MAINSTREET BANCSHARES, INC. 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 endedDecember 31, 2021 , previously filed with theSEC onMarch 23, 2022 . Results for the three and six months endedJune 30, 2022 are not necessarily indicative of results for the year endingDecember 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
greater
economic, political and environmental conditions on those markets;
? adequacy of or increases in the allowance for loan losses;
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? 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. MainStreet Bancshares, Inc. is a bank holding company that owns 100% ofMainStreet Bank andMainStreet Community Capital, LLC . OnOctober 12, 2021 , the Company filed an election to be a financial holding company with theBoard of Governors of theFederal 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 theCommonwealth of Virginia . The Company's executive offices are located at10089 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 theCommonwealth of Virginia . The Bank is a member of theFederal Reserve Bank of Richmond , and its deposits are insured by theFDIC . The Bank opened for business onMay 26, 2004 , and is headquartered inFairfax, Virginia . We currently operate six Bank branches; located inHerndon ,Fairfax ,McLean , Clarendon,Leesburg Virginia , and one inWashington 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 serviceNorthern Virginia as well as the greaterWashington, 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. 25
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Table of Contents 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 theWashington, 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 theCommonwealth of Virginia to offer CDARS, the Certificate of Deposit Account Registry Service, an innovative deposit insurance solution that providesFDIC 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 OnOctober 25, 2021 ,MainStreet Bancshares, Inc. formally introduced AvenuTM, a division ofMainStreet 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 ofMainStreet 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).
InAugust 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 theU.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"). InJanuary 2022 , theCommunity Development Financial Institutions Fund ("CDFI") of theUnited States Department of the Treasury certifiedMainStreet 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, theFederal 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 inthe 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 theU.K.'s Financial Conduct Authority inJuly 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. 26
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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
General Net income decreased$1.2 million to$5.9 million for the three months endedJune 30, 2022 from$7.1 million for the three months endedJune 30, 2021 . The decrease in net income for the three months endedJune 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 endedJune 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 endedJune 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 endedJune 30, 2022 from$15.9 million for the three months endedJune 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 endedJune 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 endedJune 30, 2022 as compared to 3.90% for the three months endedJune 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 theFederal 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 endedJune 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 ofJune 30, 2022 from$1.30 billion as ofJune 30, 2021 . The average yield on loans increased 32 basis points, or 6.8%, for the three months endedJune 30, 2022 as compared to the three months endedJune 30, 2021 . Included in average loans for the three months endedJune 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. TheFederal 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 endedJune 30, 2022 , from$20,000 for the three months endedJune 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 endedJune 30, 2022 from$245.3 million for the same period in 2021. The average yield increased to 0.77% for the three months endedJune 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. 27
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Table of Contents Interest on investment securities increased by$67,000 to$734,000 for the three months endedJune 30, 2022 from$667,000 for the three months endedJune 30, 2021 . Interest on investments inU.S Treasury,U.S. Government Agencies, andU.S Municipals decreased in total$3,000 , or 1.0%, to$317,000 for the three months endedJune 30, 2022 , from$320,000 for the three months endedJune 30, 2021 . Interest on mortgage-backed securities decreased by$4,000 , or 3.5%, to$108,000 for the three months endedJune 30, 2022 , from$112,000 for the three months endedJune 30, 2021 . Subordinated debt interest income increased by$36,000 , or 37.0%, to$132,000 for the three months endedJune 30, 2022 , from$96,000 for the three months endedJune 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 endedJune 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 endedJune 30, 2022 , from$90.8 million for the three months endedJune 30, 2021 . Interest Expense Total interest expense decreased$191,000 , to$2.7 million for the three months endedJune 30, 2022 from$2.9 million for the three months endedJune 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 endedJune 30, 2022 over the three months endedJune 30, 2021 . There were additional increases in interest expense onFederal Home Loan Bank advances of$52,000 in the three months endedJune 30, 2022 over the same period in 2021. Interest expense on deposits decreased$488,000 to$1.8 million for the three months endedJune 30, 2022 from$2.3 million for the three months endedJune 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 endedJune 30, 2022 as compared to$1.00 billion for the three months endedJune 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 endedJune 30, 2022 , compared to 93 basis points for the three months endedJune 30, 2021 . The average rate paid on money market deposits decreased 1 basis points to 0.26% for the three months endedJune 30, 2022 from 0.27% for the three months endedJune 30, 2021 . The average rate paid on interest-bearing demand deposits increased 12 basis points to 0.44% for the three months endedJune 30, 2022 from 0.32% for the three months endedJune 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 endedJune 30, 2022 as compared to 1.48% for the three months endedJune 30, 2021 . The increase in the average balance of interest-bearing demand deposits for the three months endedJune 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 theFederal Home Loan Bank increased$52,000 to$52,000 for the three months endedJune 30, 2022 , from$0 for the three months endedJune 30, 2021 as a result an average balance of$35.3 million of outstanding advances for the three months endedJune 30, 2022 compared to no advances outstanding for the three months endedJune 30, 2021 . The average balance of subordinated debt increased$32.3 million for the three months endedJune 30, 2022 , due to$30 million in refinanced debt issued in 2021 and an additional$43.7 million issued in the six months endedJune 30, 2022 Net Interest Income Net interest income increased approximately$3.1 million , or 24.1%, to$16.1 million for the three months endedJune 30, 2022 from$13.0 million for the three months endedJune 30, 2021 because of our net interest-earning assets increasing$47.3 million to$644.8 million for the three months endedJune 30, 2022 from$597.5 million for the three months endedJune 30, 2021 . The interest rate spread increased by 68 basis points to 3.52% for the three months endedJune 30, 2022 from 2.84% for the three months endedJune 30, 2021 . The net interest margin increased by 75 basis points from 3.20% for the three months endedJune 30, 2021 to 3.95% for the three months endedJune 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. 28
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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
2022 2021
Interest Interest
Income/ Yield/ Income/ Yield/
Average Balance Expense(6) Cost(5)(6) Average Balance Expense(6) 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."
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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.
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Table of Contents Non-Interest Income Non-interest income decreased$291,000 , or 18.7%, to$1.3 million for the three months endedJune 30, 2022 from$1.6 million for the three months endedJune 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 endedJune 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 endedJune 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 endedJune 30, 2022 from$7.9 million for the three months endedJune 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 endedJune 30, 2022 from$4.7 million for the three months endedJune 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 endedJune 30, 2022 from$280,000 for the three months endedJune 30, 2021 due to investments in technology and costs associated withAvenu . Franchise taxes decreased approximately$34,000 to$352,000 for the three months endedJune 30, 2022 from$386,000 for the three months endedJune 30, 2021 because of the make up of the Company's capital as ofJune 30, 2022 compared to the balance sheet as ofJune 30, 2021 .FDIC insurance premiums decreased approximately$210,000 to$150,000 for the three months endedJune 30, 2022 from$360,000 for the three months endedJune 30, 2021 due to smaller than anticipated assessments from theFDIC . Advertising and marketing expenses increased$172,000 , or 42.8%, to$574,000 for the three months endedJune 30, 2022 from$402,000 for the three months endedJune 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 endedJune 30, 2022 from a tax expense of$1.6 million for the three months endedJune 30, 2021 . The decrease in federal income tax expense for the three months endedJune 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 ofJune 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 endedJune 30, 2022 . For the three months endedJune 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 endedJune 30, 2021 .
Comparison of Statements of Income for the Six Months Ended
General Net income decreased$1.2 million to$11.4 million for the six months endedJune 30, 2022 from$12.6 million for the six months endedJune 30, 2021 . The decrease in net income for the six months endedJune 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 endedJune 30, 2022 . During the six months endedJune 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 endedJune 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 endedJune 30, 2022 from$32.2 million for the six months endedJune 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 endedJune 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 endedJune 30, 2022 as compared to 4.02% for the six months endedJune 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 theFederal 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 endedJune 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 ofJune 30, 2022 from$1.31 billion as ofJune 30, 2021 . The average yield on loans increased 19 basis points, or 4.0%, for the six months endedJune 30, 2022 as compared to the six months endedJune 30, 2021 . Included in average loans for the six months endedJune 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. TheFederal 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 endedJune 30, 2022 , from$35,000 for the six months endedJune 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 endedJune 30, 2022 from$219.6 million for the same period in 2021. The average yield increased to 0.51% for the six months endedJune 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. 31
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Table of Contents Interest on investment securities increased by$166,000 to$1.4 million for the six months endedJune 30, 2022 from$1.3 million for the six months endedJune 30, 2021 . Interest on investments inU.S Treasury,U.S. Government Agencies, andU.S Municipals increased in total$6,000 , or 0.9%, to$652,000 for the six months endedJune 30, 2022 , from$647,000 for the six months endedJune 30, 2021 . Interest on mortgage-backed securities increased by 37,000, or 21.9%, to$208,000 for the six months endedJune 30, 2022 , from$170,000 for the six months endedJune 30, 2021 . Subordinated debt interest income increased by$78,000 , or 43.4%, to$256,000 for the six months endedJune 30, 2022 , from$179,000 for the six months endedJune 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 endedJune 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 endedJune 30, 2022 , from$90.3 million for the six months endedJune 30, 2021 Interest Expense Total interest expense decreased$902,000 , to$4.8 million for the six months endedJune 30, 2022 from$5.7 million for the six months endedJune 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 endedJune 30, 2022 over the six months endedJune 30, 2021 . There were additional increases in interest expense onFederal Home Loan Bank advances of$83,000 in the six months endedJune 30, 2022 over the same period in 2021. Interest expense on deposits decreased$1.5 million to$3.5 million for the six months endedJune 30, 2022 from$4.9 million for the six months endedJune 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 endedJune 30, 2022 as compared to$1.02 billion for the six months endedJune 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 endedJune 30, 2022 , compared to 98 basis points for the six months endedJune 30, 2021 . The average rate paid on money market deposits decreased 5 basis points to 0.22% for the six months endedJune 30, 2022 from 0.27% for the six months endedJune 30, 2021 . The average rate paid on interest-bearing demand deposits increased 9 basis points to 0.41% for the six months endedJune 30, 2022 from 0.32% for the six months endedJune 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 endedJune 30, 2022 as compared to 1.68% for the six months endedJune 30, 2021 . The increase in the average balance of interest-bearing demand deposits for the six months endedJune 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 theFederal Home Loan Bank increased$83,000 to$83,000 for the six months endedJune 30, 2022 , from$0 for the six months endedJune 30, 2021 as a result an average balance of$36.2 million of outstanding advances on theFederal Home Loan Bank for the six months endedJune 30, 2022 compared to no advances for the six months endedJune 30, 2021 . The average balance of subordinated debt increased$30.7 million for the six months endedJune 30, 2022 , due to an additional$30 million in refinanced debt issued in 2021 and$43.7 million issued in the six months endedJune 30, 2022 . Net Interest Income Net interest income increased approximately$4.9 million , or 18.3%, to$31.3 million for the six months endedJune 30, 2022 from$26.5 million for the six months endedJune 30, 2021 because of our net interest-earning assets increasing$52.8 million to$630.2 million for the six months endedJune 30, 2022 from$577.4 million for the six months endedJune 30, 2021 . The interest rate spread increased by 64 basis points to 3.55% for the six months endedJune 30, 2022 from 2.91% for the six months endedJune 30, 2021 . The net interest margin increased by 63 basis points from 3.31% for the six months endedJune 30, 2021 to 3.94% for the six months endedJune 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. 32
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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
2022 2021
Interest Interest
Income/ Yield/ Income/ Yield/
Average Balance Expense (6) Cost(5)(6) Average Balance Expense(6) 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."
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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.
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Table of Contents Non-Interest Income Non-interest income decreased$576,000 , or 19.2%, to$2.4 million for the six months endedJune 30, 2022 from$3.0 million for the six months endedJune 30, 2021 . The decrease in non-interest income was primarily due to a gain on sale of loans that occurred in the six months endedJune 30, 2021 that did not occur in 2022, as well a mortgage origination fees decreasing$272,000 during the six months endedJune 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 endedJune 30, 2022 . The deposit account services fees increased primarily due to more customer activity in the six months endedJune 30, 2022 than the same period in 2021. The Company also recognized$101,000 in loan swap fee income for the six months endedJune 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 endedJune 30, 2022 from$15.7 million for the six months endedJune 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 endedJune 30, 2022 from$9.4 million for the six months endedJune 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 endedJune 30, 2022 from$677,000 for the six months endedJune 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 endedJune 30, 2022 as the Company continues to build out itsAvenu platform. Franchise taxes decreased approximately$73,000 to$699,000 for the six months endedJune 30, 2022 from$772,000 for the six months endedJune 30, 2021 because of the make up of the Company's capital as ofJune 30, 2022 compared to the balance sheet as ofJune 30, 2021 .FDIC insurance premiums decreased approximately$330,000 to$390,000 for the six months endedJune 30, 2022 from$720,000 for the six months endedJune 30, 2021 due to lower than anticipated assessments from theFDIC . Income Tax Expense Income tax expense decreased$315,000 , or 10.6%, to a tax expense of$2.7 million for the six months endedJune 30, 2022 from a tax expense of$3.0 million for the six months endedJune 30, 2021 . The decrease in federal income tax expense for the six months endedJune 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 endedJune 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 endedJune 30, 2022 . For the six months endedJune 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 endedJune 30, 2021 .
Comparison of Statements of Financial Condition at
Total Assets Total assets increased$146.0 million , or 8.9%, to$1.8 billion atJune 30, 2022 from$1.6 billion atDecember 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 ofJune 30, 2022 .Investment Securities Investment securities increased$40.7 million , or 33.8%, from$120.3 million atDecember 31, 2021 to$160.9 million atJune 30, 2022 . The increase was primarily in the available-for-sale portfolio, particularly inU.S treasury securities. AtJune 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 atDecember 31, 2021 . Net Loans Net loans increased$75.1 million , or 5.6%, to$1.42 billion atJune 30, 2022 from$1.34 billion atDecember 31, 2021 . Residential real estate loans increased$66.4 million , or 22.1%, to$366.8 million atJune 30, 2022 from$300.4 million atDecember 31, 2021 . Commercial real estate loans increased by$65.5 million from$534.2 million atDecember 31, 2021 to$599.7 million atJune 30, 2022 . Commercial and industrial loans decreased by$71.3 million from$164.0 million atDecember 31, 2021 to$92.7 million atJune 30, 2022 . Paycheck Protection Program loans comprised$4.0 million of this portfolio as ofJune 30, 2022 . Commercial and industrial loans, excluding PPP loans, decreased by$17.0 million fromDecember 31, 2021 toJune 30, 2022 . Construction loans increased$20.9 million to$358.1 million atJune 30, 2022 from$337.2 million atDecember 31, 2021 . Consumer loans decreased by$5.9 million from$23.2 million atDecember 31, 2021 to$17.2 million atJune 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. 35
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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 For the Year
Months Ended Ended December
June 30, 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 %
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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 noFederal Home Loan Bank advances outstanding and unused borrowing capacity of$441.2 million as ofJune 30, 2022 . Additionally, atJune 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 ofJune 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. AtJune 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 atJune 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 endedJune 30, 2022 andJune 30, 2021 , respectively. There were no sales of securities in the six months endedJune 30, 2022 or for six months endedJune 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 endedJune 30, 2022 andJune 30, 2021 , respectively. Net cash provided by financing activities was$124.7 million and$51.2 million for the six months endedJune 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 endedJune 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 ofJune 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. AtJune 30, 2022 ,MainStreet Bank exceeded all regulatory capital requirements and was considered "well capitalized" under regulatory guidelines. OnJanuary 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 forJune 30, 2022 andDecember 31, 2021 , reflects the Basel III capital requirements that became effectiveJanuary 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. 37
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Table of Contents The Basel III Capital Rules, a comprehensive capital framework forU.S. banking organizations, became effective for the Company and the Bank onJanuary 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 ofJune 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): To Be Well Capitalized Under the Actual Capital Adequacy Purposes 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. AtJune 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 toU.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 toU.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 comparableU.S. GAAP financial measures is presented below. 38
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Table of Contents
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 %
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