantees and have no restrictions or covenants that would impact dividends or require incurring additional financial obligations.
Cash paid for amounts included in the measurement of lease liabilities during the six months ended June 30, 2022 was $
| As of June 30, |
||||
| (Dollars in thousands) |
2022 |
|||
| Lease liabilities |
$ | |||
| Right-of-use assets |
$ | |||
| Weighted-average remaining lease term – operating leases (in months). |
||||
| Weighted-average discount rate – operating leases |
% | |||
| For the six months ended June 30, |
||||
| (Dollars in thousands) |
2022 |
|||
| Lease Cost |
||||
| Operating lease cost |
$ | |||
| Total lease costs |
$ | |||
| Cash paid for amounts included in measurement of lease liabilities |
$ | |||
The Company is the lessor for operating leases. One lease is extended on a month-to-month basis while two of these leases have arrangements for over twelve months with an option to extend the lease terms. The lease agreements do not provide for residual value guarantees and have no restrictions or covenants that would impact dividends or require incurring additional financial obligations. Total rent income on these operating leases is approximately $
As of June 30, 2022, all of the Company’s lease obligations are classified as operating leases. The Company does have any finance lease obligations.
A maturity analysis of operating lease liabilities and reconciliation of the undiscounted cash flows to the total of operating lease liabilities as of June 30, 2022 is as follows:
| (Dollars in thousands) |
||||
| 2022 |
$ | |||
| 2023 |
||||
| 2024 |
||||
| 2025 |
||||
| 2026 |
||||
| Thereafter |
||||
| Total undiscounted cash flows |
$ | |||
| Discount |
( |
) | ||
| Lease liabilities |
$ |
Item 2 – Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis is intended as a review of significant factors affecting the Company’s consolidated financial condition and results of operations for the periods indicated. This discussion and analysis should be read in conjunction with the accompanying consolidated financial statements and the related notes and the Company’s Annual Report on Form 10-K, which contains audited consolidated financial statements of the Company as of and for the year ended December 31, 2021, previously filed with the SEC on March 23, 2022. Results for the three and six months ended June 30, 2022 are not necessarily indicative of results for the year ending December 31, 2022 or any future period.
Forward-Looking Statements
This Quarterly Report on Form 10-Q contains certain forward-looking statements and information relating to the Company within the meaning of the Private Securities Litigation Reform Act of 1995 that are based on the beliefs of management as well as assumptions made by and information currently available to management. Forward-looking statements can be identified by the fact that they do not relate strictly to historical or current facts. They often include words like “believe,” “expect,” “anticipate,” “estimate,” and “intend” or future or conditional verbs such as “will,” “should,” “could,” or “may” and similar expressions or the negative thereof. Important factors that could cause actual results to differ materially from those in the forward–looking statements included herein include, but are not limited to:
| ● |
the continuing impact of the novel coronavirus disease (COVID-19) outbreak and measures taken in response for which future developments are highly uncertain and difficult to predict; |
| ● |
general economic conditions, either nationally or in our market area, that are worse than expected; |
| ● |
competition among depository and other financial institutions, particularly intensified competition for deposits; |
| ● |
inflation and an interest rate environment that may reduce our margins or reduce the fair value of our financial instruments; |
| ● |
adverse changes in the securities markets; |
| ● |
changes in laws or government regulations or policies affecting financial institutions, including changes in regulatory structure and in regulatory fees and capital requirements; |
| ● |
the impact of significant changes in accounting procedures or requirements on our financial condition or results of operations; |
| ● |
our ability to enter new markets successfully and capitalize on growth opportunities; |
| ● |
our ability to successfully integrate acquired entities; |
| ● |
changes in consumer spending, borrowing and savings habits; |
| ● |
changes in accounting policies and practices; |
| ● |
changes in our organization, compensation and benefit plans; |
| ● |
our ability to attract and retain key employees; |
| ● |
changes in our financial condition or results of operations that reduce capital; |
| ● |
changes in the financial condition or future prospects of issuers of securities that we own; |
| ● |
the concentration of our business in the Northern Virginia as well as the greater Washington, DC metropolitan area and the effect of changes in the economic, political and environmental conditions on those markets; |
| ● |
adequacy of or increases in the allowance for loan losses; |
| ● |
cyber threats, attacks or other data security events; |
| ● |
fraud or misconduct by internal or external parties; |
| ● |
reliance on third parties for key services; |
| ● |
deterioration of our asset quality, including an increase in loan delinquencies, problem assets and foreclosures; |
| ● |
future performance of our loan portfolio with respect to recently originated loans; |
| ● |
additional risks related to new lines of business, products, product enhancements or services; |
| ● |
results of examination of us by our regulators, including the possibility that our regulators may require us to increase our allowance for loan losses or to write-down assets or take other supervisory action; |
| ● |
the effectiveness of our internal controls over financial reporting and our ability to remediate any future material weakness in our internal controls over financial reporting; |
| ● |
liquidity, interest rate and operational risks associated with our business; |
| ● |
implications of our status as a smaller reporting company and as an emerging growth company; and |
| ● |
a work stoppage, forced quarantine, or other interruption or the unavailability of key employees. |
Should one or more of these risks or uncertainties materialize or should underlying assumptions prove incorrect, actual results may vary materially from those described herein. We caution readers not to place undue reliance on forward-looking statements. The Company disclaims any obligation to revise or update any forward-looking statements contained in this Form 10-Q to reflect future events or developments.
Overview
As used herein, the “Company,” “we,” “our,” and “us” refer to MainStreet Bancshares, Inc. and its subsidiary, and the “Bank” refers to MainStreet Bank.
MainStreet Bancshares, Inc.
MainStreet Bancshares, Inc. is a bank holding company that owns 100% of MainStreet Bank and MainStreet Community Capital, LLC. On October 12, 2021, the Company filed an election to be a financial holding company with the Board of Governors of the Federal Reserve System (the “Federal Reserve”). The Company elected financial holding company status in order to engage in a broader range of financial activities than are permitted for bank holding companies generally.
The Company and its subsidiaries are incorporated in and chartered by the Commonwealth of Virginia. The Company’s executive offices are located at 10089 Fairfax Boulevard, Fairfax, Virginia. Our telephone number is (703) 481-4567, and our internet address is www.mstreetbank.com. The information contained on our website shall not be considered part of this Quarterly Report on Form 10-Q, and the reference to our website does not constitute incorporation by reference of the information contained on the website.
MainStreet Bank
MainStreet Bank is a community commercial bank incorporated in and chartered by the Commonwealth of Virginia. The Bank is a member of the Federal Reserve Bank of Richmond, and its deposits are insured by the FDIC. The Bank opened for business on May 26, 2004, and is headquartered in Fairfax, Virginia. We currently operate six Bank branches; located in Herndon, Fairfax, McLean, Clarendon, Leesburg Virginia, and one in Washington D.C.
We emphasize providing responsive and personalized services to our clients. Due to the consolidation of financial institutions in our primary market area, we believe there is a significant opportunity for a local bank to provide a full range of financial services. By offering highly professional, personalized banking products and service delivery methods and employing advanced banking technologies, we seek to distinguish ourselves from larger, regional banks operating in our market area and believe we are able to compete effectively with other community banks.
We believe we have a solid franchise that meets the financial needs of our clients and communities by providing an array of personalized products and services delivered by seasoned banking professionals with decisions made at the local level. We believe a significant customer base in our market prefers to do business with a local institution that has a local management team, a local Board of Directors and local founders and that this customer base may not be satisfied with the responsiveness of larger regional banks. By providing quality services, coupled with the opportunities provided by the economies in our market area, we have generated and expect to continue to generate organic growth.
We service Northern Virginia as well as the greater Washington, D.C. metropolitan area. Our goal is to deliver a customized and targeted mix of products and services that meets or exceeds customer expectations. To accomplish this goal, we have deployed a premium operating system that gives customers access to up-to-date banking technology. These systems and our highly skilled staff have allowed us to compete with larger financial institutions. The combination of sophisticated technology and personal service sets us apart from our competition. We strive to be the leading community bank in our market.
We offer a full range of banking services to individuals, small to medium-sized businesses and professional service organizations through both traditional and electronic delivery. We were the first community bank in the Washington, D.C. metropolitan area to offer a full online business banking solution, including remote check scanners on a business customer’s desktop. We offer mobile banking apps for iPhones, iPads and Android devices that provide for remote deposit of checks. In addition, we were the first bank headquartered in the Commonwealth of Virginia to offer CDARS, the Certificate of Deposit Account Registry Service, an innovative deposit insurance solution that provides FDIC insurance on deposits up to $150 million. We believe that enhanced electronic delivery systems and technology increase profitability through greater productivity and cost control and allow us to offer new and better products and services.
Our products and services include: business and consumer checking, premium interest-bearing checking, business account analysis, savings, certificates of deposit and other depository services, as well as a broad array of commercial, real estate and consumer loans. Internet account access is available for all personal and business accounts, internet bill payment services are available on most accounts, and a robust online cash management system is available for business customers.
Avenu
On October 25, 2021, MainStreet Bancshares, Inc. formally introduced AvenuTM, a division of MainStreet Bank. AvenuTM represents the Company’s suite of Banking as a Service (“BaaS”) solutions designed to meet the banking needs of Fintech customers. We believe our approach to providing a proprietary BaaS solution is unique. Our transformational subledger combined with our high-touch compliance training goes beyond the industry standards to ensure that our Fintech partners will prosper. This division of MainStreet Bank currently serves money service businesses, payment processers, and Banking as a Service customers and provides the Bank with valuable low-cost deposits and additional streams of fee income. Our BaaS solution is in the late stage of development. A major component of the BaaS solution includes a fintech core, which is Software as a Service (SaaS).
MainStreet Community Capital, LLC
In August 2021, the Company created a community development entity (“CDE”) subsidiary, MainStreet Community Capital, LLC, a Virginia limited liability company, to apply for New Market Tax Credit (“NMTC”) allocations from the U.S. Department of Treasury’s Community Development Financial Institutions Fund. To promote development in economically distressed areas, the NMTC program was established under the Community Renewal Tax Relief Act of 2000 to provide tax incentives for capital investment in disadvantaged market areas that have not experienced economic expansion. The program establishes a tax credit for investment in a CDE and ongoing compliance with the program is accomplished through a governing board and an advisory board which maintains accountability to residents and businesses in the aforementioned disadvantaged areas. This CDE will be an intermediary vehicle for the provision of loans and investments in Low-Income Communities (“LICs”). In January 2022, the Community Development Financial Institutions Fund (“CDFI”) of the United States Department of the Treasury certified MainStreet Community Capital, LLC as a registered CDE.
Impact of Inflation
Growth in economic activity and demand for goods and services, alongside labor shortages and supply chain complications have contributed to rising inflation. In response, the Federal Reserve Board has begun raising interest rates and signaled that it will continue to raise rates, taper its purchase of mortgage and other bonds and reduce the size of the balance sheet over time. Inflation may also have impacts on the Bank’s customers, on businesses and consumers and their ability or willingness to invest, save or spend, and perhaps on their ability to repay loans. As such, there would likely be impacts on the general appetite for banking products and the credit health of the Bank’s customer base. The timing and impact of inflation and rising interest rates on our business and related financial results will depend on future developments, which are highly uncertain and difficult to predict.
Critical Accounting Policies
The accounting and financial reporting policies of the Company conform to accounting principles generally accepted in the United States of America and to general practices within the banking industry. Accordingly, the financial statements require certain estimates, judgments, and assumptions, which are believed to be reasonable, based upon the information available. These estimates and assumptions affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of income and expenses during the periods presented. Critical accounting policies comprise those that management believes are the most critical to aid in fully understanding and evaluating our reported financial results. These policies require numerous estimates or economic assumptions that may prove inaccurate or may be subject to variations which may significantly affect our reported results and financial condition for the current period or in future periods.
Following the announcement by the U.K.’s Financial Conduct Authority in July 2017 that it will no longer persuade or require banks to submit rates for the London InterBank Offered Rate (LIBOR) after 2021, central banks and regulators around the world have commissioned working groups to find suitable replacements for Interbank Offered Rates (IBOR) and other benchmark rates and to implement financial benchmark reforms more generally. These actions have resulted in uncertainty regarding the use of alternative reference rates (ARRs) and could cause disruptions in a variety of markets, as well as adversely impact our business, operations, and financial results.
To facilitate an orderly transition from Interbank Offered Rates ("IBORs") and other benchmark rates to alternative referecne rates ("ARRs"), the Company has established an enterprise-wide initiative led by senior management. The objective of this initiative is to identify, assess and monitor risks associated with the expected discontinuation or unavailability of benchmarks, including LIBOR, achieve operational readiness and engage impacted clients in connection with the transition to ARRs.
Our critical accounting policies involving significant judgments and assumptions used in the preparation of the consolidated financial statements as of June 30, 2022 have remained unchanged from the disclosures presented in our Annual Report on Form 10-K, for the year ended December 31, 2021, other than the items discussed in our Recently Issued Accounting Pronouncements.
Comparison of Statements of Income for the Three Months Ended June 30, 2022 and 2021
General
Net income decreased $1.2 million to $5.9 million for the three months ended June 30, 2022 from $7.1 million for the three months ended June 30, 2021. The decrease in net income for the three months ended June 30, 2022 was primarily due to a recovery of loan loss provision of $2.0 million over the same period in 2021. During the three months ended June 30, 2022, the Company’s net interest income increased $3.1 million over the same period in 2021. Net income was also affected by increases of $941,000 in salaries and employee benefits for the three months ended June 30, 2022 compared to the same period in 2021.
Interest Income
Total interest income increased $2.9 million, or 18.5%, to $18.8 million for the three months ended June 30, 2022 from $15.9 million for the three months ended June 30, 2021. The increase was primarily the result of an increase in interest and fees on loans of $2.7 million and an increase in interest on federal funds sold of $175,000. Total average interest-earning assets increased $6.1 million, to $1.64 billion for the three months ended June 30, 2022 from $1.64 billion for the same period in 2021 primarily because of an increase of $132.2 million in the average balance of loans, a $20.8 million increase in the average balance of investment securities and was offset by a decrease of $146.9 million in the average balance of federal funds sold and interest-earning deposits, as these funds were deployed into loans and securities. The average yield on our interest-earning assets increased 70 basis points to 4.60% for the three months ended June 30, 2022 as compared to 3.90% for the three months ended June 30, 2021 primarily because of higher average yields on interest earning assets due to market conditions, loans related to PPP lending with a rate of 1% paying off, and the Federal Reserve increasing the benchmark interest rates by 125 basis points over the course of the quarter.
Interest and fees on loans increased $2.7 million, to $18.0 million for the three months ended June 30, 2022 from $15.3 million for the same period in 2021. This increase was primarily due to an increase in the average yield on loans and the average loans outstanding increasing $132.2 million, which increased to $1.43 billion as of June 30, 2022 from $1.30 billion as of June 30, 2021. The average yield on loans increased 32 basis points, or 6.8%, for the three months ended June 30, 2022 as compared to the three months ended June 30, 2021. Included in average loans for the three months ended June 30, 2022, $11.4 million was attributable to average PPP loans. PPP loans have an interest rate of 1% and as the level of PPP loan repayments accelerate, the Bank is seeing loan yields rise to a normalized level. The Federal Reserve increased the federal interest rate by 125 basis points throughout the quarter so the impact of this increase will not be fully demonstrated until the third quarter.
Interest income on federal funds sold and interest-earning deposits increased by $175,000 to $195,000 for the three months ended June 30, 2022, from $20,000 for the three months ended June 30, 2021. The increase was primarily due to an increase in the average yield on these deposits despite the average balances decreasing over the same time period. The average balance of interest-earning deposits and federal funds sold decreased $146.9 million to $98.3 million for the three months ended June 30, 2022 from $245.3 million for the same period in 2021. The average yield increased to 0.77% for the three months ended June 30, 2022 from 0.03% for the same period in 2021. The Bank deployed the balances in these accounts to fund loan growth during the second quarter of 2022.
Interest on investment securities increased by $67,000 to $734,000 for the three months ended June 30, 2022 from $667,000 for the three months ended June 30, 2021. Interest on investments in U.S Treasury, U.S. Government Agencies, and U.S Municipals decreased in total $3,000, or 1.0%, to $317,000 for the three months ended June 30, 2022, from $320,000 for the three months ended June 30, 2021. Interest on mortgage-backed securities decreased by $4,000, or 3.5%, to $108,000 for the three months ended June 30, 2022, from $112,000 for the three months ended June 30, 2021. Subordinated debt interest income increased by $36,000, or 37.0%, to $132,000 for the three months ended June 30, 2022, from $96,000 for the three months ended June 30, 2021. The average yield on taxable securities decreased 23 basis points, to 2.20% and the average yield on tax-exempt securities decreased 27 basis points, to 3.47% on a tax equivalent basis for the three months ended June 30, 2022, from 2.43% and 3.74%, respectively, for the same period in 2021. As a decrease in market rates resulted in stagnant yielding investments, investment income increased due to the average balance of investment securities increasing by $20.8 million, to $111.7 million for the three months ended June 30, 2022, from $90.8 million for the three months ended June 30, 2021.
Interest Expense
Total interest expense decreased $191,000, to $2.7 million for the three months ended June 30, 2022 from $2.9 million for the three months ended June 30, 2021, primarily due to a $464,000 decrease in interest expense on time deposits and a $69,000 decrease in interest expense on money market deposits. These decreases were offset by an increase of $245,000 in interest expense primarily due to newly issued subordinated debt in 2021 and 2022 and were included in the three months ended June 30, 2022 over the three months ended June 30, 2021. There were additional increases in interest expense on Federal Home Loan Bank advances of $52,000 in the three months ended June 30, 2022 over the same period in 2021.
Interest expense on deposits decreased $488,000 to $1.8 million for the three months ended June 30, 2022 from $2.3 million for the three months ended June 30, 2021 primarily as a result of a decrease in average interest-bearing deposit yields and balances. The decrease in average deposit balances was $108.8 million to $892.8 million during the three months ended June 30, 2022 as compared to $1.00 billion for the three months ended June 30, 2021. The decrease in the average balance of interest-bearing deposits was primarily a result of an $88.2 million decrease in the average balance of money market deposit accounts and by a $39.0 million decrease in the average balance of time deposits. The average cost of deposits was 82 basis points for the three months ended June 30, 2022, compared to 93 basis points for the three months ended June 30, 2021. The average rate paid on money market deposits decreased 1 basis points to 0.26% for the three months ended June 30, 2022 from 0.27% for the three months ended June 30, 2021. The average rate paid on interest-bearing demand deposits increased 12 basis points to 0.44% for the three months ended June 30, 2022 from 0.32% for the three months ended June 30, 2021 primarily due to market competition. The average cost of certificates of deposit decreased by 25 basis points to 1.23% for the three months ended June 30, 2022 as compared to 1.48% for the three months ended June 30, 2021. The increase in the average balance of interest-bearing demand deposits for the three months ended June 30, 2022, primarily was the result of our continued effort to attract and retain low-cost deposits, and to reduce our reliance on wholesale deposits.
Interest expense on advances from the Federal Home Loan Bank increased $52,000 to $52,000 for the three months ended June 30, 2022, from $0 for the three months ended June 30, 2021 as a result an average balance of $35.3 million of outstanding advances for the three months ended June 30, 2022 compared to no advances outstanding for the three months ended June 30, 2021. The average balance of subordinated debt increased $32.3 million for the three months ended June 30, 2022, due to $30 million in refinanced debt issued in 2021 and an additional $43.7 million issued in the six months ended June 30, 2022
Net Interest Income
Net interest income increased approximately $3.1 million, or 24.1%, to $16.1 million for the three months ended June 30, 2022 from $13.0 million for the three months ended June 30, 2021 because of our net interest-earning assets increasing $47.3 million to $644.8 million for the three months ended June 30, 2022 from $597.5 million for the three months ended June 30, 2021. The interest rate spread increased by 68 basis points to 3.52% for the three months ended June 30, 2022 from 2.84% for the three months ended June 30, 2021. The net interest margin increased by 75 basis points from 3.20% for the three months ended June 30, 2021 to 3.95% for the three months ended June 30, 2022 on a tax equivalent basis. Refer to “Use of Certain Non-GAAP Financial Measures,” below, for a reconciliation of adjusted net interest margin.
Average Balances, Net Interest Income, Yields Earned and Rates Paid
The following table shows for the periods indicated the total dollar amount of interest from average interest-earning assets and the resulting yields, as well as the interest expense on average interest-bearing liabilities, expressed both in dollars and rates, and the net interest margin. All average balances are based on daily balances.
| For the Three Months Ended June 30, |
||||||||||||||||||||||||
| 2022 |
2021 |
|||||||||||||||||||||||
| Average Balance |
Interest Income/ Expense(6) |
Yield/ Cost(5)(6) |
Average Balance |
Interest Income/ Expense(6) |
Yield/ Cost(5)(6) |
|||||||||||||||||||
| (Dollars in thousands) |
||||||||||||||||||||||||
| Interest-earning assets: |
||||||||||||||||||||||||
| Loans(1) |
$ | 1,434,877 | $ | 17,954 | 5.02 | % | $ | 1,302,722 | $ | 15,257 | 4.70 | % | ||||||||||||
| Investment securities: |
||||||||||||||||||||||||
| Taxable |
73,153 | 401 | 2.20 | % | 54,810 | 332 | 2.43 | % | ||||||||||||||||
| Tax-exempt |
38,507 | 333 | 3.47 | % | 36,010 | 335 | 3.74 | % | ||||||||||||||||
| Federal funds and interest-bearing deposits |
98,326 | 195 | 0.80 | % | 245,257 | 20 | 0.03 | % | ||||||||||||||||
| Total interest-earning assets |
1,644,863 | $ | 18,883 | 4.60 | % | 1,638,799 | $ | 15,944 | 3.90 | % | ||||||||||||||
| Non-interest-earning assets |
65,225 | 69,950 | ||||||||||||||||||||||
| Total assets |
$ | 1,710,088 | $ | 1,708,749 | ||||||||||||||||||||
| Interest-bearing liabilities: |
||||||||||||||||||||||||
| Interest-bearing demand deposits |
$ | 96,352 | $ | 105 | 0.44 | % | $ | 68,714 | $ | 55 | 0.32 | % | ||||||||||||
| Savings and NOW deposits |
62,588 | 42 | 0.27 | % | 71,747 | 47 | 0.26 | % | ||||||||||||||||
| Money market deposits |
234,097 | 151 | 0.26 | % | 322,332 | 220 | 0.27 | % | ||||||||||||||||
| Time deposits |
499,734 | 1,530 | 1.23 | % | 538,766 | 1,994 | 1.48 | % | ||||||||||||||||
| Total interest-bearing deposits |
892,771 | 1,828 | 0.82 | % | 1,001,559 | 2,316 | 0.93 | % | ||||||||||||||||
| Federal funds purchased |
1 | — | — | 1 | — | — | ||||||||||||||||||
| Subordinated debt |
72,009 | 812 | 4.52 | % | 39,716 | 567 | 5.73 | % | ||||||||||||||||
| Federal Home Loan Bank advances |
35,275 | 52 | 0.59 | % | — | — | — | |||||||||||||||||
| Total interest-bearing liabilities |
1,000,056 | $ | 2,692 | 1.08 | % | 1,041,276 | $ | 2,883 | 1.11 | % | ||||||||||||||
| Non-interest-bearing liabilities: |
||||||||||||||||||||||||
| Demand deposits and other liabilities |
521,130 | 491,857 | ||||||||||||||||||||||
| Total liabilities |
1,521,186 | 1,533,133 | ||||||||||||||||||||||
| Stockholders’ equity |
188,902 | 175,616 | ||||||||||||||||||||||
| Total liabilities and stockholders’ equity |
$ | 1,710,088 | $ | 1,708,749 | ||||||||||||||||||||
| Net interest income |
$ | 16,191 | $ | 13,061 | ||||||||||||||||||||
| Interest rate spread(2) |
3.52 | % | 2.79 | % | ||||||||||||||||||||
| Net interest-earning assets(3) |
$ | 644,807 | $ | 597,523 | ||||||||||||||||||||
| Net interest margin(4) |
3.95 | % | 3.20 | % | ||||||||||||||||||||
| Average interest-earning assets to average interest-bearing liabilities |
164.48 | % | 157.38 | % | ||||||||||||||||||||
| (1) |
Includes loans classified as non-accrual |
| (2) |
Interest rate spread represents the difference between the average yield on average interest–earning assets and the average cost of average interest-bearing liabilities. |
| (3) |
Net interest earning assets represent total average interest–earning assets less total interest–bearing liabilities. |
| (4) |
Net interest margin represents net interest income divided by total average interest-earning assets. |
| (5) | Annualized. |
| (6) |
Income and yields for all periods presented are reported on a tax-equivalent basis using the federal statutory tax rate of 21%. Refer to “Use of Certain Non-GAAP Financial Measures.” |
Rate/ Volume Analysis
The following table presents the effects of changing rates and volumes on net interest income for the periods indicated. The rate column shows the effects attributable to changes in rate (changes in rate multiplied by prior average volume). The volume column shows the effects attributable to changes in volume (changes in average volume multiplied by prior rate). Changes attributable to both volume and rate are allocated between the volume and rate categories. The net column represents the sum of the prior columns.
For purposes of this table, changes attributable to both rate and volume, which cannot be segregated, have been allocated proportionately, based on the changes due to rate and the changes due to volume.
| For the Three Months Ended |
||||||||||||
| June 30, 2022 and 2021 |
||||||||||||
| Increase (Decrease) Due to |
Total Increase |
|||||||||||
| Volume |
Rate |
(Decrease) |
||||||||||
| (In thousands) |
||||||||||||
| Interest-earning assets: |
||||||||||||
| Loans |
$ | 1,613 | $ | 1,084 | $ | 2,697 | ||||||
| Investment securities: |
||||||||||||
| Taxable |
250 | (181 | ) | 69 | ||||||||
| Tax exempt |
94 | (96 | ) | (2 | ) | |||||||
| Federal funds and interest-bearing deposits |
(82 | ) | 257 | 175 | ||||||||
| Total interest-earning assets |
1,875 | 1,064 | 2,939 | |||||||||
| Interest-bearing liabilities: |
||||||||||||
| Interest-bearing demand deposits |
26 | 24 | 50 | |||||||||
| Savings and NOW accounts |
(15 | ) | 10 | (5 | ) | |||||||
| Money market deposit accounts |
(61 | ) | (8 | ) | (69 | ) | ||||||
| Time deposits |
(139 | ) | (325 | ) | (464 | ) | ||||||
| Total deposits |
(189 | ) | (299 | ) | (488 | ) | ||||||
| Federal Home Loan Bank advances |
52 | — | 52 | |||||||||
| Subordinated debt |
958 | (713 | ) | 245 | ||||||||
| Total interest-bearing liabilities |
821 | (1,012 | ) | (191 | ) | |||||||
| Change in net interest income |
$ | 1,054 | $ | 2,076 | $ | 3,130 | ||||||
Provision for Loan Losses
Management believes that the provision recorded for the period ended June 30, 2022 reflects a balance sufficient to provide for each allowance segment, using objective data and information available to us at this time in evaluating our standard analysis of local/national economic data, changes in underwriting quality, portfolio concentrations, experience of lending team, and credit quality. We will continuously review the loan portfolio to determine the depth and breadth of potential loan losses. As we obtain additional information and to more accurately assess the full nature and extent of elevated risk to the loan portfolio that may arise, additional provision expenses may be required.
The provision for loan losses, which is an operating expense, is maintained to ensure that the allowance for loan losses is maintained at levels we consider necessary and appropriate to absorb both probable and reasonably estimated credit losses at a balance sheet date. In determining the level of the allowance for loan losses, we consider past and current loss experience, evaluations of real estate collateral, current economic conditions, volume and type of lending, adverse situations that may affect a borrower’s ability to repay a loan and the levels of non-performing loans. The amount of the allowance is based on estimates, and actual losses may vary from such estimates as more information becomes available over time or economic conditions change. This evaluation is inherently subjective, as it requires estimates and assumptions that are susceptible to significant revision as circumstances change as more information becomes available. The allowance for loan losses is assessed monthly and provisions are made for loan losses as required in order to maintain the allowance.
Provision for loan losses increased by $2.6 million to a provision for loan losses of $480,000 for the three months ended June 30, 2022 from a provision recovery of $2.1 million for the three months ended June 30, 2021, which was normalized from the pandemic provision recovery for the same time period in 2021. Loan originations, which totaled approximately $128.8 million for the three months ended June 30, 2021 increased $47.9 million compared to loan originations, of $176.7 million for the three months ended June 30, 2022. The Company has not provisioned any allowance for loan losses for remaining PPP loans as they are 100% guaranteed by Small Business Administration. The Company did not have any non-performing loans at June 30, 2021 or June 30, 2022.
During the three months ended June 30, 2022, special mention loans decreased $1.0 million for a balance of $16.1 million. Substandard loans increased $8.6 million as of June 30, 2022 for a balance of $13.8 million. Of the substandard loans as of June 30, 2022, 79% are connected to the hospitality industry. These loans were initially impacted by the pandemic and were downgraded out of an abundance of caution while cash flows and occupancy levels have continued to increase to pre-pandemic levels. Management does not believe there will be losses associated with these credits. During the three months ended June 30, 2022, there were no charge-offs incurred, and recoveries of $2,000 were received.
Non-Interest Income
Non-interest income decreased $291,000, or 18.7%, to $1.3 million for the three months ended June 30, 2022 from $1.6 million for the three months ended June 30, 2021. The decrease in non-interest income was primarily due to gains on the sale of SBA guaranteed loans that occurred in the three months ended June 30, 2021 that did not occur in 2022. The decrease associated with that transaction was offset by an increase in loan swap fee income recognized of $101,000 for the three months ended June 30, 2022. The Company continues to focus on increasing fee income through loan swaps as it strategically benefits our customers.
Non-Interest Expense
Non-interest expense increased $1.6 million, or 20.6%, to $9.5 million for the three months ended June 30, 2022 from $7.9 million for the three months ended June 30, 2021 primarily because of increases in salary and employee benefits of $941,000 and outside service expenses of $287,000. Salaries and employee benefits expense increased by $941,000 to $5.6 million for the three months ended June 30, 2022 from $4.7 million for the three months ended June 30, 2021primarily as a result of seventeen employees and the related salary and benefit expenses for these additional employees. Outside service expenses increased $287,000, or 102.5%, to $567,000 for the three months ended June 30, 2022 from $280,000 for the three months ended June 30, 2021 due to investments in technology and costs associated with Avenu. Franchise taxes decreased approximately $34,000 to $352,000 for the three months ended June 30, 2022 from $386,000 for the three months ended June 30, 2021 because of the make up of the Company’s capital as of June 30, 2022 compared to the balance sheet as of June 30, 2021. FDIC insurance premiums decreased approximately $210,000 to $150,000 for the three months ended June 30, 2022 from $360,000 for the three months ended June 30, 2021 due to smaller than anticipated assessments from the FDIC. Advertising and marketing expenses increased $172,000, or 42.8%, to $574,000 for the three months ended June 30, 2022 from $402,000 for the three months ended June 30, 2021 due to timing of contracts and continued investment in expanding the Company's brand.
Income Tax Expense
Income tax expense decreased $146,000, or 9.0%, to a tax expense of $1.5 million for the three months ended June 30, 2022 from a tax expense of $1.6 million for the three months ended June 30, 2021. The decrease in federal income tax expense for the three months ended June 30, 2022 compared to the same period a year ago was driven by the decrease in income before income taxes of $1.3 million, to income before income tax of $7.4 million as of June 30, 2022 compared to income before income tax expense of 8.8 million for the same period in the prior year. The Company was able to apply and claim a research and development tax credit of approximately $89,000 for its associated work in developing a software platform. As a result of expanding its footprint, the Company has included assessments in income tax expense for potential state tax liabilities which totaled $116,000 for the three months ended June 30, 2022. For the three months ended June 30, 2022, the Company had an effective tax expense rate of 20.0%, compared to effective tax expense rate of 18.6% for the three months ended June 30, 2021.
Comparison of Statements of Income for the Six Months Ended June 30, 2022 and 2021
General
Net income decreased $1.2 million to $11.4 million for the six months ended June 30, 2022 from $12.6 million for the six months ended June 30, 2021. The decrease in net income for the six months ended June 30, 2022 was primarily due to non-reoccurring recovery of provision for loan losses of $1.8 million taken in the same period in 2021, combined with a $1.2 million normalized provision for loan losses for the six months ended June 30, 2022. During the six months ended June 30, 2022, the Company’s net interest income increased $4.9 million over the same period in 2021. Net income was also affected by increases of $1.7 million in salaries and employee benefits for the six months ended June 30, 2022 compared to the same period in 2021.
Interest Income
Total interest income increased $4.0 million, or 12.2%, to $36.2 million for the six months ended June 30, 2022 from $32.2 million for the six months ended June 30, 2021. The increase was primarily the result of an increase in interest and fees on loans of $3.6 million and an increase in interest on federal funds and interest-bearing deposits of $194,000. Total average interest-earning assets decreased $11.2 million, to $1.61 billion for the six months ended June 30, 2022 from $1.62 billion for the same period in 2021 primarily because of a decrease of $128.6 million in the average balance of federal funds sold and interest-earning deposits, a $22.0 million increase in the average balance of investment securities and an increase of $95.4 million in the average balance of loans as a large portion of our cash was used to fund loan growth late in the first quarter. The average yield on our interest-earning assets increased 53 basis points to 4.55% for the six months ended June 30, 2022 as compared to 4.02% for the six months ended June 30, 2021 primarily because of higher average yields on interest earning assets due to market conditions, loans related to PPP lending with a rate of 1% paying off, and the Federal Reserve increasing the benchmark interest rates by 150 basis points.
Interest and fees on loans increased $3.6 million, to $34.6 million for the six months ended June 30, 2022 from $31.0 million for the same period in 2021. This increase was primarily due to an increase in the average yield on loans and the average loans outstanding increasing $95.4 million, which increased to $1.41 billion as of June 30, 2022 from $1.31 billion as of June 30, 2021. The average yield on loans increased 19 basis points, or 4.0%, for the six months ended June 30, 2022 as compared to the six months ended June 30, 2021. Included in average loans for the six months ended June 30, 2022, $25.2 million was attributable to average PPP loans. PPP loans have an interest rate of 1% and as the level of PPP loan repayments accelerate, the Bank is seeing loan yields rise to a normalized level. The Federal Reserve increased the federal interest rate by 150 basis points over the first six months so the impact of these increases will not be fully demonstrated until the second part of the year.
Interest income on federal funds sold and interest-earning deposits increased by $194,000 to $229,000 for the six months ended June 30, 2022, from $35,000 for the six months ended June 30, 2021. The increase was primarily due to an increase in the average yield on these deposits despite the average balances decreasing over the same time period. The average balance of interest-earning deposits and federal funds sold decreased $128.6 million to $91.1 million for the six months ended June 30, 2022 from $219.6 million for the same period in 2021. The average yield increased to 0.51% for the six months ended June 30, 2022 from 0.03% for the same period in 2021. The Bank deployed the balances in these accounts to fund loan growth during the first six months of 2022.
Interest on investment securities increased by $166,000 to $1.4 million for the six months ended June 30, 2022 from $1.3 million for the six months ended June 30, 2021. Interest on investments in U.S Treasury, U.S. Government Agencies, and U.S Municipals increased in total $6,000, or 0.9%, to $652,000 for the six months ended June 30, 2022, from $647,000 for the six months ended June 30, 2021. Interest on mortgage-backed securities increased by 37,000, or 21.9%, to $208,000 for the six months ended June 30, 2022, from $170,000 for the six months ended June 30, 2021. Subordinated debt interest income increased by $78,000, or 43.4%, to $256,000 for the six months ended June 30, 2022, from $179,000 for the six months ended June 30, 2021. The average yield on taxable securities decreased 12 basis points, to 2.09% and the average yield for tax-exempt securities decreased 27 basis points, on a tax equivalent basis, for the six months ended June 30, 2022, from 3.77% and 3.507%, respectively, for the same period in 2021. As a decrease in market rates resulted in stagnant yielding investments, investment income increased due to the average balance of investment securities increasing by $22.0 million, to $112.3 million for the six months ended June 30, 2022, from $90.3 million for the six months ended June 30, 2021
Interest Expense
Total interest expense decreased $902,000, to $4.8 million for the six months ended June 30, 2022 from $5.7 million for the six months ended June 30, 2021, primarily due to a $1.3 million decrease in interest expense on time deposits and a $227,000 decrease in interest expense on money market deposits. These decreases were offset by an increase of $475,000 in interest expense primarily due to refinancing subordinated debt in 2021 and newly issued subordinated debt in 2022 that was included in the six months ended June 30, 2022 over the six months ended June 30, 2021. There were additional increases in interest expense on Federal Home Loan Bank advances of $83,000 in the six months ended June 30, 2022 over the same period in 2021.
Interest expense on deposits decreased $1.5 million to $3.5 million for the six months ended June 30, 2022 from $4.9 million for the six months ended June 30, 2021 primarily as a result of a decrease in average interest-bearing deposit yields and balances. The decrease in average deposit balances was $131.0 million to $885.4 million during the six months ended June 30, 2022 as compared to $1.02 billion for the six months ended June 30, 2021. The decrease in the average balance of interest-bearing deposits was primarily a result of a $116.5 million decrease in the average balance of money market deposit accounts and by a $31.1 million decrease in the average balance of time deposits. The average cost of deposits was 79 basis points for the six months ended June 30, 2022, compared to 98 basis points for the six months ended June 30, 2021. The average rate paid on money market deposits decreased 5 basis points to 0.22% for the six months ended June 30, 2022 from 0.27% for the six months ended June 30, 2021. The average rate paid on interest-bearing demand deposits increased 9 basis points to 0.41% for the six months ended June 30, 2022 from 0.32% for the six months ended June 30, 2021 primarily due to market competition. The average cost of certificates of deposit decreased by 43 basis points to 1.25% for the six months ended June 30, 2022 as compared to 1.68% for the six months ended June 30, 2021. The increase in the average balance of interest-bearing demand deposits for the six months ended June 30, 2022, primarily was the result of our continued effort to attract and retain low-cost deposits. and to reduce our reliance on wholesale deposits.
Interest expense on advances from the Federal Home Loan Bank increased $83,000 to $83,000 for the six months ended June 30, 2022, from $0 for the six months ended June 30, 2021 as a result an average balance of $36.2 million of outstanding advances on the Federal Home Loan Bank for the six months ended June 30, 2022 compared to no advances for the six months ended June 30, 2021. The average balance of subordinated debt increased $30.7 million for the six months ended June 30, 2022, due to an additional $30 million in refinanced debt issued in 2021 and $43.7 million issued in the six months ended June 30, 2022.
Net Interest Income
Net interest income increased approximately $4.9 million, or 18.3%, to $31.3 million for the six months ended June 30, 2022 from $26.5 million for the six months ended June 30, 2021 because of our net interest-earning assets increasing $52.8 million to $630.2 million for the six months ended June 30, 2022 from $577.4 million for the six months ended June 30, 2021. The interest rate spread increased by 64 basis points to 3.55% for the six months ended June 30, 2022 from 2.91% for the six months ended June 30, 2021. The net interest margin increased by 63 basis points from 3.31% for the six months ended June 30, 2021 to 3.94% for the six months ended June 30, 2022 on a tax equivalent basis. Refer to “Use of Certain Non-GAAP Financial Measures,” below, for a reconciliation of adjusted net interest margin.
Average Balances, Net Interest Income, Yields Earned and Rates Paid
The following table shows for the periods indicated the total dollar amount of interest from average interest-earning assets and the resulting yields, as well as the interest expense on average interest-bearing liabilities, expressed both in dollars and rates, and the net interest margin. All average balances are based on daily balances.
| For the Six Months Ended June 30, |
||||||||||||||||||||||||
| 2022 |
2021 |
|||||||||||||||||||||||
| Average Balance |
Interest Income/ Expense (6) |
Yield/ Cost(5)(6) |
Average Balance |
Interest Income/ Expense(6) |
Yield/ Cost(5)(6) |
|||||||||||||||||||
| (Dollars in thousands) |
||||||||||||||||||||||||
| Interest-earning assets: |
||||||||||||||||||||||||
| Loans(1) |
$ | 1,406,457 | $ | 34,639 | 4.97 | % | $ | 1,311,085 | $ | 31,049 | 4.78 | % | ||||||||||||
| Investment securities: |
||||||||||||||||||||||||
| Taxable |
73,283 | 758 | 2.09 | % | 54,100 | 592 | 2.21 | % | ||||||||||||||||
| Tax-exempt |
39,023 | 677 | 3.50 | % | 36,247 | 677 | 3.77 | % | ||||||||||||||||
| Federal funds and interest-bearing deposits |
91,081 | 229 | 0.51 | % | 219,648 | 35 | 0.03 | % | ||||||||||||||||
| Total interest-earning assets |
1,609,844 | $ | 36,303 | 4.55 | % | 1,621,080 | $ | 32,353 | 4.02 | % | ||||||||||||||
| Non-interest-earning assets |
76,387 | 70,337 | ||||||||||||||||||||||
| Total assets |
$ | 1,686,231 | $ | 1,691,417 | ||||||||||||||||||||
| Interest-bearing liabilities: |
||||||||||||||||||||||||
| Interest-bearing demand deposits |
$ | 83,450 | $ | 170 | 0.41 | % | $ | 68,556 | $ | 110 | 0.32 | % | ||||||||||||
| Savings and NOW deposits |
72,617 | 79 | 0.22 | % | 70,875 | 89 | 0.25 | % | ||||||||||||||||
| Money market deposits |
250,908 | 270 | 0.22 | % | 367,424 | 497 | 0.27 | % | ||||||||||||||||
| Time deposits |
478,376 | 2,961 | 1.25 | % | 509,465 | 4,244 | 1.68 | % | ||||||||||||||||
| Total interest-bearing deposits |
885,351 | 3,480 | 0.79 | % | 1,016,320 | 4,940 | 0.98 | % | ||||||||||||||||
| Federal funds purchased |
1 | — | — | — | — | — | ||||||||||||||||||
| Subordinated debt |
58,079 | 1,280 | 4.44 | % | 27,346 | 805 | 5.94 | % | ||||||||||||||||
| Federal Home Loan Bank advances |
36,215 | 83 | 0.46 | % | — | — | — | |||||||||||||||||
| Total interest-bearing liabilities |
979,646 | $ | 4,843 | 1.00 | % | 1,043,666 | $ | 5,745 | 1.11 | % | ||||||||||||||
| Non-interest-bearing liabilities: |
||||||||||||||||||||||||
| Demand deposits and other liabilities |
517,281 | 474,566 | ||||||||||||||||||||||
| Total liabilities |
1,496,927 | 1,518,232 | ||||||||||||||||||||||
| Stockholders’ Equity |
189,304 | 173,185 | ||||||||||||||||||||||
| Total liabilities and stockholders’ equity |
$ | 1,686,231 | $ | 1,691,417 | ||||||||||||||||||||
| Net interest income |
$ | 31,460 | $ | 26,608 | ||||||||||||||||||||
| Interest rate spread(2) |
3.55 | % | 2.91 | % | ||||||||||||||||||||
| Net interest-earning assets(3) |
$ | 630,198 | $ | 577,414 | ||||||||||||||||||||
| Net interest margin(4) |
3.94 | % | 3.31 | % | ||||||||||||||||||||
| Average interest-earning assets to average interest-bearing liabilities |
164.33 | % | 155.33 | % | ||||||||||||||||||||
| (1) |
Includes loans classified as non-accrual |
| (2) |
Interest rate spread represents the difference between the average yield on average interest–earning assets and the average cost of average interest-bearing liabilities. |
| (3) |
Net interest earning assets represent total average interest–earning assets less total interest–bearing liabilities. |
| (4) |
Net interest margin represents net interest income divided by total average interest-earning assets. |
| (5) | Annualized. |
| (6) |
Income and yields for all periods presented are reported on a tax-equivalent basis using the federal statutory tax rate of 21%. Refer to “Use of Certain Non-GAAP Financial Measures.” |
Rate/ Volume Analysis
The following table presents the effects of changing rates and volumes on net interest income for the periods indicated. The rate column shows the effects attributable to changes in rate (changes in rate multiplied by prior average volume). The volume column shows the effects attributable to changes in volume (changes in average volume multiplied by prior rate). Changes attributable to both volume and rate are allocated between the volume and rate categories. The net column represents the sum of the prior columns.
For purposes of this table, changes attributable to both rate and volume, which cannot be segregated, have been allocated proportionately, based on the changes due to rate and the changes due to volume.
| For the Six Months Ended |
||||||||||||
| June 30, 2022 and 2021 |
||||||||||||
| Increase (Decrease) Due to |
Total Increase | |||||||||||
| Volume |
Rate |
(Decrease) |
||||||||||
| (In thousands) |
||||||||||||
| Interest-earning assets: |
||||||||||||
| Loans |
$ | 2,321 | $ | 1,269 | $ | 3,590 | ||||||
| Investment securities: |
||||||||||||
| Taxable |
257 | (91 | ) | 166 | ||||||||
| Tax exempt |
101 | (101 | ) | — | ||||||||
| Federal funds and interest-bearing deposits |
(68 | ) | 262 | 194 | ||||||||
| Total interest-earning assets |
2,611 | 1,339 | 3,950 | |||||||||
| Interest-bearing liabilities: |
||||||||||||
| Interest-bearing demand deposits |
26 | 34 | 60 | |||||||||
| Savings and NOW accounts |
5 | (15 | ) | (10 | ) | |||||||
| Money market deposit accounts |
(143 | ) | (84 | ) | (227 | ) | ||||||
| Time deposits |
(247 | ) | (1,036 | ) | (1,283 | ) | ||||||
| Total deposits |
(359 | ) | (1,101 | ) | (1,460 | ) | ||||||
| Federal Home Loan Bank advances |
83 | — | 83 | |||||||||
| Subordinated debt |
1,058 | (583 | ) | 475 | ||||||||
| Total interest-bearing liabilities |
782 | (1,684 | ) | (902 | ) | |||||||
| Change in net interest income |
$ | 1,829 | $ | 3,023 | $ | 4,852 | ||||||
Provision for Loan Losses
Management believes that the provision recorded for the period ended June 30, 2022 reflects a balance sufficient to provide for each allowance segment, using objective data and information available to us at this time in evaluating our standard analysis of local/national economic data, changes in underwriting quality, portfolio concentrations, experience of lending team, and credit quality. We will continuously review the loan portfolio to determine the depth and breadth of potential loan losses. As we obtain additional information and to more accurately assess the full nature and extent of elevated risk to the loan portfolio that may arise, additional provision expenses may be required.
The provision for loan losses, which is an operating expense, is maintained to ensure that the allowance for loan losses is maintained at levels we consider necessary and appropriate to absorb both probable and reasonably estimated credit losses at a balance sheet date. In determining the level of the allowance for loan losses, we consider past and current loss experience, evaluations of real estate collateral, current economic conditions, volume and type of lending, adverse situations that may affect a borrower’s ability to repay a loan and the levels of non-performing loans. The amount of the allowance is based on estimates, and actual losses may vary from such estimates as more information becomes available over time or economic conditions change. This evaluation is inherently subjective, as it requires estimates and assumptions that are susceptible to significant revision as circumstances change as more information becomes available. The allowance for loan losses is assessed monthly and provisions are made for loan losses as required in order to maintain the allowance.
Provision for loan losses increased by $3.0 million to a provision for loan losses of $1.3 million for the six months ended June 30, 2022 from a non-reoccuring recovery of provision expense of $1.8 million for the six months ended June 30, 2021, primarialy related to recovering most of the special COVID pandemic provision in 2021. The provision for loan losses for the six months ended June 30, 2022 represents normal loan loss provisioning associated with loan growth. Loan originations, which totaled approximately $186.0 million for the six months ended June 30, 2021 increased $63.0 million compared to loan originations of $248.9 million for the six months ended June 30, 2022. The Company has not provisioned any allowance for loan losses for remaining PPP loans as they are 100% guaranteed by Small Business Administration. The Company did not have any non-performing loans at June 30, 2021 or at June 30, 2022. During the six months ended June 30, 2021 the Company increased some qualitative assumptions in the allowance for loan loss model to account for potential economic uncertainty we may experience. The changes in assumptions increased our allowance for loan losses compared to total gross by 5 basis points, to a level management deems appropriate.
During the six months ended June 30, 2022, special mention loans decreased $733,000 for a balance of $16.1 million. Substandard loans increased $8.6 million for a balance of $13.8 million as of June 30, 2022 Of the substandard loans, 79% are connected to the hospitality industry. These loans were initially impacted by the pandemic and were downgraded out of an abundance of caution while cash flows and occupancy levels have continued to increase to pre-pandemic levels. Management does not believe there will be losses associated with these credits. During the six months ended June 30, 2022, there were no charge-offs incurred, and recoveries of $5,000 were received.
Non-Interest Income
Non-interest income decreased $576,000, or 19.2%, to $2.4 million for the six months ended June 30, 2022 from $3.0 million for the six months ended June 30, 2021. The decrease in non-interest income was primarily due to a gain on sale of loans that occurred in the six months ended June 30, 2021 that did not occur in 2022, as well a mortgage origination fees decreasing $272,000 during the six months ended June 30, 2022 compared to the same period in the prior year. These decreases were offset by increases in deposit account service fees of $49,000 and $105,000 in bank owned life insurance income for the six months ended June 30, 2022. The deposit account services fees increased primarily due to more customer activity in the six months ended June 30, 2022 than the same period in 2021. The Company also recognized $101,000 in loan swap fee income for the six months ended June 30, 2022 and continues to focus on increasing fee income through loan swaps as it strategically benefits our customers.
Non-Interest Expense
Non-interest expense increased $2.8 million, or 17.7%, to $18.5 million for the six months ended June 30, 2022 from $15.7 million for the six months ended June 30, 2021 primarily because of increases in salary and employee benefits of $1.7 million and advertising and marketing expenses of $303,000. Salaries and employee benefits expense increased by $1.7 million to $11.2 million for the six months ended June 30, 2022 from $9.4 million for the six months ended June 30, 2021primarily as a result of seventeen employees and the related salary and benefit expenses for these additional employees. Advertising and marketing expenses increased $303,000, or 44.8%, to $980,000 for the six months ended June 30, 2022 from $677,000 for the six months ended June 30, 2021 due to new strategic partnerships and timing of initiatives. Other outside services expense increased $319,000, or 51.8%, to $935,000 for the six months ended June 30, 2022 as the Company continues to build out its Avenu platform. Franchise taxes decreased approximately $73,000 to $699,000 for the six months ended June 30, 2022 from $772,000 for the six months ended June 30, 2021 because of the make up of the Company’s capital as of June 30, 2022 compared to the balance sheet as of June 30, 2021. FDIC insurance premiums decreased approximately $330,000 to $390,000 for the six months ended June 30, 2022 from $720,000 for the six months ended June 30, 2021 due to lower than anticipated assessments from the FDIC.
Income Tax Expense
Income tax expense decreased $315,000, or 10.6%, to a tax expense of $2.7 million for the six months ended June 30, 2022 from a tax expense of $3.0 million for the six months ended June 30, 2021. The decrease in federal income tax expense for the six months ended June 30, 2022 compared to the same period a year ago was driven by the decrease in income before income taxes of $1.5 million, to income before income tax of $14.0 million for the six months ended June 30, 2022 compared to income before income tax expense of $15.5 million for the same period in the prior year. The Company was able to apply and claim a research and development tax credit of approximately $89,000 for its associated work in developing a software platform. As a result of expanding its footprint, the Company has included assessments in income tax expense for potential state tax liabilities which totaled $224,000 for the six months ended June 30, 2022. For the six months ended June 30, 2022, the Company had an effective tax expense rate of 18.9%, compared to effective tax expense rate of 19.1% for the six months ended June 30, 2021.
Comparison of Statements of Financial Condition at June 30, 2022 and December 31, 2021
Total Assets
Total assets increased $146.0 million, or 8.9%, to $1.8 billion at June 30, 2022 from $1.6 billion at December 31, 2021. The increase was primarily the result of increases in the loan portfolio of $75.1 million, $43.3 million in securities available-for-sale and $18.2 million in other assets. These increases were offset by a decrease of $2.7 million in held-to-maturity securities as of June 30, 2022.
Investment Securities
Investment securities increased $40.7 million, or 33.8%, from $120.3 million at December 31, 2021 to $160.9 million at June 30, 2022. The increase was primarily in the available-for-sale portfolio, particularly in U.S treasury securities. At June 30, 2022, our held-to-maturity portion of the securities portfolio, at amortized cost, was $17.7 million, and our available-for-sale portion of the securities portfolio, at fair value, was $143.2 million compared to our held-to-maturity portion of the securities portfolio of $20.3 million and our available-for-sale portion of the securities portfolio of $99.9 million at December 31, 2021.
Net Loans
Net loans increased $75.1 million, or 5.6%, to $1.42 billion at June 30, 2022 from $1.34 billion at December 31, 2021. Residential real estate loans increased $66.4 million, or 22.1%, to $366.8 million at June 30, 2022 from $300.4 million at December 31, 2021. Commercial real estate loans increased by $65.5 million from $534.2 million at December 31, 2021 to $599.7 million at June 30, 2022. Commercial and industrial loans decreased by $71.3 million from $164.0 million at December 31, 2021 to $92.7 million at June 30, 2022. Paycheck Protection Program loans comprised $4.0 million of this portfolio as of June 30, 2022. Commercial and industrial loans, excluding PPP loans, decreased by $17.0 million from December 31, 2021 to June 30, 2022. Construction loans increased $20.9 million to $358.1 million at June 30, 2022 from $337.2 million at December 31, 2021. Consumer loans decreased by $5.9 million from $23.2 million at December 31, 2021 to $17.2 million at June 30, 2022. The $5.9 million decrease in consumer loans is primarily a result of management’s decision to let the indirect lending portfolio amortize off the balance sheet.
Allowance for Loan Losses
The allowance for loan losses represents an amount that, in our judgment, will be adequate to absorb probable losses inherent in the loan portfolio. The provision for loan losses increases the allowance, and loans charged off, net of recoveries, reduce the allowance. The table below summarizes the allowance activity for the periods indicated:
| For the Six Months Ended June 30, |
For the Year Ended December 31, |
|||||||
| 2022 |
2021 |
|||||||
| (Dollars in thousands) |
||||||||
| Balance at beginning of year |
$ | 11,697 | $ | 12,877 | ||||
| Charge-offs: |
||||||||
| Consumer |
— | (32 | ) | |||||
| Total charge-offs |
— | (32 | ) | |||||
| Recoveries: |
||||||||
| Commercial and industrial |
— | 11 | ||||||
| Consumer |
5 | 16 | ||||||
| Total recoveries |
5 | 27 | ||||||
| Net (charge-offs) recoveries |
5 | (5 | ) | |||||
| Provision for (recovery of) loan losses |
1,280 | (1,175 | ) | |||||
| Balance at end of period |
$ | 12,982 | $ | 11,697 | ||||
| Ratios: |
||||||||
| Net charge offs to average loans outstanding |
0.00 | % | 0.00 | % | ||||
| Allowance for loan losses to non-performing loans at end of period |
N/A | N/A | ||||||
| Allowance for loan losses to gross loans at end of period |
0.91 | % | 0.86 | % | ||||
Deposits
Deposits increased $88.2 million, or 6.2% to $1.50 billion at June 30, 2022 from $1.41 billion at December 31, 2021. Our core deposits decreased $13.7 million, or 1.2%, to $1.09 billion at June 30, 2022 from $1.11 billion at December 31, 2021. The decrease in core deposits was due to the Company strategically executing some short term wholesale deposits to support loan growth. Non-interest bearing demand deposits increased $4.9 million, or 0.9%, to $535.6 million at June 30, 2022 from $530.7 million at December 31, 2021. Savings and NOW deposits decreased $27.0 million, or 31.7% to $58.2 million at June 30, 2022 from $85.2 million at December 31, 2021. Offsetting these decreases were increases in certificates of deposits of $116.8 million, or 25.4%, to $576.0 million at June 30, 2022 from $459.1 million at December 31, 2021 and in interest bearing demand deposits of $30.0 million, or 43.3%, to $99.2 million at June 30, 2022 from $69.2 million at December 31, 2021. The increase in interest bearing demand deposit accounts and time deposits were primarily the result of executing on a strategy to continue decreasing our cost of funds while continuing to driving loan growth.
Nonperforming Assets
The following table presents information regarding nonperforming assets at the dates indicated:
| June 30, |
December 31, |
|||||||
| 2022 |
2021 |
|||||||
| (Dollars in thousands) |
||||||||
| Other real estate owned |
— | 775 | ||||||
| Total non-performing assets |
$ | — | $ | 775 | ||||
| Ratios: |
||||||||
| Total non-performing loans to gross loans receivable |
0.00 | % | 0.00 | % | ||||
| Total non-performing loans to total assets |
0.00 | % | 0.00 | % | ||||
| Total non-performing assets to total assets |
0.00 | % | 0.05 | % | ||||
Liquidity and Capital Resources
Liquidity Management. Liquidity describes our ability to meet the financial obligations that arise in the ordinary course of business. Liquidity is primarily needed to meet the borrowing and deposit withdrawal requirements of our customers and to fund current and planned expenditures. Deposits are the primary source of funds for lending and investing activities; however, the Company also utilizes wholesale deposits as a funding source in addition to customer deposits. Scheduled payments, as well as prepayments, and maturities from portfolios of loans and investment securities also provide a stable source of funds. FHLB advances, other secured borrowings, federal funds purchased, and other short-term borrowed funds, as well as longer-term debt issued through the capital markets, all provide supplemental liquidity sources. The Company’s funding activities are monitored and governed through the Company’s asset/liability management process. MainStreet Bank had no Federal Home Loan Bank advances outstanding and unused borrowing capacity of $441.2 million as of June 30, 2022. Additionally, at June 30, 2022, we had the ability to borrow up to $104.0 million from other financial institutions.
The Board of Directors, management, and the Asset Liability Committee (ALCO) are responsible for establishing and monitoring our liquidity targets and strategies in order to ensure that sufficient liquidity exists for meeting the borrowing needs and deposit withdrawals of our customers as well as unanticipated contingencies. We believe that we have enough sources of liquidity to satisfy our short and long-term liquidity needs as of June 30, 2022.
We monitor and adjust our investments in liquid assets based upon our assessment of expected loan demand; expected deposit flows; yields available on interest-earning deposits and securities; and the objectives of our asset/liability management program. Excess liquid assets are invested generally in interest-earning deposits and short-and intermediate-term securities.
While maturities and scheduled amortization of loans and securities are predictable sources of funds, deposit flows and loan prepayments are greatly influenced by general interest rates, economic conditions, and competition. Our most liquid assets are cash and cash equivalents, which include federal funds sold and interest-earning deposits in other banks. The levels of these assets are dependent on our operating, financing, lending and investing activities during any given period. At June 30, 2022, cash and cash equivalents totaled $102.6 million. Securities classified as available-for-sale, which provide additional sources of liquidity, totaled $143.2 million at June 30, 2022.
Our cash flows are provided by and used in three primary activities: operating activities, investing activities, and financing activities. Net cash provided by operating activities was $14.0 million and $17.8 million for the six months ended June 30, 2022 and June 30, 2021, respectively. There were no sales of securities in the six months ended June 30, 2022 or for six months ended June 30, 2021. Net cash used in investing activities, which consist primarily of disbursements for loan originations and the purchase of securities, offset by principal collections on loans and proceeds from maturing securities, was $129.2 million and $274,000 for the six months ended June 30, 2022 and June 30, 2021, respectively. Net cash provided by financing activities was $124.7 million and $51.2 million for the six months ended June 30, 2022 and 2021, respectively, which consisted primarily of increases subordinated debt net of issuance costs of $42.6 million offset and increases in interest bearing deposits of $83.3 million for the six months ended June 30, 2022.
We are committed to maintaining a strong liquidity position. We monitor our liquidity position daily. We anticipate that we have sufficient funds to meet our current funding commitments. Certificates of deposit due within one year of June 30, 2022, totaled $415.3 million of total deposits. If these deposits do not remain with us, we will be required to seek other sources of funds, including other deposits, Federal Home Loan Bank advances and commitments from other financial institutions. Depending on market conditions, we may be required to pay higher rates on such deposits or borrowings than we currently pay. We believe, however, based on experience that a significant portion of such deposits will remain with us. We can attract and retain deposits by adjusting the interest rates offered.
Capital Management. MainStreet Bank is subject to various regulatory capital requirements, including a risk-based capital measure. The risk-based capital guidelines include both a definition of capital and a framework for calculating risk-weighted assets by assigning balance sheet assets and off-balance sheet items to broad risk categories. At June 30, 2022, MainStreet Bank exceeded all regulatory capital requirements and was considered “well capitalized” under regulatory guidelines.
On January 19, 2022, the Board of Directors of the Company declared an initial cash dividend to common shareholders. A second quartely divided was declared and paid in April of 2022. The Board of Directors will consider future dividends on a quarterly basis after its review of the Company’s financial condition, results of operations, and other factors.
Regulatory Capital
Information presented for June 30, 2022 and December 31, 2021, reflects the Basel III capital requirements that became effective January 1, 2015 for the Bank. Under these capital requirements and the regulatory framework for prompt corrective action, the Bank must meet specific capital guidelines that involve quantitative measures of the Bank’s assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices. The Bank’s capital amounts and classifications are also subject to qualitative judgments by regulators about components, risk- weightings and other factors.
The Basel III Capital Rules, a comprehensive capital framework for U.S. banking organizations, became effective for the Company and the Bank on January 1, 2015 (subject to a phase-in period for certain provisions). Under the Basel III rules, the Company must hold a capital conservation buffer above the adequately capitalized risk-based capital ratios. The capital conservation buffer for 2022 is 2.50%. Quantitative measures established by regulation to ensure capital adequacy require the Company to maintain minimum amounts and ratios of Total capital, Common Equity Tier 1 capital, and Tier 1 capital (as defined in the regulations) to risk weighted assets (as defined), and of Tier 1 capital (as defined) to average assets (as defined). Management believes, as of June 30, 2022, the Company and the Bank meet all capital adequacy requirements to which each is subject.
The Bank’s actual capital amounts and ratios are presented in the table (dollars in thousands):
| Actual |
Capital Adequacy Purposes |
To Be Well Capitalized Under the Prompt Corrective Action Provision |
||||||||||||||||||||||
| (Dollars in thousands) |
Amount |
Ratio |
Amount |
Ratio |
Amount |
Ratio |
||||||||||||||||||
| As of June 30, 2022 |
||||||||||||||||||||||||
| Total capital (to risk-weighted assets) |
$ | 259,165 | 16.23 | % | $ | 127,711 | ≥ 8.0% | $ | 159,639 | > 10.0% | ||||||||||||||
| Common equity tier 1 capital (to risk-weighted assets) |
$ | 246,183 | 15.42 | % | $ | 71,838 | ≥ 4.5% | $ | 127,711 | > 8.0% | ||||||||||||||
| Tier 1 capital (to risk-weighted assets) |
$ | 246,183 | 15.42 | % | $ | 95,783 | ≥ 6.0% | $ | 127,711 | > 8.0% | ||||||||||||||
| Tier 1 capital (to average assets) |
$ | 246,183 | 14.34 | % | $ | 68,649 | ≥ 4.0% | $ | 85,812 | > 5.0% | ||||||||||||||
| As of December 31, 2021 |
||||||||||||||||||||||||
| Total capital (to risk-weighted assets) |
$ | 227,359 | 16.06 | % | $ | 113,249 | ≥ 8.0% | $ | 141,562 | ≥ 10.0% | ||||||||||||||
| Common equity tier 1 capital (to risk-weighted assets) |
$ | 215,662 | 15.23 | % | $ | 63,703 | ≥ 4.5% | $ | 113,249 | ≥ 8.0% | ||||||||||||||
| Tier 1 capital (to risk-weighted assets) |
$ | 215,662 | 15.23 | % | $ | 84,937 | ≥ 6.0% | $ | 113,249 | ≥ 8.0% | ||||||||||||||
| Tier 1 capital (to average assets) |
$ | 215,662 | 12.90 | % | $ | 66,898 | ≥ 4.0% | $ | 83,622 | ≥ 5.0% | ||||||||||||||
Off-Balance Sheet Arrangements and Contractual Obligations
Commitments. As a financial services provider, we routinely are a party to various financial instruments with off-balance-sheet risks, such as commitments to extend credit and unused lines of credit. While these contractual obligations represent our future cash requirements, a significant portion of commitments to extend credit may expire without being drawn upon. Such commitments are subject to the same credit policies and approval process accorded to loans we make. At June 30, 2022, we had outstanding loan commitments of $497.5 million and no outstanding stand-by letters of credit. We anticipate that we will have sufficient funds available to meet our current lending commitments.
Use of Certain Non-GAAP Financial Measures
The accounting and reporting policies of the Company conform to U.S. GAAP and prevailing practices in the banking industry. However, certain non-GAAP measures are used by management to supplement the evaluation of the Company’s performance. These measures include adjusted net interest income and net interest margin.
Management believes that the use of these non-GAAP measures provides meaningful information about operating performance by enhancing comparability with other financial periods and other financial institutions. The non-GAAP measures used by management enhance comparability by excluding the effects of items that do not reflect ongoing operating performance, including non-recurring gains or charges. These non-GAAP financial measures should not be considered an alternative to U.S. GAAP-basis financial statements, and other bank holding companies may define or calculate these or similar measures differently. A reconciliation of the non-GAAP financial measures used by the Company to evaluate and measure the Company’s performance to the most directly comparable U.S. GAAP financial measures is presented below.
| For the three months ended June 30, |
For the six months ended June 30, |
|||||||||||||||
| (Dollars in thousands, except for per share data) |
2022 | 2021 | 2022 | 2021 | ||||||||||||
| Net interest margin, fully-taxable equivalent (FTE) |
||||||||||||||||
| Net interest income (GAAP) |
$ | 16,121 | $ | 12,991 | $ | 31,318 | $ | 26,466 | ||||||||
| FTE adjustment on tax-exempt securities |
70 | 70 | 142 | 142 | ||||||||||||
| Net interest income (FTE) (non-GAAP) |
16,191 | 13,061 | 31,460 | 26,608 | ||||||||||||
| Average interest earning assets |
1,644,863 | 1,638,799 | 1,609,844 | 1,621,080 | ||||||||||||
| Net interest margin (GAAP) |
3.93 | % | 3.18 | % | 3.92 | % | 3.29 | % | ||||||||
| Net interest margin (FTE) (non-GAAP) |
3.95 | % | 3.20 | % | 3.94 | % | 3.31 | % | ||||||||
Item 3 – Quantitative and Qualitative Disclosures about Market Risk
Not required for smaller reporting companies
Item 4 – Controls and Procedures
Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 (the “Exchange Act”)) as of June 30, 2022. Based on their evaluation of the Company’s disclosure controls and procedures, the Company’s Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures designed to ensure that information required to be disclosed by the Company in reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission rules and regulations are designed and operating in an effective manner.
No change in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15(d)-15(f) under the Exchange Act) occurred during the second fiscal quarter of 2022 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting. There has been no significant effect or impact on internal controls over financial reporting with the Company’s transition to a remote/work from home environment.
At June 30, 2022, the Company was not involved in any pending legal proceedings other than routine legal proceedings occurring in the ordinary course of business which involve amounts in the aggregate believed by management to be immaterial to the financial condition and operating results of the Company. In addition, no material proceedings are pending or known to be threatened or contemplated against the Company or its subsidiary by governmental authorities.
Not required for smaller reporting companies. Reference is made to “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2021, filed with the SEC on March 23, 2022. For a discussion of certain risk factors affecting the Company, see our disclosure under “Forward-Looking Statements” is Part I, Item 2 in this Form 10-Q.
Item 2 – Unregistered Sales of Equity Securities and Use of Proceeds
On October 22, 2020, the Company announced that the Board of Directors had authorized a new plan to repurchase up to $17.0 million of the Company’s outstanding common stock in open market transactions or privately negotiated transactions, including pursuant to a trading plan in accordance with Rule 10b-18 under the Securities Exchange Act of 1934. The new stock repurchase program replaces the Company’s previous program. During the three months ended June 30, 2022, 119,693 shares of common stock were repurchased.
The following information provides details of the Company’s common stock repurchases for the three months ended June 30, 2022:
| (Dollars in thousands, except for per share amounts) |
Total Number of Shares Purchased |
Average Price Paid per Share |
Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs |
Maximum Number (or Approximate Dollar Value) of Shares that May Yet be Purchased Under the Plans or Programs |
||||||||||||
| April 1, 2022 - April 30, 2022 |
8,877 | $ | 25.49 | 8,877 | $ | 2,732 | ||||||||||
| May 1, 2022 - May 31, 2022 |
110,816 | $ | 24.98 | 110,816 | $ | — | ||||||||||
| Total |
119,693 | $ | 25.14 | 119,693 | ||||||||||||
| 31.1 |
Rule 13a-14(a) Certification of the Chief Executive Officer * |
|
| 31.2 |
Rule 13a-14(a) Certification of the Chief Financial Officer * |
|
| 32.0 |
||
| 101.INS |
Inline XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document | |
| 101.SCH |
Inline XBRL Taxonomy Extension Schema Document | |
| 101.CAL |
Inline XBRL Taxonomy Extension Calculation Linkbase Document | |
| 101.DEF |
Inline XBRL Taxonomy Extension Definition Linkbase Document | |
| 101.LAB |
Inline XBRL Taxonomy Extension Label Linkbase Document | |
| 101.PRE |
Inline XBRL Taxonomy Extension Presentation Linkbase Document | |
| 101 |
The following financial statements from the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2022 formatted in Inline XBRL, filed herewith: (i) the Consolidated Balance Sheets (unaudited), (ii) the Consolidated Statements of Income (unaudited), (iii) the Consolidated Statements of Comprehensive Income (unaudited), (iv) the Consolidated Statements of Stockholders’ Equity (unaudited), (v) the Consolidated Statements of Cash Flows (unaudited) and (vi) the Notes to Consolidated Financial Statements (unaudited) |
|
| 104 |
The cover page from the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2022, formatted in Inline XBRL (included with Exhibit 101) |
* Filed herewith
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| MAINSTREET BANCHSHARES, INC |
||||
| (Registrant) |
||||
| Date: August 12, 2022 |
By: |
/s/ Jeff W. Dick |
||
| Jeff W. Dick |
||||
| Chairman & Chief Executive Officer |
||||
| (Principal Executive Officer) |
||||
| Date: August 12, 2022 |
By: |
/s/ Thomas J. Chmelik |
||
| Thomas J. Chmelik |
||||
| Senior Executive Vice President and |
||||
| Chief Financial Officer |
||||
| (Principal Financial Officer) |
Exhibit 31.1
Certification
I, Jeff W. Dick, certify that:
|
1. |
I have reviewed this Quarterly Report on Form 10-Q of MainStreet Bancshares, Inc.; |
|
2. |
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
|
3. |
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
|
4. |
The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: |
|
(a) |
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
|
(b) |
Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report, based on such evaluation; and |
|
(c) |
Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and |
|
5. |
The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions): |
|
(a) |
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and |
|
(b) |
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting. |
|
Dated: August 12, 2022 |
/s/ Jeff W. Dick |
|||
|
Jeff W. Dick |
||||
|
Chairman and Chief Executive Officer |
||||
|
(principal executive officer) |
Exhibit 31.2
Certification
I, Thomas J. Chmelik, certify that:
|
1. |
I have reviewed this Quarterly Report on Form 10-Q of MainStreet Bancshares, Inc.; |
|
2. |
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
|
3. |
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
|
4. |
The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e))) for the registrant and have: |
|
(a) |
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
|
(b) |
Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report, based on such evaluation; and |
|
(c) |
Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and |
|
5. |
The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions): |
|
(a) |
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and |
|
(b) |
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting. |
|
Dated: August 12, 2022 |
/s/ Thomas J. Chmelik |
|||
|
Thomas J. Chmelik |
||||
|
Senior Executive Vice President and Chief Financial Officer |
||||
|
(principal financial officer) |
Exhibit 32.0
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report on Form 10-Q of MainStreet Bancshares, Inc. (the “Company”) for the quarter ended June 30, 2022, as filed with the Securities and Exchange Commission (the “Report”), I hereby certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
|
1. |
The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and |
|
2. |
The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company as of and for the period covered by the Report. |
|
By: |
/s/ Jeff W. Dick |
||
|
Jeff W. Dick |
|||
|
Chairman and Chief Executive Officer |
|||
|
(principal executive officer) August 12, 2022 |
|
By: |
/s/ Thomas J. Chmelik |
||
|
Thomas J. Chmelik |
|||
|
Senior Executive Vice President and |
|||
|
Chief Financial Officer |
|||
|
(principal financial officer) |
|||
|
August 12, 2022 |
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