UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
☒ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2020
OR
☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM TO
Commission File Number 001-38817
MainStreet Bancshares, Inc.
(Exact name of Registrant as specified in its Charter)
Virginia
( State or other jurisdiction of
incorporation or organization)
10089 Fairfax Boulevard
Fairfax, VA
(Address of principal executive offices)
Registrant’s telephone number, including area code: (703) 481-4567
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Common Stock
Depositary Shares (each representing a 1/40th
interest in a share of 7.50% Series A Fixed-Rate Non-Cumulative Perpetual Preferred
Stock)
Trading
Symbol(s)
MNSB
MNSBP
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. YES ☐ NO ☒
Indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act. YES ☐ NO ☒
81-2871064
(I.R.S. Employer
Identification No.)
22030
(Zip Code)
Name of each exchange on which registered
The Nasdaq Stock Market LLC
The Nasdaq Stock Market LLC
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. YES ☒ NO ☐
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). YES ☒ NO ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, 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
☐
Non-accelerated filer
Emerging growth company
☒
☒
Smaller reporting 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 has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C.
7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☐
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). YES ☐ NO ☒
As of June 30, 2020, the last business day of the Registrant’s most recently completed second fiscal quarter, the aggregate market value of the shares of common equity held by non-affiliates of the Registrant, based on the closing price of the
shares of common stock on The NASDAQ Stock Market, was $104,561,424.
The number of shares of Registrant’s Common Stock outstanding as of March 18, 2021 was 7,544,532.
The information required by Part III of this Annual Report on Form 10-K will be found in the Company’s definitive proxy statement for its 2021 Annual Meeting of Shareholders, to be filed pursuant to Regulation 14A under the Securities
Exchange Act of 1934, and such information is incorporated herein by this reference.
DOCUMENTS INCORPORATED BY REFERENCE:
2
INDEX
PART I
Item 1.
Item 1A.
Item 1B.
Item 2.
Item 3.
Item 4.
PART II
Item 5.
Item 6.
Item 7.
Item 7A.
Item 8.
Item 9.
Item 9A.
Item 9B.
PART III
Item 10.
Item 11.
Item 12.
Item 13.
Item 14.
PART IV
Item 15.
Item 16
Business
Risk Factors
Unresolved Staff Comments
Properties
Legal Proceedings
Mine Safety Disclosures
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Selected Financial Data
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Quantitative and Qualitative Disclosures About Market Risk
Financial Statements and Supplementary Data
Changes in and Disagreements With Accountants on Accounting and Financial Disclosure
Controls and Procedures
Other Information
Directors, Executive Officers and Corporate Governance
Executive Compensation
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Certain Relationships and Related Transactions, and Director Independence
Principal Accountant Fees and Services
Exhibits, Financial Statement Schedules
Form 10-K Summary
Signatures
3
Page
4
16
28
29
29
29
30
32
35
62
64
103
103
103
104
104
104
104
104
105
105
106
Item 1. Business
PART I
As used herein, the “Company,” “we,” “our,” and “us” refer to MainStreet Bancshares, Inc., and the “Bank” refers to MainStreet Bank.
Overview
MainStreet Bancshares, Inc. is a commercial bank holding company that owns 100% of MainStreet Bank, a community bank focused on serving the borrowing, cash management and depository
needs of small to medium-sized businesses, and professional practices and retail customers. 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 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 skilled staff have allowed
us to compete aggressively with larger financial institutions. We believe 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 Federal Deposit Insurance Corporation (“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.
Both the Company and the Bank are incorporated in and chartered by the Commonwealth of Virginia. The Bank is a member of the Federal Reserve System, 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 seven Bank branches; located in Herndon, Fairfax, Fairfax City, McLean, Clarendon,
Leesburg Virginia, and one in Washington D.C.
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 Form 10-K, and the reference to our website does not constitute incorporation by reference of the information contained on the website.
Emerging Growth Company Status
We qualify as an “emerging growth company” under the JOBS Act and as defined in Section 2(a) of the Securities Act of 1933. For as long as we are an emerging growth company, we may
choose to take advantage of exemptions from various reporting requirements applicable to other public companies but not to emerging growth companies. See “Risk Factors—We are an emerging growth
company, and any decision on our part to comply only with certain reduced reporting and disclosure requirements applicable to emerging growth companies could make our common stock less attractive to
investors.”
4
As an emerging growth company:
•
•
•
•
we may present as few as two years of audited financial statements and two years of related management discussion and analysis of financial condition and results of operations, in contrast
to other reporting companies which must provide audited financial statements for three fiscal years;
we are exempt from the requirement to obtain an attestation and report from our auditors on management’s assessment of our internal control over financial reporting under the Sarbanes-
Oxley Act of 2002;
we are permitted to provide less extensive disclosure about our executive compensation arrangements; and
we are permitted to include less extensive narrative disclosures than required of other reporting companies, particularly with respect to executive compensation.
In this Form 10-K we have elected to take advantage of the reduced disclosure requirements relating to executive compensation, and in the future we may take advantage of any or all of these
exemptions for so long as we remain an emerging growth company. We will remain an emerging growth company until the earliest of (i) the end of the first fiscal year during which we have total annual gross
revenues of $1.07 billion or more, (ii) the end of the fiscal year following the fifth anniversary of the completion of our initial registered public offering of common equity securities, which will be in August
2024, (iii) the date on which we have, during the previous three-year period, issued more than $1.0 billion in non-convertible debt and (iv) the date on which we are deemed to be a “large accelerated filer” as
defined in Rule 12b-2 under the Securities Exchange Act of 1934 (the “Exchange Act”).
In addition to the relief described above, the JOBS Act permits us an extended transition period for complying with new or revised accounting standards affecting public companies. We have
elected not to take advantage of this extended transition period, which means that the financial statements included in this Form 10-K, as well as any financial statements that we file in the future, will be
subject to all new or revised accounting standards generally applicable to public companies.
Nasdaq Listing
We were 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 shares our of preferred
stock on the Nasdaq Capital Market under the symbol “MNSBP” as of September 16, 2020.
MainStreet Bancshares, Inc.
MainStreet Bancshares Inc. is a bank holding company incorporated under the laws of the Commonwealth of Virginia whose principal activity is the ownership and management of MainStreet
Bank. The Company is authorized to issue 10,000,000 shares of common stock, par value $4.00 per share. Additionally, the Company is authorized to issue 2,000,000 shares of preferred stock, par value $1.00
per share. There are 7,443,842 shares of common stock outstanding and 28,750 shares of preferred stock outstanding at December 31, 2020.
The Company is a registered bank holding company under the Bank Holding Company Act of 1956, as amended, and as such, is subject to inspection, examination, and supervision by the Board
of Governors of the Federal Reserve System (the “Federal Reserve”).
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 in 2004 and is headquartered in Fairfax, Virginia.
In May 2016, the Bank’s shareholders approved a Reorganization Agreement and a related Plan of Share Exchange whereby the Bank would reorganize into a holding company structure. Pursuant
to the Plan of Share Exchange, each outstanding share of Bank common stock was automatically converted into and exchanged for one share of the Company’s common stock. On July 15, 2016, the effective
date of the reorganization, the common shareholders of the Bank became the common shareholders of the Company.
Our Business
MainStreet Bank services Northern Virginia as well as the greater Washington, D.C. metropolitan area. The Bank’s strategy is to deliver a customized and targeted mix of products and services
that meets or exceeds customer expectations. To accomplish this goal, the Bank has deployed a premium operating system that gives customers access to the most up-to-date banking technology. These unique
systems and a highly skilled staff have allowed the Bank to compete aggressively with larger financial institutions. We believe the combination of sophisticated technology and personal service differentiates
the Bank from its competition.
The Bank markets to individuals, small to medium-sized businesses and professionals. The Bank offers a full range of banking services through traditional and electronic delivery. Services
include: basic 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. The Bank has expanded its mobile banking application to include mobile deposits.
5
As of December 31, 2020, MainStreet Bancshares, Inc. had total consolidated assets of $1.6 billion, total net loans of $1.3 billion, total deposits of $1.4 billion and total stockholders’ equity of
$167.7 million, and total equity to total assets was 10.20%. For the years ended December 31, 2020 and 2019, our return on average assets was 1.05% and 1.19%, respectively, and our return on average equity
was 10.54% and 10.79%, respectively.
We are focused on growing business relationships and building core deposits, profitable loans and non-interest income. We believe that 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 strive to be the leading
community bank in our markets.
We believe that our core lending and deposit business segments continue to perform well. For the fiscal years ended December 31, 2020 and December 31, 2019, our net charge-offs to average
loans was 0.03% and 0.09%, respectively. As of December 31, 2020, we had approximately $150,000 non-performing loans and $1.3 million in non-performing assets which represented 0.08% of total assets.
Management believes that the Company is well positioned to build on its core performance to continue to grow profitably. Although we have successfully attracted new associates, providing depth
and talent in key positions, additional employees and infrastructure are expected to be needed to manage the increasing customer relationships that would come with sustained growth.
We are a community-oriented financial institution. Our Bank offers a wide-range of commercial and consumer loan and deposit products, as well as mortgage services to individuals, and small
and medium sized businesses in our market. We seek to be the provider of choice for financial solutions to customers who value exceptional personalized service, local decision making, and modern banking
technology. Our business involves attracting deposits from local businesses and individual customers and using these deposits to originate commercial, mortgage, and consumer loans in our market area. We
also invest in securities consisting primarily of obligations of U.S. government sponsored entities, municipal obligations, mortgage-backed securities issued by Fannie Mae, Freddie Mac and Ginnie Mae, and
the subordinated debt of other financial institutions. The Company is the owner and beneficiary of bank owned life insurance (BOLI) policies on certain current and former Bank employees. These policies
generate income and can be liquidated, if necessary, with associated tax costs.
The Federal Reserve and the Virginia State Corporation Commission, through its Bureau of Financial Institutions (the “Bureau”), regulate and monitor operations of the Company and the Bank.
We are required to file with the FDIC quarterly financial condition and performance reports. The Federal Reserve and the Bureau conduct periodic onsite and offsite examinations. We must comply with a
wide variety of reporting requirements and banking regulations. The laws and regulations governing us generally have been promulgated to protect depositors and the federal deposit insurance funds and not to
protect shareholders. Additionally, we must bear the cost of compliance with the reporting and regulations; these costs can be significant and may have an effect on our financial performance.
Our executive offices are located at 10089 Fairfax Boulevard, Fairfax, Virginia, and our telephone number is (703) 481-4567. Our internet address is www.mstreetbank.com. The information
contained on our website should not be considered part of this Form 10-K, and the reference to our website does not constitute incorporation by reference of the information contained on the website.
Our Market Area. We consider our primary market area to be the northern Virginia counties of Arlington, Fairfax, Loudoun, and Prince William, and the cities of Fairfax, Alexandria, Falls
Church, Manassas and Manassas Park, as well as Washington DC and the greater Washington, DC metropolitan area. Our headquarters is located approximately 15 miles west of Washington, D.C., in Fairfax
County, Virginia.
According to the U.S. Census Bureau, the Washington, D.C. Metropolitan Statistical area (MSAs) includes three of the wealthiest counties in the United States, as well as six of the top 20
wealthiest counties. Median household income growth projections range from 6.5% to almost 9% through 2025. Overall, the Washington D.C. MSA ranks sixth out of the largest 25 MSAs ranked by
population estimates as of 2019 and fourth in largest population growth by MSA through 2019 according to the Census Bureau. Population growth for our market area has grown exponentially over the
previous decade and is expected to remain high. We expect our strategies to benefit from the continued growth in population and high income of our market area’s residents.
Area
District of Columbia
Arlington County
Fairfax County
Loudoun County
Prince William County
United States
Total
Population as of
2020 (Actual)
$
717,717
241,828
1,150,877
426,954
476,203
330,946,040
Population
Change 2010-
2020
Projected
Population
Change 2020-
2025
19.28%
16.47%
6.39%
36.71%
18.46%
7.19%
6.84% $
5.11%
2.93%
6.94%
5.43%
2.91%
Median
Household
Income 2020
91,414
129,368
128,955
149,148
112,290
67,761
Median
Household
Income
Projected
Change 2020-
225
Unemployment
Rate as of June
2020
Unemployment
Rate as of June
2019
8.84%
8.57%
6.65%
8.37%
6.77%
9.01%
9.0%
5.9%
8.1%
7.7%
9.2%
11.2%
5.8%
2.0%
2.4%
2.4%
2.6%
3.8%
Source: U.S. Bureau of Labor Statistics, S&P Global Market Intelligence
The Washington, D.C. MSA is a desirable market for a broad range of companies in a variety of industries, including eleven companies from the 2020 Fortune 500 list, and six of the United
States’ largest 100 private companies, according to the 2020 Forbes list of largest private companies by revenue. According to the U.S Bureau of Labor Statistics, the Washington, D.C. MSA has a large and
diversified economy. The following table provides an in-depth view of the distribution of employment within the Washington, D.C. MSA.
Washington, D.C. MSA Employment by Sector
Mining, Lodging, and Construction
Manufacturing
Trade, Transportation, and Utilities
Information
Financial Activities
Professional and Business Services
Education and Health Services
Leisure and Hospitality
Other Services
Government
Source: U.S. Bureau of Labor Statistics, Data as of July 2020
Note: Data is not seasonally adjusted
Employment Sector by Percent
5.3%
1.7%
12.2%
2.4%
5.0%
24.6%
13.0%
7.9%
6.5%
21.4%
As the home of the federal government, the broader Washington, D.C. region benefits from consistent population growth and remains well positioned to capitalize on any increase in government
spending and infrastructure. Further, as banks in our market have experienced continued consolidation over the last few years, our opportunities to attract talented employees and capitalize on customer
dislocation have improved. With its strong demographic characteristics, scale and robust economic activity we believe that the Washington, D.C. metropolitan area represents a strong geographic market for us
to realize our continued growth strategies within our core business model.
The Company is active in community development activities that include support for affordable housing for low- or moderate-income (LMI) individuals, including multifamily rental housing,
promoting economic development by financing small businesses or farms, revitalizing or stabilizing LMI geographies or designated disaster areas, and targeting support for community services to LMI
individuals. The Company also makes qualified investments that target these initiatives within our geographic footprint. In addition, many of our employees and directors are involved in community activities
as well as volunteer their time and expertise to local causes.
6
Competitive Strengths. We continually review our product offerings and based on these reviews may selectively add additional products to provide further diversification of our revenue sources
and to capture our customers’ full banking relationships. We believe that the following business strengths have been instrumental to the success of our core operations and will enable us to continue profitable
growth and to maximize value to our shareholders, while remaining fundamentally sound.
Community Banking Philosophy. We provide our clients with local decision making and individualized service coupled with products and services offered by our larger institutional competitors.
As our business lenders, officers, and Bank directors are based in or reside in the communities we serve, we are able to maintain a high-level of involvement in local organizations and establish a strong
understanding of the banking needs of the respective communities. We believe that our customer-centric business philosophy and sales approach enables us to build long-term relationships with desirable
customers, which enhances the quality and stability of our funding and lending operations. Our mission and philosophy have positioned us well in the communities across our market area and have enabled us
to attract and maintain a very talented and experienced management team.
Disciplined Credit Culture. We achieve our strong credit quality by adherence to sound underwriting and credit administration standards and by maintaining long-term customer relationships. All
credit decisions between $250,000 and $750,000 require concurrence of a senior lender and the Bank’s Chief Credit Officer. Approvals of credits in excess of $750,000 require full consensus of the Officer’s
Loan Committee. We maintain an independent loan review team, and senior management is actively involved with any credits requiring special attention.
Capital Position. The Bank exceeds the regulatory guidelines to be classified as “well capitalized.” Our capital position is strong and has consistently grown. At December 31, 2020, the Bank had
a tier 1 leverage capital ratio of 10.78%, a common equity tier 1 risk-based capital ratio of 13.61%, a tier 1 risk-based capital ratio of 13.61%, and a total risk-based capital ratio of 14.60%. We believe that our
capital position enhances our ability to grow organically because it enables the Bank to continue lending and to remain focused on our customers’ needs. For additional information, see Note 15 of Notes to
Consolidated Financial Statements.
Technology. We have invested in the technology necessary to meet the developing demands of our commercial and retail customers. We utilize a strong core operating system that enables us to
efficiently offer high-end deposit and loan products and have partnered with industry-leading internet banking, cash management, mobile banking, and application-based banking solutions to offer a complete
banking experience to all customers, regardless of their preference. We participate in an international and nationwide automated teller machine network in order to offer our customers ATM transactions at
over 55,000 locations in the United States, Canada, United Kingdom and Mexico.
Growth Opportunities. We believe that we can attract new customers and expand our total loans and deposits within our existing market areas through organic growth, online and mobile banking,
strategic branching and possible acquisition opportunities. We expect our market will continue to create opportunities to attract new clients and, in some cases, may become the catalyst for mergers and
acquisitions. We expect to grow our loan portfolio, open new branches and consider acquisitions only after rigorous due diligence and substantial quantitative analysis regarding the financial and capital
impacts of any such transactions. We believe that maintaining our financial discipline will generate long-term shareholder value.
Lending Activities. The Bank’s primary market focus is on making loans to small businesses, professionals and other consumers in its local market area, along with various aspects of real estate
finance. Owner-occupied and investment commercial real estate loans represent the largest segment’s of the Bank’s loan portfolio. The Bank’s primary lending activities are principally directed to its defined
market area in Northern Virginia, as well as the greater Washington, D.C. metropolitan area.
We offer a diversified loan portfolio consisting primarily of commercial business and owner-occupied and investment commercial real estate loans with higher risk-adjusted returns, shorter
maturities and more sensitivity to interest rate fluctuations, while still providing high quality loan products for single-family and multi-family residential borrowers.
We stress test our loan portfolio on a quarterly basis and measure the results against our capital profile. We multiply the total outstanding amount for each loan category by the highest quarter
historical loss for that category in order to determine the stressed loss for commercial business loans, residential real estate lending, owner-occupied commercial real estate lending and consumer instalment
lending. We stress test our investor-owned commercial real estate using three separate methodologies. If a property fails more than one of the three tests, we extend the highest exposure amount and add on
10% for selling costs.
•
•
•
An immediate and sustained increase in interest rates, which would increase interest expense for the borrower;
An immediate and sustained increase in vacancy, which would decrease rental income; and
An immediate and sustained change in the capitalization rate, or “cap rate,” which would decrease properties’ collateral values.
7
We stress test the construction lending portfolio by applying exponential discounting (k factor) to each project based upon its percentage of completion. The project is stressed using the as-is and
as-complete appraised values and assumes 10% selling costs.
The total estimated losses from the loan stress tests are subtracted from the capital account and the regulatory ratios are recalculated. As of December 31, 2020, the post-stress capital ratios were
all in excess of regulatory requirements.
Commercial Business Lending. Commercial loans are written for a variety of business purposes, including government contract receivables, plant and equipment, general working capital, contract
administration and acquisition lending. Our client base is diverse, and we do not have a concentration of commercial business loans in any specific industry segment.
Commercial Real Estate Lending. We finance owner-occupied and investment commercial real estate. Our underwriting policies and processes focus on the client’s ability to repay the loan as well
as assessment of the underlying real estate. Risks inherent in managing a commercial real estate portfolio relate to sudden or gradual drops in property values as well as changes in the economic climate. We
attempt to mitigate those risks by carefully underwriting loans of this type and by following appropriate loan-to-value standards. Commercial real estate loans represent the largest segment of the Bank’s loan
portfolio. At December 31, 2020, approximately 11.4% of our loan portfolio related to owner occupied commercial real estate loans, and approximately 26.0% of our loan portfolio related to investment
commercial real estate.
Real Estate Construction Lending. This segment of our portfolio is predominately residential in nature and is composed of loans with short durations. We offer real estate construction financing to
customers that have in place a permanent loan “take-out,” either by the Bank or another institution. Our approach to this type of lending reduces our credit risk, yet offers a competitive product in the
marketplace. We also offer construction financing to many local home builders. These loans are also short duration and carefully underwritten with an increased focus on the builder’s reputation and ability to
deliver high quality homes on time and within budget.
We also stress test the construction lending portfolio based upon the percentage completion method by stressing the as-is and as-completed appraised values. For further details, see stress test
methodology under lending activities.
Residential Real Estate Lending. The Bank offers a variety of consumer-oriented residential real estate loans both for purchase and refinancing, most of which are brokered to the secondary
market. The bulk of our current residential portfolio is made up of home equity loans to individuals. Our home equity portfolio gives the Bank a diverse client base.
Consumer Installment Lending. We offer a broad array of consumer loans including car loans, term loans, and overdraft protection.
Credit Policies and Administration. The Bank has adopted a comprehensive lending policy, which includes a well-defined risk tolerance and stringent underwriting standards for all types of loans.
Management believes that it employs experienced lending officers, secures appropriate collateral and carefully monitors the financial conditions of its borrowers.
In addition to normal repayment risks, all loans in the Bank’s portfolio are subject to the state of the economy and the related effects on the borrower and/or the real estate market. Generally,
longer-term loans have periodic interest rate adjustments and/or call provisions. Senior management monitors the loan portfolio closely minimize past due loans and swiftly address potential problem loans. In
addition to the internal business processes employed in the credit administration area, the Bank engages an outside or independent credit review firm to review the loan portfolio annually. Results of the credit
review are used to validate our internal loan ratings and to review independent commentary on specific loans and loan administration activities.
Lending Limit. As of December 31, 2020, our legal lending limit for loans to one borrower was approximately $26.9 million. The Bank “in-house” lending limit is 50% of the legal lending limit
for all relationships unless the loan is owner occupied, 1 - 4 family/residential or a government contract line of credit.. If owner occupied, 1 - 4 family or a government contractor, the “in-house” lending limit
is 90% of the legal lending limit for Good rated credits; 85% for Standard rated credits and 75% for Acceptable rated credits. Our loan policy prescribes a sub-limit to certain borrowers based upon our
determination of each borrower’s credit quality. We routinely participate loan amounts in excess of our policy limits to other financial institutions.
For additional information, see Note 1 and Note 5 of Notes to Consolidated Financial Statements.
Investments and Funding. The Bank balances its liquidity needs based on loan and deposit growth through the investment portfolio and purchased funds. It is the Bank’s goal to provide adequate
liquidity to support the loan growth of the Bank. In the event the Bank has excess liquidity, investment securities are used to generate additional income. In the event deposit growth does not fully support the
Bank’s loan growth, the Bank will utilize deposit listing services, borrowed funds, or incorporate a combination of sales of investment securities, federal funds and other purchased/borrowed funds in order to
augment the Bank’s funding position.
8
The current investment policy authorizes the Bank to invest in debt securities issued by the United States Government, agencies of the United States Government, or United States Government-
sponsored enterprises. The policy permits investments in mortgage-backed securities, including pass-through securities, issued and guaranteed by Fannie Mae, Freddie Mac and Ginnie Mae. The investment
policy also permits investments in federal funds and deposits in other insured institutions. In addition, management is authorized to invest in investment grade state and municipal obligations, private mortgage-
backed securities, and the subordinated debt of other financial institutions. The Bank does not engage in any hedging or trading activities in its investment portfolio . The Company is also the owner and
beneficiary of bank owned life insurance (BOLI) policies on certain current and former Bank employees. These policies generate income and can be liquidated, if necessary, with associated tax costs.
Generally accepted accounting principles require that, at the time of purchase, the Bank designate a security as “held-to-maturity,” “available-for-sale,” or “trading,” depending on our ability and
intent to hold such security. Debt securities available for sale are reported at fair value, while debt securities held to maturity are reported at amortized cost. The Bank does not maintain a trading portfolio.
Establishing a trading portfolio would require specific authorization by the Board of Directors.
The investment portfolio is actively managed and consists of investments classified as available-for-sale and held-to-maturity. Under the available-for sale classification, investment instruments
may be sold as deemed appropriate by management. On a monthly basis, the investment portfolio is marked to market as required by ASC 320. Additionally, the investment portfolio is used to balance the
Bank’s asset and liability position. The Bank invests in fixed rate or floating rate instruments as necessary to reduce interest rate risk exposure.
At December 31, 2020, the held-to-maturity portfolio, which is primarily composed of municipal securities and is carried at amortized cost, totaled $22.5 million. At that date, the available-for-
sale portfolio, which is composed of U.S. Treasury securities, collateralized mortgage-backed securities, subordinated debt of other financial institutions and U.S. Government agency securities and is carried at
fair value, totaled $147.4 million. For additional information, see Note 3 of Notes to Consolidated Financial Statements.
Subordinated Notes. On December 30, 2016, the Company completed the issuance and sale of $14.3 million in aggregate principal amount of fixed-to-floating rate subordinated notes in a private
placement transaction to various accredited investors. During the first quarter of 2017, an additional $700 thousand of subordinated notes was issued for a total issuance of $15.0 million. The net proceeds of
the offering supported growth and were used for other general business purposes. The notes have a maturity date of December 31, 2026 and have an annual fixed interest rate of 6.25% until December 31,
2021. Thereafter, the notes will have a floating interest rate based on three-month LIBOR rate plus 425 basis points (4.25%) (computed on the basis of a 360-day year of twelve 30-day months) from and
including January 1, 2022 to the maturity date or any early redemption date. Interest will be paid semi-annually, in arrears, on July 1 and January 1 of each year during the time that the notes remain
outstanding through the fixed interest rate period or earlier redemption date. Interest will be paid quarterly, in arrears, on April 1, July 1, October 1 and January 1 throughout the floating interest rate period or
earlier redemption date. For additional discussion around the pending LIBOR transition, see “Risk Factors - Uncertainty about the future of the London InterBank Offered Rate (LIBOR) may adversely affect
our business.”
Deposit Activities. Deposits are the major source of funding for the Bank. The Bank offers a broad array of deposit products that include demand, NOW, money market and savings accounts as
well as certificates of deposit. The Bank typically pays a competitive rate on the interest-bearing deposits. As a relationship-oriented organization, we seek generally to obtain deposit relationships with our
loan clients.
We offer a full range of consumer and commercial deposit products, including on-line banking with bill pay, cash management, sweep accounts, wire transfer, check imaging, remote deposit
capture and courier services.
As the Bank’s overall balance sheet positions dictate, we may become more or less competitive in our interest rate structure as our liquidity position changes. Additionally, we may use wholesale
deposits through sources such as deposit listing services, school systems, government entities and other sources to augment our funding position.
We can also arrange for FDIC insurance for deposits up to $150 million through CDARS, the Certificate of Deposit Account Registry Service, which provides a convenient method for a depositor
to enjoy full FDIC insurance on deposits up to $140 million through a single banking relationship.
For additional information on deposits, see Note 8 of Notes to Consolidated Financial Statements.
Payment Service Solutions. Beginning in 2016, the Board and management identified an opportunity for alternative sources of low-cost deposits and fee income. We determined that Financial
Technology (“FinTech”) companies were making significant inroads into banking and we expanded our strategic plan to include banking customers that require Banking as a Service (BaaS) and other payment
service solutions.
Bank management and the Board understand that businesses operating in this space require enhanced vetting and due diligence prior to boarding and thereafter, enhanced due diligence and risk
monitoring (including independent risk auditing) on an ongoing basis throughout the life of the relationship.
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Consistent with our culture, we worked over the past six years with a small group of clients in order to understand the risks associated with this business line. We developed an infrastructure to
identify, measure, monitor and control the risks associated with FinTechs, providing BaaS, and payment systems in general. We designed and implemented comprehensive legal, strategic, procedural and
policy documents to guide business opportunities.
We will continue to support the fintech industry. Consumers in the United States express more confidence banking with FinTechs than banks in many cases. As a business-focused community
bank, we see FinTechs as a natural way for us to expand our footprint into consumer banking opportunities.
Competition. We face significant competition for the origination of loans and the attraction of deposits. Our competition for loans comes primarily from financial institutions in our market area
and, to a lesser extent, from other financial service providers, such as mortgage companies and mortgage brokers. Competition for loans also comes from the increasing number of non-depository financial
service companies entering the mortgage market, such as insurance companies, securities companies and specialty finance companies. Our most direct competition for deposits has historically come from other
financial institutions operating in our market area. We also face competition for investors’ funds from money market funds, mutual funds and other corporate and government securities.
Diversity and Inclusion
The Company has 126 full-time employees as of December 31, 2020. The Company’s goal is to always hire the most qualified individual. The Company is located in a diversely populated
geography, and as a result, the Company has a very diverse workforce.
At the Board level, the Company has six independent directors. Two of the independent directors self-identify as female and one as an African American male. Three of the independent directors
self-identify as white males.
Seventy-five percent of the Company’s 126 employees self-identify as either female or ethnically diverse (defined as all Equal Employment Opportunity Commission classifications other than
white). The Company is proud to have three veterans on its team as well.
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The Company is focused on equal pay for equal work, and on developing all employees to reach their full potential. The Company realizes that hiring a diverse workforce that is representative of
the diversity of the local population also allows us to better serve our marketplace.
Age Group
Number of Employees
Percentage of Total
Employee Age Diversity
20 – 29
13
10%
30 – 39
34
27%
40 – 49
33
26%
50 – 59
34
27%
60 +
12
10%
The age distribution of our employee base is also appropriately diversified.
The Company celebrates diversity throughout the year and fosters opportunities to learn about different cultures, religious practices, traits and differences. The Company finds that doing so brings
out the best in the team as we grow together to exceed customer expectations and create shareholder value.
Supervision, Regulation and Other Factors
General. As a bank holding company, the Company is subject to extensive regulation under the Bank Holding Company Act of 1956, as amended, and to the examination and reporting
requirements of the Federal Reserve. The Company is also subject to the rules and regulations of the SEC under the federal securities laws.
As a Virginia-chartered bank that is a member of the Federal Reserve System, the Bank is subject to regulation, supervision and examination by the Bureau and the Federal Reserve. State and
federal laws also govern the activities in which the Bank engages, the investments that it makes and the aggregate amount of loans that may be granted to one borrower. The Bureau and the Federal Reserve
also regulate the branching authority of the Bank. In addition, various consumer and compliance laws and regulations affect the Bank’s operations.
The earnings of the Company’s subsidiaries, and therefore the earnings of the Company, are affected by general economic conditions, management policies, changes in state and federal legislation
and actions of various regulatory authorities, including those referred to above. The following description summarizes some of the significant state and federal and state laws to which the Company and the
Bank are subject. To the extent that statutory or regulatory provisions or proposals are described, the description is qualified in its entirety by reference to the particular statutory or regulatory provisions or
proposals.
The statutes, regulations and policies that govern our operations are under continuous review and are subject to amendment from time to time by Congress, the Virginia legislature and federal and
state regulatory agencies. Any such future statutory or regulatory changes could adversely affect our operations and financial condition.
Regulation of the Bank. The Bank is subject to regulation and supervision by the Bureau and by the Federal Reserve, which regulation and supervision extends to all aspects of its operations,
including but not limited to requirements concerning an allowance for loan losses, lending and mortgage operations, interest rates received on loans and paid on deposits, the payment of dividends to the
Company, loans to officers and directors, mergers and acquisitions, capital adequacy, and the opening and closing of branches.
As a state-chartered bank that is a member of the Federal Reserve System, the Bank is subject to periodic examinations by the Bureau and by the Federal Reserve Bank of Richmond. In these
examinations, the examiners assess compliance with state and federal banking regulations and the safety and soundness standards in such matters as loan underwriting and documentation, asset quality,
earnings standards, internal controls and audit systems, interest rate risk exposure, and employee compensation and benefits.
The Bureau and the Federal Reserve have enforcement responsibility over the Bank and the authority to bring actions against the Bank and certain institution-affiliated parties, including officers,
directors, and employees, for violations of laws or regulations and for engaging in unsafe and unsound practices. Formal enforcement actions include the issuance of a capital directive or cease and desist order,
civil money penalties, removal of officers and/or directors, and receivership or conservatorship of the institution.
Insurance of Deposit Accounts. The FDIC insures deposits at federally insured financial institutions like the Bank. Deposit accounts in the Bank are insured by the FDIC generally up to a
maximum of $250,000 per separately insured depositor and up to a maximum of $250,000 for self-directed retirement accounts.
The FDIC charges insured depository institutions assessments to maintain the Deposit Insurance Fund. Assessment rates for small institutions (those with less than $10 billion in assets) are based
on an institution’s weighted average CAMELS component ratings and certain financial ratios and are applied to the institution’s assessment base, which equals its average total assets minus its average tangible
equity. The FDIC’s current assessment rates (which are subject to certain adjustments) range from 3 to 16 basis points for institutions with CAMELS composite ratings of 1 or 2, 6 to 30 basis points for those
with a CAMELS composite score of 3, and 16 to 30 basis points for those with CAMELS Composite scores of 4 or 5.
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The FDIC has authority to increase insurance assessments. Any significant increases would have an adverse effect on the operating expenses and results of operations of the Bank. We cannot
predict what the FDIC assessment rates will be in the future.
Insurance of deposits may be terminated by the FDIC upon a finding that an institution has engaged in unsafe or unsound practices, is in an unsafe or unsound condition to continue operations, or
has violated any applicable law, regulation, rule, order or condition imposed by the FDIC. We do not know of any practice, condition or violation that may lead to termination of our deposit insurance.
Regulatory Capital Requirements. The Federal Reserve has promulgated capital adequacy requirements for state-chartered Federal Reserve member banks. Effective January 1, 2015, the federal
banking agencies’ capital rules were substantially revised to conform to the international regulatory standards agreed to by the Basel Committee on Banking Supervision in the accord often referred to as
“Basel III”. The Federal Reserve’s revised regulatory capital rule applies to all depository institutions as well as to all top-tier bank and savings and loan holding companies that are not subject to the Federal
Reserve Board’s Small Bank Holding Company Policy Statement. The capital requirements are quantitative measures established by regulation that require the Bank to maintain minimum amounts and ratios
of capital. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by bank regulators that, if undertaken, could have a direct material effect
on the Company’s financial statements.
The currently effective capital rule requires the maintenance of “Common Equity Tier 1” (“CET1”) capital, Tier 1 capital and Total capital to risk-weighted assets of at least 4.5%, 6% and 8%,
respectively. The rule also establishes a minimum leverage ratio of at least 4% Tier 1 capital to average consolidated assets. In addition to the above minimum requirements, the capital rule limits capital
distributions and certain discretionary bonus payments if a banking organization does not hold a “capital conservation buffer” consisting of 2.5% of CET1 capital to risk-weighted assets above the amount
necessary to meet its minimum risk-based capital requirements. The capital conservation buffer requirement effectively increases the minimum required risk-based capital ratios to 7% for CET1, 8.5% for Tier
1 capital and 10.5% for Total capital.
In determining the amount of risk-weighted assets for purposes of calculating risk-based capital ratios, a bank’s assets, including certain off-balance sheet assets (e.g., recourse obligations, direct
credit substitutes and residual interests), are multiplied by a risk weight factor assigned by the capital regulations based on the risk deemed inherent in the type of asset. Higher levels of capital are required for
asset categories believed to present greater risk. For example, a risk weight of 0% is assigned to cash and U.S. government securities, a risk weight of 50% is generally assigned to prudently underwritten first
lien one- to four-family residential mortgages, a risk weight of 100% is assigned to commercial and consumer loans, a risk weight of 150% is assigned to non-residential mortgage loans that are 90 days past
due or otherwise on non-accrual status, and a risk weight of between 0% to 600% is assigned to permissible equity interests, depending on certain specified factors.
Under applicable federal statute, the federal bank regulatory agencies are required to take “prompt corrective action” with respect to institutions that do not meet specified minimum capital
requirements. For these purposes, the statute establishes five capital categories: well- capitalized, adequately capitalized, undercapitalized, significantly undercapitalized and critically undercapitalized. Under
the implementing regulations, in order to be considered well-capitalized, a bank must have a ratio of CET1 capital to risk-weighted assets of 6.5%, a ratio of Tier 1 capital to risk-weighted assets of 8%, a ratio
of total capital to risk-weighted assets of 10%, and a leverage ratio of 5%. In order to be considered adequately capitalized, a bank must have the minimum capital ratios required by the regulatory capital rule
described above. Institutions with lower capital ratios are assigned to lower capital categories. Based on safety and soundness concerns, a bank may be assigned to a lower capital category than would
otherwise apply based on its capital ratios. A bank that is not well-capitalized is subject to certain restrictions on brokered deposits and interest rates on deposits. A bank that is not at least adequately
capitalized is subject to numerous additional restrictions, and a guaranty by its holding company is required. A bank with a ratio of tangible equity to total assets of 2.0% or less is subject to the appointment of
the FDIC as receiver if its capital level does not improve within 90 days.
As of December 31, 2020, the Bank was in compliance with all regulatory capital standards and qualified as “well-capitalized.” See Note 15 of Notes to Consolidated Financial Statements.
The Economic Growth, Regulatory Relief and Consumer Protection Act (the “Regulatory Relief Act”), enacted in May 2018, introduced an optional simplified measure of capital adequacy for
qualifying community banking organizations with total consolidated assets of less than $10 billion by instructing the federal banking regulators to establish a single “Community Bank Leverage Ratio” of
tangible equity capital divided by average consolidated assets (“CBLR”) of between 8 and 10 percent in satisfaction of any other leverage or capital requirements to which such organizations are subject.
The federal banking regulators jointly issued a final rule, effective January 1, 2020, which provided that a community banking organization with less than $10 billion in assets may elect to use the
CBLR capital framework so long as the bank has a Tier 1 leverage ratio of greater than 9% and limited amounts of off-balance-sheet exposures and trading assets and liabilities. A qualifying bank that elects to
use the CBLR framework will be deemed to satisfy the generally applicable leverage and risk-based regulatory capital requirements, will be considered to have met the well-capitalized ratio requirements
under the prompt corrective action regulations, and will not be required to report or calculate risk-based capital. In accordance with the provisions of the Coronavirus Aid, Relief, and Economic Security Act
(the “CARES Act”), the federal banking agencies issued a final rule in August 2020 to set the CBLR at 8% through the end of 2020. On January 1, 2021, the CBLR increased to 8.5% for the 2021 calendar
year and, on January 1, 2022, the CBLR will return to 9%. The Bank has elected not to opt into the CBLR framework.
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Transactions with Related Parties. The Bank is subject to the Federal Reserve’s Regulation W, which comprehensively implements the restrictions of Sections 23A and 23B of the Federal
Reserve Act on transactions between a bank and its “affiliates.” The sole “affiliate” of the Bank, as defined in Regulation W, is the Company. Section 23A and the implementing provisions of Regulation W
generally place limits on the amount of a bank’s loans or extensions of credit to, investments in, or certain other transactions with its affiliates, and on the amount of advances to third parties collateralized by
the securities or obligations of affiliates. Section 23B and Regulation W generally require a bank’s transactions with affiliates to be on terms substantially the same, or at least as favorable to the bank, as those
prevailing at the time for comparable transactions with non-affiliated companies.
The Bank is also subject to certain restrictions on extensions of credit to executive officers, directors, certain principal shareholders and their related interests. Such extensions of credit must be
made on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with third parties and must not involve more than the normal risk of
repayment or present other unfavorable features.
Community Reinvestment Act and Fair Lending Laws. All insured depository institutions have a responsibility under the Community Reinvestment Act of 1977 (the “CRA”) and federal
regulations thereunder to help meet the credit needs of their communities, including low- and moderate-income neighborhoods. In connection with its examination of a state-chartered Federal Reserve member
bank like the Bank, the Federal Reserve is required to assess our record of meeting the credit needs of our entire community. The CRA requires the Bank’s record of compliance with the CRA to be taken into
account in the evaluation of applications by the Bank or the Company for approval of an expansionary proposal, such as a merger or other acquisition of another bank or the opening of a new branch office.
The Bank received a “satisfactory” CRA rating in its most recent assessment received on October 10, 2019 by the Federal Reserve.
In addition, the Equal Credit Opportunity Act and the Fair Housing Act prohibit lenders from discriminating in their lending practices on the basis of characteristics specified in those statutes. A
failure to comply with the Equal Credit Opportunity Act or the Fair Housing Act could result in enforcement actions by a bank’s principal federal regulatory agency, as well as by other federal regulatory
agencies or the Department of Justice.
Other Consumer Protection Laws. The Bank’s lending and deposit-taking operations are subject to numerous other federal and state laws designed to protect consumers. The Consumer Financial
Protection Bureau (“CFPB”) issues regulations and standards under the federal consumer protection laws, which include, among others, the Home Mortgage Disclosure Act, the Real Estate Settlement
Procedures Act, the Truth in Lending Act, the Electronic Fund Transfer Act, the Truth in Savings Act, the Fair Credit Reporting Act, and the Dodd-Frank Wall Street Reform and Consumer Protection Act’s
prohibition on unfair, deceptive or abusive acts or practices. The Bank’s consumer financial products and services are subject to examination by the Federal Reserve for compliance with these and other CFPB
regulations and standards.
In addition, customer privacy statutes and regulations limit the ability of the Bank to disclose nonpublic consumer information to non-affiliated third parties. These laws require us to provide
notice to our customers regarding privacy policies and practices and to give our customers an option to prevent their non-public personal information from being shared with non-affiliated third parties or with
our affiliates.
Bank Secrecy Act / Anti-Money Laundering Laws. The Bank is subject to the Bank Secrecy Act and other anti-money laundering laws and regulations, including the USA PATRIOT Act of 2001.
These laws and regulations require the Bank to implement policies, procedures, and controls to detect, prevent, and report money laundering and terrorist financing and to verify the identity of their customers.
Violations of these requirements can result in substantial civil and criminal sanctions. In addition, provisions of the USA PATRIOT Act require the federal financial institution regulatory agencies to consider
the effectiveness of a financial institution's anti-money laundering activities when reviewing mergers and acquisitions.
Commercial Real Estate Lending Concentrations. The federal banking agencies have issued guidance on sound risk management practices for concentrations in commercial real estate
lending. The particular focus is on exposure to commercial real estate loans that are dependent on the cash flow from the real estate held as collateral and that are likely to be sensitive to conditions in the
commercial real estate market (as opposed to real estate collateral held as a secondary source of repayment or as an abundance of caution). The purpose of the guidance is not to limit a bank’s commercial real
estate lending but to guide banks in developing risk management practices and capital levels commensurate with the level and nature of real estate concentrations. The guidance directs the federal banking
agencies to focus their supervisory resources on institutions that may have significant commercial real estate loan concentration risk. A bank that has experienced rapid growth in commercial real estate
lending, has notable exposure to a specific type of commercial real estate loan, or is approaching or exceeding the following supervisory criteria may be identified for further supervisory analysis with respect
to real estate concentration risk:
•
•
Total reported loans for construction, land development and other land represent 100% or more of the bank’s total regulatory capital; or
Total commercial real estate loans (as defined in the guidance) represent 300% or more of the bank’s total regulatory capital and the outstanding balance of the bank’s commercial real estate
loan portfolio has increased 50% or more during the prior 36 months.
The guidance provides that the strength of an institution’s lending and risk management practices with respect to such concentrations will be taken into account in supervisory guidance on
evaluation of capital adequacy.
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Regulation of the Company. As a bank holding company under the Bank Holding Company Act, we are subject to regulation, supervision, and examination by the Federal Reserve. We are
required to file quarterly reports with the Federal Reserve and provide such additional information as the Federal Reserve may require. The Federal Reserve has extensive enforcement authority over bank
holding companies, including, among other things, the ability to assess civil money penalties, to issue cease and desist or removal orders and to require that a holding company divest subsidiaries (including its
bank subsidiaries). In general, enforcement actions may be initiated for violations of law and regulations and unsafe or unsound practices. We are also required to file certain reports with, and otherwise comply
with the rules and regulations of, the SEC.
Regulatory Capital Requirements. The federal regulatory capital rules apply to all depository institutions as well as to bank holding companies with consolidated assets of $3 billion or more.
However, the regulatory capital requirements generally do not apply on a consolidated basis to a bank holding company with total consolidated assets of less than $3 billion unless the holding company: (1) is
engaged in significant nonbanking activities either directly or through a nonbank subsidiary; (2) conducts significant off-balance sheet activities (including securitization and asset management or
administration) either directly or through a nonbank subsidiary; or (3) has a material amount of debt or equity securities outstanding (other than trust preferred securities) that are registered with the SEC. The
Federal Reserve may apply the regulatory capital standards at its discretion to any bank holding company, regardless of asset size, if such action is warranted for supervisory purposes.
Because the Company has total consolidated assets of less than $3 billion and does not engage in activities that would trigger application of the federal regulatory capital rules, it is not at present
subject to consolidated capital requirements under the such rules.
Acquisitions. Under the Bank Holding Company Act, we are required to obtain the prior approval of the Federal Reserve to acquire ownership or control of more than 5% of the voting shares or
substantially all of the assets of any bank holding company or bank or merge or consolidate with another bank holding company. Federal law authorizes bank holding companies to make interstate acquisitions
of banks without geographic limitation.
Permissible Activities. In general, the Bank Holding Company Act limits the activities of a bank holding company to those of banking, managing or controlling banks, or any other activity that
the Federal Reserve has determined to be so closely related to banking or to managing or controlling banks that an exception is allowed for those activities. Bank holding companies that qualify and elect to be
treated as “financial holding companies” may engage in a broad range of additional activities that are (i) financial in nature or incidental to such financial activities or (ii) complementary to a financial activity
and do not pose a substantial risk to the safety and soundness of depository institutions or the financial system generally. These activities include securities underwriting and dealing, insurance agency and
underwriting, and making merchant banking investments. We have not made an election to be treated as a financial holding company.
Incentive Compensation. Federal banking agencies have issued guidance on incentive compensation policies intended to ensure that the incentive compensation policies of banking organizations
do not undermine the safety and soundness of such organizations by encouraging excessive risk-taking. The guidance, which covers all employees that have the ability to materially affect the risk profile of an
organization, is based upon the key principles that a banking organization’s incentive compensation arrangements should (i) provide incentives that do not encourage risk-taking beyond the organization’s
ability to effectively identify and manage risks, (ii) be compatible with effective internal controls and risk management, and (iii) be supported by strong corporate governance, including active and effective
oversight by the organization’s board of directors. In accordance with federal statute, the federal banking agencies prohibit incentive-based compensation arrangements that encourage inappropriate risk taking
by covered financial institutions (generally institutions that have over $1 billion in assets) and are deemed to be excessive, or that may lead to material losses.
The Federal Reserve will review, as part of its standard, risk-focused examination process, the incentive compensation arrangements of banking organizations (such as the Company) that are
not “large, complex banking organizations.” These reviews will be tailored to each organization based on the scope and complexity of the organization’s activities and the prevalence of incentive compensation
arrangements. The findings of the supervisory initiatives will be included in reports of examination. Deficiencies will be incorporated into the organization’s supervisory ratings, which can affect
the organization’s ability to make acquisitions and take other actions. Enforcement actions may be taken against a banking organization if its incentive compensation arrangements, or related risk-management
control or governance processes, pose a risk to the organization’s safety and soundness and the organization is not taking prompt and effective measures to correct the deficiencies. The scope and content of the
U.S. banking regulators’ policies on executive compensation is likely to continue to evolve. It cannot be determined at this time whether compliance with such policies will adversely affect the Company’s
ability to hire, retain and motivate its key employees.
Source of Strength. Under the Bank Holding Company Act, a bank holding company is required to act as a source of financial and managerial strength to each of its subsidiary banks and to
commit resources to support each subsidiary bank. Under this source of strength doctrine, the Federal Reserve may require a bank holding company to make capital injections into a troubled subsidiary bank.
The Federal Reserve may charge the bank holding company with engaging in unsafe and unsound practices if it fails to commit resources to such a subsidiary bank or if it undertakes actions that the Federal
Reserve believes might jeopardize its ability to commit resources to such subsidiary bank. A capital injection may be required at times when the holding company does not have the resources to provide it.
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In addition, any loans by a holding company to a subsidiary bank are subordinate in right of payment to deposits and to certain other indebtedness of such subsidiary bank. In the event of a bank
holding company’s bankruptcy, the bankruptcy trustee will assume any commitment by the holding company to a federal bank regulatory agency to maintain the capital of a subsidiary bank. Moreover, the
bankruptcy law provides that claims based on any such commitment will be entitled to a priority of payment over the claims of the institution’s general unsecured creditors, including the holders of its note
obligations.
Payment of Dividends. The Company is subject to various restrictions relating to the payment of dividends. The Federal Reserve has issued guidance indicating that bank holding companies
should generally pay dividends only if the company’s net income available to common shareholders over the past year has been sufficient to fully fund the dividends, and the prospective rate of earnings
retention appears consistent with the company’s capital needs, asset quality and overall financial condition. The Federal Reserve’s guidance also states that a bank holding company should inform and consult
with its regional Federal Reserve Bank in advance of declaring or paying a dividend that exceeds earnings for the period for which the dividend is being paid or that could result in a material adverse change to
the organization’s capital structure. In addition, under Virginia law, the Company generally may not pay dividends or distributions to holders of common stock if it would be unable to pay its debts as they
become due in the ordinary course of business or if its total assets would be less than the sum of its total liabilities plus the amount of the liquidation preference of any class of shares with superior rights than
common stock.
As the majority of the Company’s revenues result from dividends paid to the Company by the Bank, the Company’s ability to pay dividends to our shareholders largely depends on the receipt of
such dividends from the Bank. The Bank is subject to various laws and regulations limiting the amount of dividends that it can pay. Under Virginia law, without the permission of the Virginia State
Corporation Commission, a state bank may not pay dividends, except from retained earnings. Under federal law applicable to state-chartered Federal Reserve member banks, a bank may not declare or pay a
dividend without prior Federal Reserve approval if the total of all dividends declared during the calendar year, including the proposed dividend, exceeds the sum of the bank’s net income during the current
calendar year and the retained net income of the prior two calendar years. The Federal Reserve may also object to a proposed dividend based on safety and soundness concerns.
No insured depository institution may pay a dividend if, after paying the dividend, the institution would be undercapitalized. In addition, as noted above, if the Bank does not maintain the capital
conservation buffer required by applicable regulatory capital rules, its ability to pay dividends to the Company will be limited.
Federal Securities Law. The Company’s common stock is registered under Section 12(b) of the Exchange Act, and the Company is subject to the periodic reporting and other requirements of the
SEC under Section 12(b) of the Exchange Act and SEC regulations.
Item 1A. Risk Factors
This section highlights the material risks that the Company currently faces. Any of the risks described below could materially adversely affect our business, financial condition, and results of
operations.
Risks Related to Our Business
Pandemic Risks
Pandemic risks, such as the one we are currently experiencing due to COVID-19, can have an impact on every risk outlined in the paragraphs below. We have learned that pandemic risks can, in-and-of-
themselves, cause serious national and even global financial and economic distress. The results of that financial distress and the associated health concerns can and will impact businesses as ongoing
concerns, the health and well-being of a population, and the financial capabilities of consumers, businesses and government entities. Pandemic risks can and will impact our business and financial results.
The COVID-19 pandemic has created, and may continue to create, significant disruption of the global economy and financial markets. Governments, businesses, and the public are taking actions
to contain the spread of COVID-19 and to mitigate its effects, including quarantines, travel bans, “stay at home” orders, cancellation of events and travel, closures of businesses and schools, fiscal stimulus, and
legislation intended to provide monetary aid and other relief. While the scope, duration, and full effect of COVID-19 continue to evolve and are not fully known, the pandemic and related efforts to contain it
have disrupted global economic activity, adversely affected the functioning of financial markets, impacted interest rates, increased economic and market uncertainty, and disrupted trade and supply chains.
Credit and Lending Risks
Our business, like that of most banking organizations, is highly susceptible to credit risk.
As a lender, the Bank is exposed to the risk that customers will be unable to repay their loans according to terms of the loan agreements and that the collateral securing payment of the loans (if
any) may not be sufficient to assure repayment. Credit losses could have a material adverse effect on our operating results and financial condition.
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We have significant exposure to risks associated with commercial and residential real estate.
A substantial portion of our loan portfolio consists of commercial and residential real estate-related loans, including construction and residential and commercial mortgage loans. As of
December 31, 2020, we had approximately $141.8 million of owner-occupied and $325.1 million of investment commercial real estate loans outstanding, which represented approximately 11.4% and 26.0%,
respectively, of our loan portfolio as of December 31, 2020. As of that same date, we had approximately $324.9 million of construction real estate loans and $183.5 million of residential real estate loans,
which represent 26.0% and 14.7% respectively.
The adverse consequences from real estate-related credit risks tend to be cyclical and are often driven by local and national economic developments that are not controllable or entirely foreseeable
by us or our borrowers. As a result:
•
•
we have a greater risk of loan defaults and losses in the event of economic weaknesses associated with commercial and residential real estate in our market area and nationally, which may
have a negative effect on the ability of our borrowers to timely repay their loans; and
loan concentrations and the associated risks related to commercial and residential real estate may pose additional regulatory credit risk concerns, including interest rate risk due to maturity
considerations, liquidity risk due to funding considerations and risks to earnings and capital.
Since we engage in lending secured by real estate and may be forced to foreclose on the collateral property and own the underlying real estate, we may be subject to the increased costs and risks
associated with the ownership of real property, which could have an adverse effect on our business and results of operations.
A significant portion of our loan portfolio is secured by real property. During the ordinary course of business, we may foreclose on and take title to properties securing certain loans, in which event
we become exposed to the risks inherent in the ownership of real estate. The amount that we, as a mortgagee, may realize after a default is dependent upon factors outside of our control, including:
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general or local economic conditions;
environmental clean-up liabilities;
neighbourhood values;
interest rates;
real estate tax rates;
operating expenses of the foreclosed properties;
supply of and demand for rental units or properties;
ability to obtain and maintain adequate occupancy of the properties;
zoning laws;
governmental rules, regulations and fiscal policies; and
extreme weather conditions or other natural or man-made disasters.
Certain expenditures associated with the ownership of real estate, principally real estate taxes and maintenance costs, may also adversely affect our operating expenses.
Commercial and industrial loans may expose us to greater financial and credit risk than other loans.
Commercial and industrial loans generally carry larger loan balances and can involve a greater degree of financial and credit risk than other loans, including less collateral at liquidation. Any
significant failure to pay on time by our customers would hurt our earnings. The increased financial and credit risks associated with these types of loans result from several factors, including the concentration
of principal in a limited number of loans and borrowers, the size of loan balances, the effects of general economic conditions on income-producing properties and the increased difficulty of evaluating and
monitoring these types of loans. In addition, when underwriting a commercial or industrial loan, we may take a security interest in commercial real estate, and, in some instances upon a default by the
borrower, we may foreclose on and take title to the property, which may lead to additional risks for us under applicable environmental laws.
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The small-to-midsized businesses that we lend to may have fewer resources to weather adverse business developments, which may impair a borrower’s ability to repay a loan, and such impairment could have
a material adverse effect on our business, financial condition and results of operations.
We focus our business development and marketing strategy primarily on small-to-midsized businesses. These businesses frequently have smaller market shares than their competition, may be
more vulnerable to economic downturns, often need substantial additional capital to expand or compete and may experience substantial volatility in operating results, any of which may impair a borrower’s
ability to repay a loan. In addition, the success of a small-to-midsized business often depends on the management skills, talents and efforts of one or two people or a small group of people, and the death,
disability or resignation of one or more of these people could have an adverse impact on the business and its ability to repay its loan. If general economic conditions negatively impact the markets in which we
operate and small-to-midsized businesses are adversely affected or our borrowers are otherwise harmed by adverse business developments, this, in turn, could have a material adverse effect on our business,
financial condition and results of operations.
The borrowing needs of our customers may increase, especially during a challenging economic environment, which could result in increased borrowing against our contractual obligations to extend credit.
A commitment to extend credit is a formal agreement to lend funds to a customer as long as there is no violation of any condition established under the agreement. The actual borrowing needs of
our customers under these credit commitments have historically been lower than the contractual amount of the commitments. A significant portion of these commitments expire without being drawn upon.
Because of the credit profile of our customers, we typically have a substantial amount of total unfunded credit commitments, which is not reflected on our balance sheet. As of December 31, 2020, we had
$219.4 million in unfunded credit commitments to our customers. Actual borrowing needs of our customers may exceed our expectations, especially during a challenging economic environment when our
customers’ companies may be more dependent on our credit commitments due to the lack of available credit elsewhere, the increasing costs of credit, or the limited availability of financings from venture
firms. This could adversely affect our liquidity, which could impair our ability to fund operations and meet obligations as they become due and could have a material adverse effect on our business, financial
condition and results of operations.
Our allowance for loan losses may not be adequate to cover actual future losses.
We maintain an allowance for loan losses to cover estimable and observable loan losses inherent in our portfolio. Every loan we make carries a certain risk of non-repayment, and we make various
assumptions and judgments about the collectability of our loan portfolio including the creditworthiness of our borrowers and the value of the real estate and other assets serving as collateral for the repayment
of loans. Through a periodic review of the loan portfolio, management determines the amount of the allowance for loan losses by considering general market conditions, credit quality of the loan portfolio, the
collateral supporting the loans and performance of customers relative to their financial obligations with us. The amount of future losses is susceptible to changes in economic, operating and other conditions,
including changes in interest rates, which may be beyond our control, and these losses may exceed current estimates. We cannot fully predict the amount or timing of losses or whether the loss allowance will
be adequate in the future. If our assumptions prove to be incorrect, our allowance for loan losses may not be sufficient to cover losses inherent in our loan portfolio, resulting in additions to the allowance.
Excessive loan losses could have a material adverse impact on our financial condition and results of operations.
We may be required to increase our provisions for loan losses and to charge off loans in the future, which increases and charges could materially adversely affect us.
There is no precise method of predicting the timing of loan losses. We can give no assurance that our allowance for loan losses is or will be sufficient to absorb actual loan losses. We maintain an
allowance for loan losses, which is a reserve established through a provision for loan losses charged to expense, that represents management’s estimable and observable losses within the existing portfolio of
loans. The level of the allowance reflects management’s evaluation of, among other factors, the status of specific impaired loans, trends in historical loss experience, delinquency trends, credit concentrations
and economic conditions within our market area. The determination of the appropriate level of the allowance for loan losses inherently involves a high degree of subjectivity and judgment and requires us to
make significant estimates of current credit risks and future trends, all of which may undergo subsequent material changes. Changes in economic conditions affecting borrowers, new information regarding
existing loans, identification of additional problem loans and other factors, both within and outside of our control, may require us to increase our allowance for loan losses. Increases in nonperforming loans
have a significant impact on our allowance for loan losses.
In addition, bank regulatory agencies periodically review our allowance for loan losses and may require us to increase the provision for loan losses or to recognize further loan charge-offs, based
on judgments that differ from those of management. If loan charge-offs in future periods exceed our allowance for loan losses, we will need to record additional provisions to increase our allowance for loan
losses. Furthermore, growth in our loan portfolio would generally lead to an increase in the provision for loan losses. Generally, increases in our allowance for loan losses will result in a decrease in net income
and shareholders’ equity, and may have a material adverse effect on our financial condition, results of operations and cash flows. Material additions to our allowance could also materially decrease our net
income.
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The implementation of the Current Expected Credit Loss accounting standard could require the Company to increase its allowance for credit losses.
In June 2016, the FASB issued ASU No. 2016-13, “Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments,” which replaces the incurred loss
model with an expected loss model, which is referred to as the current expected credit loss model, or “CECL.” This standard requires earlier recognition of expected credit losses on loans and certain other
instruments, compared to the incurred loss model. 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 revised methodology required by ASU 2016-13, which will be effective for the Company in the fiscal year beginning after December 15, 2022, represents a significant change from existing
GAAP and may result in material changes to the Company’s accounting for financial instruments. For most debt securities, the transition approach requires a cumulative-effect adjustment to the statement of
financial position as of the beginning of the first reporting period the guidance is effective. For other-than-temporarily impaired debt securities, the guidance will be applied prospectively. The Company will
record a one-time adjustment to its credit loss allowance, as of the beginning of the first quarter of 2023, equal to the difference between the amounts of its credit loss allowance under the incurred loss
methodology and under CECL. The Company cannot yet determine the magnitude of any such one-time cumulative adjustment or of the overall impact of the new standard on its financial condition or results
of operations. In anticipation of the implementation of CECL, the Company is working with a third party to compile data and develop an estimate using historical and qualitative data based on the requirements
of ASU 2016-13.
A significant portion of our loan portfolio is unseasoned.
Since December 31, 2016, our loan portfolio has increased approximately 177.4%, from $464 million at December 31, 2016 to $1.3 billion at December 31, 2020. While we believe our
underwriting standards are designed to manage normal lending risks, it is difficult to assess the future performance of our loan portfolio due to the recent origination of many of our loans. As a result, it is
difficult to determine whether these loans will become non-performing or delinquent, or whether we will hold non-performing or delinquent loans that may adversely affect our future performance.
We extend credit to a variety of customers based on internally established standards and judgment. We manage credit risk through a program of underwriting standards, the review of certain credit decisions
and an on-going process of assessment of the quality of the credit already extended. Our credit standards and ongoing process of credit assessment might not protect us from significant credit losses.
We take credit risk by virtue of making loans, extending loan commitments and letters of credit and, to a lesser degree, purchasing non-governmental securities. Our exposure to credit risk is
managed through the use of consistent underwriting standards, and we avoid highly leveraged transactions as well as excessive industry and other concentrations. Our credit administration function employs
risk management techniques to ensure that loans adhere to corporate policy and problem loans are promptly identified. While these procedures are designed to provide us with the information needed to
implement policy adjustments where necessary, and to take proactive corrective actions, there can be no assurance that such measures will be effective in avoiding undue credit risk.
We are subject to environmental liability risk associated with our lending activities.
In the course of our business, we may purchase real estate, or we may foreclose on and take title to real estate. Although we exercise prudent due diligence when making loans, we could be subject
to environmental liabilities with respect to these properties. We may be held liable to a governmental entity or to third parties for property damage, personal injury, investigation and clean-up costs incurred by
these parties in connection with environmental contamination or may be required to investigate or clean up hazardous or toxic substances or chemical releases at a property. The costs associated with
investigation or remediation activities could be substantial. In addition, if we are the owner or former owner of a contaminated site, we may be subject to common law claims by third parties based on damages
and costs resulting from environmental contamination emanating from the property. Any significant environmental liabilities could cause an adverse effect on our business, financial condition and results of
operations.
Interest Rate Risks
Changes in interest rates may negatively affect our earnings, income and financial condition as well as the value of our assets.
Our earnings and cash flows depend substantially upon our net interest income. Net interest income is the difference between interest income earned on interest-earning assets, such as loans and
investment securities, and interest expense paid on interest-bearing liabilities, such as deposits and borrowed funds. Interest rates are sensitive to many factors that are beyond our control, including general
economic conditions, competition and policies of various governmental and regulatory agencies and, in particular, the policies of the Board of Governors of the Federal Reserve System (the “Federal
Reserve”).
In an attempt to help the overall economy, the Federal Reserve has kept interest rates low through its targeted Fed Funds rate. During 2020, the Federal Reserve decreased the targeted Fed Funds
rate to 0 - 25 basis points. The Federal Reserve has indicated that further changes
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would be subject to economic conditions. As the Federal Reserve increases and decreases the targeted Fed Funds rate, overall interest rates will likely be impacted.
Changes in monetary policy, including changes in interest rates, not only could influence the interest we receive on loans and investment securities and the amount of interest we pay on deposits
and borrowings, but such changes could also affect: (1) our ability to originate loans and obtain deposits; (2) the fair value of our financial assets and liabilities, including our securities portfolio; and (3) the
average duration of our interest-earning assets. Interest-earning assets may be more responsive to changes in interest rates than interest-bearing liabilities, or vice versa (repricing risk), individual interest rates
or rate indices underlying various interest-earning assets and interest-bearing liabilities may not change in the same degree over a given time period (basis risk), and interest rate relationships may change
across the spectrum of interest-earning asset and interest-bearing liability maturities (yield curve risk), including a prolonged flat or inverted yield curve environment. Any substantial, unexpected, prolonged
change in market interest rates could have a material adverse effect on our financial condition and results of operations.
Uncertainty about the future of the London InterBank Offered Rate (LIBOR) may adversely affect our business.
In 2017, the Chief Executive of the United Kingdom Financial Conduct Authority, which regulates LIBOR, announced that it intends to halt persuading or compelling banks to submit rates for the
calculation of LIBOR after 2021. As a result, LIBOR, as currently operated, may not continue after 2021. It is impossible to predict whether and to what extent banks will continue to provide LIBOR
submissions to the administrator of LIBOR or whether any additional reforms to LIBOR may be enacted in the United Kingdom or elsewhere. At this time, there is uncertainty as to what rate or rates may
become accepted alternatives to LIBOR. One leading alternative rate, the Secured Overnight Financing Rate (SOFR) published by the Federal Reserve Bank of New York, is not directly comparable to LIBOR
and cannot easily or simply be substituted for it in outstanding instruments. Key differences between the two are: SOFR is based on secured lending, while LIBOR is not; and SOFR is limited to overnight
lending, while LIBOR encompasses several short-term maturity periods. It is impossible to predict the effect of any alternatives on the value of LIBOR-based securities and variable rate loans. Our primary
exposures to LIBOR are in interest rate loan swaps on commercial loans and subordinated debt. The lack of a leading alternative to LIBOR means that LIBOR continues to be used in many new instruments. In
addition, it is not known how a transition away from LIBOR, or to a new version of LIBOR, will impact our ability to use hedge accounting after 2021.
It is not known whether LIBOR will continue after 2021 in a legally workable form. There is a risk that an adverse outcome of the LIBOR transition after 2021 could increase our interest and
other costs relative to our outstanding subordinated debt. We may not be able to refinance those instruments on terms that reduce those costs to the level we would have expected if LIBOR were to continue
indefinitely, unchanged.
Liquidity Risk
Liquidity risk could impair our ability to fund operations and jeopardize our financial condition.
Liquidity is essential to our business. An inability to raise funds through deposits, borrowings, the sale of loans and other sources could have a substantial negative effect on our liquidity. Our
access to funding sources in amounts adequate to finance our activities, or on terms that are acceptable to us, could be impaired by factors that affect us specifically or the financial services industry or the
economy in general. Factors that could detrimentally affect our access to liquidity sources include, among other things, a decrease in the level of our business activity as a result of a downturn in the markets in
which our loans are concentrated and an adverse regulatory action against us. Our ability to borrow could also be impaired by factors that are not specific to us, such as a disruption in the financial markets or
negative views and expectations about the prospects for the financial services industry.
Among other sources of funds, we rely heavily on deposits for funds to make loans and provide for our other liquidity needs. However, our loan demand has historically exceeded the rate at which
we have been able to build core deposits for which there is substantial competition from a variety of different competitors, so we have relied on interest-sensitive deposits, including wholesale deposits, as
sources of funds. Those deposits may not be as stable as other types of deposits and, in the future, depositors may not renew those deposits when they mature, or we may have to pay a higher rate of interest to
attract or retain them or to replace them with other deposits or with funds from other sources. Not being able to attract deposits, or to retain or replace them as they mature, would adversely affect our liquidity.
Paying higher deposit rates to attract, retain or replace those deposits could have a negative effect on our interest margin and operating results.
Operational Risks
New lines of business, products, product enhancements or services may subject us to additional risks.
From time to time, we implement new lines of business, or offer new products and product enhancements as well as new services within our existing lines of business and we will continue to do
so in the future. There are substantial risks and uncertainties associated with these efforts, particularly in instances where the markets are not fully developed. In implementing, developing or marketing new
lines of business, products, product enhancements or services, we may invest significant time and resources, although we may not assign the appropriate level of resources or expertise necessary to make these
new lines of business, products, product enhancements or services successful or to realize their expected benefits. Further, initial timetables for the introduction and development of new lines of business,
products, product enhancements or services may not be achieved, and price and profitability targets may not prove feasible. External factors, such as compliance with regulations, competitive alternatives and
shifting market preferences, may also impact the ultimate implementation of a new line of business or offerings of new products,
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product enhancements or services. Furthermore, any new line of business, product, product enhancement or service could have a significant impact on the effectiveness of our system of internal controls.
Failure to successfully manage these risks in the development and implementation of new lines of business or offerings of new products, product enhancements or services could have an adverse impact on our
business, financial condition or results of operations.
In 2016, we added a new funding source by way of facilitating payment services. We are continuing to identify and solicit new customers in need of these specialized services. The primary
reasons for expanding into payment services are to secure an additional source of low-cost deposits and to capture additional fee income. A bank’s risks when dealing with a processor account are similar to
risks from other activities in which customers conduct transactions through the bank on behalf of the customers’ clients. It is necessary for a bank to implement an adequate processor approval, monitoring and
auditing program that extends beyond credit risk management and is conducted on an ongoing basis. When a bank is not able to identify and understand the nature and source of transactions processed through
accounts, the bank’s risks and the likelihood of suspicious activity can increase. Without these precautions, a bank could be vulnerable to processing illicit or sanctioned transactions.
We face risks related to our operational, technological and organizational infrastructure.
Our ability to grow and compete is dependent on the Bank’s ability to build or acquire the necessary operational and technological infrastructure and to manage the cost of that infrastructure as we
expand. In our case, operational risk can manifest itself in many ways, such as errors related to failed or inadequate processes, faulty or disabled computer systems, fraud by employees or outside persons and
exposure to external events. As discussed below, we are dependent on our operational infrastructure to help manage these risks. In addition, we are heavily dependent on the strength and capability of our
technology systems that the Bank uses both to interface with customers and to manage internal financial and other systems. Our ability to develop and deliver new products that meet the needs of our existing
customers and attract new ones depends on the functionality of our technology systems. Additionally, our ability to run our business in compliance with applicable laws and regulations is dependent on these
infrastructures.
We continuously monitor our operational and technological capabilities and make modifications and improvements as circumstances warrant. In some instances, the Bank may build and maintain
these capabilities itself. We outsource many of these functions to third parties. These third parties may experience errors or disruptions that could adversely impact the Bank and over which it may have limited
control. We also face risk from the integration of new infrastructure platforms and/or new third-party providers of such platforms into the Bank’s existing businesses.
Many of our larger competitors have substantially greater resources to invest in technological improvements. As a result, they may be able to offer additional or superior technologies compared to
those that we will be able to provide, which could put us at a competitive disadvantage. Accordingly, we may lose customers seeking new technology-driven products and services to the extent we are unable
to compete effectively.
A failure in our operational systems or infrastructure, or those of third parties, could impair our liquidity, disrupt our business, result in the unauthorized disclosure of confidential information, damage our
reputation and cause financial losses.
Our business is dependent on our ability to process and monitor, on a daily basis, a number of transactions. These transactions, as well as the information technology services we provide to clients,
often must adhere to client-specific guidelines, as well as legal and regulatory standards. Developing and maintaining our operational systems and infrastructure is challenging, particularly as a result of rapidly
evolving legal and regulatory requirements and technological shifts. Our financial, accounting, data processing or other operating systems and facilities may fail to operate properly or become disabled as a
result of events that are wholly or partially beyond the Bank’s control, such as a spike in transaction volume, cyber-attack or other unforeseen catastrophic events, which may adversely affect our ability to
process these transactions or provide services.
In addition, our operations rely on the secure processing, storage and transmission of confidential and other information on our computer systems and networks. Although we take protective
measures to maintain the confidentiality, integrity and availability of our and our clients’ information across all geographic and product lines, and endeavor to modify these protective measures as
circumstances warrant, the nature of the threats continues to evolve. As a result, our computer systems, software and networks may be vulnerable to unauthorized access, loss or destruction of data (including
confidential client information), account takeovers, unavailability of service, computer viruses or other malicious code, cyber-attacks and other events that could have an adverse security impact. Despite the
defensive measures we take to manage our internal technological and operational infrastructure, these threats may originate externally from third parties such as foreign governments, organized crime and other
hackers, and outsource or infrastructure-support providers and application developers, or may originate internally from within our organization. Given the increasingly high volume of our transactions, certain
errors may be repeated or compounded before they can be discovered and rectified.
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We also face the risk of operational disruption, failure, termination or capacity constraints of any of the third parties that facilitate our business activities, including exchanges, clearing agents,
clearing houses or other financial intermediaries. Such parties could also be the source of an attack on, or breach of, our operational systems, data or infrastructure. In addition, as interconnectivity with our
clients grows, we increasingly face the risk of operational failure with respect to our clients’ systems.
We rely on vendors to support our operations. We also rely on vendors to provide part of our services we deliver to customers. While we have a vendor management program policy in place and
believe we have selected our vendors appropriately, we cannot directly control their employees or their operating environments. A breach or failure of a chosen vendor could have a material impact on our
operating environment.
Our services and technology solutions rely on the internet more and more. Computers connected to the internet are vulnerable to many types of threats by cyber criminals. Although none of these
types of attacks have had a material impact on our business to date, we anticipate that the efforts to attack our systems, and those of our customers and vendors, will grow in complexity and volume. As such,
we have developed an incident response plan to coordinate the efforts following the identification of an attack.
Failure to maintain a secure computing environment, stay up to date on security vulnerabilities or deploy adequate technologies to protect against attacks, may subject our information and systems
to security breaches that could compromise confidential information and damage our reputation and business. We rely on industry-standard encryption and authentication security systems to provide the
security required to protect our data. Periodically our systems are subjected to scans, exploitations and audits by a qualified independent third party to evaluate the effectiveness of our security controls and
system configurations.
Cyber criminals may attempt to trick employees, customers or vendors through phishing schemes or other methods to disclose sensitive information. Employees receive annual security training
and are periodically assessed through simulated attack tools to assist with behavior shaping and coaching against social engineering threats.
If one or more of these events occurs, it could potentially jeopardize the confidential, proprietary and other information processed and stored in, and transmitted through, the Bank’s computer
systems and networks, or otherwise cause interruptions or malfunctions in our, as well as our clients’ or other third parties’ operations, which could result in damage to our reputation, substantial costs,
regulatory penalties and/or client dissatisfaction or loss.
Potential costs of a cyber incident may include, but would not be limited to, remediation costs, increased protection costs, lost revenue from the unauthorized use of proprietary information or the
loss of current and/or future customers, and litigation.
We maintain an insurance policy through the Bank’s blanket bond at the maximum of currently available limits. However, we cannot assure you that this policy would be sufficient to cover all
financial losses, damages, penalties, including lost revenues, should the Bank experience any one or more of our or a third party’s systems failing or experiencing attack.
We rely on third parties to provide key components of our business infrastructure, and a failure of these parties to perform for any reason could disrupt our operations.
Third parties provide key components of our business infrastructure such as data processing, internet connections, network access, core application processing, statement production and account
analysis. Our business depends on the successful and uninterrupted functioning of our information technology and telecommunications systems and third-party servicers. The failure of these systems, or the
termination of a third-party software license or service agreement on which any of these systems is based, could interrupt our operations. Because our information technology and telecommunications systems
interface with and depend on third-party systems, we could experience service denials if demand for such services exceeds capacity or such third-party systems fail or experience interruptions. Replacing
vendors or addressing other issues with our third-party service providers could entail significant delay and expense. If we are unable to efficiently replace ineffective service providers, or if we experience a
significant, sustained or repeated system failure or service denial, it could compromise our ability to operate effectively, damage our reputation, result in a loss of customer business, and subject us to additional
regulatory scrutiny and possible financial liability, any of which could have an adverse effect on our business, financial condition and results of operations.
Reputational risk and social factors may impact our results.
Our ability to originate and maintain accounts is highly dependent upon consumer and other external perceptions of our business practices and/or our financial health. Adverse perceptions could
damage our reputation in both the customer and funding markets, leading to difficulties in generating and maintaining accounts as well as in financing them. Adverse developments with respect to the
consumer or other external perceptions regarding the practices of our competitors, or our industry as a whole, may also adversely impact our reputation. In addition, adverse reputational impacts on third parties
with whom we have important relationships may also adversely impact our reputation. Adverse impacts on our reputation, or the reputation of our industry, may also result in greater regulatory and/or
legislative scrutiny, which may lead to laws or regulations that may change or constrain the manner in which the Bank engages with its customers and the products the Bank offers. Adverse reputational
impacts or events may also increase our litigation risk. We carefully monitor internal and external developments for areas of potential reputational risk and have established governance structures to assist in
evaluating such risks in our business practices and decisions.
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We could be subject to losses, regulatory action or reputational harm due to fraudulent and negligent acts on the part of loan applicants, our employees and vendors.
In deciding whether to extend credit or enter into other transactions with clients and counterparties, and the terms of any such transaction, we may rely on information furnished by or on behalf of
clients and counterparties, including financial statements, property appraisals, title information, employment and income documentation, account information and other financial information. We may also rely
on representations of clients and counterparties as to the accuracy and completeness of that information and, with respect to financial statements, on reports of independent auditors. Any such misrepresentation
or incorrect or incomplete information, whether fraudulent or inadvertent, may not be detected prior to funding. In addition, one or more of our employees or vendors could cause a significant operational
breakdown or failure, either as a result of human error or where an individual purposefully sabotages or fraudulently manipulates our loan documentation, operations or systems. Whether a misrepresentation is
made by the applicant or another third party, we generally bear the risk of loss associated with the misrepresentation. A loan subject to a material misrepresentation is typically unsellable or subject to
repurchase if it is sold prior to detection of the misrepresentation. The sources of the misrepresentations may also be difficult to locate, and we may be unable to recover any of the monetary losses we may
suffer as a result of the misrepresentations. Any of these developments could have an adverse effect on our business, financial condition and results of operations.
We are subject to claims and litigation pertaining to intellectual property.
Banking and other financial services companies, such as ours, rely on technology companies to provide information technology products and services necessary to support their day-to-day
operations. Technology companies frequently enter into litigation based on allegations of patent infringement or other violations of intellectual property rights. In addition, patent holding companies seek to
monetize patents they have purchased or otherwise obtained. Competitors of our vendors, or other individuals or companies, may from time to time claim to hold intellectual property sold to us by our vendors.
Such claims may increase in the future as the financial services sector becomes more reliant on information technology vendors. The plaintiffs in these actions frequently seek injunctions and substantial
damages.
Regardless of the scope or validity of such patents or other intellectual property rights, or the merits of any claims by potential or actual litigants, we may have to engage in protracted litigation.
Such litigation is often expensive, time-consuming, disruptive to our operations and distracting to management. If we are found to infringe one or more patents or other intellectual property rights, we may be
required to pay substantial damages or royalties to a third party. In certain cases, we may consider entering into licensing agreements for disputed intellectual property, although no assurance can be given that
such licenses can be obtained on acceptable terms or that litigation will not occur. These licenses may also significantly increase our operating expenses. If legal matters related to intellectual property claims
were resolved against us or settled, we could be required to make payments in amounts that could have an adverse effect on our business, financial condition and results of operations.
The decreased soundness of other financial institutions could adversely affect us.
Our ability to engage in routine funding transactions could be adversely affected by the actions and commercial soundness of other financial institutions. Financial services institutions are
interrelated as a result of trading, clearing, counterparty or other relationships. We have exposure to many different industries and counterparties, and we routinely execute transactions with counterparties in
the financial industry. As a result, defaults by, or even rumors or questions about, one or more financial services institutions, or the financial services industry generally, have led in the past to market-wide
liquidity problems and could lead to losses or defaults by us or by other institutions. Many of these transactions expose us to credit risk in the event of default of our counterparty or client. In addition, our
credit risk may be exacerbated when the collateral that we hold cannot be realized upon or is liquidated at prices insufficient to recover the full amount of the loan. We cannot assure you that any such losses
would not materially and adversely affect our business, financial condition or results of operations.
Strategic Risks
Strong competition within our market area could reduce our profits and slow growth.
We face competition in making loans, attracting deposits and hiring and retaining experienced employees. Price competition for loans and deposits may result in our charging lower interest rates
on loans and paying higher interest rates on deposits, thereby reducing our net interest income. Price competition also may limit our ability to originate loans. Competition makes it more difficult and costly to
attract and retain qualified employees.
Our financial performance will be negatively affected if we are unable to execute our growth strategy.
Our stated growth strategy is to grow organically and supplement that growth with select acquisitions, if available. Our success depends primarily on generating loans and deposits of acceptable
risk and expense. There can be no assurance that we will be successful in continuing our organic, or internal, growth strategy. Our ability to identify appropriate markets for expansion, recruit and retain
qualified personnel, and fund growth at reasonable cost, depends upon prevailing economic conditions, maintenance of sufficient capital, competitive factors, changes in banking laws, and other factors.
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We cannot be certain as to our ability to manage increased levels of assets and liabilities without increased expenses and higher levels of nonperforming assets. We may be required to make
additional investments in equipment and personnel to manage higher asset levels and loan balances, which may adversely affect earnings, shareholder returns, and our efficiency ratio. Increases in operating
expenses or nonperforming assets may decrease our earnings and the value of the Company’s capital stock.
We may face increasing deposit-pricing pressures, which may, among other things, reduce our profitability.
Deposit pricing pressures may result from competition as well as changes to the interest rate environment. Current economic conditions have intensified competition for deposits. The competition
has had an impact on interest rates paid to attract deposits as well as fees charged on deposit products. In addition to the competitive pressures from other depository institutions, we face heightened
competition from non-depository financial products such as securities and other alternative investments.
Furthermore, technology and other market changes have made it more convenient for bank customers to transfer funds for investing purposes. Bank customers also have greater access to deposit
vehicles that facilitate spreading deposit balances among different depository institutions to maximize FDIC insurance coverage. In addition to competitive forces, we also are at risk from market forces as they
affect interest rates. It is not uncommon when interest rates transition from a low interest rate environment to a rising rate environment, for deposit and other funding costs to rise in advance of yields on
earning assets. In order to keep deposits required for funding purposes, it may be necessary to raise deposit rates without commensurate increases in asset pricing in the short term.
Historically low interest rates may adversely affect our net interest income and profitability.
In recent years it has been the policy of the Federal Reserve to maintain interest rates at historically low levels through its targeted federal funds rate and the purchase of mortgage-backed
securities. As a result, market rates on the loans we have originated and the yields on securities we have purchased have been at historically low levels. As discussed above, rates are fluctuating, and due to a
number of factors including changes in monetary policies of the Federal Reserve, will likely continue to fluctuate.
External and Market-Related Risks
Changes in general business, economic and political conditions, especially in Northern Virginia, could adversely affect our earnings.
Our success depends, to a certain extent, upon economic and political conditions, local and national, as well as governmental monetary policies. Conditions such as inflation, recession,
unemployment, changes in interest rates, money supply and other factors beyond our control may adversely affect our asset quality, deposit levels and loan demand and, therefore our earnings. Because we
have a significant amount of real estate loans, decreases in real estate values could adversely affect the value of property used as collateral and our ability to sell the collateral upon foreclosure. Adverse
changes in the economy may also have a negative effect on the ability of our borrowers to make timely repayments of their loans, which would have an adverse impact on our earnings. If during a period of
reduced real estate values we are required to liquidate the collateral securing a loan to satisfy the debt or to increase our allowance for loan losses, it could materially reduce our profitability and adversely
affect our financial condition. The substantial majority of our loans are to individuals and businesses in the Northern Virginia and Washington D.C metropolitan area. Consequently, significant declines in the
economy in the Northern Virginia and Washington D.C. metropolitan area could have a materially adverse effect on our financial condition and results of operations.
Additionally, the emergence of widespread health emergencies or pandemics, such as coronavirus (“COVID-19”), could lead to quarantines, business shutdowns, increases in unemployment, labor
shortages, disruptions to supply chains, and overall economic instability. Events such as these may become more common in the future and could cause significant damage such as disrupt power and
communication services, impact the stability of our facilities and result in additional expenses, impair the ability of our borrowers to repay their loans, reduce the value of collateral securing the repayment of
our loans, which could result in the loss of revenue. While we have established and regularly test disaster recovery procedures, the occurrence of any such event could have a material adverse effect on our
business, operations and financial condition.
If we do not adjust to rapid changes in the financial services industry, our financial performance may suffer.
We face substantial competition for customer relationships, as well as other sources of funding in the communities it serves. Competing providers include other banks, savings institutions and trust
companies, insurance companies, mortgage banking operations, credit unions, finance companies, title companies, money market funds and other financial and nonfinancial companies which may offer
products functionally equivalent to those offered by the Bank. Many competing providers have greater financial resources than we do and offer services within and outside the market areas we serve. In
addition to this challenge of attracting and retaining customers for traditional banking services, our competitors include securities dealers, brokers, mortgage bankers, investment advisors and finance and
insurance companies who seek to offer one-stop financial services to their customers that may include services that financial institutions have not been able or allowed to offer to their customers in the past.
The increasingly competitive environment is primarily a result of changes in regulation, changes in technology and product delivery systems and the accelerating pace of consolidation among financial service
providers. If we are unable to adjust both to increased competition for traditional banking services and changing customer needs and preferences, our financial performance and your investment in our capital
stock could be adversely affected.
23
Additional required capital may not be available.
We are required by federal regulatory authorities to maintain adequate levels of capital to support our operations. In addition, we may elect to raise additional capital to support our business or to
finance acquisitions, if any, or we may otherwise elect or be required to raise additional capital. Our ability to raise additional capital, if needed, will depend on conditions in the capital markets, economic
conditions and a number of other factors, many of which are outside of our control, and on our financial performance. Accordingly, there can be no assurance that we can raise additional capital if needed or on
terms acceptable to us. If we cannot raise additional capital when needed, it may have a material adverse effect on our financial condition, results of operations and prospects.
Compliance and Regulatory Risks
We operate in a highly regulated environment, and we may be adversely affected by changes in laws and regulations.
We are subject to extensive regulation, supervision and examination by the Federal Reserve, our primary federal regulator, the Virginia Bureau of Financial Institutions, our chartering authority
and the FDIC, as insurer of our deposits. Such regulation and supervision govern the activities in which we and the Bank may engage, and are intended primarily for the protection of the insurance fund and the
depositors and borrowers of the Bank rather than for holders of our common stock. Various consumers and compliance laws also affect our operations.
Regulatory authorities have extensive discretion in their supervisory and enforcement activities, including the imposition of restrictions on our operations, the classification of our assets and
determination of the level of our allowance for loan losses. Any change in such regulation and oversight, whether in the form of regulatory policy, regulations, legislation or supervisory action, may have a
material impact on our operations. The earnings of the Bank, and therefore the earnings of the Company, are affected by changes in federal and state legislation and actions of various regulatory authorities.
The Bank has become subject to more stringent regulatory capital requirements.
The Bank is subject to the comprehensive, consolidated supervision and regulation of the FRB and the Bureau of Financial Institutions, including risk-based and leverage capital requirements. The
Bank must maintain certain risk-based and leverage capital ratios as required by our banking regulators, which can change depending on general economic conditions and on the Bank’s particular condition,
risk profile and growth plans. If at any time we fail to meet minimum regulatory capital standards or other regulatory requirements, our financial condition would be materially and adversely affected.
In addition, the capital requirements implemented by the federal banking regulators under Basel III could, among other things, result in lower returns on invested capital, adversely affect our
ability to pay dividends or repurchase shares, require the raising of additional capital, and result in regulatory actions if we were to be unable to comply with such requirements. Compliance with current or new
capital requirements may limit operations that require the intensive use of capital and could adversely affect our ability to expand or maintain present business levels. Additional information, including the
Bank’s compliance with applicable capital requirements at December 31, 2020, is provided in Item 7 Management's Discussion and Analysis of Financial Condition and Results of Operations.
The Tax Cuts and Jobs Act may have an unanticipated impact on our business.
The Tax Cuts and Jobs Act (the “Act”), enacted in 2017, contains the most extensive amendments to the Internal Revenue Code in over 30 years. The primary change for the Company was the
Act’s reduction of the federal corporate tax rate from a maximum of 35% to a flat 21%. Among other sweeping changes for individual taxpayers, the Act doubles the standard deduction for individuals, limits
the deductibility of state and local income, property and sales taxes by individuals to $10,000 per year, eliminates the deductibility of interest on home equity loans, and eliminates the deductibility of interest
on new home mortgages in excess of $750,000 (down from $1.0 million previously). The Act also eliminates loss carrybacks and limits the deductibility of loss carryforwards to 80% of current-year taxable
income. The Act allows 100% expensing for all non-real property capital expenditures for five years but limits the deductibility of net interest expense (interest expense minus interest income) to 30% of
taxable income for businesses with average annual gross receipts of more than $25 million.
While we expect to benefit from the lower federal tax rate in the future, the lower tax rate reduced the value of existing other deferred tax assets, which we were required to revalue during the
2017 fiscal year. Lower tax rates will also reduce the attractiveness of certain tax-advantaged bank investments such as municipal bonds and bank-owned life insurance. Various other provisions of the Act
could have unanticipated effects on the business of the Bank. By reducing the tax advantages of home ownership through its limits on the deductibility of mortgage interest and property taxes and the
elimination of the deductibility of interest on certain home equity loans, the Act could affect demand for housing and residential mortgages in the future. The value of the properties securing loans in our loan
portfolio may be adversely impacted as a result of the changing economics of home ownership, as such an impact could require an increase in our provision for loan losses, which would reduce our profitability
and could materially adversely affect our business, financial condition and results of operations. The higher standard deduction could also affect mortgage financing by reducing the number of taxpayers who
itemize deductions and therefore benefit from these deductions. Furthermore, the lower corporate tax rates and new limits on the deductibility of net interest expense may reduce demand for loans from larger
business borrowers and increase competition for lending to smaller business borrowers.
24
Risks Associated with Our Common Stock
The market price for the Company’s common stock price may be volatile.
The market price of our common stock may be highly volatile, which may make it difficult for you to resell your shares at the volume, prices and times desired. There are many factors that may impact the
market price and trading volume of our common stock, including, without limitation:
•
•
•
•
•
•
•
•
•
•
actual or anticipated fluctuations in our operating results, financial condition or asset quality;
operating results that vary from the expectations of management, securities analysts and investors;
changes in expectations as to our future financial performance;
operating and stock price performance of companies that investors deem comparable to us;
future issuances of our common stock or other securities;
changes in general economic or business conditions;
changes in the credit, mortgage and housing markets, the markets for securities relating to mortgages or housing, and developments with respect to financial institutions generally;
proposed or adopted changes in laws, regulations or policies affecting us;
significant acquisitions or business combinations, strategic partnerships, joint ventures or capital commitments by or involving our competitors or us; and
other economic, competitive, governmental, regulatory and technological factors affecting our operations, pricing, products and services.
There is not an active or consistent trading market in our common stock, and we cannot assure you that a more active or consistent trading market in the common stock will develop. As a result, relatively small
trades could have a significant impact on the price of our common stock.
Our common stock is subordinate to our existing and future preferred stock and to our subordinated notes..
The Company has outstanding preferred stock that is senior to the common stock and could adversely affect the ability of the Company to declare or pay dividends or distributions of common
stock. In addition, the terms of the Company’s outstanding fixed-to-floating rate subordinated notes prohibit it from declaring or paying any dividends, or purchasing, acquiring, or making a liquidation
payment with respect to, its capital stock, during an event of default under the subordinated note purchase agreement. Furthermore, if the Company experiences a material deterioration in its financial
condition, liquidity, capital, results of operations or risk profile, the Company’s regulators may not permit it to make future payments on its preferred stock, thereby preventing the payment of dividends on the
common stock.
We are an emerging growth company, and any decision on our part to comply only with certain reduced reporting and disclosure requirements applicable to emerging growth companies could make our
common stock less attractive to investors.
We are an emerging growth company, and, for as long as we continue to be an emerging growth company, we may choose to take advantage of exemptions from various reporting requirements
applicable to other public companies but not to emerging growth companies, including, but not limited to, reduced disclosure obligations regarding executive compensation in our periodic reports and proxy
statements, and exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and stockholder approval of any golden parachute payments not previously approved. As
an emerging growth company, we also will not be subject to Section 404(b) of the Sarbanes Oxley Act of 2002, which would require that our independent auditors review and attest as to the effectiveness of
our internal control over financial reporting. In this Form 10-K, we have elected to take advantage of the reduced disclosure requirements relating to executive compensation, and in the future we may take
advantage of any or all of these exemptions for so long as we remain an emerging growth company. In addition to the relief described above, the JOBS Act permits us an extended transition period for
complying with new or revised accounting standards affecting public companies. We have elected not to take advantage of this extended transition period, which means that the financial statements included in
this Form 10-K, as well as any financial statements that we file in the future, will be subject to all new or revised accounting standards generally applicable to public companies.
We will cease to be an emerging growth company upon the earliest of: (i)the first fiscal year after our annual gross revenues are $1.07 billion or more; (i)the date on which we have, during the
previous three-year period, issued more than $1.0 billion in non-convertible debt securities; or (i)the end of any fiscal year in which the market value of our common stock held by non-affiliates exceeded $700
million as of the end of the second quarter of that fiscal year, or five years after completing our initial public offering. Investors may find our common stock less attractive if we choose to rely on these
exemptions. If some investors find our common stock less attractive as a result of any choices to reduce future disclosure, there may be a less active trading market for our common stock and the price of our
common stock may be more volatile.
25
General Risk Factors
We will depend on our management team to implement our business strategy and execute successful operations, and we could be harmed by the loss of their services.
We are dependent upon the services of the members of our senior management team who direct our strategy and operations. Members of our senior management team, as well as commercial
lending specialists who possess expertise in our markets and key business relationships, could be difficult to replace. The loss of these persons, or our inability to hire additional qualified personnel, could
impact our ability to implement our business strategy and could have a material adverse effect on our results of operations and our ability to compete in our markets.
We may not be able to attract and retain skilled people.
Our success depends, in large part, on our ability to attract and retain key people. Competition for the best people in most activities in which we engage can be intense, and we may not be able to
retain or hire the people we want or need. In order to attract and retain qualified employees, we must compensate our employees at market levels. If we are unable to continue to attract and retain qualified
employees, or do so at rates necessary to maintain our competitive position, our performance, including our competitive position, could suffer, and, in turn, adversely affect our business, financial condition and
results of operations. The number of experienced banking professionals in our markets may not be the same as in certain other markets.
We may be subject to increased litigation which could result in legal liability and damage to our reputation.
We may be named from time to time as a defendant in litigation relating to its business and activities. Litigation may include claims for substantial compensatory or punitive damages or claims for
indeterminate amounts of damages. We are also involved from time to time in other reviews, investigations and proceedings (both formal and informal) by governmental and self- regulatory agencies regarding
its business. These matters also could result in adverse judgments, settlements, fines, penalties, injunctions or other relief.
In addition, in recent years, a number of judicial decisions have upheld the right of borrowers to sue lending institutions on the basis of various evolving legal theories, collectively termed “lender
liability.” Generally, lender liability is founded on the premise that a lender has either violated a duty, whether implied or contractual, of good faith and fair dealing owed to the borrower or has assumed a
degree of control over the borrower resulting in the creation of a fiduciary duty owed to the borrower or its other creditors or shareholders.
Substantial legal liability or significant regulatory action against the Company could materially adversely affect its business, financial condition or results of operations, or cause significant harm
to our reputation.
Our reported financial results depend on management’s selection of accounting methods and certain assumptions and estimates.
Our accounting policies and assumptions are fundamental to the Company’s reported financial condition and results of operations. Management must exercise judgment in selecting and applying
many of these accounting policies and methods so that they comply with generally accepted accounting principles and reflect management’s judgment of the most appropriate manner to report our financial
condition and results. In some cases, management must select the accounting policy or method to apply from two or more alternatives, any of which may be reasonable under the circumstances, yet may result
in the Company’s reporting materially different results than would have been reported under an alternative method.
The obligations associated with being a public company require significant resources and management attention.
As a public company, we face increased legal, accounting, administrative and other costs and expenses that we have not previously incurred, particularly after we are no longer an emerging
growth company. We are subject to the reporting requirements of the Exchange Act, which requires that we file annual, quarterly and current reports with respect to our business and financial condition and
proxy and other information statements, and the applicable rules and regulations implemented by the SEC, the Sarbanes-Oxley Act, the Dodd-Frank Act, the PCAOB and the Nasdaq Stock Market, each of
which imposes additional reporting and other obligations on public companies.
As a public company, we are required to:
•
•
•
•
prepare and distribute periodic reports, proxy statements and other shareholder communications in compliance with the federal securities laws and rules;
expand the roles and duties of our board of directors and committees thereof;
institute more comprehensive financial reporting and disclosure compliance procedures;
involve and retain to a greater degree outside counsel and accountants in the activities listed above;
26
•
•
•
•
•
enhance our investor relations function;
establish new internal policies, including those relating to trading in our securities and disclosure controls and procedures;
retain additional personnel;
comply with Nasdaq Stock Market listing standards; and
comply with applicable requirements of the Sarbanes-Oxley Act.
We expect these rules and regulations and changes in laws, regulations and standards relating to corporate governance and public disclosure, which have created uncertainty for public companies,
to increase legal and financial compliance costs and make some activities more time consuming and costly. These laws, regulations and standards are subject to varying interpretations, in many cases due to
their lack of specificity, and, as a result, their application in practice may evolve over time as new guidance is provided by regulatory and governing bodies. This could result in continuing uncertainty
regarding compliance matters and higher costs necessitated by ongoing revisions to disclosure and governance practices. Our investment in compliance with existing and evolving regulatory requirements will
result in increased administrative expenses and a diversion of management’s time and attention from revenue-generating activities to compliance activities, which could have an adverse effect on our business,
financial condition and results of operations. These increased costs could require us to divert a significant amount of money that we could otherwise use to expand our business and achieve our strategic
objectives.
Item 1B. Unresolved Staff Comments
None.
27
Item 2. Properties
As of December 31, 2020, the net book value of our office properties was $9.5 million, and the net book value of our furniture, fixtures and equipment was $894,000. The following table sets forth
information regarding our offices.
Headquarters:
10089 Fairfax Blvd.
Fairfax, VA 22030
Other Properties:
Herndon Branch
722 Elden Street
Herndon, VA 20170
Fairfax Branch
4029 Chain Bridge Road
Fairfax, VA 22030
McLean Branch
1354 Old Chain Bridge Road
McLean, VA 22101
Clarendon Branch
1000 N. Highland Street
Arlington, VA 22201
Leesburg Branch
307 E. Market Street
Leesburg, VA 20176
Washington D.C. Branch
1130 Connecticut Avenue, N.W.
Washington, D.C. 20036
Location
Leased or
Owned
Year Acquired
or Leased
Net Book Value
of Real
Property
(In thousands)
Owned
2010
$
5,628
Leased
2004
Leased
2006
Owned
2014
Owned
2009
Owned
2017
Leased
2019
—
—
1,280
549
2,076
—
We believe that current facilities are adequate to meet our present and foreseeable needs, subject to possible future expansion. See Note 7 of Notes to the December 31, 2020, Consolidated
Financial Statements, for additional disclosures related to the Company’s properties.
Item 3. Legal Proceedings
From time to time, we are a party to various litigation matters incidental to our ordinary conduct of our business. Management believes that none of these legal proceedings, individually or in the
aggregate, will have a material adverse impact on the results of operations or financial condition of the Company.
Item 4. Mine Safety Disclosures
Not Applicable
28
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Common Stock
Our common stock is traded on the Nasdaq Capital Market under the symbol “MNSB.” At December 31, 2020, the Company had approximately 268 shareholders of record. This total does not
reflect shares held in nominee or “street name” accounts through various firms.
Dividends
To date, we have not paid a cash dividend on our common stock. Holders of our common stock are only entitled to receive dividends when, as and if declared by the Board of Directors out of
funds legally available for dividends. As the Company is a bank holding company and does not engage directly in business activities of a material nature, its ability to pay dividends on our common stock will
depend, in large part, upon the receipt of dividends from the Bank. Any future determination relating to our dividend policy will be made by the Board of Directors and will depend on a number of factors,
including general and economic conditions, industry standards, our financial condition and operating results, our available cash and current and anticipated cash needs, capital requirements, our ability to
service debt obligations senior to our common stock, banking regulations, contractual, legal, tax and regulatory restrictions, and limitations on the payment of dividends by the Company to its shareholders or
by the Bank, and such other factors as the Board of Directors may deem relevant.
Holders of the common stock are subject to priority dividend rights of any holders of preferred stock then outstanding. There were 28,750 shares of preferred stock outstanding at December 31,
2020.
Dividends.”
A discussion of applicable regulatory restrictions on dividends by the Company and the Bank is provided in Item 1 (“Business”) under “Supervision, Regulation and Other Factors – Payment of
Securities Authorized For Issuance Under Equity Compensation Plans
The following table provides information concerning securities authorized for issuance under equity compensation plans, the weighted average price of such securities and the number of securities
remaining available for future issuance, as of December 31, 2020.
Equity Compensation Plan Category
Plans approved by shareholders
Plans not approved by shareholders
Total
Number of
securities to be
issued upon
exercise of
outstanding
options,
warrants
and rights
Weighted-
average
exercise
price of
outstanding
options,
warrants
and rights (1)
Number of
securities
remaining and
available for
future
issuance (2)
161,435 $
—
161,435 $
—
—
—
558,805
—
558,805
(1)
(2)
Restricted stock shares were not included when calculating the weighted-average exercise price.
Remaining shares available for issuance include 558,805 shares under the 2019 Equity Incentive Plan (“2019 Plan”). Shares remaining to be issued subsequent to December 31, 2020 under the 2019 Plan
can be issued either as a restricted stock grant or upon exercise of stock options.
Unregistered Sales and Issuer Repurchases of Common Stock
Unregistered Sales of Common Stock
Set forth below is information concerning sales of common stock by the Company during the past 3 years that were not registered under the Securities Act.
29
On August 24, 2018, the Company issued and sold 2,368,421 shares of common stock at $19.00 per share, for a total of $49,999,999, to accredited investors. The Company relied upon the
exemption from registration under Section 4(a)(2) of the Securities Act and Rule 506 of Regulation D promulgated thereunder. Sales commissions of $1,899,212 were paid to FIG Partners, LLC, the sole
placement agent. See Note 22 of Notes to Consolidated Financial Statements.
In 2016, the Board of Directors of the Bank and the Bank’s shareholders approved the MainStreet Bank 2016 Equity Incentive Plan (the “2016 Plan”), to provide officers, other selected employees
and directors with additional incentives to promote growth and performance. The terms and conditions of the 2016 Plan were subsequently converted into and deemed to be the terms and conditions of a
substantially identical Company incentive compensation plan. A total of 204,971 shares of restricted common stock were awarded under the 2016 Plan, of which 98,506 shares have vested. The Bank relied on
the exemption from registration under Section 3(a)(2) of the Securities Act. The Company relied upon the exemption from registration under Rule 701 promulgated under the Securities Act. See Note 17 of
Notes to Consolidated Financial Statements.
In 2019, the Board of Directors of the Bank and the Bank’s shareholders approved the MainStreet Bank 2019 Equity Incentive Plan (the “2019 Plan”), to provide officers, other selected employees
and directors with additional incentives to promote growth and performance. The terms and conditions of the 2019 Plan were subsequently converted into and deemed to be the terms and conditions of a
substantially identical Company incentive compensation plan. To date, a total of 10,000 shares of restricted common stock have been awarded under the 2019 Plan, of which awards for no shares have vested.
See Note 17 of Notes to Consolidated Financial Statements. In August 2019, the Company registered with the SEC, on Form S-8, the shares of common stock that would then be issuable under the 2019 Plan.
As a result of the stockholders’ approval of the 2019 Plan, no additional awards have been or will be made under the Bank’s 2016 Plan, although all awards that were outstanding under the 2016 Plan as of July
17, 2019 remained outstanding in accordance with their terms.
Repurchases of Common Stock
On September 18, 2019, the Board of Directors of the Company authorized a common stock repurchase program to repurchase up to $10.0 million of the Company’s common stock at the
discretion of management. The Company did not repurchase any of its shares during the year ended December 31, 2019.
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 year ended December 31, 2020, the Company repurchased 895,785 shares. During the three months ended March 31, 2020, 60,000 shares of common
stock were repurchased.
The following information provides details of the Company’s common stock repurchases for the three months ended December 31, 2020:
(Dollars in thousands, except for per share amounts)
October 1, 2020 - October 31, 2020
November 1, 2020 - November 30, 2020
Total
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
742,924
92,861
835,785
$
$
$
15.20
16.04
15.29
742,924
92,861
835,785
$
$
5,709,000
4,220,000
30
Preferred Stock and Depositary Shares
On September 15, 2020, the Company closed its underwritten public offering of 1,000,000 depositary shares, each representing 1/40th of a share of 7.50% Series A Fixed-Rate Non-Cumulative
Perpetual Preferred Stock, par value $1.00 per share (the “Series A Preferred Stock”). On September 25, 2020, the Company completed the sale of an additional 150,000 depositary shares pursuant to the
underwriters’ full exercise of their over-allotment option to purchase additional depositary shares.
Trading the depositary shares on the Nasdaq Capital Market commenced on September 16, 2020, under the symbol “MNSBP.”
On November 18, 2020, the Board of Directors declared an initial quarterly cash dividend on the outstanding shares of Series A Preferred Stock. The declared cash dividend was for the time
period between the original issuance of the depositary shares on September 15, 2020, up to, but excluding, the first dividend payment date. The declared cash dividend equated to approximately $0.55 per
depositary share, or $22.08 per share of Series A Preferred Stock outstanding. The cash dividend was payable on December 30, 2020, to shareholders of record as of the close of business on December 14,
2020.
On February 17, 2021, the Board of Directors declared a quarterly cash dividend on the outstanding shares of the Series A Preferred Stock. The declared cash dividend equated to approximately
$0.47 per depositary share, or $18.75 per share of Series A Preferred Stock outstanding, The cash dividend is payable on March 30, 2021, to shareholders of record as of the close of business on March 15,
2021.
Item 6. Selected Financial Data
Selected Financial Data
The following table sets forth summarized historical consolidated financial information for each of the periods indicated. This information should be read together with Management's Discussion
and Analysis of Financial Condition and Results of Operations below and with the accompanying consolidated financial statements included in this Form 10-K. The historical information indicated as of and
for the years ended December 31, 2020, 2019 and 2018, has been derived from the Company's audited consolidated financial statements for the years ended December 31, 2020, 2019, and 2018. Historical
results set forth below and elsewhere in this Form 10-K are not necessarily indicative of future performance.
Selected Financial Condition Data:
Total assets
Total cash and cash equivalents
Total investment securities
Loans held for sale
Loans receivable, net
Bank-owned life insurance
Premises and equipment, net
Total deposits
FHLB advances and other borrowings
Subordinated debt
Total stockholders’ equity
$
2020
1,643,165
107,528
169,934
57,006
1,230,379
25,341
14,289
1,438,246
—
14,834
167,665
At December 31,
2019
(In thousands)
$
$
1,277,358
64,844
116,705
—
1,030,425
24,562
14,153
1,071,623
40,000
14,805
137,034
2018
1,100,613
58,076
82,157
—
917,125
14,064
14,222
920,137
40,000
14,776
121,251
31
Selected Operating Data:
Interest income
Interest expense
Net interest income
Provision for loan losses
Net interest income after provision for loan losses
Total non-interest income
Total non-interest expenses
Income before income taxes
Income tax expense
Net income
Less: Preferred stock dividends
Net income available to common shareholders
Basic and diluted net income per common share (1)
(1)
Per share amounts reflect the effect of a 5% stock dividend paid on April 30, 2018.
2020
For the year ended December 31,
2019
(In thousands)
2018
$
$
62,072
16,095
$
58,813
19,377
45,977
3,610
42,367
7,493
30,300
19,560
3,843
39,436
1,618
37,818
4,862
25,376
17,304
3,354
15,717
635
15,082
$
13,950
—
13,950
$
43,835
12,666
31,169
3,126
28,043
3,239
19,979
11,303
2,094
9,209
—
9,209
1.85
$
1.69
$
1.38
$
$
32
Performance Ratios:
Return on average assets
Return on average equity
Interest rate spread
Net interest margin
Efficiency ratio
Non-interest expense to average assets
Average interest-earning assets to average interest-bearing liabilities
Per share Data and Shares Outstanding
Earnings per common share (basic and diluted)
Book value per common share
Market value per common share
Weighted average common shares (basic and diluted)
Common shares outstanding at end of period
Capital Ratios (Bank)
Common equity tier 1(CET1) capital to risk-weighted assets
Total risk-based capital to risk-weighted assets
Tier 1 capital to risk-weighted assets
Tier 1 capital to average assets
Asset Quality Ratios
Allowance for loan losses as a percentage of total loans
Allowance for loan losses as a percentage of total loans, excluding PPP loans (1)
Allowance for loan losses as a percentage of non-performing assets
Net charge-offs to average outstanding loans during the period
Non-performing loans as a percentage of total loans
Non-performing assets as a percentage of total assets
Other Data:
Common equity / total assets
Total equity / total assets
Average equity to average assets
Number of offices
Number of full-time equivalent employees
At or For the Years Ended December 31,
2019
2018
2020
1.05%
10.54%
2.69%
3.21%
56.67%
2.02%
146.99%
1.19%
10.79%
2.88%
3.50%
57.28%
2.16%
136.14%
0.97%
10.38%
2.94%
3.41%
58.07%
2.11%
134.55%
$
$
$
$
$
$
1.85
18.86
16.91
8,131,334
7,443,842
$
$
$
1.69
16.59
23.00
8,251,302
8,260,259
1.38
14.83
17.06
6,652,979
8,177,978
13.61%
14.60%
13.61%
10.78%
1.03%
1.16%
9.68
0.03%
0.01%
0.08%
8.54%
10.20%
9.96%
7
126
12.68%
13.50%
12.68%
12.12%
0.92%
0.92%
7.94
0.09%
—
0.09%
10.73%
10.73%
11.02%
7
126
12.90%
13.75%
12.90%
12.41%
0.95%
0.95%
4.53
0.00%
0.21%
0.18%
11.02%
11.02%
9.35%
6
110
(1)
Non-GAAP; refer to Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations” section “Non-GAAP Measures”
of this Form 10-K.
33
Item 7 – Management’s Discussion and Analysis of Financial Condition and Results of Operations
The purpose of this discussion is to focus on significant changes in the financial condition and results of operations of the Company during the years ended December 31, 2020 and 2019. The
following discussion supplements and provides information about the major components of the results of operations, financial condition, liquidity and capital resources of the Corporation. This discussion and
analysis should be read in conjunction with the accompanying consolidated financial statements.
Forward-Looking Statements
This Annual Report on Form 10-K 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 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 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;
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 this market;
adequacy of our allowance for loan losses;
deterioration of our asset quality;
cyber threats, attacks or events
reliance on third parties for key services
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-K to reflect future events or
34
developments. The discussion of the critical accounting policies and analysis set forth below is intended to supplement and highlight information contained in the accompanying Consolidated Financial
Statements and the selected financial data presented elsewhere in this Form 10-K.
COVID-19 Pandemic
The effects of the COVID-19 pandemic and resulting economic conditions have impacted our business and financial results and could continue to impact our business and results of operations in a
number of ways in the future, including without limitation in areas related to credit, collateral, customer demand, operations, interest rate risk, liquidity and litigation, as described in more detail below. The
extent to which the Company’s business will continue to be negatively affected by the pandemic will depend on future developments, which are highly uncertain and cannot be reasonably predicted.
Credit Risk. The risk of timely loan repayment and the value of collateral supporting our loans are affected by the strength of our borrowers’ businesses. Concern about the spread of COVID-19
has caused, and is likely to continue to cause, business shutdowns, limitations on commercial activity and financial transactions, labor shortages, supply chain interruptions, increased unemployment and
commercial property vacancy rates, reduced profitability and ability for property owners to make mortgage payments, and overall economic and financial market instability, all of which may cause our
customers to be unable to make scheduled loan payments. If the effects of COVID-19 result in widespread and sustained repayment shortfalls on loans in our portfolio, we could incur significant delinquencies,
foreclosures and credit losses, particularly if the available collateral is not sufficient to cover our exposure. The future effects of COVID-19 on economic activity could negatively affect the collateral values
associated with our existing loans, our ability to liquidate real estate collateral securing our residential and commercial real estate loans, our ability to maintain loan origination volume and to obtain additional
financing, the future demand for, or profitability of, our lending and services, and the financial condition and credit risk of our customers. Further, in the event of delinquencies, regulatory changes and policies
designed to protect borrowers may slow or prevent us from making business decisions or may delay our taking certain remediation actions. In addition, we have unfunded commitments to extend credit to
customers. Increased borrowings under these commitments could adversely impact our liquidity.
In an effort to support our communities during the pandemic, we are participating in the Paycheck Protection Program (“PPP”), a program established by the CARES Act to provide loans to small
businesses for payroll and other basic expenses during the COVID-19 pandemic. PPP loans are fully guaranteed by the Small Business Administration (“SBA”) and provide for full forgiveness of the loans
during a specified forgiveness period that meet specific guidelines provided by the SBA. The deadline to apply for PPP loans was initially June 30, 2020 and was later extended to August 8, 2020; the
Consolidated Appropriations Act of 2021 (the “CAA”), enacted in December 2020, reopened and expanded the PPP. Small businesses and other entities and individuals can apply for PPP loans from existing
SBA lenders and other approved regulated lenders that enroll in the program, subject to numerous limitations and eligibility criteria.
PPP loans are subject to regulatory requirements that would require forbearance of loan payments for a specified time or that could limit our ability to pursue all available remedies in the event of
a loan default. If the borrower under the PPP loan fails to qualify for loan forgiveness, or if the borrower defaults and the SBA determines there is a deficiency in the manner in which any PPP loans were
originated, funded or serviced by the Bank, we would be subject to repayment risk as well as the heightened risk of holding these loans at unfavorable interest rates as compared to loans that we would have
otherwise made.
Business Continuity Planning Risk. Our financial condition and results of operations may be affected by a variety of external factors that may affect the price or marketability of our products and
services, changes in interest rates that may increase our funding costs, reduced demand for our financial products due to economic conditions and the various responses of governmental and nongovernmental
authorities. The COVID-19 pandemic has significantly increased economic and demand uncertainty and has led to severe disruption and volatility in capital markets. Furthermore, many of the governmental
actions in response to the pandemic have been directed toward curtailing household and business activity to contain COVID-19. These actions have been rapidly changing. Future effects of COVID-19 on
economic activity could negatively affect the future banking products we provide and could result in a decline in loan originations.
Operational Risk. Current and future restrictions on our workforce’s access to our facilities could limit our ability to meet customer servicing expectations and have a material adverse effect on our
operations. We rely on business processes and branch activity that largely depend on people and technology, including access to information technology systems as well as information, applications, payment
systems and other services provided by third parties. In response to COVID-19, we have modified our business practices with a portion of our employees working remotely from their homes to minimize
interruptions of our operations. Technology in employees’ homes may be more limited or less reliable than in our offices. The continuation of these work-from-home measures also introduces additional
operational risk, including increased cybersecurity risk.
We rely on many third parties in our business operations. Many of these parties may limit the availability and access of their services. If third-party service providers continue to have limited
capacities for a prolonged period or if additional limitations or potential disruptions in these services materialize, it may negatively affect our operations.
Interest Rate Risk. Our net interest income, lending activities, deposits, investment portfolio, cash flows and profitability are and are likely to continue to be negatively affected by volatility in
interest rates caused by uncertainties stemming from COVID-19. On March 15, 2020 the Federal Reserve lowered its target range for the federal funds rate to a range from 0 to 0.25 percent, and has since
maintained that range, citing concerns about the impact of COVID-19 on markets and stress in the energy sector. A prolonged period of extremely volatile and
35
unstable market conditions would likely increase our funding costs and negatively affect market risk mitigation strategies. Higher income volatility from changes in interest rates and spreads to benchmark
indices will likely cause a loss of future net interest income and a decrease in current fair market values of our investment portfolio and other assets. Fluctuations in interest rates will impact both the level of
income and expense recorded on most of our assets and liabilities and the market value of all interest-earning assets and interest-bearing liabilities, which in turn could have a material adverse effect on our net
income, operating results, or financial condition.
Liquidity. Federal, state and local governments have mandated or encouraged financial institutions to accommodate borrowers and other customers affected by the COVID-19 pandemic. Legal
and regulatory responses to concerns about the COVID-19 pandemic could result in additional regulation or restrictions affecting the conduct of our business in the future. In addition to our measures to
address the potential effects from negative economic conditions noted above, the Company has instituted a program to help COVID-19 impacted customers. This program includes waiving certain fees and
charges and offering payment deferment and other loan relief, as appropriate, for customers impacted by COVID-19. The Company’s liquidity could be negatively impacted if a significant number of
customers apply and are approved for the deferral of payments or request additional deferrals. In addition, if these deferrals are not effective in mitigating the effect of COVID-19 on our customers, the
negative effects on our business and results of operations may be more substantial and may continue over a longer period of time. A significant amount of loan growth during the second quarter was a direct
result of PPP loans. This loan growth is likely to end in the near-term.
Litigation Risk. Although the Company has taken and continues to take precautions to protect the safety and well-being of its employees, no assurance can be given that the steps being taken will
be adequate or appropriate. Concerns have been expressed regarding possible employee lawsuits for tort claims related to the COVID-19 pandemic, including class action lawsuits alleging that unsafe
workplaces have caused employees to contract COVID-19 or subjected them to the risk of exposure. Possible statutory defenses may mitigate the risk of liability in any such lawsuits; however, the availability
of such defenses is uncertain and cannot be predicted at this time.
The PPP has also attracted interest from federal and state enforcement authorities, oversight agencies, regulators and Congressional committees. Offices of state attorneys general and other federal
and state agencies may assert that they are not subject to the provisions of the CARES Act and the PPP regulations that entitle the Bank to rely on borrower certifications, and they may take more aggressive
actions against the Bank for alleged violations of the provisions governing the Bank’s participation in the PPP. Federal and state regulators can impose or request that we consent to substantial sanctions,
restrictions and requirements if they determine there are violations of laws, rules or regulations or weaknesses or failures with respect to general standards of safety and soundness, which could adversely affect
our business, reputation, results of operation and financial condition.
Since the opening of the PPP, several larger banks have been subject to litigation regarding the process and procedures that such banks used in processing applications for the PPP. The Company
and the Bank may be exposed to the risk of litigation, from both clients and non-clients that solicited the Bank for PPP loans, regarding its process and procedures used to process applications for the PPP. If
any such litigation is filed against the Company or the Bank and is not resolved in a manner favorable to the Company or the Bank, it may result in significant financial liability or adversely affect the
Company’s reputation. Any financial liability, litigation costs or reputational damage caused by PPP-related litigation could have a material adverse impact on our business, financial condition and results of
operations.
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.
The accounting principles followed by the Company and the methods of applying these principles conform with accounting principles generally accepted in the United States of America and with
general practices within the banking industry. The Company’s critical accounting policies relate to (1) the allowance for loan losses, (2) fair value of financial instruments, (3) income taxes, and (4) derivative
financial instruments. 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.
Allowance for Loan Losses: Management’s policy is to maintain the allowance for loan losses at a level sufficient to absorb estimated probable incurred losses inherent in the loan portfolio.
Management performs periodic and systematic detailed reviews of its loan portfolio to identify trends and to assess the overall collectability of the loan portfolio. Accounting standards require that loan losses
be recorded when management determines it is probable that a loss has been incurred and the amount of the loss can be reasonably estimated.
36
The allowance consists of a specific component and a general component. The specific component relates to loans that are classified as impaired, and is established when the discounted cash
flows (or collateral value or observable market price) of the impaired loan is lower than the carrying value of that loan. For impaired collateral dependent loans, an updated appraisal will typically be ordered if
a current one is not on file. Appraisals are performed by independent third-party appraisers with relevant industry experience. Adjustments to the appraised value may be made based on recent sales of like
properties or general market conditions when appropriate. The general component covers non-classified or performing loans and those loans classified as substandard or special mention that are not
impaired. The general component is based on historical loss experience adjusted for qualitative factors, such as current economic conditions, including current home sales and foreclosures, unemployment
rates and retail sales. Non-impaired classified loans are assigned a higher allowance factor based on an internal migration analysis, which increases with the severity of classification, than non-classified
loans.
Estimates for the allowance for loan losses are determined by analyzing historical losses, historical migration to charge-off experience, current trends in delinquencies and charge-offs, the results
of regulatory examinations and changes in the size, composition and risk assessment of the loan portfolio. Also included in management’s estimate for the allowance for loan losses are considerations with
respect to the impact of current economic events. These events may include, but are not limited to, fluctuations in overall interest rates, political conditions, legislation that may directly or indirectly affect the
banking industry and economic conditions affecting specific geographical areas and industries in which the Company conducts business.
While management uses the best information available to establish the allowance for loan losses, future adjustments to the allowance for loan losses and methodology may be necessary if
economic or other conditions differ substantially from the assumptions used in making the estimates. Such adjustments to original estimates, as necessary, are made in the period in which these factors and
other relevant considerations indicate that loss levels vary from previous estimates. A detailed discussion of the methodology used in determining the allowance for loan losses is included in Note 1, Basis of
Presentation, in Notes to Consolidated Financial Statements.
Fair Value of Financial Instruments: A portion of the Company’s assets and liabilities is carried at fair value, with changes in fair value recorded either in earnings or accumulated other
comprehensive income (loss). These include investment securities available for sale and interest rate loan swaps on qualifying commercial loans. Periodically, the estimation of fair value also affects
investment securities held to maturity when it is determined that an impairment write-down is other than temporary. Fair value determination is also relevant for certain other assets such as other real estate
owned, which is recorded at the lower of the recorded balance or fair value, less estimated costs to sell. The determination of fair value also impacts certain other assets that are periodically evaluated for
impairment using fair value estimates, including impaired loans.
Fair value is generally based upon quoted market prices, when available. If such quoted market prices are not available, fair value is based upon internally developed models that primarily use
observable market-based parameters as inputs. Valuation adjustments may be made to ensure that financial instruments are recorded at fair value. These adjustments may include amounts to reflect
counterparty credit quality and the Company’s creditworthiness, among other things, as well as other unobservable parameters. Any such valuation adjustments are applied consistently over time. While
management believes the Company’s valuation methodologies are appropriate and consistent with other market participants, the use of different methodologies or assumptions to determine the fair value of
certain financial instruments could result in a different estimate of fair value at the reporting date.
See Note 19, Fair Value Presentation, in Notes to Consolidated Financial Statements for a detailed discussion of determining fair value, including pricing validation processes.
Income Taxes: The Company’s income tax expense, deferred tax assets and liabilities, and reserves for unrecognized tax benefits reflect management’s best assessment of estimated taxes due. The
calculation of each component of the Company’s income tax provision is complex and requires the use of estimates and judgments in its determination. As part of the Company’s evaluation and
implementation of business strategies, consideration is given to the regulations and tax laws that apply to the specific facts and circumstances for any tax positions under evaluation. Management closely
monitors tax developments on both the federal and state level in order to evaluate the effect they may have on the Company’s overall tax position and the estimates and judgments used in determining the
income tax provision and records adjustments as necessary.
Deferred income taxes arise from temporary differences between the tax and financial statement recognition of revenue and expenses. In evaluating the Company’s ability to recover its deferred
tax assets within the jurisdiction from which they arise, the Company must consider all available evidence, including scheduled reversals of deferred tax liabilities, projected future taxable income, tax planning
strategies and the results of recent operations. A valuation allowance is recognized for a deferred tax asset if, based on the available evidence, it is more likely than not that some portion or all of a deferred tax
asset will not be realized. See Note 10, Income Taxes, in Notes to Consolidated Financial Statements for additional information.
Derivative Financial Instruments: The Bank recognizes derivative financial instruments at fair value as either other assets or other liabilities in the consolidated balance sheet. The Bank’s
derivative financial instruments include interest rate swaps with certain qualifying commercial loan customers and dealer counterparties. Because the interest rate swaps with loan customers and dealer
counterparties are not designated as hedging instruments, adjustments to reflect unrealized gains and losses resulting from changes in fair value of these instruments are reported as noninterest income or
noninterest expense, as applicable. The Bank’s interest rate swaps with loan customers and dealer counterparties are described more fully in Note 18 in the December 31, 2020, Consolidated Financial
Statements.
37
Other Real Estate Owned: Assets acquired through, or in lieu of, foreclosure are held for sale and are initially recorded at fair value less estimated costs to sell at the date of foreclosure.
Subsequent to foreclosure, management periodically performs valuations of the foreclosed assets based on updated appraisals, general market conditions, recent sales of similar properties, length of time the
properties have been held, and our ability and intention with regard to continued ownership of the properties. The Company may incur additional write-downs of foreclosed assets to fair value less estimated
costs to sell if valuations indicate a further deterioration in market conditions.
Analysis of Results of Operations for the Years Ended December 31, 2020 and 2019
Net Income
The following table sets forth the principal components of net income for the periods indicated.
Interest income
Interest expense
Net interest income
Provision for loan losses
Net interest income after provision
Non-interest income
Non-interest expense
Net income before income taxes
Income tax expense
Net income
Less: Preferred stock dividends
Net income available to common shareholders
2020
For the Year Ended December 31,
2019
(In thousands)
% Change
$
$
62,072
16,095
45,977
3,610
42,367
7,493
30,300
19,560
3,843
15,717
635
15,082
$
$
58,813
19,377
39,436
1,618
37,818
4,862
25,376
17,304
3,354
13,950
—
13,950
5.54%
-16.94%
16.59%
123.11%
12.03%
54.11%
19.40%
13.04%
14.58%
12.67%
100.00%
8.11%
Net income for the year ended December 31, 2020, was $15.7 million, an increase of $1.7 million, or 12.67% compared to $14.0 million earned during the year ended December 31, 2019. The
increase in net income was due to $6.5 million of additional net interest income, primarily driven by increased volume of loans and decrease in interest rates on interest-bearing deposits. The increase in non-
interest expenses was due to a $2.2 million increase in salaries and employee benefits and $2.0 million increase in the provision for loan losses.
Net Interest Income and Net Interest Margin
Net interest income is the principal component of the Company’s income stream and represents the difference, or spread, between interest and fee income generated from earning assets and the
interest expense paid on deposits and borrowed funds. Net interest margin, stated as a percentage, is the yield obtained by dividing the difference between interest income generated on earning assets and the
interest expense paid on all funding sources by average earning assets. Fluctuations in interest rates as well as changes in the volume and mix of earning assets and interest-bearing liabilities can impact net
interest income and net interest margin.
Net interest income before provision for loan losses totaled $46.0 million for the year ended December 31, 2020, compared to $39.4 million for the year ended December 31, 2019. The increase in
net interest income was driven by an increase in loan production and decrease in interest rates on interest-bearing deposits during the year for the year ended December 31, 2020.
The net interest margin was 3.21% for the year ended December 31, 2020, compared to 3.50% for the year ended December 31, 2019. The decrease in net interest margin primarily resulted from a
decrease in average rates earned on our loan portfolio and investment in lower yielding securities. In addition, loans associated with the Paycheck Protection Program (“PPP”) carried a below market rate of
1.00%. This decrease was offset by decreasing rates on our cost of funds, primarily in wholesale deposits, money market deposits and other borrowings.
The yield for the year ended December 31, 2020 for the loan portfolio was 4.89% compared to 5.61% for the year ended December 31, 2019. The decrease primarily reflects the maturity of higher
yielding loans and lower yields on new loans based on lower interest rates starting in the first half of the year. The Federal Reserve decreased its targeted benchmark interest rate to 0-25 basis points, which
impacted yields obtained on new loans.
For the year ended December 31, 2020, the yield on the total investment securities portfolio was 2.63% compared to 3.09% for the year ended December 31, 2019. The decrease of 46 basis points
was primarily due to rates on variable securities decreasing with the current rate environment and lower yields on investment securities purchased during the period.
38
The rate paid on interest bearing deposits decreased to 1.58% during the year ended December 31, 2020, from 2.25% during the year ended December 31, 2019. This decrease was a result of
lower rates paid on all outstanding deposits in conjunction with the decreasing rate environment throughout the year.
The rate paid on FHLB borrowings for the year ended December 31, 2020 was 1.73% compared to 2.59% for the corresponding period in 2019. This decrease was primarily due to falling interest
rates for these types of borrowings.
The following table sets forth the major components of net interest income and the related yields and rates for the year ended December 31, 2020, compared to the year ended December 31, 2019.
39
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.
Interest-earning assets:
Loans (1)
Investment securities
Federal funds and interest-bearing
deposits
Total interest-earning assets
Non-interest-earning assets
Total assets
Interest-bearing liabilities:
Interest-bearing demand deposits
Money market deposits
Savings and NOW deposits
Time deposits
Total interest-bearing deposits
Federal funds purchased
Federal Home Loan Bank advances
Subordinated debt
Total interest-bearing liabilities
Non-interest-bearing liabilities:
Demand deposits and other liabilities
Total liabilities
Stockholders’ Equity
Total liabilities and Stockholders’
equity
Net interest income
Interest rate spread (2)
Net interest-earning assets (3)
Net interest margin (4)
Net interest margin, excluding PPP loans(5)
Average interest-earning assets to
average interest-bearing liabilities
Average
Balance
2020
Interest
Income/
Expense
For the Year Ended December 31,
Yield/
Cost
Average
Balance
(Dollars in thousands)
2019
Interest
Income/
Expense
Yield/
Cost
$
$
$
$
$
$
$
1,219,525
76,414
$
$
$
$
$
135,688
1,431,627
66,561
1,498,188
37,431
314,398
66,028
535,116
952,973
—
6,189
14,820
973,982
375,046
1,349,028
149,160
59,634
2,007
431
62,072
317
2,162
221
12,322
15,022
—
107
966
16,095
4.89% $
2.63%
0.32% $
4.34%
$
0.85% $
0.69%
0.33%
2.30%
1.58% $
—
1.73%
6.52%
1.65% $
$
984,014
71,149
$
$
$
$
$
72,643
1,127,806
45,282
1,173,088
56,675
129,606
62,047
544,084
792,412
37
21,162
14,791
828,402
215,405
1,043,807
129,281
55,208
2,202
1,403
58,813
998
2,379
289
14,196
17,862
1
548
966
19,377
$
1,498,188
$
1,173,088
$
45,977
$
39,436
$
457,645
2.69%
$
299,404
3.21%
3.21%
146.99%
136.14%
5.61%
3.09%
1.93%
5.21%
1.76%
1.84%
0.47%
2.61%
2.25%
2.70%
2.59%
6.53%
2.34%
2.87%
3.50%
3.50%
(1)
(2)
(3)
(4)
(5)
Includes loans classified as non-accrual, average PPP balances of $116.7 million, average balances of loans held for sale and related interest income of approximately $1.2 million for the year ended December 31, 2020.
Interest rate spread represents the difference between the average yield on average interest–earning assets and the average cost of average interest-bearing liabilities.
Net interest earning assets represent total average interest–earning assets less total interest–bearing liabilities.
Net interest margin represents net interest income divided by total average interest-earning assets.
Non-GAAP; refer to Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations” section “Non-GAAP Measures” of this Form 10-K.
40
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 volume). The volume column shows the effects attributable to changes in volume (changes in volume multiplied by prior rate). 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.
Interest-earning assets:
Loans
Investment securities
Federal funds and interest-bearing deposits
Total interest-bearing assets
Interest-bearing liabilities:
Interest-bearing demand deposits
Money market deposit accounts
Savings and NOW deposits
Time deposits
Total deposits
Federal funds purchased
Federal Home Loan Bank advances
Subordinated debt
Total interest-bearing liabilities
Change in net interest income
Provision for Loan Losses
For the Twelve Months Ended
December 31, 2020 and 2019
Increase (Decrease) Due to
Volume
Rate
(In thousands)
Total Increase
(Decrease)
$
$
$
$
$
12,105
153
698
12,956
$
$
(270) $
1,921
19
(228)
1,442
$
(1)
(300)
1
1,142
11,814
$
(7,679) $
(348)
(1,670)
(9,697) $
(411) $
(2,138)
(87)
(1,646)
(4,282) $
—
(141)
(1)
(4,424)
(5,273) $
4,426
(195)
(972)
3,259
(681)
(217)
(68)
(1,874)
(2,840)
(1)
(441)
—
(3,282)
6,541
We establish a provision for loan losses, which is charged to operations, in order to maintain the allowance for loan losses at a level we consider necessary to absorb credit losses incurred in the
loan portfolio that are both probable and reasonably estimated at the 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 or economic conditions change.
This evaluation is inherently subjective, as it requires estimates that are susceptible to significant revision as circumstances change as more information becomes available. The allowance for loan
losses is assessed on a monthly basis and provisions are made for loan losses as required in order to maintain the allowance.
The provision for loan losses increased to $3.6 million for the year ended December 31, 2020 from $1.6 million for the year ended December 31, 2019. The increase is primarily as a direct result
of additional provisions added in response to the COVID-19 pandemic. In addition, loan originations increased $178.6 million, which totalled $230.8 million for the year ended December 31, 2019 compared
to loan originations of $409.4 million for the year ended December 31, 2020. Loan originations included $173.1 million in PPP loans during the year ended December 31, 2020. Non-performing loans
increased $149,000, from $0 at December 31, 2019 to $149,000 as of December 31, 2020. During the year ended December 31, 2020, substandard loans decreased $1.2 million for a balance of $2.1 million.
During the year ended December 31, 2020, the watchlist increased $68.1 million, however this increase is attributable to only five relationships all of which are in the hospitality industry. Management does
not believe any loss currently exists in these loans but due to the disproportionate impact COVID-19 has had on the hospitality industry, the Bank is managing these credits closely. During the year ended
December 31, 2020, there were $1.9 million in charge-offs and recoveries of $1.5 million were received. During the year ended December 31, 2019, there were $929,000 in charge-offs recorded and recoveries
received of $865,000.
41
Non-Interest Income
Our primary sources of non-interest income are service charges on deposit accounts, such as interchange fees and statement fees, income earned on bank owned life insurance, fees earned from
executing interest rate swaps on commercial loans, and gains realized on the sale of the guaranteed portion of Small Business Administration (“SBA”) loans.
The following table presents, for the period indicated, the major categories of non-interest income:
Non-interest income
Deposit account service charges
Bank owned life insurance income
Loan swap fee income
Net gain on available-for-sale securities
Net gain on sale of loans
Other fee income
Total non-interest income
2020
For the Year Ended December 31,
2019
(In thousands)
% Change
$
$
1,916
779
3,510
—
33
1,255
7,493
$
$
1,668
498
989
5
566
1,136
4,862
14.87%
56.43%
254.90%
-100.00%
-94.17%
10.48%
54.11%
Non-interest income increased $2.6 million, or 54.1%, to $7.5 million for the year ended December 31, 2020 from $4.9 million for the year ended December 31, 2019. The increase in non-interest
income was primarily due to an increase in service fees on our business accounts and fees earned from executing interest rate swaps on commercial loans for the year ended December 31, 2020. The Bank has
focused on expanding these areas and expects similar opportunities throughout 2021. Deposit account service fees increased $248,000 to $1.9 million for the year ended December 31, 2020 from $1.7 million
for the year ended December 31, 2019 primarily as a result of an increased customer deposit portfolio and fee structure. Bank owned life insurance income increased $281,000 for the year ended December 31,
2020 compared to the year ended December 31, 2019 due to additional policies purchased later in the prior year. Fees earned on interest rate swaps for commercial loans increased $2.5 million, or 255%, to
$3.5 million for the year ended December 31, 2020 from $989,000 for the year ended December 31, 2019. This increase was purely related to the volume of interest rate swaps entered into during 2020.
Non-Interest Expense
Generally, non-interest expense is composed of all employee expenses and costs associated with operating our facilities, obtaining and retaining customer relationships and providing bank
services. The largest component of non-interest expense is salaries and employee benefits. Non-interest expense also includes operational expenses, such as occupancy and equipment expenses, professional
fees, advertising expenses and other general and administrative expenses, including FDIC assessments, communications, travel, meals, training, supplies and postage. The following table presents, for the
periods indicated, the major categories of non-interest expense:
Non-interest expense
Salaries and employee benefits
Occupancy expenses
Furniture and equipment expenses
Advertising and marketing
Outside services
Administrative expenses
Franchise tax
FDIC insurance
Data processing
Other real estate expenses, net
Other operating expenses
Total non-interest expense
2020
For the Year Ended December 31,
2019
(In thousands)
% Change
$
$
17,937
1,270
2,128
1,003
959
674
1,370
1,329
1,242
459
1,887
30,258
$
$
15,776
864
1,728
906
863
731
1,229
680
995
62
1,542
25,376
13.70%
46.99%
23.15%
10.71%
11.12%
-7.80%
11.47%
95.44%
24.82%
640.32%
22.37%
19.24%
42
Non-interest expense increased $4.9 million or 19.4% to $30.3 million for the year ended December 31, 2020 from $25.4 million for the year ended December 31, 2019 primarily as a result of
increases in salary and employee benefits of $2.1 million, FDIC insurance of $649,000 and other operating expenses of $776,000. Salaries and employee benefits expense increased by $2.1 million to
$17.9 million for the year ended December 31, 2020 from $15.8 million for the year ended December 31, 2019 primarily as a result of increasing the salaries for our employees who were customer facing
during the depth of the pandemic. It was important to support our employees who could not adhere to a work-from-home policy due to the unique nature of their job responsibilities. Other operating expenses
increased $345,000, or 22.4%, to $1.9 million for the year ended December 31, 2020 from $1.5 million for the year ended December 31, 2019 due to increases in professional and consulting fees and fees
related to investments in technology infrastructure. The Bank also revalued its other real estate owned portfolio which resulted in a writedown of $400,000. FDIC increased approximately $649,000 to $1.3
million for the year ended December 31, 2020 from $680,000 for the year ended December 31, 2019.
Income Tax Expense
Income tax expense increased $489,000, or 14.6%, to $3.8 million for the year ended December 31, 2020 from $3.4 million for the year ended December 31, 2019. The increase in federal income
tax expense for the year ended December 31, 2020 compared to the same period a year ago was driven by the increase in income before income taxes of $2.3 million, or 13.0%, to $19.6 million as of
December 31, 2020 compared to $17.3 million for the same period in the prior year. As a result of tax regulation, the Company has included assessments in income tax expense for state tax liabilities during
2020. For the year ended December 31, 2020, the Bank had an effective federal tax rate of 19.6%, compared to effective federal tax rate of 19.4% for the year ended December 31, 2019.
Comparison of Statements of Financial Condition at December 31, 2020 and at December 31, 2019
Total Assets
Total assets increased $365.8 million, or 28.6%, to $1.6 billion at December 31, 2020 from $1.3 billion at December 31, 2019. The increase was primarily the result of increases of $257.0 million
in gross loans receivable, $53.2 million in available-for-sale securities, and $9.4 million in other assets.
Investment Securities
We use our securities portfolio to provide a source of liquidity, provide an appropriate return on funds invested, manage interest rate risk, meet collateral requirements and meet regulatory capital
requirements. Our investment policy is established and reviewed annually by the Board of Directors. We are permitted under federal law to invest in various types of liquid assets, including United States
Government obligations, securities of various federal agencies and of state and municipal governments, mortgage-backed securities, time deposits of federally insured institutions, certain bankers’ acceptances
and federal funds.
Our investment objectives are to maintain high asset quality, to provide and maintain liquidity, to establish an acceptable level of interest rate and credit risk, to provide an alternate source of low-
risk investments when demand for loans is weak and to generate a favorable return. The Board of Directors has the overall responsibility for the investment portfolio, including approval of our investment
policy. The Board of Directors is also responsible for implementation of the investment policy and monitoring investment performance. The Board of Directors reviews the status of the investment portfolio on
a quarterly basis, or more frequently if warranted.
Generally accepted accounting principles require that, at the time of purchase, we designate a security as held to maturity, available-for-sale, or trading, depending on our ability and intent to hold
such security. Debt securities available for sale are reported at fair value, while debt securities held to maturity are reported at amortized cost. We do not maintain a trading portfolio. Establishing a trading
portfolio would require specific authorization by the Board of Directors.
The total investment securities portfolio, including both investment securities available for sale and investment securities held to maturity, was $169.9 million at December 31, 2020, an increase of
$53.2 million compared with December 31, 2019. At December 31, 2020, the investment securities portfolio includes $147.4 million of investment securities available for sale and $22.5 million of investment
securities held to maturity compared to $92.8 million of investment securities available for sale and $23.9 million of investment securities held to maturity at December 31, 2019.
During the year ended December 31, 2019, the Company sold seven securities in the available-for-sale investment portfolio. Of these seven, four were sold at a loss of $18,000 and three were sold
at a gain of $23,000 for a net gain of $5,000. The Company did not sell any securities within the investment portfolio for the year ended December 31, 2020.
While all securities are reviewed by the Company for other-than-temporary impairments (“OTTI”), the securities that typically are impacted by credit impairment are non-agency collateralized
mortgage obligations and asset-backed securities. Refer to Note 3, in Notes to Consolidated Financial Statements for further details. To date, we have had no OTTI.
43
Securities Portfolio Composition. The following table sets forth the amortized cost and estimated fair value of our available for sale and held to maturity securities at the dates indicated.
(Dollars in thousands)
Available-for-sale:
U.S. Treasury Securities
Collateralized Mortgage Backed
Subordinated Debt
Municipal Securities
U.S Governmental Agencies
Total
Held-to-maturity:
Municipal securities
Subordinated Debt
Total
2020
Amortized
Cost
Fair
Value
2019
Amortized
Cost
Fair
Value
December 31,
$
$
$
90,000
24,743
3,250
21,348
6,785
146,126
20,015
2,505
22,520
$
$
$
90,000
24,896
3,278
22,605
6,635
147,414
21,073
2,505
23,578
$
$
$
49,999
17,659
2,500
13,888
8,135
92,181
22,414
1,500
23,914
$
$
$
49,998
17,673
2,554
14,631
7,935
92,791
23,178
1,500
24,678
Portfolio Maturities and Yields. The composition and maturities of the investment securities portfolio at December 31, 2020, are summarized in the following table. Maturities are based on the
final contractual payment date, and do not reflect the effect of scheduled principal repayments, prepayments, or early redemptions that may occur. Adjustable-rate mortgage-backed securities are included in
the period in which interest rates are next scheduled to adjust.
One Year or Less
Amortized
Cost
Weighted
Average
Yield
More than One Year
through Five Years
More than Five Years
through Ten Years
More than
Ten Years
Amortized
Cost
Weighted
Average
Yield
Weighted
Average
Amortized
Cost
Yield
(Dollars in thousands)
Amortized
Cost
Weighted
Average
Yield
Amortized
Cost
Total
Fair
Value
Weighted
Average
Yield
Securities available for sale:
U.S. Treasury Securities
Collateralized Mortgage
Securities
Subordinated Debt
Municipal Securities
U.S. Government Agencies
$
90,000
0.02% $
—
—
$
—
—
$
—
—
$
90,000
$
90,000
2
—
—
—
6.17%
—
—
—
—
—
1,009
—
—
—
2.69%
—
—
3,250
—
—
—
5.38%
—
—
24,741
—
20,339
6,785
1.44%
—
2.97%
1.97%
24,743
3,250
21,348
6,785
24,896
3,278
22,605
6,635
Total
$
90,002
0.02% $
1,009
2.69% $
3,250
5.38% $
51,865
2.11% $
146,126
$
147,414
Securities held to maturity:
Municipal Securities
Subordinated Debt
Total Securities
Loan Portfolio
$
$
—
—
—
$
—
—
1,515
1,500
2.77% $
5.83%
7,409
1,000
2.97% $
5.75%
11,091
5
3.02% $
—
20,015
2,505
$
21,073
2,505
—
$
3,015
4.30% $
8,409
3.30% $
11,096
3.02% $
22,520
$
23,578
0.02%
1.44%
5.38%
2.95%
1.97%
2.31%
2.99%
5.79%
3.30%
Our primary source of income is derived from interest earned on loans. Our loan portfolio consists of loans secured by real estate as well as commercial business loans and consumer loans,
substantially all of which are secured by corresponding deposits at the Bank. Our loan customers primarily consist of small- to medium-sized businesses, professionals, real estate investors, small residential
builders and individuals. Our owner occupied and investment commercial real estate loans, residential construction loans and commercial business loans provide us with higher risk-adjusted returns, shorter
maturities and more sensitivity to interest rate fluctuations, and are complemented by our relatively lower risk residential real estate loans to individuals. Our lending activities are principally directed to our
market area consisting of the Washington, D.C. and Northern Virginia metropolitan areas.
44
Average loans represented 85.2% of average interest-earning assets for the year ended December 31, 2020, compared to 87.3% for the year ended December 31, 2019. The following table presents
the Company’s loan portfolio by portfolio segment at December 31, 2020 and December 31, 2019.
Residential real estate:
Single family
Multifamily
Farmland
Commercial real estate:
Owner occupied
Non-owner occupied
Construction and land development
Commercial – non-real estate:
Commercial and industrial(1)
Consumer – non-real estate:
Unsecured
Secured
Total gross loans
Less: unearned fees
Less: unamortized discount on secured loans
Less: allowance for loan losses
Net loans
At December 31,
2020
2019
Amount
Percent
Amount
Percent
(Dollars in thousands)
$
$
139,338
42,300
861
141,813
326,117
324,906
11.15% $
3.39%
0.07%
11.35%
26.10%
26.00%
143,535
6,512
801
134,116
287,754
272,620
230,027
18.41%
121,225
241
43,832
1,249,435
(6,178)
(1)
(12,877)
1,230,379
0.02%
3.51%
100.00%
$
599
74,984
1,042,146
(2,118)
(19)
(9,584)
1,030,425
13.77%
0.62%
0.08%
12.87%
27.61%
26.16%
11.63%
0.06%
7.20%
100.00%
(1)
Includes PPP loan balances of $135.2 million as of December 31, 2020.
The consumer loans above include $241,000 and $599,000 of overdrafts reclassified as loans for the years ended December 31, 2020 and 2019, respectively.
The Bank held $57.0 million loans for sale at December 31, 2020 and $0 at December 31, 2019.
Loan Portfolio Maturities and Yields. The following table summarizes the scheduled repayments of our loan portfolio at December 31, 2020. Demand loans, having no stated repayment schedule
or maturity, and overdraft loans are reported as being due in one year or less. Maturities are based on the final contractual payment date and do not reflect the impact of prepayments and scheduled principal
amortization.
Amounts due in:
One year or less
After one year through two years
After two years through three years
After three years through five years
After five years through ten years
After ten years through fifteen years
After fifteen years
Total
Single-Family
Multi-Family
As of December 31, 2020
Farmland
(In thousands)
Owner
Occupied
Non-owner
Occupied
$
$
$
$
23,545
3,320
6,197
14,648
64,933
1,738
24,957
139,338
45
1,532
—
914
10,518
29,336
—
—
42,300
$
$
—
—
687
—
—
174
—
861
$
$
11,462
4,608
836
23,295
80,490
14,195
6,927
141,813
$
$
45,344
24,162
33,141
21,276
183,473
18,643
78
326,117
Amounts due in:
One year or less
After one year through two years
After two years through three years
After three years through five years
After five years through ten years
After ten years through fifteen years
After fifteen years
Total
Construction
and Land
Development
Commercial
and Industrial
(In thousands)
$
$
166,750 $
32,344
59
29,272
73,888
22,593
—
324,906 $
41,567 $
135,993
6,808
14,109
25,754
5,796
—
230,027 $
Consumer
Total
1,094 $
6,113
12,727
20,921
3,218
—
—
44,073 $
291,294
206,540
61,369
134,039
461,092
63,139
31,962
1,249,435
The following table sets forth our fixed and adjustable-rate loans at December 31, 2020 that are contractually due after December 31, 2020.
Residential real estate:
Single family
Multifamily
Farmland
Commercial real estate:
Owner occupied
Non-owner occupied
Construction and land development
Commercial – non-real estate:
Commercial and industrial
Consumer – non-real estate:
Unsecured
Secured
Totals
Fixed
Rates
Due After December 31, 2020
Adjustable
Rates
(In thousands)
Total
$
30,661 $
15,243
861
42,807
59,936
29,781
108,677 $
27,057
—
99,006
266,181
295,125
139,338
42,300
861
141,813
326,117
324,906
176,565
53,462
230,027
241
43,660
399,755 $
—
172
849,680 $
241
43,832
1,249,435
$
46
The following table shows our loan originations, participations, purchases, sales and repayment activities for the periods indicated.
Total loans at beginning of year:
Loans originated:
Real estate loans:
Residential real estate:
Single family
Multifamily
Commercial real estate:
Owner occupied
Non-owner occupied
Construction and land development
Commercial – non-real estate:
Commercial and industrial
Consumer – non-real estate:
Unsecured
Secured
Total loans originated:
Loan principal repayments:
Principal repayments
Loans transferred to other real estate owned:
Transfers to other real estate owned
Loans transferred to loans held for sale:
Transfers to loans held for sale
Net loan activity
Total loans at the end of year
Years Ended December 31,
2020
2019
(In thousands)
$
1,042,146
$
927,437
45,993
28,149
17,581
52,154
118,241
146,847
324
118
409,407
32,906
0
28,079
44,429
85,940
28,928
0
10,480
230,762
144,750
114,846
362
1,207
57,006
—
207,289
114,709
$
1,249,435 $
1,042,146
Loans, net of unearned income, totaled $1.2 billion at December 31, 2020, an increase of $207.3 million from December 31, 2019. The increase in total loans was primarily driven by growth in the
overall loan portfolio, with significant increases in the commercial and industrial segment through the PPP program, as well as the construction portfolio. The Company reclassified approximately $57.0
million of commercial real estate loans to loans held for sale as part of its regulatory risk strategy.
Asset Quality
The Company’s asset quality remained strong during the year ended December 31, 2020. Nonperforming assets, which includes nonaccrual loans, accruing loans 90 days past due, accruing
troubled debt restructured (“TDR”) loans 90 days past due, and other real estate owned totaled $1.2 million at December 31, 2020 and 2019.
A loan’s past due status is based on the contractual due date of the most delinquent payment due. All loans which are 30 or more days past due at the end of the month are reported to the Board of
Directors. Commercial loans are generally placed on nonaccrual status when the collection of principal or interest is 90 days or more past due, or earlier, if collection is uncertain based on an evaluation of the
net realizable value of the collateral and the financial strength of the borrower. Consumer loans are generally placed on nonaccrual status when the collection of principal or interest is 120 days or more past
due, or earlier, if collection is uncertain based on an evaluation of the net realizable value of the collateral and the financial strength of the borrower. Loans greater than 90 days past due may remain on accrual
status if management determines it has adequate collateral to cover the principal and interest. For those loans that are carried on nonaccrual status, payments are first applied to principal outstanding. A loan
may be returned to accrual status if the borrower has demonstrated a sustained period of repayment performance in accordance with the contractual terms of the loan and there is reasonable assurance the
borrower will continue to make payments as agreed.
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.
47
Refer to Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations” section “COVID 19 Economic Impact ” of this Form 10-K for additional information
on loan modifications during the year ended December 31, 2020.
As a percentage of total assets, nonperforming assets were 0.08% at December 31, 2020 compared with 0.09% at December 31, 2019. As of December 31, 2020, the Company had $149,000 in
loans placed on nonaccrual status.
See Note 1, Organization, Basis of Presentation, and Impact of Recently Issued Accounting Pronouncements and Note 5, Allowance for Loan Losses, in Notes to Consolidated Financial
Statements for further information on the Company’s credit grade categories, which are derived from standard regulatory rating definitions.
The following table summarizes asset quality information at December 31, 2020 and December 31, 2019.
Non-accrual loans:
Residential real estate
Single family
Total non-accrual loans
Total non-performing loans
Other real estate owned
Total non-performing assets
Accruing TDRs:
Residential real estate
Total accruing TDRs
Ratios:
Total non-performing loans to gross loans receivable
Total non-performing loans to total assets
Total non-performing assets to total assets
Total non-performing assets and accruing troubled debt restructured loans to total
assets
December 31,
2020
December 31,
2019
(Dollars in thousands)
$
$
$
$
149
149
149
1,180
1,329
$
$
—
—
$
$
0.01%
0.01%
0.08%
0.08%
—
—
—
1,207
1,207
1,482
1,482
0.00%
0.00%
0.09%
0.21%
Interest income that would have been recorded for the years ended December 31, 2020 and 2019 had non-accruing loans been current according to their original terms amounted to $45 and $0
respectively. We did not recognize any interest income for these loans for the years ended December 31, 2020 and 2019, respectively.
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 suspension applies during the modification. A modification can be a forbearance agreement, a new repayment plan, interest rate modification, or any other arrangement that defers or delays
the payment of principal or interest. This provision applies only to loans that were current or less than 30 days past due on payments as of December 31, 2019.
The agencies are to defer to the financial institutions to suspend the TDR requirements. Financial institutions may presume that borrowers current on payments are not experiencing financial
difficulties at modification to determine TDR status, and no further TDR analysis is required for each loan modification in the program. Examiners will exercise judgment in reviewing loan modifications,
including TDRs, will not automatically adversely risk rate credits affected by COVID-19, and will not criticize prudent efforts to modify the terms on existing loans to affected customers.
As of December 31, 2020, there were no loans not disclosed in the above table, where known information about possible credit problems of borrowers causes management to have serious doubts
as to the ability of such borrowers to comply with the present loan repayment terms.
Delinquent Loans. The following table sets forth our delinquent loans at December 31, 2020 and 2019.
48
(Dollars in thousands)
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
30-59
Days Past
Due
60-89
Days Past
Due
Greater
than 90
Days
Total
Past Due
Current
Total
Loans
Receivable
Nonaccrual
December 31, 2020
$
$
—
—
—
—
—
—
—
—
—
—
$
$
—
—
—
—
—
—
—
—
68
68
$
$
49
—
—
—
—
—
—
—
—
—
—
$
$
—
—
—
—
—
—
—
—
68
68
$
$
139,189
42,300
861
$
139,338
42,300
861
141,813
326,117
324,906
141,813
326,117
324,906
230,027
230,027
241
43,764
1,249,218
$
241
43,832
1,249,435
$
$
149
—
—
—
—
—
—
—
—
149
(Dollars in thousands)
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
30-59
Days Past
Due
60-89
Days Past
Due
Greater
than 90
Days
Total
Past Due
Current
Total
Loans
Receivable
Nonaccrual
December 31, 2019
$
$
—
—
—
—
—
—
—
—
124
124
$
$
—
—
—
150
—
—
—
—
—
150
$
$
—
—
—
—
—
—
—
—
—
—
$
$
—
—
—
150
—
—
—
—
124
274
$
$
143,535
6,512
801
$
143,535
6,512
801
133,966
287,754
272,620
134,116
287,754
272,620
121,225
121,225
599
74,860
1,041,872
$
599
74,984
1,042,146
$
$
—
—
—
—
—
—
—
—
—
—
Classified Assets. Federal regulations provide for the classification of loans and other assets that are considered to be of lesser quality as substandard, doubtful, or loss assets. Loans not classified
as impaired are assigned a higher allowance factor based on an internal migration analysis, which increases with the severity of classification, than pass rated loans. The characteristics of the loan ratings are as
follows:
•
•
•
•
•
Pass rated loans are to persons or business entities with an acceptable financial condition, appropriate collateral margins, appropriate cash flow to service the existing loan, and an
appropriate leverage ratio. The borrower has paid all obligations as agreed and it is expected that this type of payment history will continue. When necessary, acceptable personal
guarantors support the loan.
Special mention loans have a specific defined weakness in the borrower’s operations and the borrower’s ability to generate positive cash flow on a sustained basis. The borrower’s recent
payment history is characterized by late payments. The Bank’s risk exposure is mitigated by collateral supporting the loan. The collateral is considered to be well-margined, well
maintained, accessible and readily marketable.
Substandard loans are considered to have specific and well-defined weaknesses that jeopardize the viability of the Bank’s credit extension. The payment history for the loan has been
inconsistent and the expected or projected primary repayment source may be inadequate to service the loan. The estimated net liquidation value of the collateral pledged and/or ability of
the personal guarantor(s) to pay the loan may not adequately protect the Bank. There is a distinct possibility that the Bank will sustain some loss if the deficiencies associated with the
loan are not corrected in the near term. A substandard loan would not automatically meet our definition of impaired unless the loan is significantly past due and the borrower’s
performance and financial condition provide evidence that it is probable that the Bank will be unable to collect all amounts due.
Doubtful rated loans have all the weaknesses inherent in a loan that is classified substandard but with the added characteristics that the weaknesses make collection or liquidation in full,
on the basis of currently existing facts, conditions and values, highly questionable and improbable. The possibility of loss is extremely high.
Loss rated loans are not considered collectible under normal circumstances and there is no realistic expectation for any future payment on the loan. Loss rated loans are fully charged off.
In connection with the filing of our periodic reports with the Federal Reserve Board and in accordance with our classification of assets policy, we regularly review the problem loans in our
portfolio to determine whether any loans require classification in accordance with applicable regulations.
50
On the basis of this review of our assets, our classified and special mention assets, at the dates indicated were as follows.
(Dollars in thousands)
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
(Dollars in thousands)
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
Pass
Watch
Special
Mention
Substandard
Doubtful
Total
December 31, 2020
$
$
137,937
42,300
861
$
—
—
—
136,257
265,578
322,149
225,012
5,556
59,453
2,757
4,059
$
738
—
—
—
—
—
591
241
43,832
1,174,167
$
—
—
71,825
$
—
—
1,329
$
$
663
—
—
—
1,086
—
365
—
—
2,114
$
—
—
—
—
—
—
—
—
—
—
$
139,338
42,300
861
141,813
326,117
324,906
230,027
241
43,832
1,249,435
$
Pass
Watch
Special
Mention
Substandard
Doubtful
Total
December 31, 2019
$
—
—
—
—
—
—
3,772
—
—
3,772
$
$
—
—
—
—
—
—
5,685
—
—
5,685
$
$
516
—
—
150
—
—
2,662
—
—
3,328
$
—
—
—
—
—
—
—
—
—
—
$
143,535
6,512
801
134,116
287,754
272,620
121,225
599
74,984
1,042,146
$
$
$
$
143,019
6,512
801
133,966
287,754
272,620
109,106
599
74,984
1,029,361
$
$
Analysis and Determination of the Allowance for Loan Losses. The allowance for loan losses is maintained at a level which, in management’s judgment, is adequate to absorb probable credit
losses inherent in the loan portfolio. The amount of the allowance is based on management’s evaluation of the collectability of the loan portfolio, including the nature of the portfolio, credit concentrations,
trends in historical loss experience, specific impaired loans, and economic conditions. Allowances for impaired loans are generally determined based on collateral values or the present value of estimated cash
flows. Because of uncertainties associated with regional economic conditions, collateral values, and future cash flows on impaired loans, it is reasonably possible that management’s estimate of probable credit
losses inherent in the loan portfolio and the related allowance may change materially in the near-term. The allowance is increased by a provision for loans losses which is charged to expense and reduced by
full and partial charge-offs, net of recoveries. Changes in the allowance relating to impaired loans are charged or credited to the provision for loan losses. Management’s periodic evaluation of the adequacy of
the allowance is based on various factors, including, but not limited to, management’s ongoing review and grading of loans, facts and issues related to specific loans, historical loan loss or loan pools, the fair
value of the underlying collateral, current economic conditions and other qualitative and quantitative factors which could affect potential credit losses. An integral part of their examination process, the Federal
Reserve Board will periodically review our allowance for loan losses, and as a result of such reviews, we may have to adjust our allowance for loan losses.
51
The following table sets forth activity in our allowance for loan losses for the periods indicated.
Balance at beginning of year
Charge-offs:
Commercial real estate
Commercial industrial
Consumer
Total charge-offs
Recoveries:
Residential real estate
Commercial real estate
Commercial and industrial
Consumer
Total recoveries
Net charge-offs
Provision for loan losses
Balance at end of period
Ratios:
Net charge offs to average loans outstanding (annualized)
Allowance for loan losses to non-performing loans at end of
period
Allowance for loan losses to gross loans at end of period
$
$
For the Year Ended
December 31,
2020
For the Year Ended
December 31,
2019
(Dollars in thousands)
9,584
$
(1)
(1,792)
(60)
(1,853)
2
—
1,526
8
1,536
(317)
3,610
12,877
0.03%
8642.28%
1.03%
$
8,831
(733)
(98)
(98)
(929)
58
1
5
—
64
(865)
1,618
9,584
0.09%
N/A
0.92%
At December 31, 2020, our allowance for loan losses represented 1.03 % of total loans and had no non-performing loans. The allowance for loan losses increased to $12.9 million at December 31,
2020 from $9.6 million at December 31, 2019 primarily as a direct result of adding a general qualitative factor to the allowance for loan losses in response to the COVID-19 pandemic, as well as provision
expense on newly originated loans. There were $317,000 and $865,000 in net loan charge-offs during the years ended December 31, 2020 and December 31, 2019, respectively.
Allocation of Allowance for Loan Losses. The following table sets forth the allowance for loan losses allocated by loan category and the percent of the allowance in each category to the total
allocated allowance at the dates indicated. The allowance for loan losses allocated to each category is not necessarily indicative of future losses in any particular category and does not restrict the use of the
allowance to absorb losses in other categories.
(Dollars in thousands)
Residential Real Estate:
Single family
Multifamily
Farmland
Commercial Real Estate:
Owner occupied
Non-owner occupied
Construction and Land Development
Commercial – Non Real Estate:
Commercial and industrial(1)
Consumer – Non Real Estate:
Unsecured
Secured
Total
2020
Percent of
Allowance
in Each
Category
to Total
Allocated
Allowance
At December 31,
Percent of
Loans
in Each
Category to
Total Loans
Allowance for
Loan Losses
2019
Percent of
Allowance
in Each
Category
to Total
Allocated
Allowance
Percent of
Loans
in Each
Category to
Total Loans
7.91%
1.58%
0.01%
14.58%
36.30%
25.83%
10.91%
0.09%
2.80%
11.15% $
3.39%
0.07%
11.35%
26.10%
26.00%
18.41%
0.02%
3.51%
980
45
5
1,352
2,902
2,180
1,552
4
564
10.23%
0.47%
0.05%
14.11%
30.28%
22.75%
16.19%
0.04%
5.88%
13.77%
0.62%
0.08%
12.87%
27.61%
26.16%
11.63%
0.06%
7.10%
$
Allowance
for Loan
Losses
1,019
203
1
1,878
4,674
3,326
1,405
11
360
$
12,877
100.0%
100.0% $
9,584
100.0%
100.0%
(1)
No allowance assigned to PPP loans due to SBA guarantee
52
53
Derivative Financial Instruments
The Bank uses derivative financial instruments (“derivatives”) primarily to manage risks to the Bank associated with changing interest rates, and to assist customers with their risk management
objectives. The Bank classifies these items as free standing derivatives consisting of customer accommodation loan swaps (“loan swaps”). The Bank enters into interest rate swaps with certain qualifying
commercial loan customers to meet their interest rate risk management needs. The Bank 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 Bank receives a floating rate. These back-to-back loan swaps qualify as financial derivatives with fair values
reported in “Other assets” and “Other liabilities” in the Consolidated Balance Sheet. Changes in fair value are recorded in other noninterest expense and net to zero because of the identical amounts and terms
of the swaps.
The following tables summarize key elements of the Banks’s derivative instruments as of the dates indicated.
December 31, 2020
Customer-related interest rate
contracts
(Dollars in thousands)
Matched interest rate swap with borrower
Matched interest rate swap with counterparty
December 31, 2019
Customer-related interest rate
contracts
(Dollars in thousands)
Matched interest rate swap with borrower
Matched interest rate swap with counterparty
Funding Activities
Notional
Amount
$
$
210,314
210,314
Positions
Assets
Liabilities
Collateral
Pledges
$
38
38
12,152
—
$
—
12,152
$
$
15,120
15,120
Notional
Amount
$
$
71,860
71,860
Positions
Assets
Liabilities
Collateral
Pledges
$
12
12
4,039
—
$
—
4,039
$
$
6,400
6,400
Deposits are the primary source of funds for lending and investing activities and their cost is the largest category of interest expense. The Company also utilizes brokered 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
Deposits
Total deposits increased by $309.7 million from December 31, 2019 to December 31, 2020. Brokered deposits, which are included in the table below, totaled $279.9 million and $236.9 million at
December 31, 2020 and December 31, 2019, respectively. The following table presents the Company’s average deposits segregated by major category for the year ended December 31, 2020:
Deposit type:
Interest-bearing demand
Money market
Savings and NOW
Time deposits
Interest-bearing deposits
Non-interest bearing demand
Average
Balance
2020
Percent
At December 31,
Weighted
Average
Rate
Average
Balance
(Dollars in thousands)
2019
Percent
Weighted
Average
Rate
$
37,431
314,398
66,028
535,116
952,973
353,591
2.86%
24.06%
5.05%
40.96%
72.94%
27.06%
0.85% $
0.69% $
0.33% $
2.30% $
1.58%
56,675
129,606
62,047
544,084
792,412
204,500
5.69%
13.00%
6.22%
54.58%
79.49%
20.51%
1.76%
1.84%
0.47%
2.61%
2.25%
Total deposits
$
1,306,564
100.00%
1.15% $
996,912
100.00%
1.79%
54
The overall increase in total deposits was primarily driven by an increase in non-interest bearing demand deposits and money market deposits largely due to balances related to the PPP initiative.
The increase was partially offset by a decrease in interest bearing demand deposits and time deposits. Certificates and other time deposits decreased from December 31, 2020 compared to December 31, 2019
primarily as a result of decreasing our wholesale deposits.
At December 31, 2020, the aggregate amount of all our certificates of deposit in amounts greater than or equal to $250,000 was approximately $219.0 million. The following table sets forth the
maturity of these certificates as of December 31, 2020.
Maturity period:
Three months or less
Over three through twelve months
Over twelve months through three years
Over three years
Total
The following table sets forth all of our time deposits classified by interest rate as of the dates indicated.
Interest Rate Range:
0.01 – 0.99%
1.00 – 1.99%
2.00 – 2.99%
3.00 and greater
Total
December 31,
2020
(In thousands)
$
20,228
55,664
101,304
41,788
$
218,984
At December 31,
2020
2019
(In thousands)
$
$
156,499 $
61,188
247,456
31,600
496,743 $
809
83,577
434,808
41,663
560,857
The following table sets forth by interest rate ranges information concerning the maturities of our certificates of deposit as of December 31, 2020.
Interest Rate Range:
0.01 – 0.99%
1.00 – 1.99%
2.00 – 2.99%
3.00 and greater
Total
Borrowed Funds
Period to Maturity
Less Than
or Equal to
One Year
More Than
One to Two
Years
More Than
Two to
Three
Years
More Than
Three Years
Total
Percent of
Total
Certificate
Accounts
(Dollars in thousands)
$
$
115,457
42,731
103,162
11,458
272,808
$
$
6,430
16,255
58,439
4,963
86,087
$
$
5,540
1,420
44,493
13,284
64,737
$
$
29,072
782
41,362
1,895
73,111
$
$
156,499
61,188
247,456
31,600
496,743
31.51%
12.32%
49.82%
6.36%
100.00%
We may obtain advances from the Federal Home Loan Bank of Richmond upon the security of the common stock we own in that bank and certain of our residential mortgage loans, provided
certain standards related to creditworthiness have been met. These advances are made pursuant to several credit programs, each of which has its own interest rate and range of maturities. Federal Home Loan
Bank advances are generally available to meet seasonal and other withdrawals of deposit accounts and to permit increased lending.
At December 31, 2020 and 2019, we were permitted to borrow up to an aggregate total of $407.7 million and $308.4 million, respectively, from the Federal Home Loan Bank of Richmond. There
were Federal Home Loan Bank borrowings outstanding of $0 at December 31, 2020 and $40.0 million at December 31, 2019. Additionally, we had credit availability of $104.0 million with correspondent
banks for short-term liquidity needs, if necessary. No borrowings were outstanding at December 31, 2020 and 2019, under this facility.
55
The following table shows certain information regarding Federal Home Loan Bank advances at or for the dates indicated:
Balance at end of period
Average balance during the period
Weighted average interest rate at end of period
Weighted average interest rate during the period
$
$
For the Years Ended December 31,
2020
2019
(Dollars in thousands)
$
$
—
6,189
—
1.73%
40,000
21,162
1.98%
2.59%
On December 30, 2016, the Company completed the issuance of $14.3 million in aggregate principal amount of fixed-to-floating rate subordinated notes in a private placement transaction to
various accredited investors. During the first quarter 2017, an additional $700,000 of subordinated notes was issued for a total issuance of $15.0 million. The net proceeds of the offering are intended to
support growth and be used for other general business purposes. The notes have a maturity date of December 31, 2026 and have an annual fixed interest rate of 6.25% until December 31, 2021. Thereafter, the
notes will have a floating interest rate based on three-month London Interbank Offered Rate (“LIBOR”) rate plus 425 basis points (4.25%) (computed on the basis of a 360-day year of twelve 30-day months)
from and including January 1, 2022 to the maturity date or any early redemption date. Interest will be paid semi-annually, in arrears, on July 1 and January 1 of each year during the time that the notes remain
outstanding through the fixed interest rate period or earlier redemption date. Interest will be paid quarterly, in arrears, on April 1, July 1, October 1 and January 1 throughout the floating interest rate period or
earlier redemption date.
Stockholders’ Equity
Total stockholders’ equity at December 31, 2020 was $167.7 million, an increase of $30.6 million compared to December 31, 2019. Stockholders' equity increased $15.1 million due to net income
and $27.3 million due to a preferred stock issuance during the period. These increases were offset by common share repurchases of approximately $13.8 million. In addition, accumulated other comprehensive
income increased $554,000, primarily as a result of a increase in the fair value of investment debt securities available for sale.
Liquidity and Capital Resources
Liquidity is the ability of the Company to convert assets into cash or cash equivalents without significant loss and to raise additional funds by increasing liabilities. Liquidity management involves
maintaining the Company’s ability to meet the day-to-day cash flow requirements of its customers, whether they are depositors wishing to withdraw funds or borrowers requiring funds to meet their credit
needs. Without proper liquidity management, the Company would not be able to perform the primary function of a financial intermediary and would, therefore, not be able to meet the needs of the communities
it serves.
The Company assesses liquidity needs on a daily basis using a sophisticated monitoring system that identifies daily sources and uses for a rolling 30-day period. The Company also assesses
liquidity needs under various scenarios of market conditions, asset growth and changes in credit ratings. The assessment includes liquidity stress testing which measures various sources and uses of funds under
the different scenarios. The assessment provides regular monitoring of unused borrowing capacity and available sources of contingent liquidity to prepare for unexpected liquidity needs and to cover
unanticipated events that could affect liquidity.
The asset portion of the balance sheet provides liquidity primarily through unencumbered debt securities available for sale, loan principal and interest payments, maturities and prepayments of
investment securities held to maturity and, to a lesser extent, sales of investment debt securities available for sale. Other short-term investments such as federal funds sold and maturing interest- bearing
deposits with other banks, are additional sources of liquidity.
The liability portion of the balance sheet provides liquidity through various customers’ interest-bearing and noninterest-bearing deposit accounts and through FHLB and other borrowings.
Brokered deposits, federal funds purchased, and other short-term borrowings are additional sources of liquidity and, basically, represent the Company’s incremental borrowing capacity. These sources of
liquidity are used as necessary to fund asset growth and meet short-term liquidity needs.
In addition to the Company’s financial performance and condition, liquidity may be impacted by the Company’s structure as a bank holding company that is a separate legal entity from the Bank.
The Company requires cash for various operating needs that could include payment of dividends to its stockholder, the servicing of debt, and the payment of general corporate expenses. The primary source of
liquidity for the Company is dividends paid by the Bank. Applicable federal and state statutes and regulations impose restrictions on the amount of dividends that may be paid by the Bank. In addition to the
formal statutes and regulations, regulatory authorities also consider the adequacy of the Bank’s total capital in relation to its assets, deposits and other such items. Any future dividends must be set forth in the
Company's capital plans before any dividends can be paid.
The Company’s ability to raise funding at competitive prices is affected by the rating agencies’ views of the Company’s credit quality, liquidity, capital and earnings. Management meets with the
rating agencies on a routine basis to discuss the current outlook for the Company.
56
The Board of Director 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 December 31, 2020.
We monitor and adjust our investments in liquid assets based upon our assessment of: (1) expected loan demand; (2) expected deposit flows; (3) yields available on interest-earning deposits and
securities; and (4) 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 December 31, 2020, cash and cash equivalents totaled $107.5 million. Securities classified as available-for-sale, which provide
additional sources of liquidity, totaled $147.4 million at December 31, 2020.
Our cash flows are comprised of three primary classifications: cash flows from operating activities, investing activities, and financing activities. Net cash provided by operating activities was
$16.9 million and $16.7 million for the twelve months ended December 31, 2020 and December 31, 2019, respectively. Net cash used in investing activities, which consists primarily of disbursements for loan
originations and the purchase of securities, offset by principal collections on loans and proceeds from maturing securities, was $313.8 million and $161.4 million for the twelve months ended December 31,
2020 and December 31, 2019, respectively. During the twelve months ended December 31, 2019, the Company realized gains on sale of available-for-sale debt securities of $5,000. There were no sales of
available-for-sale debt securities in 2020. Net cash provided by financing activities was $339.5 million and $151.5 million for the twelve months ended December 31, 2020 and 2019, respectively, which
consisted primarily of increases in interest bearing deposits of $117.8 million and $248.8 million offset by net repayments of $40.0 million from the Federal Home Loan Bank for the twelve months ended
December 31, 2020. There were no net repayments from the Federal Home Loan Bank for the same period in 2019.
We are committed to maintaining a strong liquidity position. We monitor our liquidity position on a daily basis. We anticipate that we will have sufficient funds to meet our current funding
commitments. Certificates of deposit due within one year of December 31, 2020, totaled $272.8 million of total deposits. If these deposits do not remain with us, we will be required to seek other sources of
funds in the normal course of business, including other deposits and Federal Home Loan Bank advances. 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 past experience that a significant portion of such deposits will remain with us. We have the ability to attract and retain deposits by adjusting
the interest rates offered. Management believes that the current sources of liquidity are adequate to meet the Company’s requirements and plans for continued growth.
Off Balance Sheet Arrangements
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. The following table presents information about the Company's commitments at December 31, 2020.
Commitments
Commitments to extend credit
Standby and commercial letters of credit
Total
December 31, 2020
(In Thousands)
$
$
219,414
1,062
220,476
On March 9, 2021, the Bank signed a lease commitment for a new operations center.
Regulatory Capital
The Bank is subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and
possible additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Company’s consolidated financial statements. Under capital adequacy guidelines and the
regulatory framework for prompt corrective action, the Bank must meet specific capital guidelines that involve quantitative measures of assets, liabilities, and certain off-balance sheet items as calculated under
regulatory accounting practices. The capital amounts and classifications are also subject to qualitative judgments by the regulators about components, risk weightings and other factors.
57
The federal regulatory capital rules apply to all depository institutions as well as to bank holding companies with consolidated assets of $3 billion or more. However, the regulatory capital
requirements generally do not apply on a consolidated basis to a bank holding company with total consolidated assets of less than $3 billion unless the holding company: (1) is engaged in significant
nonbanking activities either directly or through a nonbank subsidiary; (2) conducts significant off-balance sheet activities (including securitization and asset management or administration) either directly or
through a nonbank subsidiary; or (3) has a material amount of debt or equity securities outstanding (other than trust preferred securities) that are registered with the Securities and Exchange Commission. The
Federal Reserve may apply the regulatory capital standards at its discretion to any bank holding company, regardless of asset size, if such action is warranted for supervisory purposes.
Because the Company has total consolidated assets of less than $3 billion and does not engage in activities that would trigger application of the federal regulatory capital rules, it is not at present
subject to consolidated capital requirements under the such rules.
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 was phased in
from 0.0% for 2015 to 2.50% by 2019. The capital conservation buffer for 2020 and 2019 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 December 31, 2020, the Company and the Bank meets all capital adequacy requirements to which it is subject.
As of December 31, 2020 and 2019, the most recent notification from the Federal Reserve Bank of Richmond categorized the Bank as well capitalized under the regulatory framework for prompt
corrective action. To be categorized as well capitalized, the Bank must maintain minimum total risk-based, Common Equity Tier 1 risk-based, Tier 1 risk-based, and Tier 1 leverage ratios as set forth in the
following table. There are no conditions or events since that notification that management believes have changed the Bank’s category.
The Bank’s actual regulatory capital amounts and ratios as of December 31, 2020 and 2019 are presented in the table below.
(Dollars in thousands)
As of December 31, 2020
Total capital (to risk-weighted assets)
Common equity tier 1 capital (to risk-weighted assets)
Tier 1 capital (to risk-weighted assets)
Tier 1 capital (to average assets)
As of December 31, 2019
Total capital (to risk-weighted assets)
Common equity tier 1 capital (to risk-weighted assets)
Tier 1 capital (to risk-weighted assets)
Tier 1 capital (to average assets)
COVID-19 Economic Impact
Actual
Capital Adequacy
Purposes
To Be Well Capitalized
Under the Prompt
Corrective Action
Provision
Amount
Ratio
Amount
Ratio
Amount
Ratio
$
$
$
$
$
$
$
$
189,534
176,657
176,657
176,657
157,892
148,308
148,308
148,308
14.60% $
13.61% $
13.61% $
10.78% $
13.50% $
12.68% $
12.68% $
12.12% $
103,872
58,428
77,904
65,557
93,576
52,636
70,182
48,937
≥ 8.0% $
≥ 4.5% $
≥ 6.0% $
≥ 4.0% $
≥ 8.0% $
≥ 4.5% $
≥ 6.0% $
≥ 4.0% $
129,840
103,872
103,872
81,946
116,970
93,576
93,576
61,171
≥ 10.0%
≥ 8.0%
≥ 8.0%
≥ 5.0%
≥ 10.0%
≥ 8.0%
≥ 8.0%
≥ 5.0%
On Friday, March 13, 2020, President Trump declared a national emergency caused by the coronavirus (COVID-19) pandemic. The federal and state guidelines issued in connection with this
national emergency to curb the spread of the COVID-19 pandemic have caused economic disruption across nearly every industry as well as significant unemployment. The Commonwealth of Virginia and the
District of Columbia instituted stay at home guidelines with an exception made for essential businesses. Both jurisdictions consider banking to be an essential business.
As an essential business, MainStreet Bank is firstly committed to providing a safe work environment. On March 16, 2020, we transitioned nearly all our employees to work from home. We were
fully prepared to do so because of our available technology.
The Bank established a crisis task force compromised of executive officers, senior management and department heads in order to provide streamlined communication across business functions.
This designated group began meeting routinely to track and monitor the pandemic’s impact on the key operations of the institution. Executive management also held weekly meetings with the entire Bank staff
to communicate new initiatives and share information about how we are responding to the needs of our employees and customers.
Since most of our customers were comfortable using our digital platform, we temporarily closed two of our seven locations and reduced the hours of the remaining locations. We also increased the
average wage of our dedicated customer-facing branch staff by 50% during
58
the initial stages of this crisis, as we believed they provided an invaluable customer interaction and were committed to meeting the needs of our customers who had to conduct business in person.
At the forefront of the crisis, we established a forbearance program for commercial customers with a term-debt repayment structure. The forbearances either provide two months deferral of
principal and interest payments or converting the loan to three months of interest-only payments. Both solutions were focused on assisting our borrowers in preserving their liquidity.
In order to maintain the Company’s strong asset quality, the Board and management initiated two payment deferral programs to support borrowers needs during the pandemic:
Phase 1 – Borrowers could opt to defer up to two months of principal and interest payments, and
Phase 2 – Commercial lenders would work with borrowers individually to design and implement a custom solution to achieve a positive outcome for the borrower.
An overwhelming number of borrowers, 77.5% (by dollar amount), did not indicate a need for any support from either phase to continue performing on their loan obligations.
Phase 1 - Initiated March 24, 2020. At this point little was known about the state of the pandemic with no predictions on its duration or severity. A total of 195 borrowers participated in this
phase, representing 22.5% of the dollar amount of loans outstanding.
Phase 1 was evenly distributed across the portfolio, excluding the hotel loan segment. The Company has 15 operating hotels in its portfolio totaling $92.4 million. The hospitality industry was
significantly impacted by the pandemic and 14 hotels that we financed requested to participate in Phase 1. All loans that requested a Phase 1 deferral have returned to a normal paying status or participated in
Phase 2.
Paycheck Protection Program – Initiated April 3, 2020. During Phase 1, the Bank was also participating as a lender in the Paycheck Protection Program (PPP), described below, to provide
additional liquidity assistance to our borrowers. The Bank processed over 1,000 PPP loans totalling just over $173 million. Underwriting standards were focused on providing precisely the amount that should
qualify for forgiveness by the federal government.
Phase 2 – Initiated May 4, 2020. The Board and management aligned the maximum deferment for Phase 2 with the Federal Reserve’s Main Street Lending Program and set the maximum
deferment period at 12 months. The Board and management also established several restrictive covenants for borrowers participating in Phase 2.
The objective established by Bank Management was for each borrower to attain a greater than 90% probability of a positive outcome. The Bank’s lending teams worked with their borrowers to
determine what amount and term of deferment, if any, would be reasonable to achieve that objective.
There were 42 borrowers representing 7.4% of total loans outstanding who would ultimately participate in Phase 2. While still a concentration, only 60% of the hotels requested additional
payment deferrals for Phase 2. As of December 31, 2020, all previously reported borrowers with payment deferrals are scheduled to be back to making monthly payments.
The Bank is currently participating in the additional round of the Paycheck Protection Program for eligible borrowers.
Regulatory easing for COVID-19 pandemic
Federal Reserve Bank reserve requirements to zero.
On March 15, 2020, the Federal Reserve reduced reserve requirement ratios to zero percent effective March 26, 2020. This action eliminated reserve requirements for all depository institutions.
Prior to the change, reserve requirement ratios on net transactions accounts differed based on the amount of net transactions accounts at the depository institution.
A certain amount of net transaction accounts, known as the "reserve requirement exemption amount," was subject to a reserve requirement ratio of zero percent. Net transaction account balances
above the reserve requirement exemption amount and up to a specified amount, known as the "low reserve tranche," were subject to a reserve requirement ratio of 3 percent. Net transaction account balances
above the low reserve tranche were subject to a reserve requirement ratio of 10 percent. The reserve requirement exemption amount and the low reserve tranche are indexed each year pursuant to formulas
specified in the Federal Reserve Act
Community Bank Leverage Ratio reduced to 8%
As required by Section 4012 of the CARES Act, the federal banking agencies temporarily lowered the community bank leverage ratio (the “CBLR”), issuing two interim final rules to set the
CLBR at 8% and then gradually re-establish it at 9%.
59
Under the interim final rules, the CBLR was set at 8% beginning in the second quarter of 2020 through the end of the year. Community banks that have a leverage ratio of 8% or greater and meet
certain other criteria may elect to use the CBLR framework. Beginning in 2021, the CBLR will increase to 8.5% for the calendar year. Community banks will have until Jan. 1, 2022, before the leverage ratio
requirement to use the CBLR framework will return to 9%.
“The agencies are providing community banking organizations with a clear and gradual transition back to the 9 percent leverage ratio requirement previously established by the agencies,”
regulators said in a joint press release. “This transition will allow community banking organizations to focus on supporting lending to creditworthy households and businesses given the recent strains on the
U.S. economy caused by the coronavirus.”
Forbearance not automatically a Troubled Debt Restructuring (TDR)
On March 9, 2020, the Federal Reserve, Office of the Comptroller of the Currency, Federal Deposit Insurance Corp., Consumer Financial Protection Bureau, National Credit Union
Administration, and Conference of State Bank Supervisors issued a joint statement to financial institutions urging them to work constructively with borrowers and other customers affected by COVID-19.
Since then, the agencies provided additional guidance and the CARES Act was signed into law. Together, they offer these key takeaways:
Working with Customers
The agencies encourage financial institutions to work prudently and pro-actively with borrowers – consistent with "safe and sound" practices – who are or may be unable to meet their payment
obligations because of the effects of COVID-19. The agencies view loan modification programs as positive actions to mitigate adverse effects on borrowers due to COVID-19. The agencies will not criticize
institutions for working with borrowers and will not direct supervised institutions to automatically categorize all COVID-19 related loan modifications as troubled debt restructurings ("TDRs").
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 suspension applies during the modification. A modification can be a forbearance agreement, a new repayment plan, interest rate modification, or any other arrangement that defers or delays
the payment of principal or interest. This provision applies only to loans that were current – less than 30 days past due on payments – as of December 31, 2019.
The agencies are to defer to the financial institutions to suspend the TDR requirements. Financial institutions may presume that borrowers current on payments are not experiencing financial
difficulties at modification to determine TDR status, and no further TDR analysis is required for each loan modification in the program. Examiners will exercise judgment in reviewing loan modifications,
including TDRs, will not automatically adversely risk rate credits affected by COVID-19, and will not criticize prudent efforts to modify the terms on existing loans to affected customers.
Past Due Reporting and Nonaccrual Status
Regarding loans not otherwise reportable as past due, financial institutions are not expected to designate loans with deferrals granted due to COVID-19 as past due because of the deferral. A loan’s
payment date is governed by the due date stipulated in the loan documents. If a financial institution agrees to a payment deferral, this may result in no contractual payments being past due, and these loans are
not considered past due during the deferral period. During a short-term deferral or modification, the loans generally should not be reported as nonaccrual.
Federal Reserve Paycheck Protection Program Lending Facility
On April 9, 2020, the Federal Reserve issued guidance for banks that wish to participate in the Federal Reserve’s Paycheck Protection Program Lending Facility (the “PPPL Facility”). Under the
PPPL Facility, the Federal Reserve Banks will extend funding, on a non-recourse basis, to banks participating in the PPP administered by the Small Business Administration (the “SBA”), taking PPP loans
originated under the PPP as collateral.
Main Street Lending Program
The Federal Reserve has announced that it is establishing a Main Street Lending Program to support lending to small and medium-sized businesses that were in sound financial condition before
the onset of the COVID-19 pandemic. The Program will operate through three facilities:
60
The Main Street New Loan Facility (MSNLF), the Main Street Priority Loan Facility (MSPLF), and the Main Street Expanded Loan Facility (MSELF).
Non-GAAP Measures
In reporting the results of December 31, 2019, the Company has provided supplemental performance measures on an operating basis. These measures are a supplement to GAAP used to prepare
the Company’s financial statements and should not be considered in isolation or as a substitute for comparable measures calculated in accordance with GAAP. In addition, the Company’s non-GAAP measures
may not be comparable to non-GAAP measures of other companies. The Company uses the non-GAAP measures discussed herein in its analysis of the Company’s performance.
Net interest margin excluding PPP loans, which is used in computing net interest margin, provides valuable additional insight into the net interest margin and the impact the Paycheck Protection
Program has had on our financial metrics. The entire PPP adjustment is attributable to the interest received on PPP loans, which is lower than normal market rates, and fees recognized on PPP loans that are
amortized ratably over the life of the loan.
The Company believes that Allowance for loan losses, excluding PPP to total loans is a meaningful supplement to GAAP financial measures and useful to investors because it measures the
reserves placed aside to absorb possible credit losses inherent in the loan portfolio. PPP loans are backed by the full faith of the SBA and as such, we have not set aside reserves for this segment of the loan
portfolio.
The following table reconciles these non-GAAP measures from their respective GAAP basis measures for the years ended December 31,
(Dollars in thousands)
Paycheck Protection Program adjustment impact
Loans held for investment (GAAP)
Less: PPP loans
Loans held for investment, excluding PPP (non-GAAP)
Average loans held for investment (GAAP)
Less: Average PPP loans
Average loans held for investment, excluding PPP (non-GAAP)
Net interest margin adjustment
Net interest income (GAAP)
Less: PPP fees recognized
Less: PPP interest income earned
Net interest income, excluding PPP income (non-GAAP)
Average interest earning assets (GAAP)
Less: average PPP loans
Average interest earning assets, excluding PPP (non-GAAP)
Net interest margin (GAAP)
Net interest margin, excluding PPP (non-GAAP)
Allowance for loan losses, adjusted
Allowance for loan losses (GAAP)
Total gross loans (GAAP)
Less: PPP loans
Total gross loans, excluding PPP loans (non-GAAP)
Allowance for loan losses to total loans, excluding PPP (non-GAAP)
2020
For the year ended December 31,
2019
2018
$
$
$
$
$
1,249,435
135,180
1,114,255
1,219,525
116,690
1,102,835
45,977
2,598
1,167
42,212
1,431,627
116,690
1,314,937
3.21%
3.21%
12,877
1,249,435
135,180
1,114,255
1.16%
$
$
$
$
$
1,042,146
—
1,042,146
984,014
—
984,014
39,436
—
—
39,436
1,127,806
—
1,127,806
3.50%
3.50%
9,584
1,042,146
—
1,042,146
0.92%
927,437
—
927,437
795,130
—
795,130
31,170
—
—
31,170
913,885
—
913,885
3.41%
3.41%
8,831
927,437
—
927,437
0.95%
$
$
$
$
$
61
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
Market Risk Management
The effective management of market risk is essential to achieving the Company’s strategic financial objectives. As a financial institution, the Company’s most significant market risk exposure is
interest rate risk in its balance sheet; however, market risk also includes product liquidity risk, price risk and volatility risk in the Company’s lines of business. The primary objectives of market risk
management are to minimize any adverse effect that changes in market risk factors may have on net interest income, and to offset the risk of price changes for certain assets recorded at fair value.
Interest Rate Market Risk
The Company’s net interest income and the fair value of its financial instruments are influenced by changes in the level of interest rates. The Company manages its exposure to fluctuations in
interest rates through policies established by its Asset/Liability Committee. The Asset/Liability Committee meets regularly and has responsibility for approving asset/liability management policies, formulating
strategies to improve balance sheet positioning and/or earnings and reviewing the interest rate sensitivity of the Company.
We estimate what our net interest income would be for a 12-month period. We then calculate what the net interest income would be for the same period under different interest rate assumptions.
These estimates require certain assumptions to be made, including loan and mortgage-related investment prepayment speeds, reinvestment rates, and deposit maturity and decay rates. These assumptions are
inherently uncertain. As a result, no simulation model can precisely predict the impact of changes in interest rates on our net interest income.
The table below sets forth, as of December 31, 2020, the calculation of the estimated changes in our net interest income that would result from changes in market interest rates over one year if we
take no action from our current plan..
Basis Point Change in
Interest Rates
Net Interest Income
Year 1 Forecast
(Dollars in thousands)
Year 1 Change
From Level
+400
+300
+200
+100
Level
-100
-200
$
$
$
$
$
$
$
32,947
30,496
27,198
24,155
21,658
20,761
19,400
52.13%
40.81%
25.58%
11.53%
—
-4.14%
-10.42%
Economic Value of Equity (“EVE”). We analyze the sensitivity of our financial condition to changes in interest rates through our economic value of equity model. This analysis measures the
difference between predicted changes in the fair value of our assets and predicted changes in the present value of our liabilities assuming various changes in current interest rates. The table below represents an
analysis of our interest rate risk as measured by the estimated changes in our economic value of equity, resulting from an instantaneous and sustained parallel shift in the yield curve at December 31, 2020.
Estimated Increase
(Decrease) EVE
Basis Point
Change in
Interest Rates(1)
Estimated
EVE(2)
+400
+300
+200
+100
Level
-200
-100
$
$
$
$
$
$
$
201,437
195,988
186,031
174,005
158,420
141,980
140,750
$
$
$
$
$
$
$
Amount
Percent
(Dollars in thousands)
43,017
37,567
27,611
15,584
—
(16,441)
(17,671)
27.15%
23.71%
17.43%
9.84%
—
(10.38)%
(11.15)%
EVE as a Percentage of Fair
Value of Assets(3)
EVE
Ratio(4)
Increase
(Decrease)
Basis Points
33.06%
27.87%
20.07%
11.06%
—
(11.55)%
(13.37)%
315
266
191
105
(110)
(127)
(1)
(2)
Assumes an immediate uniform change in interest rates at all maturities.
EVE is the fair value of expected cash flows from assets, less fair value of the expected cash flows arising from our liabilities adjusted for the value of off-balance sheet contracts.
62
(3)
(4)
Fair value of assets represents the amount at which an asset could be exchanged between knowledgeable and willing parties in an arms-length transaction.
EVE Ratio represents EVE divided by the fair value of assets.
Market Interest Rate Shift
The financial statements and related data presented herein have been prepared in accordance with generally accepted accounting principles in the United States of America which require the
measurement of financial position and operating results in terms of historical dollars without considering changes in relative purchasing power of money over time due to inflation.
The majority of assets and liabilities of a financial institution are monetary in nature; therefore, a financial institution differs greatly from most commercial and industrial companies, which have
significant investments in fixed assets or inventories that are greatly impacted by inflation. However, inflation does have an important impact on the growth of total assets in the banking industry and the
resulting need to increase equity capital at higher than normal rates in order to maintain an appropriate equity-to-assets ratio. Inflation also affects other expenses that tend to rise during periods of general
inflation.
Management believes the most significant potential impact of inflation on financial results is a direct result of the Company’s ability to manage the impact of changes in interest rates.
Management attempts to maintain a balanced position between rate-sensitive assets and liabilities in order to minimize the impact of interest rate fluctuations on net interest income. However, this goal can be
difficult to completely achieve in times of rapidly changing interest rates and is one of many factors considered in determining the Company’s interest rate positioning. The Company is asset sensitive as of
December 31, 2020. Refer to the Net Interest Income Sensitivity table for additional details on the Company’s interest rate sensitivity.
The Bank also uses derivative financial instruments to manage risk to the Bank associated with changing interest rates, and to assist customers with their risk management objectives. The Bank
enters into interest rate swaps with certain qualifying commercial loan customers to meet their interest rate risk management needs. The net result of these interest rate swaps is that the customer pays a fixed
rate of interest and the Bank receives a floating rate thus allowing the Bank another tool to further manage the interest rate risk for certain products. These back-to-back loan swaps qualify as financial
derivatives with fair values reported in “Other assets” and “Other liabilities” in the Consolidated Balance Sheet.
We believe that our current interest rate exposure is manageable and does not indicate any significant exposure to interest rate changes.
Item 8. Financial Statements and Supplementary Data
63
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Stockholders and the Board of Directors
MainStreet Bancshares, Inc.
Fairfax, Virginia
Opinion on the Financial Statements
We have audited the accompanying consolidated statements of financial condition of MainStreet Bancshares, Inc. and Subsidiary (the Company) as of December 31, 2020 and 2019, the related consolidated
statements of income, comprehensive income, stockholders' equity and cash flows for the years then ended, and the related notes to the consolidated financial statements (collectively, the financial statements).
In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2020 and 2019, and the results of its operations and its cash flows for
the years then ended, in conformity with accounting principles generally accepted in the United States of America.
Basis for Opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public
accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with U.S. federal
securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are
free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our
audits, we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over
financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such
procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant
estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
/s/ YOUNT, HYDE & BARBOUR, P.C.
We have served as the Company's auditor since 2008.
Winchester, Virginia
March 23, 2021
64
Item 8 – Financial Statements and Supplementary Data
Consolidated Financial Statements
Consolidated Statements of Financial Condition as of December 31, 2020 and December 31, 2019 (Dollars in thousands, except per share data)
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
Restricted securities, at cost
Loans held for sale
Loans, net of allowance for loan losses of $12,877 and $9,584, respectively
Premises and equipment, net
Other real estate owned, net
Accrued interest and other receivables
Bank owned life insurance
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
Federal Home Loan Bank advances
Subordinated debt, net
Other liabilities
Total Liabilities
Commitments and contingencies (Note 12)
Stockholders’ Equity
Preferred stock, $1.00 par value, 2,000,000 shares authorized non-cumulative perpetual;
28,750 issued and outstanding as of December 31, 2020 and no shares issued and outstanding as of December 31, 2019
Common stock, $4.00 par value, 10,000,000 shares authorized; issued and outstanding
7,443,842 shares (including 161,435 nonvested shares) for December 31, 2020 and
8,260,259 shares (including 160,961 nonvested shares) for December 31, 2019
Capital surplus
Retained earnings
Accumulated other comprehensive income
Total Stockholders’ Equity
Total Liabilities and Stockholders’ Equity
See Notes to the Consolidated Financial Statements
65
At December 31,
2020
At December 31,
2019
$
$
$
75,935
31,593
107,528
147,414
22,520
4,616
57,006
1,230,379
14,289
1,180
9,604
25,341
23,288
1,643,165
370,497
70,307
74,099
426,600
496,743
1,438,246
—
14,834
22,420
1,475,500
53,376
11,468
64,844
92,791
23,914
6,157
—
1,030,425
14,153
1,207
5,420
24,562
13,885
1,277,358
252,707
53,707
63,015
141,337
560,857
1,071,623
40,000
14,805
13,896
1,140,324
27,263
—
29,130
66,116
44,179
977
167,665
1,643,165
$
32,397
75,117
29,097
423
137,034
1,277,358
$
$
$
$
Consolidated Statements of Income for the Years Ended December 31, 2020 and 2019 (Dollars in thousands, except per share data).
For the Year
Ended December 31,
2020
2019
Interest Income
Interest and fees on loans
Interest on investments 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 fund purchases
Interest on Federal Home Loan Bank advances
Interest on subordinated debt
Total Interest Expense
Net interest income
Provision for 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 available-for-sale 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
Franchise tax
FDIC insurance
Data processing
Administrative expenses
Other real estate expenses, net
Other operating expenses
Total Non-Interest Expense
Income before income taxes
Income Tax Expense
Net Income
Preferred stock dividends
Net Income per common share
Net Income per common share:
Basic
Diluted
$
$
$
$
$
59,634
2,007
431
62,072
317
221
2,162
12,322
—
107
966
16,095
45,977
3,610
42,367
1,916
779
3,510
—
33
1,213
7,451
17,937
2,128
1,003
1,270
959
1,370
1,329
1,242
674
459
1,887
30,258
19,560
3,843
15,717
635
15,082
1.85
1.85
$
$
$
$
$
55,208
2,202
1,403
58,813
998
289
2,379
14,196
1
548
966
19,377
39,436
1,618
37,818
1,668
498
989
5
566
1,136
4,862
15,776
1,728
906
864
863
1,229
680
995
731
62
1,542
25,376
17,304
3,354
13,950
—
13,950
1.69
1.69
See Notes to the Consolidated Financial Statements
66
Consolidated Statements of Comprehensive Income for the Years Ended December 31, 2020 and 2019 (Dollars in thousands)
Comprehensive Income, net of taxes
Net Income
Other comprehensive income, net of tax:
Unrealized gains on available for sale securities arising
during the period (net of tax, $145 and $206, respectively)
Less: reclassification adjustment for securities gains included in
net income (net of tax, $0 and ($1), respectively)
Add: reclassification adjustment for amortization of unrealized
losses on securities transferred from available for sale to held
to maturity (net of tax, $5 and $6, respectively)
Other comprehensive income
Comprehensive Income
For the Year
Ended December 31,
2020
2019
15,717
$
13,950
533
—
21
554
16,271
$
772
(4)
22
790
14,740
$
$
Consolidated Statements of Stockholders’ Equity for the Years Ended December 31, 2020 and 2019 (Dollars in thousands).
See Notes to the Consolidated Financial Statements
Common
Stock
Capital
Surplus
Retained
Earnings
Accumulated
Other
Comprehensive
Income (Loss)
Total
Balance, December 31, 2018
Vesting of restricted stock
Stock based compensation expense
Net income
Other changes related to restricted stock awards
Other comprehensive income
Balance, December 31, 2019
Balance, December 31, 2019
Preferred stock issued, net
Vesting of restricted stock
Stock based compensation expense
Common stock repurchased
Dividends on preferred stock
Net income
Other comprehensive income
Balance, December 31, 2020
$
$
$
$
32,176
221
—
—
—
—
32,397
Preferred
Stock
—
27,263
—
—
—
—
—
—
27,263
$
$
$
$
74,256
$
$
(367) $
(221)
1,043
—
39
—
75,117
$
15,186
—
—
13,950
(39)
—
29,097
$
—
—
—
—
790
423
$
121,251
—
1,043
13,950
—
790
137,034
Common
Stock
Capital
Surplus
Retained
Earnings
Accumulated
Other
Comprehensive
Income
$
32,397
—
316
—
(3,583)
—
—
—
29,130
$
$
75,117
—
(316)
1,529
(10,214)
—
—
—
66,116
$
$
29,097
—
—
—
—
(635)
15,717
—
44,179
$
423
—
—
—
—
—
—
554
977
$
$
Total
137,034
27,263
—
1,529
(13,797)
(635)
15,717
554
167,665
See Notes to the Consolidated Financial Statements
67
Consolidated Statements of Cash Flows (Dollars in thousands)
Year Ended December 31,
Cash Flows from Operating Activities
Net income
Adjustments to reconcile net income to net cash provided by operating activities:
2020
2019
$
15,717
$
13,950
Depreciation, amortization, and accretion, net
Amortization of right-of-use assets
Deferred income tax benefit
Writedown of other real estate owned
Gain on valuation of other real estate owned
Provision for loan losses
Stock based compensation expense
Income from bank owned life insurance
Subordinated debt amortization expense
Gain on disposal of premises and equipment
Gain on sale of available-for-sale securities
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, sales, called, refunded
Purchases
Activity in held-to-maturity securities:
Purchases
Maturities, called, refunded
Purchases of restricted investment in bank stock
Redemption of restricted investment in bank stock
Net increase in loan portfolio
Purchases of bank owned life insurance
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 in interest bearing demand, savings, and time deposits
Net decrease in Federal Home Loan Bank advances and other borrowings
Issuance of preferred stock, net
Cash dividends paid on preferred stock
Repurchase 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
Transfers from loans to other real estate owned
Transfers from loans receivable to loans held for sale, at carrying value
Net unrealized gain on securities available-for-sale
See Notes to the Consolidated Financial Statements
68
1,746
390
(1,752)
432
(43)
3,610
1,529
(779)
29
(36)
—
(4,184)
(8,167)
8,524
17,016
8,931
235,000
(298,352)
(1,005)
2,260
(1,222)
2,763
(260,932)
—
53
(1,282)
(313,786)
117,790
248,833
(40,000)
27,263
(635)
(13,797)
339,454
42,684
64,844
107,528
16,587
4,618
—
362
57,006
678
$
$
$
$
$
$
$
1,593
236
(462)
—
—
1,618
1,043
(498)
29
(67)
(5)
(250)
(9,942)
9,447
16,692
4,831
134,844
(175,894)
—
2,110
(5,109)
4,846
(116,125)
(10,000)
77
(990)
(161,410)
40,958
110,528
—
—
—
—
151,486
6,768
58,076
64,844
19,498
4,159
6,693
1,207
—
967
$
$
$
$
$
$
$
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 principal activity is the ownership and management of
MainStreet Bank. On May 18, 2016, the stockholders of MainStreet Bank (the “Bank”) approved a Reorganization Agreement and Plan of Share Exchange (“Reorganization”) whereby the Bank would
reorganize into a holding company structure. The Plan of Share Exchange called for each outstanding share of Bank common stock to be automatically converted into and exchanged for one share of the
Company’s common stock, and the common stockholders of the Bank would become the common stockholders of the Company on the effective date of the Reorganization. The Company is authorized to issue
10,000,000 shares of common stock with a par value of $4.00 per share. Additionally, the Company is authorized to issue 2,000,000 shares of preferred stock at a par value $1.00 per share. There is currently
28,750 shares of preferred stock outstanding.
On July 15, 2016, the Reorganization became effective, and the Bank became a wholly-owned subsidiary of the Company. The holding company is regulated under the Bank Holding Company Act of 1956, as
amended (“BHC Act”) and is subject to inspection, examination, and supervision by the Federal Reserve Board.
On April 18, 2019, the Company completed the registration of its common stock with the Securities Exchange Commission 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.”
We were 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 shares of preferred stock on the Nasdaq
Capital Market on the symbol “MNSBP” as of September 16, 2020.
MainStreet 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 Bank of Richmond. 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.
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”) as applicable to a smaller reporting
company.
Principles of Consolidation – The consolidated financial statements include accounts of the Company and its wholly-owned subsidiary, the Bank. All significant intercompany transactions and balances have
been eliminated in consolidation.
Cash and cash equivalents – For the purpose of presentation in the Statements of Cash Flows, the Bank has defined cash and cash equivalents as those amounts included in the balance sheet captions “Cash and
due from banks” and “Federal funds sold.”
Investment securities – The Bank’s investment debt securities are classified as either held to maturity, available for sale or trading. At December 31, 2020 and December 31, 2019, the Bank held approximately
$22.5 million and $23.9 million, respectively, in securities classified as held to maturity. The Bank held no securities classified as trading.
Debt securities which are not classified as held to maturity or trading are classified as securities available for sale. Debt securities available for sale are reported at fair value. Any unrealized gain or loss, net of
applicable income taxes, is reported as a separate addition to or reduction from stockholders’ equity. Gains and losses arising from the sale of debt securities available for sale are recognized based on the
specific identification method on a trade-date basis and included in results of operations.
Debt securities held to maturity includes securities purchased with the ability and positive intent to hold to maturity. Debt securities are stated at historical cost adjusted for amortization of premiums and
accretion of discount. Any investment security, for which there has been a value impairment deemed by management to be other than temporary, is written down to its estimated fair value with a charge to
current operations.
69
Purchase premiums and discounts are recognized in interest income using the interest method over the terms of the securities. Declines in the fair value of held to maturity and available for sale debt securities
below their cost that are deemed to be other than temporary are reflected in earnings as realized losses. In determining whether other-than-temporary impairment exists, management considers many factors,
including (1) the length of time and the extent to which the fair value has been less than cost, (2) the financial condition and near-term prospects of the issuer, and (3) 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. Gains and losses on the sale of securities are recorded on the trade date and are determined using the specific identification method.
Restricted equity securities consist of the Federal Reserve Bank and Federal Home Loan Bank of Atlanta (“FHLB”) stock in the amount of $3.3 million and $1.1 million respectively, as of December 31, 2020,
compared to $3.3 million and $2.7 million, respectively, as of December 31, 2019. Restricted equity securities also consisted of $126,800 in Community Bankers Bank stock at December 31, 2020 and
December 31, 2019. This restricted stock is recorded at cost because its ownership is restricted and it lacks a market for resale. The Bank is required to maintain Federal Reserve Bank stock at a level of 6% of
capital and surplus. The FHLB requires the Bank to maintain stock, at a minimum, in an amount equal to 4.5% of outstanding borrowings and 0.20% of total assets. When evaluating restricted stock for
impairment, its value is based on ultimate recoverability of the par value rather than by recognizing temporary declines in value. The Bank does not consider these investments to be impaired at December 31,
2020 or December 31, 2019 and no previous impairment has been recognized.
Loans held for sale - Loans intended for sale are recorded at the lower aggregate cost or fair value as of the balance sheet date. Gains and losses on loan sales are determined by the specific-identification
method.
Loans - The Bank makes commercial and consumer loans to customers. Our recorded investment in loans that management has the intent and ability to hold for the foreseeable future, or until maturity or pay-
off, generally are reported at their unpaid principal balances adjusted for charge-offs, unearned discounts, any deferred fees or costs on originated loans, and the allowance for loan losses. Interest on loans is
credited to operations based on the principal amount outstanding. Loan fees and origination costs are deferred and the net amount is amortized as an adjustment of the related loan’s yield using the effective
interest method. The Bank is amortizing these amounts over the contractual life of the related loans.
A loan’s past due status is based on the contractual due date of the most delinquent payment due. All loans which are 30 or more days past due at the end of the month are reported to the Board of Directors.
Commercial loans are generally placed on nonaccrual status when the collection of principal or interest is 90 days or more past due, or earlier, if collection is uncertain based on an evaluation of the net
realizable value of the collateral and the financial strength of the borrower. Consumer loans are generally placed on nonaccrual status when the collection of principal or interest is 120 days or more past due, or
earlier, if collection is uncertain based on an evaluation of the net realizable value of the collateral and the financial strength of the borrower. Loans greater than 90 days past due may remain on accrual status
if management determines it has adequate collateral to cover the principal and interest. For those loans that are carried on nonaccrual status, payments are first applied to principal outstanding. A loan may be
returned to accrual status if the borrower has demonstrated a sustained period of repayment performance in accordance with the contractual terms of the loan and there is reasonable assurance the borrower will
continue to make payments as agreed. It is Bank policy to charge-off loans whose collectability is sufficiently questionable and can no longer be justified as an asset on the balance sheet. To determine if a loan
should be charged-off, all possible sources of repayment are analysed, including: (1) the potential for future cash flow, (2) the value of the Bank’s collateral, and (3) the strength of co-makers or guarantors. All
principal and previously accrued interest is charged to the allowance for loan losses. All future payments received on the loan are credited to the allowance for loan losses as a recovery. These policies are
applied consistently across our loan portfolio.
Impairment of a loan - The Bank considers a loan impaired when it is probable that the Bank will be unable to collect all interest and principal payments as scheduled in the loan agreement when due. A loan is
not considered impaired during a period of an insignificant delay in payment if the ultimate collectability of all amounts due is expected. Impairment is measured on a loan by loan basis for all commercial,
construction and residential loans by either the present value of expected future cash flows discounted at the loan’s effective interest rate, the loan’s obtainable market price or the fair value of the collateral if
the loan is collateral dependent. Consistent with the Bank’s method for nonaccrual loans, payments on impaired loans are first applied to principal outstanding. Smaller balance consumer loans are not
individually evaluated for impairment.
Troubled Debt Restructuring (TDR) occurs when the Bank agrees to modify the original terms of a loan due to the deterioration in the financial condition of the borrower. TDRs are considered impaired loans.
Upon designation as a TDR, the Bank evaluates the borrower’s payment history, past due status and ability to make payments based on the revised terms of the loan. If a loan was accruing prior to being
modified as a TDR and if the Bank concludes that the borrower is able to continue making such payments, and there are no other factors or circumstances that would cause it to conclude otherwise, the loan
will remain on an accruing status. If a loan was on nonaccrual status at the time of the TDR, the loan will remain on nonaccrual status following the modification and may be returned to accrual status based on
the policy for returning loans to accrual status as noted above. Restructured loans for which there was no rate concession, and therefore made at a market rate of interest, may be eligible to be removed from
TDR status in periods subsequent to the restructuring depending on the performance of the loan. As of December 31, 2020, and December 31, 2019, the Bank had approximately zero and $1.5 million of loans
classified as TDR, respectively. At December 31, 2019, TDR loans consisted of one loan.
70
Allowance for Loan Losses - The allowance for loan losses is established through charges to earnings in the form of a provision for loan losses. Loan losses are charged against the allowance for loan losses for
the difference between the carrying value of the loan and the estimated net realizable value or fair value of the collateral, if collateral dependent, when:
•
•
•
•
Management believes that the collectability of the principal is unlikely regardless of delinquency status.
The loan is a consumer loan and is 120 days past due.
The loan is a non-consumer loan, unless the loan is well secured and recovery is probable.
The borrower is in bankruptcy, unless the debt has been reaffirmed, is well secured and recovery is probable.
Subsequent recoveries, if any, are credited to the allowance.
The allowance represents an amount that, in management’s judgment, will be adequate to absorb probable losses inherent in the loan portfolio. Management’s judgment in determining the level of the
allowance is based on evaluations of the collectability of loans while taking into consideration such factors as trends in delinquencies and charge-offs, changes in the nature and volume of the loan portfolio,
current economic conditions that may affect a borrower’s ability to repay and the value of collateral, overall portfolio quality and review of specific potential losses. This evaluation is inherently subjective, as
it requires estimates that are susceptible to significant revision as more information becomes available. The evaluation also considers the following risk characteristics of each loan portfolio segment:
•
•
•
•
•
•
Real estate residential mortgage loans, including equity lines of credit, carry risks associated with the continued credit-worthiness of the borrower and the changes in the value of the
collateral.
Real estate construction loans and land improvement carry risks that the project will not be finished according to schedule, the project will not be finished according to budget and the value of
the collateral may, at any point in time, be less than the principal amount of the loan. Construction loans also bear the risk that the general contractor, who may or may not be a loan customer,
may be unable to finish the construction project as planned because of financial pressure unrelated to the project.
Commercial real estate loans carry risks of the client’s ability to repay the loan from the cash flow derived from the underlying real estate. Risks inherent in managing a commercial real estate
portfolio relate to sudden or gradual drops in property values as well as changes in the economic climate. Real estate security diminishes risks only to the extent that a market exists for the
subject collateral. These risks are attempted to be mitigated by carefully underwriting loans of this type and by following appropriate loan-to-value standards.
Commercial and industrial loans carry risks associated with the successful operation of a business or a real estate project, in addition to other risks associated with the ownership of real estate,
because the repayment of these loans may be dependent upon the profitability and cash flows of the business or project. In addition, there is risk associated with the value of collateral other
than real estate which may depreciate over time and cannot be appraised with as much precision.
Consumer secured loans (indirect lending) carry risks associated with the continued credit-worthiness of the borrower and the value of the collateral (e.g., rapidly-depreciating assets such as
automobiles). These risks are attempted to be mitigated by following appropriate loan-to-value standards and an experienced management team for this type of portfolio.
Consumer unsecured loans (credit cards) carry risks associated with the continued credit-worthiness of the borrower. Consumer unsecured loans are more likely to be immediately adversely
affected by job loss, divorce, illness or personal bankruptcy.
The allowance consists of specific and general components. The specific component relates to loans that are classified as impaired and is established when the discounted cash flows (or collateral value or
observable market price) of the impaired loan is lower than the carrying value of that loan. For collateral dependent loans, an updated appraisal will be ordered if a current one is not on file. Appraisals are
performed by independent third-party appraisers with the relevant industry experience. Adjustments to the appraised value may be made based on recent sales of like properties or general market conditions
when appropriate. The general component covers non-classified or performing loans and those loans classified as substandard or special mention that are not impaired. The general component is based on
historical loss experience adjusted for qualitative factors, such as current economic conditions, including current home sales and foreclosures, unemployment rates and retail sales. Non-impaired classified
loans are assigned a higher allowance factor based on an internal migration analysis, which increases with the severity of classification, than non-classified loans. The characteristics of the loan ratings are as
follows:
•
•
•
Pass rated loans are to persons or business entities with an acceptable financial condition, appropriate collateral margins, appropriate cash flow to service the existing loan, and an appropriate
leverage ratio. The borrower has paid all obligations as agreed and it is expected that this type of payment history will continue. When necessary, acceptable personal guarantors support the
loan.
Watch rated loans have all the characteristics of pass rated loans but show signs of emerging financial weaknesses which the Bank will continue monitoring more closely. Watch rated loans
are still performing as agreed.
Special mention loans have a specific defined weakness in the borrower’s operations and the borrower’s ability to generate positive cash flow on a sustained basis. The borrower’s recent
payment history is characterized by late payments. The Bank’s risk exposure is mitigated by collateral supporting the loan. The collateral is considered to be well-margined, well maintained,
accessible and readily marketable.
71
•
•
•
Substandard loans are considered to have specific and well-defined weaknesses that jeopardize the viability of the Bank’s credit extension. The payment history for the loan has been
inconsistent and the expected or projected primary repayment source may be inadequate to service the loan. The estimated net liquidation value of the collateral pledged and/or ability of the
personal guarantor(s) to pay the loan may not adequately protect the Bank. There is a distinct possibility that the Bank will sustain some loss if the deficiencies associated with the loan are not
corrected in the near term. A substandard loan would not automatically meet our definition of impaired unless the loan is significantly past due and the borrower’s performance and financial
condition provide evidence that it is probable that the Bank will be unable to collect all amounts when due.
Doubtful rated loans have all the weaknesses inherent in a loan that is classified substandard but with the added characteristics that the weaknesses make collection or liquidation in full, on
the basis of currently existing facts, conditions and values, highly questionable and improbable. The possibility of loss is extremely high.
Loss rated loans are not considered collectible under normal circumstances and there is no realistic expectation for any future payment on the loan. Loss rated loans are fully charged off.
Other Real Estate Owned (“OREO”) - Assets acquired through, or in lieu of, loan foreclosure are held for sale and are initially recorded at fair value less costs to sell at the date of foreclosure, establishing a
new cost basis. Subsequent to foreclosure, management periodically performs valuations of the foreclosed assets based on updated appraisals, general market conditions, and recent sales of like properties,
length of time the properties have been held and our ability and intention with regard to continued ownership of the properties. The Bank may incur additional write-downs of foreclosed assets to fair value less
costs to sell if valuations indicate a further deterioration in market values. Revenue and expenses from operations and changes in the valuation allowance are included in net expenses from foreclosed assets
and improvements are capitalized.
Interest income on loans – Interest on loans is accrued and credited to income on daily balances of the principal amount outstanding. The accrual of interest on loans is discontinued when, in the opinion of
management, there is an indication that the borrower may be unable to meet payments as they become due. Upon such discontinuance, all unpaid accrued interest is reversed.
Generally, the Bank will return a loan to accrual status when all delinquent interest and principal becomes current and remains current for six consecutive months under the terms of the loan agreement or the
loan is well-secured or in process of collection. Upon returning to accrual status, interest payments applied to the principal balance of a loan while in nonaccrual status are recognized as a yield adjustment over
the remaining life.
Loan origination and commitment fees and certain related direct costs - Loan origination and commitment fees charged by the Bank and certain direct loan origination costs are deferred and the net amount is
amortized as a yield adjustment. The Bank amortizes these net amounts over the life of the related loans or, in the case of demand loans, over the estimated life. Net fees related to standby letters of credit are
recognized over the commitment period.
Premises and equipment – Land is carried at cost. Premises and equipment are stated at cost, less accumulated depreciation and amortization computed principally on the straight-line basis over the estimated
useful life of each asset, which ranges from 3 to 39 years. Leasehold improvements are amortized over the shorter of the related lease term or the estimated useful lives of the improvements. Construction in
progress includes assets which will be reclassified and depreciated once placed into service.
Income taxes – The Bank uses an asset and liability approach in financial accounting and reporting for income taxes. Deferred income tax assets and liabilities are computed for differences between the
financial statement and tax bases of assets and liabilities that will result in taxable or deductible amounts in the future. The principal items relate primarily to differences between the allowance for loan losses,
deferred loan fees, and accumulated depreciation and amortization. Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized. Income tax expense
(benefit) is the tax payable or refundable for the period plus or minus the change during the period in deferred tax assets and liabilities.
When tax returns are filed, it is highly certain that some positions taken would be sustained upon examination by the taxing authorities, while others are subject to uncertainty about the merits of the position
taken or the amount of the position that would be ultimately sustained. The benefit of a tax position is recognized in the financial statements in the period during which, based on all available evidence,
management believes it is more likely than not that the position will be sustained upon examination, including the resolution of appeals or litigation processes, if any. Tax positions taken are not offset or
aggregated with other positions. Tax positions that meet the more-likely-than-not recognition threshold are measured as the largest amount of tax benefit that is more than 50% likely of being realized upon
settlement with the applicable taxing authority. The portion of the benefits associated with tax positions taken that exceeds the amount measured as described above is reflected as a liability for unrecognized
tax benefits in the accompanying balance sheet along with any associated interest and penalties that would be payable to the taxing authorities upon examination. As of December 31, 2020, and December 31,
2019, there were no such liabilities recorded.
Interest and penalties associated with unrecognized tax benefits, if any, would be classified as additional income taxes in the statement of income.
72
Comprehensive income – Accounting principles generally require that recognized revenue, expenses, gains and losses be included in net income. Although, certain changes in assets and liabilities, such as
unrealized gains and losses on available for sale securities, are reported as a separate component of the equity section of the balance sheet, such items, along with net income, are components of comprehensive
income.
Stock compensation plans – Stock compensation accounting guidance (FASB ASC 718, “Compensation – Stock Compensation”) requires that the compensation cost relating to share-based payment
transactions be recognized in financial statements. That cost will be measured based on the grant date fair value of the equity or liability instruments issued.
The stock compensation accounting guidance requires that compensation cost for all stock awards be calculated and recognized over the employees’ service period, generally defined as the vesting period. For
awards with graded-vesting, compensation cost is recognized on a straight-line basis over the requisite service period for the entire award. A Black-Sholes model is used to estimate the fair value of stock
options, while the market price of the Bank’s common stock at the date of grant is used for restricted stock awards. No stock options were granted during 2020 and 2019.
Earnings per common share – Net income per common share has been determined under the provisions of FASB ASC 260, “Earnings Per Share” and has been computed based on the weighted average
common shares outstanding during the year ended December 31, (8,131,334 for 2020 and 8,251,302 for 2019). Diluted earnings per share reflect additional potential common shares that would have been
outstanding if dilutive potential common shares had been issued, as well as any adjustment to income that would result from the assumed issuance.
The only potential dilutive stock of the Bank as defined in FASB ASC 260 would be stock options granted to various directors, officers, and employees of the Bank. There were no such options outstanding at
December 31, 2020 or December 31, 2019. Restricted stock is included in the computation of basic earnings per share as the holder is entitled to full benefits of a stockholder during the vesting period.
Off-balance sheet instruments – In the ordinary course of business, the Bank has entered into off-balance sheet financial instruments consisting of commitments to extend credit, commercial letters of credit,
and standby letters of credit. Such financial instruments are recorded in the financial statements when they are funded, or related fees are incurred or received.
Advertising and marketing expense – Advertising and marketing costs are expensed as incurred.
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 to (1) the allowance for loan losses, (2) fair value of financial instruments, (3) derivative financial instruments, and (4) 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 and valuation of other real
estate owned management obtains independent appraisals for significant properties.
Fair value of financial instruments – Fair values of financial instruments are estimated using relevant market information and other assumptions, as more fully disclosed in Note 19. Fair value estimates
involve uncertainties and matters of significant judgment. Changes in assumptions or in market conditions could significantly affect the estimates.
Derivative Financial Instruments – The Bank recognizes derivative financial instruments at fair value as either an other asset or other liability in the consolidated balance sheet. The Bank’s derivative financial
instruments include interest rate swaps with certain qualifying commercial loan customers and dealer counterparties. Because the interest rate swaps with loan customers and dealer counterparties are not
designated as hedging instruments, adjustments to reflect unrealized gains and losses resulting from changes in fair value of these instruments are reported as noninterest income or noninterest expense, as
applicable. The Bank’s interest rate swaps with loan customers and dealer counterparties are described more fully in Note 18.
Transfers of financial assets – Transfers of financial assets are accounted for as sales, when control over the assets has been surrendered. Control over transferred assets is deemed to be surrendered when
(1) the assets have been isolated from the Bank – put presumptively beyond reach of the transferor and its creditors, even in bankruptcy or other receivership, (2) the transferee obtains the right (free of
conditions that constrain it from taking advantage of that right) to pledge or exchange the transferred assets, and (3) the Bank does not maintain effective control over the transferred assets through an
agreement to repurchase them before their maturity or the ability to unilaterally cause the holder to return specific assets.
73
Risks and uncertainties - The outbreak of COVID-19 has adversely impacted a broad range of industries in which the Company’s customers operate and could impair their ability to fulfil their financial
obligations to the Company. The World Health Organization has declared COVID-19 to be a global pandemic indicating that almost all public commerce and related business activities must be, to varying
degrees, curtailed with the goal of decreasing the rate of new infections. The spread of the outbreak has caused disruptions in the U.S. economy and has disrupted banking and other financial activity in the
areas in which the Company operates. While there has been no material impact to the Company’s employees to date, COVID-19 could also potentially create widespread business continuity issues for the
Company. The Company’s business is dependent upon the willingness and ability of its employees and customers to conduct banking and other financial transactions. If the global response to contain
COVID-19 escalates further or is unsuccessful, the Company could experience a material adverse effect on its business, financial condition, results of operations and cash flows. While it is not possible to
know the full universe or extent that the impact of COVID-19, and resulting measures to curtail its spread, will have on the Company’s operations, the Company is disclosing potentially material items of
which it is aware.
74
Revenue Recognition
Most revenue associated with the Company’s financial instruments, including interest income and gains/losses on investment securities, derivatives and sales of financial instruments are outside the scope of
ASC Topic 606. The Company’s services that fall within the scope of ASC Topic 606 are presented within noninterest income and are recognized as revenue. A description of the primary revenue streams
accounted for under ASC Topic 606 follows:
Service Charges on Deposit Accounts. The Company earns fees from its deposit customers for overdraft and account maintenance services. Overdraft fees are recognized when the overdraft occurs. Account
maintenance fees, which relate primarily to monthly maintenance, are earned over the course of a month, representing the period over which the company satisfies the performance obligation.
Other Service Charges and Fees. The Company earns fees from its customers for transaction-based services. Such services include safe deposit box, ATM, stop payment, wire transfer, mortgage origination
and interest rate swap fees. In each case, these service charges and fees are recognized in income at the time or within the same period that the Company’s performance obligation is satisfied.
Interchange Income. The Company earns interchange fees from debit and credit cardholder transactions conducted through various payment networks. Interchange fees from cardholder transactions represent a
percentage of the underlying transaction value and are recognized daily, concurrently with the transaction processing services.
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 U.S. Securities and Exchange Commission (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 currently assessing the impact that ASU 2016-13 will have on its consolidated financial statements.
The Company has formed a Committee to oversee the accounting impact of this ASU. In anticipation of the ASU, the Company is working with third party to compile data and develop an estimate using
historical and qualitative data based on the requirements of ASU 2016-13.
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 August 2018, the FASB issued ASU 2018-13, “Fair Value Measurement (Topic 820): Disclosure Framework—Changes to the Disclosure Requirements for Fair Value Measurement.” The amendments
modify the disclosure requirements in Topic 820 to add disclosures regarding changes in unrealized gains and losses, the range and weighted average of significant unobservable inputs used to develop Level 3
fair value measurements and the narrative description of measurement uncertainty. Certain disclosure requirements in Topic 820 are also removed or modified. The amendments are effective for fiscal years
beginning after December 15, 2019, and interim periods within those fiscal years. Certain of the amendments are to be applied prospectively while others are to be applied retrospectively. Early adoption is
permitted. The Company does not expect the adoption of ASU 2018-13 to have a material impact on its consolidated financial statements.
In December 2019, the FASB issued ASU 2019-12, “Income Taxes (Topic 740) – Simplifying the Accounting for Income Taxes.” The ASU is expected to reduce cost and complexity related to the accounting
for income taxes by removing specific exceptions to general principles in Topic 740 (eliminating the need for an organization to analyze whether certain exceptions apply in a given period) and improving
financial statement preparers’ application of certain income tax-related guidance. This ASU is part of the FASB’s simplification initiative to make narrow-scope simplifications and improvements to
accounting standards through a series of short-term projects. For public business entities, the amendments are effective for fiscal years beginning after December 15, 2020, and interim periods within those
fiscal years. Early adoption is permitted. The Company is currently assessing the impact that ASU 2019-12 will have on its consolidated financial statements.
In January 2020, the FASB issued ASU 2020-01, “Investments – Equity Securities (Topic 321), Investments – Equity Method and Joint Ventures (Topic 323), and Derivatives and Hedging (Topic 815) –
Clarifying the Interactions between Topic 321, Topic 323, and Topic 815.”
75
The ASU is based on a consensus of the Emerging Issues Task Force and is expected to increase comparability in accounting for these transactions. ASU 2016-01 made targeted improvements to accounting
for financial instruments, including providing an entity the ability to measure certain equity securities without a readily determinable fair value at cost, less any impairment, plus or minus changes resulting
from observable price changes in orderly transactions for the identical or a similar investment of the same issuer. Among other topics, the amendments clarify that an entity should consider observable
transactions that require it to either apply or discontinue the equity method of accounting. For public business entities, the amendments in the ASU are effective for fiscal years beginning after December 15,
2020, and interim periods within those fiscal years. Early adoption is permitted. The Company does not expect the adoption of ASU 2020-01 to have a material impact on its consolidated financial statements.
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 has inventoried its exposure to instruments that include a reference
to LIBOR and have included amendments to transition to an appropriate comparable rate. The Company has also discontinued using LIBOR as a primary rate reference. 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.
On March 12, 2020, the SEC finalized amendments to its “accelerated filer” and “large accelerated filer” definitions. The amendments increase the threshold criteria for meeting these filer classifications and
were effective on April 27, 2020. Any changes in filer status are to be applied beginning with the filer’s first annual report filed with the SEC subsequent to the effective date. The rule change revises the
definition of “accelerated filers” to exclude entities with public float of less than $700 million and less than $100 million in annual revenues. The Company has not historically nor currently meet the standard
of “accelerated filer” or “large accelerated filer.” The classifications of “accelerated filer” and “large accelerated filer” require a public company to obtain an auditor attestation concerning the effectiveness of
internal control over financial reporting (ICFR) and include the opinion on ICFR in its annual report on Form 10-K. Non-accelerated filers also have additional time to file quarterly and annual financial
statements. All public companies are required to obtain and file annual financial statement audits, as well as provide management’s assertion on effectiveness of internal control over financial reporting, but
the external auditor attestation of internal control over financial reporting is not required for non-accelerated filers. While the Company does not meet the requirements requiring an opinion on ICRF in its
annual report, it has total assets exceeding $1.0 billion, and remains subject to FDICIA, which requires an auditor attestation concerning internal controls over financial reporting. As such, other than the
additional time provided to file quarterly and annual financial statements, this change does not significantly change the Company’s annual reporting and audit requirements.
In October 2020, the FASB issued ASU 2020-08, “Codification Improvements to Subtopic 310-20, Receivables – Nonrefundable fees and Other Costs.” This ASU clarifies that an entity should reevaluate
whether a callable debt security is within the scope of ASC paragraph 310-20-35-33 for each reporting period. For public business entities, the ASU is effective for fiscal years beginning after December 15,
2020, and interim periods within those fiscal years. Early adoption is not permitted. All entities should apply ASU No. 2020-08 on a prospective basis as of the beginning of the period of adoption for existing
or newly purchased callable debt securities. The Bank/Company does not expect the adoption of ASU 2020-06 to have a material impact on its consolidated financial statements.
Recently Adopted Accounting Developments
In August 2018, the FASB issued ASU 2018-13, “Fair Value Measurement (Topic 820) - Changes to the Disclosure Requirements for Fair Value Measurement” (“ASU 2018-13”). ASU 2018-13 modifies the
disclosure requirements on fair value measurements by requiring that Level 3 fair value disclosures include the range and weighted average of significant unobservable inputs used to develop those fair value
measurements. For certain unobservable inputs, an entity may disclose other quantitative information in lieu of the weighted average if the entity determines that other quantitative information would be a more
reasonable and rational method to reflect the distribution of unobservable inputs used to develop Level 3 fair value measurements. Certain disclosure requirements in Topic 820 were also removed or modified.
ASU 2018-13 was effective for the Company on January 1, 2020.
76
In March 2020 (Revised in April 2020), various regulatory agencies, including the Board of Governors of the Federal Reserve System and the Federal Deposit Insurance Corporation, (“the agencies”) issued an
interagency statement on loan modifications and reporting for financial institutions working with customers affected by the Coronavirus. The interagency statement was effective immediately and impacted
accounting for loan modifications. Under Accounting Standards Codification 310-40, “Receivables – Troubled Debt Restructurings by Creditors,” (“ASC 310-40”), a restructuring of debt constitutes a troubled
debt restructuring (“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 agencies
confirmed with the staff of the FASB that short-term modifications made on a good faith basis in response to COVID-19 to borrowers who were current prior to any relief, are not to be considered TDRs. This
includes short-term (e.g., six months) modifications such as payment deferrals, fee waivers, extensions of repayment terms, or other delays in payment that are insignificant. Borrowers considered current are
those that are less than 30 days past due on their contractual payments at the time a modification program is implemented. In August 2020, a joint statement on additional loan modifications was issued.
Among other things, the Interagency Statement addresses accounting and regulatory reporting considerations for loan modifications, including those accounted for under Section 4013 of the Coronavirus Aid,
Relief, and Economic Security (“CARES”) Act. The CARES Act was signed into law on March 27, 2020 to help support individuals and businesses through loans, grants, tax changes and other types of
relief. The most significant impacts of the Act related to accounting for loan modifications and establishment of the Paycheck Protection Program (“PPP”). On December 21, 2020, the Consolidated
Appropriates Act of 2021 (“CAA”) was passed. The CAA extends or modifies many of the relief programs first created by the CARES Act, including the PPP and treatment of certain loan modifications
related to the COVID-19 pandemic. This interagency guidance is expected to have a material impact on the Company’s ability to provide relief to our borrowers; however, this impact cannot be quantified at
this time.
Note 2. Restrictions on Cash
To comply with Federal Reserve regulations, the Bank is required to maintain certain average cash reserve balances. The daily average cash reserve requirements were approximately $0 and $17.1 million as of
December 31, 2020 and December 31, 2019, respectively.
On March 15, 2020, the Federal Reserve reduced reserve requirement ratios to zero percent effective March 26, 2020. This action eliminated reserve requirements for all depository institutions. Prior to the
change, reserve requirement ratios on net transactions accounts differed based on the amount of net transactions accounts at the depository institution.
A certain amount of net transaction accounts, known as the "reserve requirement exemption amount," was subject to a reserve requirement ratio of zero percent. Net transaction account balances above the
reserve requirement exemption amount and up to a specified amount, known as the "low reserve tranche," were subject to a reserve requirement ratio of 3 percent. Net transaction account balances above the
low reserve tranche were subject to a reserve requirement ratio of 10 percent. The reserve requirement exemption amount and the low reserve tranche are indexed each year pursuant to formulas specified in
the Federal Reserve Act
Note 3. Investment Securities
Investment securities available-for-sale was comprised of the following:
(Dollars in thousands)
U.S. Treasury Securities
Collateralized Mortgage Backed
Subordinated Debt
Municipal Securities
U.S. Governmental Agencies
Total
Amortized
Cost
December 31, 2020
Gross
Unrealized
Gains
Gross
Unrealized
Losses
90,000 $
24,743
3,250
21,348
6,785
146,126 $
— $
282
29
1,257
—
1,568 $
— $
(129)
(1)
—
(150)
(280) $
Fair Value
90,000
24,896
3,278
22,605
6,635
147,414
$
$
77
Investment securities held-to-maturity was comprised of the following:
(Dollars in thousands)
Municipal Securities
Subordinated Debt
Total
Investment securities available-for-sale was comprised of the following:
(Dollars in thousands)
U.S. Treasury Securities
Collateralized Mortgage Backed
Subordinated Debt
Municipal Securities
U.S. Governmental Agencies
Total
Investment securities held-to-maturity was comprised of the following:
(Dollars in thousands)
Municipal Securities
Subordinated Debt
Total
Amortized
Cost
December 31, 2020
Gross
Unrealized
Gains
Gross
Unrealized
Losses
20,015 $
2,505
22,520 $
1,058 $
—
1,058 $
— $
—
— $
Fair Value
21,073
2,505
23,578
Amortized
Cost
December 31, 2019
Gross
Unrealized
Gains
Gross
Unrealized
Losses
49,999 $
17,659
2,500
13,888
8,135
92,181 $
— $
82
55
743
—
880 $
(1) $
(68)
(1)
—
(200)
(270) $
Fair Value
49,998
17,673
2,554
14,631
7,935
92,791
$
$
$
$
Amortized
Cost
$
$
22,414 $
1,500
23,914 $
December 31, 2019
Gross
Unrealized
Gains
Gross
Unrealized
Losses
766 $
—
766 $
(2) $
—
(2) $
Fair Value
23,178
1,500
24,678
The scheduled maturities of securities available-for-sale and held-to-maturity at December 31, 2020 were as follows:
(Dollars in thousands)
Due in one year or less
Due from one to five years
Due from after five to ten years
Due after ten years
Total
December 31, 2020
Available-for-Sale
Held-to-Maturity
Amortized
Cost
Fair Value
Amortized
Cost
Fair Value
$
$
90,002 $
1,009
3,250
51,865
146,126 $
90,002 $
1,033
3,279
53,100
147,414 $
— $
3,015
8,409
11,096
22,520 $
—
3,059
8,855
11,664
23,578
Securities with a fair value of $269,075 and $267,899 at December 31, 2020 and December 31, 2019, respectively, were pledged to secure FHLB advances.
There were seven securities sold from the available-for-sale portfolio during the year ended December 31, 2019. There were no sales for the same period in 2020.
78
The following tables summarize the fair value and unrealized losses at December 31, 2020 and December 31, 2019, aggregated by investment category and length of time that individual securities have been in
a continuous loss position:
(Dollars in thousands)
Available-for-sale:
Collateralized Mortgage Backed
Subordinated Debt
U.S Governmental Agencies
Total
(Dollars in thousands)
Available-for-sale:
U.S. Treasury Securities
Collateralized Mortgage Backed
Municipal Securities
U.S Government Agencies
Total
Held-to-maturity:
Municipal Securities
Total
Less than 12 Months
Fair
Value
Unrealized
Loss
December 31, 2020
12 Months or Longer
Total
Fair
Value
Unrealized
Loss
Fair
Value
Unrealized
Loss
14,971
749
—
15,720
$
$
(129) $
(1)
—
(130) $
—
—
6,785
6,785
$
$
$
—
—
(150)
(150) $
14,971
749
6,785
22,505
$
$
(129)
(1)
(150)
(280)
Less than 12 Months
Fair
Value
Unrealized
Loss
December 31, 2019
12 Months or Longer
Total
Fair
Value
Unrealized
Loss
Fair
Value
Unrealized
Loss
49,998
6,223
499
—
56,720
$
$
537
537
$
$
(1) $
(67)
(1)
—
(69) $
(2) $
(2) $
—
834
—
7,857
8,691
$
$
—
—
$
$
$
—
(1)
—
(200)
(201) $
—
—
$
$
49,998
7,057
499
7,857
65,411
$
$
537
537
$
$
(1)
(68)
(1)
(200)
(270)
(2)
(2)
$
$
$
$
$
$
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.
79
At December 31, 2020, there were two collateralized mortgage backed securities with fair values totaling $15.0 million, one municipal security with a fair value of $1.0 million and two subordinated debt
securities with fair values of $749,000 considered temporarily impaired and in an unrealized loss position of less than 12 months. At December 31, 2020, there were nine U.S. government agencies with fair
values totaling approximately $6.6 million that were in an unrealized loss position of more than 12 months. The Bank does not consider any of the securities in the available for sale portfolio to be other-than-
temporarily impaired at December 31, 2020 and December 31, 2019. There were seven securities sold during 2019; four were sold at a loss of $18,000 and three were sold at gain of $23,000 for a net gain of
$5,000, and no securities were sold in 2020.
All 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 December 31, 2020 and December 31, 2019 was $54,836 and $81,076, respectively.
Note 4. Loans Receivable
Loans receivable were comprised of the following:
(Dollars in thousands)
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
Less: unamortized discount on consumer secured loans
Less: allowance for loan losses
Net Loans
December 31,
2020
December 31,
2019
$
$
139,338 $
43,332
861
141,813
325,085
324,906
143,535
6,512
801
134,116
287,754
272,620
230,027
121,225
241
43,832
1,249,435
(6,178)
(1)
(12,877)
1,230,379 $
599
74,984
1,042,146
(2,118)
(19)
(9,584)
1,030,425
The unsecured consumer loans above include $241,064 and $599,009 of overdrafts reclassified as loans for the years ended December 31, 2020 and December 31, 2019, respectively.
The Bank held $57.0 in commercial real estate loans for sale at December 31, 2020. There were no loans held for sale at December 31, 2019.
The following table presents nonaccrual loans by classes of the loan portfolio as of December 31, 2020 and December 31, 2019:
(Dollars in thousands)
Residential Real Estate:
Single Family
Total
December 31,
2020
December 31,
2019
$
$
149 $
149 $
—
—
80
The following tables present the segments of the loan portfolio summarized by aging categories as of December 31, 2020 and December 31, 2019:
(Dollars in thousands)
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
(Dollars in thousands)
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
30-59
Days Past
Due
60-89
Days Past
Due
Greater
than 90
Days
Total
Past Due
Current
Total
Loans
Receivable
Nonaccrual
December 31, 2020
—
—
—
—
—
—
—
—
68
68
$
$
—
—
—
—
—
—
—
—
—
—
30-59
Days Past
Due
60-89
Days Past
Due
$
$
$
$
—
—
—
—
—
—
—
—
124
124
$
$
$
$
$
$
—
—
—
—
—
—
—
—
—
—
$
$
—
—
—
—
—
—
—
—
68
68
$
$
139,189
42,300
861
$
139,338
42,300
861
141,813
326,117
324,906
141,813
326,117
324,906
230,027
230,027
241
43,764
1,249,218
$
241
43,832
1,249,435
$
$
149
—
—
—
—
—
—
—
—
149
December 31, 2019
Greater
than 90
Days
Total
Past Due
Current
Total
Loans
Receivable
Nonaccrual
—
—
—
—
—
—
—
—
—
—
$
$
—
—
—
150
—
—
—
—
124
274
$
$
143,535
6,512
801
$
143,535
6,512
801
133,966
287,754
272,620
134,116
287,754
272,620
121,225
121,225
599
74,860
1,041,872
$
599
74,984
1,042,146
$
$
—
—
—
—
—
—
—
—
—
—
—
—
—
150
—
—
—
—
—
150
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 of time, generally six months, and the ultimate collectability of the total contractual principal and interest is no longer in
doubt.
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 December 31, 2020, and December 31, 2019, the Company had TDRs totalling $0 and $1.5 million, respectively. At December 31, 2019 the Company had one TDR which is performing in compliance
with the restructured terms and on accrual status. During the twelve months ended December 31, 2020, the Company modified, at current market rates, the loan that was previously identified as a TDR. No
other additional modifications occurred to TDR loans during the twelve months ended December 31, 2020. No additional loan commitments were outstanding to these borrowers at December 31, 2020 and
December 31, 2019.
81
The following table details the Company’s TDRs that are on accrual status and non-accrual status at December 31, 2019:
(Dollars in thousands)
Residential Real Estate
Total
As of December 31, 2019
Number
Of Loans
Accrual
Status
1 $
1 $
1,482 $
1,482 $
Non-
Accrual
Status
Total TDRs
— $
- $
1,482
1,482
No loans were modified under the terms of a TDR during the years ended December 31, 2020 and 2019, and there were no loans modified as TDR’s that subsequently defaulted during the years ended
December 31, 2020 and 2019 that were modified as TDR’s within the twelve months prior to default.
Note 5. Allowance for Loan Losses
The following tables summarize the activity in the allowance for loan losses by loan class for the twelve months ended December 31, 2020 and 2019:
Allowance for Credit Losses By Portfolio Segment
For the twelve months ended December 31, 2020
Residential
Real Estate
Commercial
Construction
Consumer
Commercial
Total
Beginning Balance
Charge-offs
Recoveries
Provision
Ending Balance
Ending Balance:
Individually evaluated for Impairment
Collectively evaluated for Impairment
$
$
$
$
1,030
—
2
191
1,223
$
$
—
1,223
$
$
82
4,254
$
(1)
—
2,299
6,552
$
—
6,552
$
$
2,180
—
—
1,146
3,326
$
$
—
3,326
$
$
$
568
(60)
8
(145)
371
$
$
1,552
(1,792)
1,526
119
1,405
$
—
371
$
$
—
1,405
$
$
9,584
(1,853)
1,536
3,610
12,877
—
12,877
Allowance for Credit Losses By Portfolio Segment
For the twelve months ended December 31, 2019
Residential
Real Estate
Commercial
Construction
Consumer
Commercial
Total
Beginning Balance
Charge-offs
Recoveries
Provision
Ending Balance
Ending Balance:
Individually evaluated for Impairment
Collectively evaluated for Impairment
$
$
$
$
$
1,019
—
58
(47)
1,030
$
—
1,030
$
$
$
4,299
(733)
1
687
4,254
$
—
4,254
$
$
1,468
—
—
712
2,180
$
$
—
2,180
$
$
$
$
827
(98)
5
(166)
568
$
—
568
$
$
1,218
$
(98)
—
432
1,552
$
—
1,552
$
$
8,831
(929)
64
1,618
9,584
—
9,584
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 December 31, 2020 and December 31, 2019:
December 31, 2020
Loans Receivable
(Dollars in thousands)
Residential Real Estate
Commercial Real Estate
Construction and Land Development
Commercial & Industrial(1)
Consumer
Total
(1)
No allowance assigned to the $135.2 in PPP loans due to SBA guarantee
(Dollars in thousands)
Residential Real Estate
Commercial Real Estate
Construction and Land Development
Commercial & Industrial
Consumer
Total
December 31, 2019
Loans Receivable
83
Ending
Balance:
Individually
Evaluated
for
Impairment
Ending
Balance:
Collectively
Evaluated
for
Impairment
301 $
1,088 $
— $
58 $
— $
1,447 $
182,198
466,842
324,906
229,969
44,073
1,247,988
Ending
Balance
182,499 $
467,930
324,906
230,027
44,073
1,249,435 $
Ending
Balance:
Individually
Evaluated
for
Impairment
Ending
Balance:
Collectively
Evaluated
for
Impairment
1,482 $
—
—
—
—
1,482 $
149,366
421,870
272,620
121,225
75,583
1,040,664
Ending
Balance
150,848 $
421,870
272,620
121,225
75,583
1,042,146 $
$
$
$
$
The following table summarizes information in regard to impaired loans by loan portfolio class as of December 31, 2020 and December 31, 2019:
(Dollars in thousands)
With no related allowance recorded
Residential Real Estate:
Single family
Commercial Real Estate:
Non-Owner Occupied
Commercial & Industrial
Total
Recorded
Investment
December 31, 2020
Unpaid
Principal
Balance
Related
Allowance
Recorded
Investment
December 31, 2019
Unpaid
Principal
Balance
Related
Allowance
$
301
$
301
$
—
$
1,482
$
1,482
$
1,088
58
1,447
$
1,088
58
1,447
$
$
—
—
—
$
—
—
1,482
$
—
—
1,482
$
The following table presents additional information regarding the impaired loans for the years ended December 31, 2020 and 2019.
(Dollars in thousands)
With no related allowance recorded
Residential Real Estate:
Single family
Commercial Real Estate:
Non-Owner Occupied
Commercial & Industrial
Total
December 31, 2020
December 31, 2019
Average
Record
Investment
Interest
Income
Recognized
Average
Record
Investment
Interest
Income
Recognized
Years Ended
$
304
$
16
$
1,495
$
1,097
64
1,465
$
97
10
123
$
—
—
1,495
$
$
—
—
—
—
60
—
—
60
No additional funds are committed to be advanced in connection with impaired loans. There were no nonaccrual loans at December 31, 2020 and December 31, 2019 excluded from the impaired loan
disclosure.
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, on the
basis of 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.
84
The following tables summarize the aggregate Pass and criticized categories of Watch, Special Mention, Substandard and Doubtful within the Company’s internal risk rating system as of December 31, 2020
and December 31, 2019:
(Dollars in thousands)
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
(Dollars in thousands)
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
Note 6. Related Party Transactions
Pass
Watch
Special
Mention
Substandard
Doubtful
Total
December 31, 2020
$
$
137,937
43,332
861
$
—
—
—
136,257
264,546
322,149
225,012
5,556
59,453
2,757
4,059
$
738
—
—
—
—
—
591
241
43,832
1,174,167
$
—
—
71,825
$
—
—
1,329
$
$
663
—
—
—
1,086
—
365
—
—
2,114
$
—
—
—
—
—
—
—
—
—
—
$
139,338
43,332
861
141,813
325,085
324,906
230,027
241
43,832
1,249,435
$
Pass
Watch
Special
Mention
Substandard
Doubtful
Total
December 31, 2019
$
—
—
—
—
—
—
3,772
—
—
3,772
$
$
—
—
—
—
—
—
5,685
—
—
5,685
$
$
516
—
—
150
—
—
2,662
—
—
3,328
$
—
—
—
—
—
—
—
—
—
—
$
143,535
6,512
801
134,116
287,754
272,620
121,225
599
74,984
1,042,146
$
$
$
$
143,019
6,512
801
133,966
287,754
272,620
109,106
599
74,984
1,029,361
$
$
The Bank grants loans and letters of credit to its executive officers, directors and their affiliated entities. Such loans are made in the ordinary course of business on substantially the same terms and conditions,
including interest rates and collateral, as those prevailing at the same time for comparable transactions with unrelated persons, and, in the opinion of management, do not involve more than normal risk or
present other unfavorable features.
The aggregate amount of such loans outstanding at December 31, 2020 was approximately $787,429 compared to $998,469 at December 31, 2019. During 2020, new loans and line of credit advances to such
related parties was approximately $146,025 compared to $211,630 during 2019. Repayments on loans to directors and officers were $357,065 and $288,320 during 2020 and 2019, respectively. The Bank
maintains deposit accounts with some of its executive officers, directors and their affiliated entities. Such deposit accounts at December 31, 2020 and December 31, 2019 amounted to approximately $1.4
million and $1.4 million, respectively.
85
Note 7. Premises and Equipment
Premises and equipment are summarized as follows at December 31:
(Dollars in thousands)
Cost
Building
Land
Leasehold improvements
Furniture, fixtures and equipment
Computer software and equipment
Less accumulated depreciation
Construction in progress
Premises and equipment, net
2020
2019
12,765 $
2,856
996
2,741
1,165
20,523
(6,261)
27
14,289 $
12,347
2,856
148
2,509
1,144
19,004
(5,218)
367
14,153
$
$
Depreciation and amortization charged to operations were $1.1 million and $1.0 million during the years ended December 31, 2020 and December 31, 2019, respectively.
Note 8. Deposits
Time deposits in denominations of $250,000 or more totaled approximately $219.0 million and $217.2 million at December 31, 2020 and 2019, respectively.
At December 31, 2020, maturities of time deposits are as follows:
(Dollars in thousands)
2021
2022
2023
2024
Thereafter
Total
Year ended
December 31,
270,794
88,279
64,907
52,845
19,918
496,743
$
$
Brokered deposits, as defined by the FDIC, totaled approximately $279.5 million and $236.9 million at December 31, 2020 and December 31, 2019, respectively.
Note 9. Borrowed Funds
The Bank also has a credit availability agreement with the FHLB based on a percentage of total assets. As of December 31, 2020, the credit availability with FHLB is approximately $407.6 million. This
credit availability agreement provides the Bank with access to a myriad of advance products offered by the FHLB. The rate of interest charged is based on market conditions. At December 31, 2020, there
were commercial real estate, residential 1-4 and multi-family loans totaling $444.3 million were used to collateralize FHLB advances. There was one security pledged as collateral to secure FHLB advances
for the amount of $269,075 at December 31, 2020.
The Bank did not have any FHLB advances at December 31, 2020.
The average balance on FHLB advances for the years ended December 31, 2020 and December 31, 2019 was approximately $6.2 million and $21.2 million, respectively. The weighted average interest rate
paid at December 31, 2020 and 2019 was 1.73% and 2.59%, respectively. The weighted average rate of borrowings outstanding at December 31, 2019 was 1.98%.
Note 10. Income Taxes
The Company files tax returns in the U.S. federal jurisdiction and required states. With few exceptions, the Bank is no longer subject to tax examination by tax authorities for years prior to 2016.
The Commonwealth of Virginia assesses a Bank Franchise Tax on banks instead of a state income tax. The Bank Franchise Tax expense is reported in non-interest expense and the tax’s calculation is unrelated
to taxable income.
86
The provision for income taxes consists of the following components:
(Dollars in thousands)
Current expense
Deferred (benefit)
Total
2020
2019
$
$
5,595 $
(1,752)
3,843 $
3,816
(462)
3,354
Income tax expense for the years ended December 31, 2020 and 2019 differed from the federal statutory rate applied to income before income taxes for the following reasons:
(Dollars in thousands)
Computed “expected” income tax expense
Increase (decrease)in income taxes resulting from:
Non-deductible expense
Tax exempt Interest
BOLI Income
State Income Taxes
Restricted Stock Adjustment
Other Adjustments
Total
Year ended December 31,
2020
2019
$
4,108 $
25
(259)
(164)
165
(95)
63
3,843 $
$
87
3,634
36
(242)
(105)
52
(49)
28
3,354
The tax effects of temporary differences result in deferred tax assets and liabilities as presented below:
(Dollars in thousands)
Deferred tax assets:
Allowance for loan losses
Restricted stock
OREO adjustment
Net loan fees
Organizational costs
Right-of-use liability
Unrealized losses on securities transferred to held to maturity
Gross deferred tax assets
Deferred tax liabilities:
Depreciation
Unrealized gain on securities available for sale
Prepaid expense
Right-of-use Asset
Gross deferred tax liabilities
Net deferred tax asset
December 31,
2020
2019
2,851 $
313
95
1,368
6
1,463
12
6,108
267
285
20
1,371
1,943
4,165 $
2,086
262
—
461
7
1,459
18
4,293
115
134
14
1,433
1,696
2,597
$
$
Note 11. Earnings Per Common Share
Basic earnings per share excludes dilution and is computed by dividing net income available to common stockholders 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 no such potentially dilutive securities outstanding in 2020 or 2019.
The weighted average number of shares used in the calculation of basic and diluted earnings per share includes unvested restricted shares of the Company’s common stock outstanding. Applicable guidance
requires that outstanding unvested share-based payment awards that contain voting rights and rights to non-forfeitable dividends participate in undistributed earnings with common stockholders.
(Dollars in thousands)
Net income
Preferred stock dividends
Net income per common share
Weighted average number of shares issued,
basic and diluted
Net income per common share:
Basic and diluted income per common share
For the Year Ended December 31,
2020
2019
$
$
15,717 $
(635)
15,082 $
13,950
—
13,950
8,131,334
8,251,302
$
1.85 $
1.69
88
Note 12. Commitments and Contingencies
The Bank’s financial statements do not reflect various commitments and contingent liabilities which arise in the normal course of business and which involve elements of credit risk, interest risk and liquidity
risk. These commitments and contingent liabilities are commitments to extend credit and standby letters of credit.
The amounts of loan commitments and standby letters of credit are set forth in the following table as of December 31, 2020 and 2019:
(Dollars in thousands)
Loan commitments
Standby letters of credit
December 31,
2020
2019
$
$
219,414 $
1,062 $
251,508
672
Commitments to extend credit and standby letters of credit all include exposure to some credit loss in the event of nonperformance of the customer. The Bank’s credit policies and procedures for credit
commitments and financial guarantees are the same as those for extensions of credit that are recorded on the statements of financial condition. Because these instruments have fixed maturity dates, and
because many of them expire without being drawn upon, they do not generally present any significant liquidity risk to the Bank. The Bank has not incurred any losses on commitments in 2020 or 2019.
During 2020, the Bank made a commitment of $5.0 million to the Housing Equity Fund of Virginia XXIV, L.L.C. This commitment will be funding through capital calls from the fund and we expect our
investment to be fully funded by December 31, 2023.
During 2020, the Bank made a commitment of $2.0 million to the Washington Housing Initiative Impact Pool, L.L.C. This commitment will be funding through capital calls from the fund. As of December 31,
2020, no funds have been deployed, with a remaining unfunded balance of $2.0 million.
From time to time, we are a party to various litigation matters incidental to our ordinary conduct of our business. Management believes that none of these legal proceedings, individually or in the aggregate,
will have a material adverse impact on the results of operations or financial condition of the Company.
Note 13. Leases
On January 1, 2019, the Company adopted ASU No. 2016-02 “Leases (Topic 842)” and all subsequent ASUs that modified Topic 842. The Company elected the optional transition method provided by ASU
2018-11 and did not adjust prior periods for ASC 842. The Company also elected certain practical expedients within the standard and consistent with such elections did not reassess whether any expired or
existing contracts are or contain leases, did not reassess the lease classification for any expired or existing leases, and did not reassess any initial direct costs for existing leases. As stated in the Company’s
2018 Form 10 registration document, the implementation of the new standard resulted in recognition of a right-of-use asset and lease liability of $2.7 million at the date of adoption, which is primarily related
to the Company’s lease of premises used in operations. The right-of-use asset and lease liability are included in other assets and other liabilities, respectively, in the Consolidated Balance Sheets.
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.
89
Cash paid for amounts included in the measurement of lease liabilities during the twelve months ended December 31, 2020 was $399,000. The Company adopted ASC 842 effective January 1, 2019. Prior to
January 1, 2019, the Company measured lease expense in accordance with FASB ASC Topic 840. During twelve months ended December 31, 2020, the Company recognized lease expense of $590,000
(Dollars in thousands)
Lease liabilities
Right-of-use assets
Weighted-average remaining lease term – operating leases
(in months).
Weighted-average discount rate – operating leases
(Dollars in thousands)
Lease Cost
Operating lease cost
Total lease costs
Cash paid for amounts included in measurement of lease
liabilities
As of December 31,
2020
6,607
6,195
187.5
3.12%
For the year
ended December 31,
2020
590
590
399
$
$
$
$
$
The Company is the lessor for three 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 $6,000 per month.
As of December 31, 2020, all of the Company’s lease obligations are classified as operating leases. The Company does not 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 December 31, 2020 is as follows:
(Dollars in thousands)
2021
2022
2023
2024
2025
Thereafter
Total undiscounted cash flows
Discount
Lease liabilities
Minimum annual rental commitments under the lease obligations are as follows as of December 31, 2019:
(Dollars in thousands)
2020
2021
2022
2023
2024
Thereafter
Total undiscounted cash flows
Discount
Lease liabilities
90
$
$
$
529
542
556
571
586
5,506
8,290
(1,683)
6,607
327
529
543
557
572
6,191
8,719
(2,018)
(6,701)
Note 14. Significant Concentrations of Credit Risk
Substantially all the Bank’s loans, commitments and standby letters of credit have been granted to customers located in the greater Washington, D.C. Metropolitan Area. The concentrations of credit by type of
loan are set forth in Note 4.
The Bank maintains its cash and federal funds sold in correspondent bank deposit accounts. The amount on deposit at December 31, 2020 exceeded the insurance limits of the Federal Deposit Insurance
Corporation by $48.9 million. The Bank has not experienced any losses in such accounts and believes it is not exposed to any significant credit risks.
Note 15. Regulatory Matters
Information presented for December 31, 2020 and December 31, 2019, 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 was phased in from 0.0%
for 2015 to 2.50% by 2019. The capital conservation buffer for 2019 and 2020 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 December 31, 2020, the Company and the Bank meets all capital adequacy requirements to which it is subject.
The Bank’s actual capital amounts and ratios are presented in the table (dollars in thousands):
(Dollars in thousands)
As of December 31, 2020
Total capital (to risk-weighted assets)
Common equity tier 1 capital (to risk-weighted assets)
Tier 1 capital (to risk-weighted assets)
Tier 1 capital (to average assets)
As of December 31, 2019
Total capital (to risk-weighted assets)
Common equity tier 1 capital (to risk-weighted assets)
Tier 1 capital (to risk-weighted assets)
Tier 1 capital (to average assets)
Actual
Capital Adequacy
Purposes
To Be Well Capitalized
Under the Prompt
Corrective Action
Provision
Amount
Ratio
Amount
Ratio
Amount
Ratio
$
$
$
$
$
$
$
$
189,534
176,657
176,657
176,657
157,892
148,308
148,308
148,308
91
14.60% $
13.61% $
13.61% $
10.78% $
13.50% $
12.68% $
12.68% $
12.12% $
103,872
58,428
77,904
65,557
93,576
52,636
70,182
48,937
≥ 8.0% $
≥ 4.5% $
≥ 6.0% $
≥ 4.0% $
≥ 8.0% $
≥ 4.5% $
≥ 6.0% $
≥ 4.0% $
129,840
103,872
103,872
81,946
116,970
93,576
93,576
61,171
≥ 10.0%
≥ 8.0%
≥ 8.0%
≥ 5.0%
≥ 10.0%
≥ 8.0%
≥ 8.0%
≥ 5.0%
Note. 16 Defined Contribution Benefit Plan
The Bank adopted a 401(k) defined contribution plan on October 1, 2004, which is administered by Principal Investments. Participants have the right to contribute up to a maximum of 15% of pretax annual
compensation or the maximum allowed by the Internal Revenue Code, whichever is less. The Bank began making a matching contribution to the plan on January 1, 2010. The Bank matches dollar for dollar
up to 3% of the employee’s contribution and then fifty cents on the dollar on the next two percentage points up to the employee contribution of 5%. The total amount the Bank matched during 2020 and 2019
was $478,960 and $465,064, respectively.
Note 17. Stock Based Compensation Plan
ASC Topic 718, Compensation – Stock Compensation, requires the Bank to recognize expense related to the fair value of share-based compensation awards in net income. Total compensation expense for
restricted stock recorded for the years ended December 31, 2020 and December 31, 2019 were $1.4 million and $1.0 million, respectively.
In 2016, the Board of Directors of the Bank adopted, and the Bank’s shareholders subsequently approved, the MainStreet Bank 2016 Equity Incentive Plan (the “2016 Plan”), to provide officers, other selected
employees and directors of the Bank with additional incentives to promote the growth and performance of the Bank. At December 31, 2018, there were 133,869 restricted shares outstanding that were awarded
under the 2016 Plan. During the year ended December 31, 2019, there were 72,281 restricted shares awarded, no restricted shares were forfeited, and no stock options were awarded under the 2016 Plan. The
restricted shares awarded during 2019 vest equally on an annual basis over a three, five or ten year period. As a result of the stockholders’ approval of the 2016 Plan, no additional awards have been or will be
made under the Bank’s 2006 Plan, although all awards that were outstanding under the 2006 Plan as of May 17, 2006 remained outstanding in accordance with their terms.
On July 17, 2019, the Board of Directors of the Bank adopted, and the Bank’s shareholders subsequently approved, the MainStreet Bank 2019 Equity Incentive Plan (the “2019 Plan”), to provide officers, other
selected employees and directors of the Bank with additional incentives to promote the growth and performance of the Bank. At December 31, 2019, there were 10,000 restricted shares outstanding that were
awarded under the 2019 Plan. During the year ended December 31, 2020, there were 82,444 restricted shares awarded, 3,076 restricted shares were forfeited, and no stock options were awarded under the 2019
Plan. The restricted shares awarded during 2020 vest equally on an annual basis over a three, five, or ten year period. As a result of the stockholders’ approval of the 2019 Plan, no additional awards have been
or will be made under the Bank’s 2016 Plan, although all awards that were outstanding under the 2016 Plan as of July 17, 2019 remained outstanding in accordance with their terms.
92
A summary of the status of the Bank’s nonvested restricted stock shares as of December 31, 2020 and changes during the year ended December 31, 2020 is presented below:
Nonvested Restricted Stock Shares
Nonvested at January 1, 2020
Granted
Vested
Forfeited
Nonvested at December 31, 2020
Shares
160,961 $
82,444
(78,894)
(3,076)
161,435 $
Weighted
Average Grant
Date Fair Value
16.00
19.92
15.15
19.24
18.36
As of December 31, 2020, there was $1.7 million of total unrecognized compensation cost related to nonvested restricted stock awards. The cost is expected to be recognized over approximately ten years. The
total fair value of shares vested during the years ended December 31, 2020 and 2019 was $1.2 million and $738,752, respectively.
Note 18. Derivatives and Risk Management Activities
The Bank uses derivative financial instruments (or “derivatives”) primarily to assist customers with their risk management objectives. The Bank classifies these items as free standing derivatives consisting of
customer accommodation interest rate loan swaps (or “interest rate loan swaps”). The Bank enters into interest rate swaps with certain qualifying commercial loan customers to meet their interest rate risk
management needs. The Bank 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 Bank 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 Banks’s derivative instruments as of December 31, 2020 and December 31, 2019.
December 31, 2020
Customer-related interest rate
contracts
(Dollars in thousands)
Matched interest rate swap with borrower
Matched interest rate swap with counterparty
December 31, 2019
Customer-related interest rate
contracts
(Dollars in thousands)
Matched interest rate swap with borrower
Matched interest rate swap with counterparty
Notional
Amount
$
$
210,314
210,314
Positions
Assets
Liabilities
Collateral
Pledges
$
38
38
12,152
—
$
—
12,152
$
$
15,120
15,120
Notional
Amount
$
$
71,860
71,860
Positions
Assets
Liabilities
Collateral
Pledges
$
12
12
4,039
—
$
—
4,039
$
$
6,400
6,400
The Company is able to recognize fee income upon execution of the interest rate swap contract and completed its first contract in the fourth quarter of 2018. Interest rate swap fee income for the twelve months
ended December 31, 2020 and 2019 was $3.5 million and $989,000, respectively.
93
Note 19. 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 December 31, 2020, and December 31, 2019, 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 18: Derivatives and Risk Management Activities”, 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.
94
The following tables provide the fair value for assets required to be measured and reported at fair value on a recurring basis as of December 31, 2020 and December 31, 2019:
(Dollars in thousands)
Assets:
Investment securities available-for-sale:
U.S. Treasury Securities
Collateralized Mortgage Backed
Subordinated Debt
Municipal Securities
U.S. Government Agencies
Derivative asset – interest rate swap on loans
Total
Liabilities:
Derivative liability – interest rate swap on loans
Total
(Dollars in thousands)
Assets:
Investment securities available-for-sale:
U.S. Treasury Securities
Collateralized Mortgage Backed
Subordinated Debt
Municipal Securities
U.S. Government Agencies
Derivative asset – interest rate swap on loans
Total
Liabilities:
Derivative liability – interest rate swap on loans
Total
Level 1
Level 2
Level 3
Total
December 31, 2020
— $
—
—
—
—
—
— $
—
— $
90,000 $
24,896
3,278
22,605
6,635
12,152
159,566 $
12,152
12,152 $
— $
—
—
—
—
—
— $
—
— $
90,000
24,896
3,278
22,605
6,635
12,152
159,566
12,152
12,152
Level 1
Level 2
Level 3
Total
December 31, 2019
— $
—
—
—
—
—
— $
—
— $
49,998 $
17,673
2,554
14,631
7,935
4,039
96,830 $
4,039
4,039 $
— $
—
—
—
—
—
— $
—
— $
49,998
17,673
2,554
14,631
7,935
4,039
96,830
4,039
4,039
$
$
$
$
$
$
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. The vast majority 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.
95
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 following table summarizes the value of the Bank’s assets as of December 31, 2020 and December 31, 2019 that were measured at fair value on a nonrecurring basis during the period:
December 31, 2020
(Dollars in thousands)
Assets:
Other Real Estate Owned
Total
December 31, 2019
(Dollars in thousands)
Assets:
Other Real Estate Owned
Total
Level 1
Level 2
Level 3
Total
— $
— $
— $
— $
1,180 $
1,180 $
1,180
1,180
Level 1
Level 2
Level 3
Total
— $
— $
— $
— $
1,207 $
1,207 $
1,207
1,207
$
$
$
$
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, 2020
(Dollars in thousands)
Other Real Estate Owned, net
Total
Fair Value of Financial Instruments
Fair Value
1,180
1,180
$
$
Fair Value Measurements at December 31, 2020
Valuation Technique(s)
Appraisals
Unobservable Inputs
Discount to reflect current market
conditions and estimated selling costs
Range of
Inputs
6% - 10%
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. Additionally, in accordance with ASU 2016-01, which the Company adopted on January 1, 2018 on a prospective basis, the
Company uses the exit price notion, rather than the entry price notion, in calculation the fair values of financial instruments not measured at fair value on a recurring basis.
96
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.
December 31, 2020
(Dollars in thousands)
Assets:
Cash and cash equivalents
Restricted equity securities
Securities:
Available for sale
Held to maturity
Loans, net
Loans held for sale
Derivative asset – interest rate swap on loans
Bank owned life insurance
Accrued interest receivable
Liabilities:
Deposits
Derivative liability – interest rate swaps on loans
Accrued interest payable
December 31, 2019
(Dollars in thousands)
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
Advances from the FHLB
Derivative liability – interest rate swaps on loans
Accrued interest payable
Carrying
Amount
Estimated
Fair Value
Quoted
Prices in
Active
Markets for
Identical
Assets
Level 1
Significant
Other
Observable
Inputs
Level 2
Significant
Unobservable
Inputs
Level 3
$
107,528
4,616
$
107,528
4,616
$
107,528
—
$
$
—
4,616
147,414
22,520
1,230,379
57,006
12,152
25,341
9,154
147,414
23,578
1,259,671
58,930
12,152
25,341
9,154
$
$
1,438,246
12,152
490
$
1,451,708
12,152
490
—
—
—
—
—
—
—
—
—
—
147,414
23,578
—
—
12,152
25,341
9,154
$
$
941,503
12,152
490
—
—
—
—
1,259,671
58,930
—
—
—
510,205
—
—
Carrying
Amount
Estimated
Fair Value
Quoted
Prices in
Active
Markets for
Identical
Assets
Level 1
Significant
Other
Observable
Inputs
Level 2
Significant
Unobservable
Inputs
Level 3
$
$
64,844
6,157
$
64,844
6,157
$
64,844
—
$
—
6,157
92,791
23,914
1,030,425
4,039
24,562
4,282
1,071,623
40,000
4,039
982
$
92,791
24,678
1,048,181
4,039
24,562
4,282
1,079,011
39,998
4,039
982
$
$
—
—
—
—
—
—
—
—
—
—
92,791
24,678
—
4,039
24,562
4,282
$
$
510,766
39,998
4,039
982
—
—
—
—
1,048,181
—
—
—
568,245
—
—
—
Fair value estimates are made at a specific point in time, based on relevant market information and information about the financial instrument. These estimates do not reflect any premium or discount that could
result from offering for sale at one time the Bank’s entire holdings of a particular financial instrument. Because no market exists for a significant portion of the Bank’s financial instruments, fair value estimates
are based on judgments regarding future expected loss experience, current economic conditions, risk characteristics of various financial instruments and other factors. These estimates are subjective in nature
and involve uncertainties and matters of significant judgment, and therefore, cannot be determined with precision. Changes in assumptions could significantly affect the estimates.
Fair value estimates are based on existing on-balance sheet and off-balance sheet financial instruments without attempting to estimate the value of anticipated future business and the value of assets and
liabilities that are not considered financial instruments. Significant assets that are not considered financial assets include deferred income taxes and bank premises and equipment. In addition, the tax
ramifications related to the realization of the unrealized gains and losses can have a significant effect on fair value estimates and have not been considered in the estimates.
97
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 December 31, 2020 from December 31, 2019.
Note 20. Other Real Estate Owned
At December 31, 2020 and 2019, Other Real Estate Owned was $1.2 million and $1.2 million, respectively. OREO is comprised of non-residential property associated with a commercial relationship and
located in Virginia. Changes in the balance for OREO are as follows:
(Dollars in thousands)
Balance, beginning of year
Loss on valuation, net
Transfers between loans and other real estate owned
Balance, end of year
Expenses applicable to other real estate owned include the following:
(Dollars in thousands)
Operating expenses, net of rental income
Balance, end of year
As of December 31, 2020, there were no real estate loans in the process of foreclosure.
Note 21. Accumulated Other Comprehensive Gain
$
$
$
$
2020
2019
1,207 $
(389)
362
1,180 $
—
—
1,207
1,207
2020
2019
459 $
459 $
62
62
The following table presents the cumulative balances of the components of accumulated other comprehensive income net of deferred taxes, as of December 31, 2020 and December 31, 2019:
(Dollars in thousands)
Unrealized gain on securities
Unrealized loss on securities transferred to HTM
Securities gains included in net income
Tax effect
Total accumulated other comprehensive income
2020
2019
$
$
1,287 $
(55)
—
(255)
977 $
609
(81)
5
(110)
423
Note 22. Capital
On September 18, 2019, the Board of Directors of the Company authorized a common stock repurchase program to repurchase up to $10.0 million of the Company’s common stock at the discretion of
management. The Company did not repurchase any of its shares during the year ended December 31, 2019.
On September 15, 2020, the Company issued 1,000,000 depositary shares, each representing a 1/40th interest in a share of the Company’s Fixed-to-Floating Rate Series A Noncumulative Perpetual Preferred
Stock, par value $1.00 per share, with a liquidation preference of $1,000 per share (equivalent to $25 per depositary share). Dividends will accrue on the depositary shares at a fixed rate equal to 7.50% per
annum. On September 25, 2020, the Company completed the sale of an additional 150,000 depositary shares, pursuant to the underwriters’ full exercise of their over-allotment option to purchase additional
depositary shares.
On October 22, 2020, the Board of Directors of the Company authorized a common stock repurchase program to repurchase up to $17.0 million of the Company’s common stock at the discretion of
management. The new common stock repurchase program replaced the Company’s previous repurchase plan which was authorized on September 18, 2019. The Company repurchased approximately $13.8
million of common stock during the year ended December 31, 2020.
98
Note 23. Subordinated Notes
On December 30, 2016, the Company completed the issuance of $14.3 million in aggregate principal amount of fixed-to-floating rate subordinated notes in a private placement transaction to various accredited
investors. During the first quarter 2017, an additional $700,000 of subordinated notes was issued for a total issuance of $15.0 million. The net proceeds of the offering are intended to support growth and be
used for other general business purposes. The notes have a maturity date of December 31, 2026 and have an annual fixed interest rate of 6.25% until December 31, 2021. Thereafter, the notes will have a
floating interest rate based on three-month LIBOR rate plus 425 basis points (4.25%) (computed on the basis of a 360-day year of twelve 30-day months) from and including January 1, 2022 to the maturity
date or any early redemption date. Interest will be paid semi-annually, in arrears, on July 1 and January 1 of each year during the time that the notes remain outstanding through the fixed interest rate period or
earlier redemption date. Interest will be paid quarterly, in arrears, on April 1, July 1, October 1 and January 1 throughout the floating interest rate period or earlier redemption date.
Note 24. Condensed Parent Company Financial Statements
Condensed financial statements pertaining only to the Company are presented below. The investment in subsidiary is accounted for using the equity method of accounting.
The payment of dividends by the subsidiary is restricted by various regulatory limitations. Banking regulations also prohibit extensions of credit to the parent company unless appropriately secured by assets.
99
Condensed Parent Company Only
Condensed Balance Sheet
(Dollars in thousands)
December 31,
ASSETS
Cash on deposit with subsidiary
Investment in subsidiary
Other assets
Total Assets
Liabilities:
Other liabilities
Subordinated debt, net of debt issuance costs
Stockholders’ equity
Total Liabilities and Stockholders’ Equity
2020
2019
3,754 $
177,634
1,560
182,948 $
449 $
14,834
167,665
182,948 $
1,335
148,731
1,773
151,839
—
14,805
137,034
151,839
$
$
$
$
100
Condensed Statement of Income
(Dollars in thousands)
For the Year Ended December 31,
Income
Dividends from subsidiary
Expenses
Subordinated debt interest expense
Non-interest expense
Total expenses
Undistributed earnings of subsidiary
Net income before income taxes
Income tax benefit
Net income
Less: preferred stock dividends
Net income available to common shareholders
101
2020
2019
$
635 $
—
966
4
970
15,848
15,513 $
(204)
15,717 $
(635)
15,082 $
966
83
1,049
14,779
13,730
(220)
13,950
—
13,950
$
$
$
Condensed Statement of Cash Flows
(Dollars in thousands)
Year Ended December 31,
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income
Adjustments to reconcile net income to net cash provided by (used in)
operating activities:
Equity in undistributed earnings of subsidiary
Stock based compensation
Subordinated debt amortization expense
Decrease (increase) in other assets
Increase in other liabilities
Net cash provided by (used in) operating activities
CASH FLOWS FROM INVESTING ACTIVITIES:
Investment in bank subsidiary
Net cash used in investing activities
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of common stock
Repurchase of common stock
Issuance of preferred stock, net
Cash dividends paid on preferred stock
Net cash provided by financing activities
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR
CASH AND CASH EQUIVALENTS, END OF YEAR
102
2020
2019
$
15,717 $
13,950
(15,848)
1,378
29
212
449
1,937
(12,500)
(12,500)
151
(13,797)
27,263
(635)
12,982
2,419
1,335
3,754 $
$
(14,779)
1,043
29
(525)
—
(282)
—
—
—
—
—
—
—
(282)
1,617
1,335
Item 9.
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
Item 9A. Controls and Procedures
Disclosure 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 December 31, 2020. 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.
Management’s Report on Internal Control over Financial Reporting. Management of the Company is also responsible for establishing and maintaining adequate internal control over financial
reporting (as defined in Rule 13a‑15(f) under the Exchange Act). Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Therefore, even those
systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation.
Management, including the Company’s principal executive and principal financial officer, assessed the effectiveness of the Company’s internal control over financial reporting as of December 31,
2020. In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control – Integrated Framework
(2013). Based on our assessment, we believe that, as of December 31, 2020, the Company’s internal control over financial reporting was effective based on those criteria.
The Company’s annual report does not include an attestation report of the Company’s independent registered public accounting firm, Yount, Hyde, & Barbour. P.C. (YHB), regarding internal
control over financial reporting. Management’s report was not subject to attestation by YHB pursuant to rules of the Securities and Exchange Commission that permit the Company to provide only
management’s report in its annual report.
The 2020 consolidated financial statements have been audited by the independent registered public accounting firm of Yount, Hyde, & Barbour. P.C. Personnel from YHB were given unrestricted
access to all financial records and related data, including minutes of all meetings of the Board of Directors and Committees thereof. Management believes that all representation made to the independent
auditors were valid and appropriate. The resulting report from YHB accompanies the consolidated financial statements.
Changes in Internal Controls. There were no changes in the Company’s internal control over financial reporting during the Company’s fourth quarter ended December 31, 2020 that have
materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
Item 9B. Other Information
None.
103
Item 10. Directors, Executive Officers and Corporate Governance
Part III
The information required by this Item with respect to our directors and certain corporate governance practices is contained in our Proxy Statement for our 2021 Annual Meeting of Shareholders
(the “Proxy Statement”) to be filed with the SEC within 120 days after the end of the Company’s fiscal year ended December 31, 2020. Such information is incorporated herein by reference.
Item 11. Executive Compensation
The information required by this Item is incorporated herein by reference to our Proxy Statement to be filed with the SEC within 120 days after the end of the Company’s fiscal year ended
December 31, 2020.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
The information required by this Item regarding security ownership of certain beneficial owners and management is incorporated by reference to our Proxy Statement to be filed with the SEC
within 120 days after the end of the Company’s fiscal year ended December 31, 2020.
Item 13. Certain Relationships and Related Transactions, and Director Independence
The information required by this Item is incorporated herein by reference to our Proxy Statement to be filed with the SEC within 120 days after the end of the Company’s fiscal year ended
December 31, 2020.
Item 14. Principal Accountant Fees and Services
The information required by this Item is incorporated herein by reference to our Proxy Statement to be filed with the SEC within 120 days after the end of the Company’s fiscal year ended
December 31, 2020.
104
Item 15. Exhibits and Financial Statement Schedules
Exhibit
Number
2.1
3.1
3.2
4.1
4.2
4.3
4.4
4.5
10.1
10.2
10.3
10.4
10.5
10.6
21.1
23.1
31.1
31.2
32.0
Description
Agreement and Plan of Reorganization (incorporated by reference to Exhibit 2.1 to the Company’s Form 10-12B filed on February 15, 2019)
Restated Articles of Incorporation (incorporated by reference to Exhibit 3.1 to the Company’s Form 8-K filed on November 19, 2020)
Bylaws (incorporated by reference to Exhibit 3.1 to the Company’s Form 8-K filed on February 18, 2021)
Form of common stock certificate (incorporated by reference to Exhibit 4.1 to the Company’s Form 10-12B filed on February 15, 2019)
Form of Subordinated Note Purchase Agreement (incorporated by reference to Exhibit 4.2 to the Company’s Form 10-12B filed on February 15, 2019)
Description of the Registrant’s Common Stock Registered pursuant to section 12 of the Securities Exchange Act of 1934
Deposit Agreement, dated as of September 15,2020, by and among the Company, American Stock Transfer and Trust Company, LLC, and the holder from time to time of the Depositary
Receipts decided therein (incorporated by reference to Exhibit 4.1 to the Company’s Form 8-K filed on September 15, 2020)
Form of Depositary Receipt representing the Depositary Shares (incorporated by reference to Exhibit 4.2 to the Company’s Form 8-K filed on September 15, 2020)
2016 Equity Incentive Plan (incorporated by reference to Exhibit 10.1 to the Company’s Form 10-12B filed on February 15, 2019)
Form of Restricted Stock Award Agreement (incorporated by reference to Exhibit 10.2 to the Company’s Form 10-12B filed on February 15, 2019)
Employment Agreement with Jeff W. Dick (incorporated by reference to Exhibit 10.3 to the Company’s Form 10-12B filed on February 15, 2019)
Employment Agreement with Charles C. Brockett (incorporated by reference to Exhibit 10.1 to the Company’s Form 8-K filed on July 20, 2020)
Employment Agreement with Thomas J. Chmelik (incorporated by reference to Exhibit 10.5 to the Company’s Form 10-12B filed on February 15, 2019)
2019 Equity Incentive Plan (incorporated by reference to Exhibit 10.1 to the Company’s Form 8-K filed on July 19, 2019)
Subsidiaries of the Registrant (incorporated by reference to Exhibit 21 to the Company’s Form 10-12B filed on February 15, 2019)
Consent of Yount, Hyde & Barbour, P.C.
Rule 13a-14(a) Certification of the Chief Executive Officer
Rule 13a-14(a) Certification of the Chief Financial Officer
Section 1350 Certification
Item 16. Form 10-K Summary
Not Applicable
105
Pursuant to the requirements of Section 13 or 15(d) 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
SIGNATURES
authorized.
Date: March 23, 2021
MAINSTREET BANCHSHARES, INC
(Registrant)
By: /s/ Jeff W. Dick
Jeff W. Dick
Chairman & Chief Executive Officer
(Principal Executive Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons on behalf of the Registrant and in the capacities and on the dates
indicated.
Date: March 23, 2021
Date: March 23, 2021
Date: March 23, 2021
Date: March 23, 2021
Date: March 23, 2021
Date: March 23, 2021
Date: March 23, 2021
Date: March 23, 2021
Date: March 23, 2021
Date: March 23, 2021
By:
/s/ Jeff W. Dick
Jeff W. Dick
Chairman & Chief Executive Officer
(Principal Executive Officer)
/s/ Thomas J. Chmelik
Thomas J. Chmelik
Senior Executive Vice President and
Chief Financial Officer and Director
(Principal Financial Officer)
/s/ Charles C. Brockett
Charles C. Brockett
President and Director
/s/ Richard A. Vari
Richard A. Vari
Vice President and Chief Accounting Officer
(Principal Accounting Officer)
/s/ Paul Thomas Haddock
Paul Thomas Haddock
Director
/s/ Patsy I. Rust
Patsy I. Rust
Director
/s/ Terry M. Saeger
Terry M. Saeger
Director
/s/ Elizabeth S. Bennett
Elizabeth S. Bennett
Director
/s/ Darrell Green
Darrell Green
Director
/s/ Russell Echlov
Russell Echlov
Director
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DESCRIPTION OF THE REGISTRANT’S SECURITIES REGISTERED
UNDER SECTION 12 OF THE SECURITIES EXCHANGE ACT OF 1934
Exhibit 4.3
As of December 31, 2020, MainStreet Bancshares, Inc. (the “Company”) had two classes of securities registered under Section 12 of the Securities Exchange Act of 1934, as amended (the
“Exchange Act”): (1) our common stock, and (1) our depositary shares, each representing a 1/40th interest in a share of 7.50% Series A Fixed-Rate Non-Cumulative Perpetual Preferred Stock (“Series A
Preferred Stock”).
The following description is a summary and does not purport to be complete. It is subject to and qualified in its entirety by reference to our Restated Articles of Incorporation, as amended (the
“Articles of Incorporation”) and our Bylaws (the “Bylaws”), each of which is an exhibit to the Annual Report on Form 10-K of which this Exhibit 4.3 is a part. We encourage you to read our Articles of
Incorporation, our Bylaws and applicable provisions of the Virginia Stock Corporation Act for additional information.
Our authorized capital stock consists of:
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10,000,000 shares of common stock, par value $4.00 per share; and
2,000,000 shares of serial preferred stock, par value $1.00 per share.
AUTHORIZED CAPITALIZATION
Our Board of Directors may issue shares of our capital stock from time to time for such consideration as the Board may deem advisable without further shareholder approval, subject to the
maximum number of authorized shares provided in our Articles of Incorporation. Our capital stock is non-withdrawable capital, is not an insurable account and is not insured by the FDIC.
Dividend Rights
DESCRIPTION OF THE COMMON STOCK
We may pay dividends, as declared from time to time by the Board of Directors, out of funds legally available for the payment of dividends, subject to certain restrictions imposed by federal
and state laws. The holders of common stock are entitled to receive and share equally in any dividends as may be declared by the Board of Directors.
Voting Rights
In all elections of directors, each common shareholder has the right to cast one vote for each share of common stock owned by him or her and is entitled to vote for as many persons as there are
directors to be elected. Our common shareholders do not have cumulative voting rights. On any other question to be determined by a vote of shares at any meeting of common shareholders, each shareholder
shall be entitled to one vote for each share of common stock owned by him or her and entitled to vote. Unless otherwise required by the Virginia Stock Corporation Act or our Articles of Incorporation, one-
third of the votes entitled to be cast on a matter by a voting group at a shareholder meeting shall constitute a quorum.
Preemptive Rights
Holders of our common stock have no preemptive rights.
Calls and Assessments
All common stock outstanding is fully paid and nonassessable.
Liquidation Rights
Upon our liquidation, dissolution or winding up, whether voluntary or involuntary, holders of our common stock are entitled to share ratably, after satisfaction in full of all of our liabilities
(including deposit liabilities), in all of our remaining assets available for distribution. Holders of Series A Preferred Stock have a priority over the holders of the Company’s common stock in the event of
liquidation or dissolution.
Transfer Agent
American Stock Transfer & Trust Company, LLC serves as our registrar and transfer agent.
Provisions That May Affect Change of Control
Our Articles of Incorporation and the Virginia Stock Corporation Act contain certain provisions designed to enhance the ability of the Board of Directors to deal with attempts to acquire control
of the Company. These provisions and the ability to set the voting rights, preferences and other terms thereof may be deemed to have an anti-takeover effect and may discourage takeover attempts which have
not been approved by the Board (including takeovers which certain shareholders may deem to be in their best interest). To the extent that such takeover attempts are discouraged, temporary fluctuations in the
market price of our common stock resulting from actual or rumored takeover attempts may be inhibited. These provisions also could discourage or make more difficult a merger, tender offer or proxy contest,
even though such transaction may be favorable to the interests of shareholders, and could potentially adversely affect the market price of our common stock.
The following briefly summarizes protective provisions that are contained in our Articles of Incorporation or provided by the Virginia Stock Corporation Act. This summary is necessarily
general and is not intended to be a complete description of all the features and consequences of those provisions and is qualified in its entirety by reference to our Articles of Incorporation and the Virginia
Stock Corporation Act.
Supermajority Approval of Certain Actions. Our Articles of Incorporation require a supermajority of 80% or more of all votes entitled to be cast for shareholder approval of certain actions,
unless at least two-thirds of the Board of Directors has approved and recommended the action. Items subject to this supermajority provision include amendments of our Articles of Incorporation, approval of
plans of merger or share exchange, asset sales of all or substantially all of the Company’s assets other than in the regular course of business, and plans of dissolutions. If at least two-thirds of our Board of
Directors has approved and recommended one of the above actions, a simple majority vote is required to approve the matter.
Staggered Board of Directors. According to our Bylaws, our Board of Directors must have a minimum of five members and a maximum of 15 members. Our Board consists of three groups
each of which serves three-year terms, with the term of office of one group expiring each year. According to our Articles of Incorporation and Bylaws, a director may be removed with or without cause by the
affirmative vote of a majority in interest of shareholders present at a meeting where a quorum is in attendance.
Authorized Shares of Preferred Stock. See “Description of the Series A Preferred Stock” regarding preferences associated with the issued and outstanding Series A Preferred Stock.
The Company is unable to determine the effects of any future issuance of a series of preferred stock on the rights of its shareholders until the Board of Directors determines the rights of the
holders of such series. However, such effects might include: (i) a preference in the payment of dividends to holders of preferred stock; (ii) dilution of voting power in the unlikely event that the holders of
shares of preferred stock are given voting rights; (iii) dilution of the equity interests and voting power of holders of common stock if the preferred stock is converted into common stock; (iv) a liquidation
preference above the holders of common stock; and (v) prevention of mergers with or business combinations by the Company and discouragement of possible tender offers for shares of the Company’s
common stock.
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Virginia Stock Corporation Act. Articles 14 and 14.1 of the Virginia Stock Corporation Act contain provisions regarding affiliated transactions and control share acquisitions. These provisions
could have an anti-takeover effect, thereby reducing the control premium that might otherwise be reflected in the value of our common stock. Although Virginia corporations are permitted to opt out of these
provisions, we have not done so. Below is a summary of the key provisions of these Articles. You should read the actual provisions of the Virginia Stock Corporation Act for a complete understanding of the
restrictions that these provisions place on affiliated transactions and control share acquisitions.
Affiliated Transactions Statute. Article 14 of the Virginia Stock Corporation Act governs “affiliated transactions,” or transactions between a Virginia corporation and an “interested
shareholder.” “Interested shareholders” are holders of more than 10% of any class of a corporation’s outstanding voting shares. Subject to certain exceptions discussed below, the affiliated transactions statute
requires that, for three years following the date upon which any shareholder becomes an interested shareholder, any affiliated transaction must be approved by the affirmative vote of holders of two-thirds of
the outstanding shares of the corporation entitled to vote, other than the shares beneficially owned by the interested shareholder, and by a majority (but not less than two) of the “disinterested directors.” The
affiliated transactions statute defines a disinterested director as a member of a corporation’s board of directors who either (i) was a member before the later of January 1, 1988 or the date on which an interested
shareholder became an interested shareholder or (ii) was recommended for election by, or was elected to fill a vacancy and received the affirmative vote of, a majority of the disinterested directors then on the
corporation’s board of directors. At the expiration of the three-year period after a shareholder becomes an interested shareholder, these provisions require that any affiliated transaction be approved by the
affirmative vote of the holders of two-thirds of the outstanding shares of the corporation entitled to vote, other than those beneficially owned by the interested shareholder.
The principal exceptions to the special voting requirement apply to affiliated transactions occurring after the three-year period has expired and require either that the affiliated transaction be
approved by a majority of the corporation’s disinterested directors or that the transaction satisfy specific statutory fair price requirements. In general, the fair price requirements provide that the shareholders
must receive for their shares the higher of: the highest per share price paid by the interested shareholder for his or its shares during the two-year period prior to becoming an interested shareholder, or the fair
market value of the shares. The fair price requirements also require that, during the three years preceding the announcement of the proposed affiliated transaction, all required dividends have been paid and no
special financial accommodations have been accorded the interested shareholder, unless approved by a majority of the disinterested directors.
Control Share Acquisitions Statute. With specific enumerated exceptions, Article 14.1 of the Virginia Stock Corporation Act applies to acquisitions of shares of a corporation which would
result in an acquiring person’s ownership of the corporation’s shares entitled to be voted in the election of directors falling within any one of the following ranges: 20% to 33 1/3 %, 33 1/3% to 50% or 50% or
more. Shares that are the subject of a control share acquisition will not be entitled to voting rights unless the holders of a majority of the “disinterested shares” vote at an annual or special meeting of
shareholders of the corporation to accord the control shares with voting rights. Disinterested shares are those outstanding shares entitled to be voted that are not owned by the acquiring person or by officers
and inside directors of the target company. Under specific circumstances, the control share acquisitions statute permits an acquiring person to call a special shareholders’ meeting for the purpose of considering
granting voting rights to the holders of the control shares. As a condition to having this matter considered at either an annual or special meeting, the acquiring person must provide shareholders with detailed
disclosures about his or its identity, the method and financing of the control share acquisition and any plans to engage in specific transactions with, or to make fundamental changes to, the corporation, its
management or business. Under specific circumstances, the control share acquisitions statute grants dissenters’ rights to shareholders who vote against granting voting rights to the control shares. Among the
acquisitions specifically excluded from the control share acquisitions statute are acquisitions which are a part of certain negotiated transactions to which the corporation is a party and which, in the case of
mergers or share exchanges have been approved by the corporation’s shareholders under other provisions of the Virginia Stock Corporation Act.
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DESCRIPTION OF THE PREFERRED STOCK
Our Articles of Incorporation authorize our Board of Directors to divide the authorized preferred stock into and issue the same in series and, to the fullest extent permitted by law, to fix and
determine the preferences, limitations and relative rights of the shares of any series so established, and to provide for the issuance thereof. Prior to the issuance of any share of a series of preferred stock, the
Board of Directors shall establish such series by adopting an amendment to the Articles of Incorporation.
On September 15 and September 25, 2020, we issued an aggregate 1,150,000 depositary shares, each representing a 1/40th ownership interest in a share of 7.50% Series A Fixed-Rate Non-
Cumulative Preferred Stock, par value $1.00 per share, with a liquidation preference of $1,000 per share of the Series A Preferred Stock (equivalent to $25 per depositary share) and an aggregate liquidation
preference of $28,750,000, all of which were outstanding as of December 31, 2020.
General
DESCRIPTION OF THE SERIES A PREFERRED STOCK
The Series A Preferred Stock is a single series of our authorized preferred stock. We are offering 1,000,000 depositary shares (1,150,000 depositary shares if the underwriters exercise their
over-allotment option in full), representing 25,000 shares of the Series A Preferred Stock (28,750 shares of the Series A Preferred Stock if the underwriters exercise their over-allotment option in full) in the
aggregate by this prospectus supplement and the accompanying prospectus. Shares of the Series A Preferred Stock, upon issuance against full payment of the purchase price for the depositary shares, will be
fully paid and nonassessable. The depositary will be the sole holder of shares of the Series A Preferred Stock. The holders of depositary shares will be required to exercise their proportional rights in the Series
A Preferred Stock through the depositary, as described in the section entitled “Description of the Depositary Shares.”
Shares of the Series A Preferred Stock rank senior to our common stock and at least equally with each other series of Series A Preferred Stock we may issue if provided for in the articles of
amendment relating to such Series A Preferred Stock or otherwise (except for any senior stock that may be issued with the requisite consent of the holders of the Series A Preferred Stock and all other parity
stock, if any), with respect to the payment of dividends and distributions of assets upon liquidation, dissolution or winding up of the Company. See “—Other Series A Preferred Stock” below. In addition, we
will generally be able to pay dividends and distributions upon liquidation, dissolution or winding up only out of lawfully available assets for such payment (after satisfaction of all claims for indebtedness and
other non-equity claims). Further, the Series A Preferred Stock may be fully subordinated to interests held by the U.S. government in the event that we enter into a receivership, insolvency, liquidation, or
similar proceeding.
The Series A Preferred Stock is not convertible into, or exchangeable for, shares of any other class or series of stock or other securities of the Company. The Series A Preferred Stock has no
stated maturity and is not subject to any sinking fund or other obligation of the Company to redeem or repurchase the Series A Preferred Stock.
We reserve the right to re-open this series and issue additional shares of the Series A Preferred Stock either through public or private sales at any time and from time to time, which may or may
not involve additional depositary shares. The additional shares would form a single series with the Series A Preferred Stock. In addition, we may from time to time, without notice to or consent of holders of
the Series A Preferred Stock or the depositary shares, issue additional shares of Series A Preferred Stock that rank equally with or junior to the Series A Preferred Stock.
Dividends
General. Dividends on the Series A Preferred Stock will not be cumulative. If our Board of Directors or a duly authorized committee of our Board of Directors does not declare a dividend on
the Series A Preferred Stock in respect of a dividend period, then no dividend shall be deemed to have accrued for such dividend period, be payable on the applicable dividend payment date, or be cumulative,
and we will have no obligation to pay any dividend for that dividend period, whether or not our Board of Directors or a duly authorized committee of our Board of Directors
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declares a dividend on the Series A Preferred Stock for any subsequent dividend period. A dividend period is each period from and including a dividend payment date to but excluding the next dividend
payment date, except that the initial dividend period commenced on and included the original issue date of the Series A Preferred Stock. Dividends payable on the Series A Preferred Stock will be computed on
the basis of a 360-day year consisting of twelve 30-day months.
Holders of the Series A Preferred Stock are entitled to receive, when, as, and if declared by our Board of Directors or a duly authorized committee of our Board of Directors out of assets legally
available for the payment of dividends under Virginia law, non-cumulative cash dividends based on the liquidation preference of the Series A Preferred Stock at a rate equal to 7.50% per annum for each
quarterly dividend period from the original issue date through the redemption date of the Series A Preferred Stock, if any. In the event that we issue additional shares of Series A Preferred Stock after the
original issue date, dividends on such shares will accrue from the original issue date of such additional shares or any other date we specify at the time such additional shares are issued.
If declared by our Board of Directors or a duly authorized committee of our Board of Directors, we will pay dividends on the Series A Preferred Stock quarterly in arrears, on March 30,
June 30, September 30 and December 30 of each year, commencing on December 30, 2020 (each such date, a “dividend payment date”). If any date on which dividends would otherwise be payable is not a
business day, then the dividend payment date will be the next business day without any adjustment to the amount of dividends paid. A business day means any weekday that is not a legal holiday in New York,
New York, and that is not a day on which banking institutions in New York, New York, are closed.
Dividends will be payable to holders of record of the Series A Preferred Stock as they appear on our stock register on the applicable record date, which shall be the 15th calendar day before the
applicable dividend payment date, or such other record date, not exceeding 30 calendar days before the applicable payment date, as shall be fixed by our Board of Directors or a duly authorized committee of
our Board of Directors. The corresponding record dates for the depositary shares will be the same as the record dates for the Series A Preferred Stock.
Dollar amounts resulting from that calculation will be rounded to the nearest cent, with one-half cent being rounded upward. Dividends on the Series A Preferred Stock will cease to accrue on
the redemption date, if any, as described below under “—Redemption,” unless we default in the payment of the redemption price of the shares of the Series A Preferred Stock called for redemption.
The Company’s ability to pay dividends on the Series A Preferred Stock depends on the ability of MainStreet Bank to pay dividends to the Company. The ability of the Company and
MainStreet Bank to pay dividends in the future is subject to bank regulatory requirements and capital adequacy rules and policies established by the Virginia Bureau of Financial Institutions and the Board of
Governance of the Federal Reserve System (the “Federal Reserve”). In particular, dividends on the Series A Preferred Stock may not be declared, paid or set aside for payment if and to the extent such
dividends would cause us to fail to comply with applicable laws and regulations, including capital adequacy rules applicable to us. The Federal Reserve also has the authority to prohibit or to limit the payment
of dividends by a banking organization under its jurisdiction if, in the Federal Reserve’s opinion, the organization is engaged in or is about to engage in an unsafe or unsound practice.
Priority of Dividends. The Series A Preferred Stock ranks junior as to payment of dividends to any class or series of our Series A Preferred Stock that we may issue in the future that is
expressly stated to be senior to the Series A Preferred Stock. If at any time we do not pay, on the applicable dividend payment date, accrued dividends on any shares that rank senior in priority to the Series A
Preferred Stock with respect to dividends, we may not pay any dividends on the Series A Preferred Stock or repurchase, redeem, or otherwise acquire for consideration any shares of Series A Preferred Stock
until we have paid, or set aside for payment, the full amount of the unpaid dividends on the shares that rank senior in priority with respect to dividends that must, under the terms of such shares, be paid before
we may pay dividends on, repurchase, redeem, or otherwise acquire for consideration, the Series A Preferred Stock. There are no other shares of Series A Preferred Stock issued and outstanding.
So long as any share of Series A Preferred Stock remains outstanding, unless, in each case, the full dividends for the preceding dividend period on all outstanding shares of the Series A
Preferred Stock have been paid in full or declared and a sum sufficient for the payment thereof has been set aside for payment:
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no dividend shall be declared or paid or set aside for payment and no distribution shall be declared or made or set aside for payment on any junior stock (other than (i) a dividend
payable solely in junior stock or (ii) any dividend in connection with the implementation of a shareholders’ rights plan, or the redemption or repurchase of any rights under any such
plan);
no shares of junior stock shall be repurchased, redeemed or otherwise acquired for consideration by us, directly or indirectly (other than (i) as a result of a reclassification of junior stock
for or into other junior stock, (ii) the exchange or conversion of one share of junior stock for or into another share of junior stock, (iii) through the use of the proceeds of a substantially
contemporaneous sale of other shares of junior stock, (iv) purchases, redemptions or other acquisitions of shares of junior stock in connection with any employment contract, benefit
plan or other similar arrangement with or for the benefit of employees, officers, directors or consultants, (v) purchases of shares of junior stock pursuant to a contractually binding
requirement to buy junior stock existing prior to the preceding dividend period, including under a contractually binding stock repurchase plan, (vi) the purchase of fractional interests in
shares of junior stock pursuant to the conversion or exchange provisions of such stock or the security being converted or exchanged, or (vii) the acquisition by us or any of our
subsidiaries of record of ownership in junior stock for the beneficial ownership of any other persons (other than for the beneficial ownership by us or any of our subsidiaries), including
as trustees or custodians), nor shall any monies be paid to or made available for a sinking fund for the redemption of any such securities by us; and
no shares of parity stock, if any, shall be repurchased, redeemed or otherwise acquired for consideration by us, directly or indirectly (other than (i) pursuant to pro rata offers to
purchase all, or a pro rata portion, of the Series A Preferred Stock and such parity stock, if any, (ii) as a result of a reclassification of parity stock for or into other parity stock, (iii) the
exchange or conversion of parity stock for or into other parity stock or junior stock, (iv) through the use of the proceeds of a substantially contemporaneous sale of other shares of parity
stock, (v) purchases of shares of parity stock pursuant to a contractually binding requirement to buy parity stock existing prior to the preceding dividend period, including under a
contractually binding stock repurchase plan, (vi) the purchase of fractional interests in shares of parity stock pursuant to the conversion or exchange provisions of such stock or the
security being converted or exchanged, or (vii) the acquisition by us or any of our subsidiaries of record of ownership in parity stock for the beneficial ownership of any other persons
(other than for the beneficial ownership by us or any of our subsidiaries), including as trustees or custodians), nor shall any monies be paid to or made available for a sinking fund for
the redemption of any such securities by us.
We will not declare or pay or set apart funds for the payment of dividends on any parity stock, unless we have paid or set apart funds for the payment of dividends on the Series A Preferred
Stock. When dividends are not paid in full upon shares of Series A Preferred Stock and parity stock, if any, all dividends declared upon shares of Series A Preferred Stock and parity stock will be declared on a
proportional basis so that the amount of dividends declared per share will bear to each other the same ratio that accrued dividends for the then-current dividend period per share on the Series A Preferred Stock,
and accrued dividends, including any accumulations, if any, on parity stock, if any, bear to each other.
As used herein, “junior stock” means our common stock and any other class or series of stock of the Company hereafter authorized over which the Series A Preferred Stock has preference or
priority in the payment of dividends or in the distribution of assets on any liquidation, dissolution or winding up of the Company. As of the date of this prospectus supplement, our common stock is the only
series of junior stock outstanding.
As used herein, “parity stock” means any other class or series of stock of the Company that ranks on a parity with the Series A Preferred Stock with respect to the payment of dividends and
distributions of assets upon liquidation, dissolution or winding up of the Company. As of the date of this prospectus supplement, there are no series of parity stock outstanding. See “—Other Series A Preferred
Stock” below.
As used herein, “senior stock” means any other class or series of stock of the Company ranking senior to the Series A Preferred Stock with respect to the payment of dividends and distributions
of assets upon liquidation, dissolution or winding up of the Company. There are no series of senior stock outstanding. See “—Other Series A Preferred Stock” below.
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Subject to the considerations described above, and not otherwise, dividends (payable in cash, stock or otherwise), as may be determined by our Board of Directors or a duly authorized
committee of our Board of Directors, may be declared and paid on our common stock and any other stock ranking equally with or junior to the Series A Preferred Stock from time to time out of any assets
legally available for such payment, and the holders of Series A Preferred Stock shall not be entitled to participate in any such dividend.
Redemption
The Series A Preferred Stock is not subject to any mandatory redemption, sinking fund or other similar provisions. Neither the holders of Series A Preferred Stock nor holders of depositary
shares will have the right to require the redemption or repurchase of the Series A Preferred Stock.
We may, at our option and subject to any required regulatory approval, redeem the Series A Preferred Stock (i) in whole or in part, from time to time, on any dividend payment date on or after
September 30, 2025, or (ii) in whole, but not in part, at any time within 90 days following a “regulatory capital treatment event,” in either case at a redemption price equal to $1,000 per share (equivalent to $25
per depositary share), plus any declared and unpaid dividends on the shares of Series A Preferred Stock called for redemption up to the redemption date.
A “regulatory capital treatment event” means the good faith determination by the Company that, as a result of any:
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amendment to, or change (including any announced prospective change) in, the laws or regulations of the United States or any political subdivision of or in the United States that is
enacted or becomes effective after the initial issuance of any share of Series A Preferred Stock;
proposed change in those laws or regulations that is announced or becomes effective after the initial issuance of any share of Series A Preferred Stock; or
official administrative decision or judicial decision or administrative action or other official pronouncement interpreting or applying those laws or regulations that is announced after the
initial issuance of any share of Series A Preferred Stock;
there is more than an insubstantial risk that the Company will not be entitled to treat the full liquidation value of the shares of Series A Preferred Stock then outstanding as “Tier 1 capital” (or its equivalent) for
purposes of the Federal Reserve’s capital adequacy rules (or, as and if applicable, the capital adequacy rules of any successor federal banking regulator or agency), as then in effect and applicable, for as long
as any share of Series A Preferred Stock is outstanding.
We are a bank holding company regulated by the Federal Reserve. We treat the Series A Preferred Stock as “additional tier 1 capital” (or its equivalent) for purposes of the capital adequacy
rules of the Federal Reserve (or, as and if applicable, the capital adequacy rules or regulations of any successor federal banking agency) applicable to us.
If shares of the Series A Preferred Stock are to be redeemed, the notice of redemption shall be sent to the holders of record of the Series A Preferred Stock to be redeemed not less than 30 days
nor more than 60 days prior to the date fixed for redemption thereof (provided that, if the depositary shares representing the Series A Preferred Stock are held in book-entry form through The Depository Trust
Company (“DTC”), we may give such notice in any manner permitted by DTC). Each notice of redemption will include a statement setting forth:
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the redemption date;
the number of shares of Series A Preferred Stock to be redeemed and, if fewer than all the shares held by the holder are to be redeemed, the number of shares of Series A Preferred
Stock to be redeemed from the holder;
the redemption price;
the place or places where the certificates evidencing shares of Series A Preferred Stock, if applicable, are to be surrendered for payment of the redemption price; and
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that dividends on the shares of Series A Preferred Stock to be redeemed will cease to accrue on the redemption date.
Upon the redemption date, dividends will cease to accrue on shares of Series A Preferred Stock, and such shares of Series A Preferred Stock shall no longer be deemed outstanding and all
rights of the holders of such shares will terminate, including the rights described under “—Voting Rights” below, except the right to receive the redemption price plus any declared and unpaid dividends on the
shares of Series A Preferred Stock called for redemption up to the redemption date. See “Description of the Depositary Shares” for information about redemption of the depositary shares relating to the Series
A Preferred Stock.
In case of any redemption of only part of the shares of the Series A Preferred Stock at the time outstanding, the shares to be redeemed shall be selected pro rata or by lot. Subject to the
provisions hereof, our Board of Directors or a duly authorized committee of our Board of Directors shall have full power and authority to prescribe the terms and conditions upon which shares of the Series A
Preferred Stock shall be redeemed from time to time.
Under the Federal Reserve’s capital adequacy rules applicable to bank holding companies, any redemption of the Series A Preferred Stock is subject to prior approval by the Federal Reserve.
Any redemption of the Series A Preferred Stock is subject to our receipt of any required prior approval by the Federal Reserve and to the satisfaction of any conditions set forth in the capital adequacy rules of
the Federal Reserve applicable to redemption of the Series A Preferred Stock.
Neither the holders of the Series A Preferred Stock nor the holders of the related depositary shares have the right to require the redemption or repurchase of the Series A Preferred Stock. Any
notice of redemption, once given, shall be irrevocable.
Liquidation Rights
In the event that we voluntarily or involuntarily liquidate, dissolve or wind-up our business and affairs, holders of the Series A Preferred Stock will be entitled to receive a liquidating
distribution of $1,000 per share of the Series A Preferred Stock (equivalent to $25 per depositary share), plus any declared and unpaid dividends, without accumulation of any undeclared dividends, out of
assets legally available for distribution to our shareholders, before we make any distribution of assets to the holders of our common stock or any other class or series of shares ranking junior to the Series A
Preferred Stock. Holders of the Series A Preferred Stock will not be entitled to any other amounts from us after they have received their full liquidating distribution.
In any such distribution, if the assets of the Company are not sufficient to pay the liquidation preferences plus declared and unpaid dividends in full to all holders of the Series A Preferred Stock
and all holders of parity stock, if any, as to such distribution with the Series A Preferred Stock, the amounts paid to the holders of Series A Preferred Stock and the holders of parity stock, if any, will be paid
pro rata in accordance with the respective aggregate liquidating distribution owed to those holders. If the liquidation preference plus declared and unpaid dividends has been paid in full to all holders of Series
A Preferred Stock and parity stock, if any, the holders of our junior stock shall be entitled to receive all remaining assets of the Company according to their respective rights and preferences.
In addition, we will generally be able to pay dividends and distributions upon liquidation, dissolution or winding up only out of lawfully available assets for such payment (after satisfaction of
all claims for indebtedness and other non-equity claims). Further, the Series A Preferred Stock may be fully subordinated to interests held by the U.S. government in the event that we enter into a receivership,
insolvency, liquidation, or similar proceeding.
Our merger or consolidation with any other entity, including a merger or consolidation in which the holders of Series A Preferred Stock receive cash, securities or property for their shares, or
the sale, lease or exchange of all or substantially all of the assets of the Company for cash, securities or other property, shall not constitute a liquidation, dissolution or winding up of the Company.
Because we are a holding company, our rights and the rights of our creditors and our shareholders, including the holders of the Series A Preferred Stock, to participate in the assets of any
subsidiary, including MainStreet Bank,
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upon that subsidiary’s liquidation or recapitalization may be subject to the prior claims of that subsidiary’s creditors, including deposits, except to the extent that we are a creditor with recognized claims
against the subsidiary.
Voting Rights
Except as provided below, the holders of the Series A Preferred Stock will have no voting rights.
Right to Elect Two Directors upon Nonpayment of Dividends. If we fail to pay, or declare and set apart for payment, dividends on outstanding shares of the Series A Preferred Stock for six
quarterly dividend periods, whether or not consecutive (a “Nonpayment”), the number of members of our Board of Directors shall be increased by two, and the holders of outstanding shares of the Series A
Preferred Stock, voting as a single class with the holders of shares of any equally ranked series of Series A Preferred Stock for which dividends have not been paid and upon which voting rights have been
conferred and are exercisable (“Voting Parity Stock”) shall be entitled to vote for the election of two additional members of the Board of Directors (the “Series A Preferred Stock Directors”), with each series
or class having a number of votes proportionate to the aggregate liquidation preference of the outstanding shares of such class or series. At any time after such voting power has vested, the holders of the Series
A Preferred Stock shall have the right, voting as a single class together with the holders of Voting Parity Stock (if any), to elect two Series A Preferred Stock Directors at a special meeting called upon the
written request of the holders of record of at least 20% of the outstanding shares of the Series A Preferred Stock or any series of Voting Parity Stock (unless such request is received by us less than 90 days
before the date publicly announced for our next annual meeting or fixed for a special meeting of shareholders, in which event such election shall be held at such upcoming annual or special meeting of the
shareholders); provided that at no time shall our Board of Directors include more than two Series A Preferred Stock Directors, and provided further that any election of Series A Preferred Stock Directors
would not cause us to violate the corporate governance requirements of the Nasdaq Capital Market (or any other exchange on which our securities may be listed) regarding the independence of directors or
other similar requirements. Notice for any such special meeting will be given in a similar manner to that provided in the Company’s Bylaws for a special meeting of shareholders of the Company.
The Series A Preferred Stock Directors elected at any such special meeting or annual meeting will hold office until our next annual meeting of shareholders unless their term has been
previously terminated as described below. In case any vacancy occurs among the Series A Preferred Stock Directors, a successor will be elected by the Board of Directors to serve until the next annual meeting
of shareholders upon the nomination by the remaining Series A Preferred Stock Director or, if no Series A Preferred Stock Director remains in office, by the vote of the holders of record of the outstanding
shares of Series A Preferred Stock and any series of Voting Parity Stock, voting as a single class, with each series or class having a number of votes proportionate to the aggregate liquidation preference of the
outstanding shares of such class or series. Each of the two Series A Preferred Stock Directors shall each be entitled to one vote per director on any matter.
Upon payment in full of continuous noncumulative dividends on the Series A Preferred Stock for a period of one year following a Nonpayment, the terms of the two Series A Preferred Stock
Directors elected as set forth above shall immediately terminate, the number of directors shall be reduced by two, and the voting rights described above shall cease, subject to revesting of such voting rights in
the event of any future Nonpayment. In addition, if and when the rights of holders of Series A Preferred Stock terminate for any reason, including under circumstances described above under “— Redemption,”
such voting rights shall terminate along with the other rights (except, if applicable, the right to receive the redemption price plus any declared and unpaid dividends), and the terms of any Series A Preferred
Stock Directors shall terminate automatically and the number of directors shall be reduced by two, assuming that the rights of holders of such Voting Parity Stock have similarly terminated.
Under the regulations of the Federal Reserve, if the holders of any series of Series A Preferred Stock are or become entitled to vote separately for the election of directors as a class, such series,
along with any other holders of stock that are entitled to vote for the election of directors with that series, will be deemed a class of voting securities. A company holding 25% or more of that class, or less if it
otherwise exercises a “controlling influence” over us, will be subject to regulation as a bank holding company under the Bank Holding Company Act of 1956, as amended (the “BHC Act”). In addition, at the
time the series is deemed a class of voting securities, any other bank holding company will be required to obtain the prior approval of the Federal Reserve under the BHC Act to acquire or retain more than 5%
of that class. Any other person (other than a bank holding company) will be required to obtain the non-objection
9
of the Federal Reserve under the Change in Bank Control Act of 1978, as amended, to acquire or retain 10% or more of that class.
Other Voting Rights. So long as any shares of Series A Preferred Stock remain outstanding, the affirmative vote or consent of the holders of at least two-thirds of all outstanding shares of the
Series A Preferred Stock, voting separately as a class, shall be required to:
•
•
•
authorize or increase the authorized amount of, or issue shares of, any class or series of senior stock, or issue any obligation or security convertible into or evidencing the right to
purchase any such shares of senior stock;
amend the provisions of our Articles of Incorporation, so as to adversely affect the powers, preferences, privileges or rights of the Series A Preferred Stock, taken as a whole; provided,
however, that any increase in the amount of the authorized or issued Series A Preferred Stock or authorized common stock or Series A Preferred Stock or the creation and issuance, or
an increase in the authorized or issued amount, of other series of Series A Preferred Stock ranking equally with or junior to the Series A Preferred Stock with respect to the payment of
dividends or the distribution of assets upon liquidation, dissolution or winding up of the Company will not be deemed to adversely affect the powers, preferences, privileges or rights of
the Series A Preferred Stock; or
consummate a binding share-exchange or reclassification involving the Series A Preferred Stock, or a merger or consolidation with or into another entity unless (i) the shares of the
Series A Preferred Stock remain outstanding or are converted into or exchanged for preferred securities of the surviving entity and (ii) the shares of the remaining Series A Preferred
Stock or the new preferred securities of the surviving entity have terms that are not materially less favorable than the Series A Preferred Stock.
The foregoing voting provisions will not apply if, at or prior to the time when the act with respect to which such vote would otherwise be required shall be effected, all outstanding shares of
Series A Preferred Stock shall have been redeemed.
Voting Rights under Virginia Law. Except as expressly set forth in the Articles of Amendment, the Virginia Stock Corporation Act does not provide any additional voting rights to the holders
of the Series A Preferred Stock. Therefore, under the Virginia Stock Corporation Act, the holders of the Series A Preferred Stock will only have those voting rights set forth above under “—Voting Rights.”
Preemptive and Conversion Rights
The holders of the Series A Preferred Stock do not have any preemptive or conversion rights.
Other Series A Preferred Stock
Our Articles of Incorporation authorize our Board of Directors to create and provide for the issuance of one or more series of Series A Preferred Stock without the approval of our shareholders.
Our Board of Directors can also determine the terms, including the designations, powers, preferences and rights (including conversion, voting and other rights) and the qualifications, limitations or restrictions,
of any such series of Series A Preferred Stock. Currently, 2,000,000 shares of our capital stock are classified as preferred stock under our Articles of Incorporation.
Depositary Agent, Transfer Agent and Registrar
American Stock Transfer & Trust Company, LLC is the depositary, transfer agent and registrar for the Series A Preferred Stock. We may, in our sole discretion, remove the depositary in
accordance with the agreement between
10
us and the depositary; provided that we will appoint a successor depositary who will accept such appointment prior to the effectiveness of its removal.
Information Rights
During any period in which the Company is not subject to Section 13 or 15(d) of the Exchange Act and any shares of the Series A Preferred Stock are outstanding, we will use our best efforts to
(i) make available on our website, at www.mstreetbank.com, current information specified in Rule 144(c)(2) under the Securities Act of 1933 and Rule 15c2-11(a)(5)(i) to (xiv) and (xvi) under the Exchange
Act; and (ii) promptly, upon request, supply such information to any holder or prospective holder of Series A Preferred Stock.
General
DESCRIPTION OF THE DEPOSITARY SHARES
We are issuing depositary shares representing proportional fractional interests in shares of the Series A Preferred Stock. Each depositary share represents a 1/40th interest in a share of the Series
A Preferred Stock, and will be evidenced by depositary receipts. We will deposit the underlying shares of the Series A Preferred Stock with a depositary pursuant to a deposit agreement among us, American
Stock Transfer & Trust Company, LLC and the holders from time to time of the depositary receipts evidencing the depositary shares (the “Deposit Agreement”). Subject to the terms of the Deposit Agreement,
each holder of a depositary share will be entitled, through the depositary, in proportion to the applicable fraction of a share of Series A Preferred Stock represented by such depositary share, to all the rights and
preferences of the Series A Preferred Stock represented thereby, including dividend, voting, redemption and liquidation rights.
References herein to “holders” of depositary shares mean those persons who own depositary shares registered in their own names on the books that we or the depositary maintain for this
purpose, and not indirect holders who own beneficial interests in depositary shares registered in street name or issued in book-entry form through DTC. Please review the special considerations that apply to
indirect holders described in the section entitled “Book-Entry Issuance.”
American Stock Transfer & Trust Company, LLC is the depositary, transfer agent and registrar for the depositary shares.
Dividends and Other Distributions
Each dividend payable on a depositary share will be in an amount equal to 1/40th of the dividend declared and payable on the related share of the Series A Preferred Stock.
The depositary will distribute any cash dividends or other cash distributions received in respect of the deposited Series A Preferred Stock to the record holders of depositary shares relating to
the underlying Series A Preferred Stock in proportion to the number of depositary shares held by such holders. If we make a distribution other than in cash, the depositary will distribute any property received
by it to the record holders of depositary shares entitled to those distributions, unless it determines that it is not feasible to make a distribution. In that event, the depositary may, with our approval, sell the
property and distribute the net proceeds from the sale to the record holders of the depositary shares.
Record dates for the payment of dividends and other matters relating to the depositary shares are the same as the corresponding record dates for the Series A Preferred Stock.
The amounts distributed to holders of depositary shares will be reduced by any amounts required to be withheld by the depositary or by us on account of taxes or other governmental charges.
11
Redemption of Depositary Shares
If we redeem the Series A Preferred Stock represented by the depositary shares, the depositary shares will be redeemed from the proceeds received by the depositary resulting from the
redemption of the Series A Preferred Stock held by the depositary. The redemption price per depositary share is expected to be equal to 1/40th of the redemption price per share payable with respect to the
Series A Preferred Stock (or $25 per depositary share), plus any declared and unpaid dividends, without accumulation of any undeclared dividends.
Whenever we redeem shares of Series A Preferred Stock held by the depositary, the depositary will redeem, as of the same redemption date, the number of depositary shares representing shares
of Series A Preferred Stock so redeemed. If fewer than all of the outstanding depositary shares are redeemed, the depositary will select the depositary shares to be redeemed pro rata or by lot, or in such other
manner that the depositary determines to be fair and equitable. The depositary will send notice of redemption to record holders of the depositary receipts not less than 30 and not more than 60 days prior to the
date fixed for redemption of the Series A Preferred Stock and the related depositary shares (provided that, if the depositary shares representing the Series A Preferred Stock are held in book-entry form through
DTC, the depositary may give such notice in any manner permitted by DTC).
Voting the Series A Preferred Stock
Because each depositary share represents a 1/40th interest in a share of the Series A Preferred Stock, holders of depositary receipts will be entitled to 1/40th of a vote per depositary share under
those limited circumstances in which holders of the Series A Preferred Stock are entitled to a vote, as described above in “Description of the Series A Preferred Stock—Voting Rights.”
When the depositary receives notice of any meeting at which the holders of the Series A Preferred Stock are entitled to vote, the depositary will send the information contained in the notice to
the record holders of the depositary shares relating to the Series A Preferred Stock. Each record holder of the depositary shares on the record date, which will be the same date as the record date for the Series A
Preferred Stock, may instruct the depositary to vote the amount of the Series A Preferred Stock represented by the holder’s depositary shares. Insofar as practicable, the depositary will vote the amount of the
Series A Preferred Stock represented by depositary shares in accordance with the instructions it receives. We will agree to take all reasonable actions that the depositary determines are necessary to enable the
depositary to vote as instructed. If the depositary does not receive specific instructions from the holders of any depositary shares representing the Series A Preferred Stock, it will not vote the amount of the
Series A Preferred Stock represented by such depositary shares.
Listing of Depositary Shares
The depositary shares are listed on the Nasdaq Capital Market under the symbol “MNSBP.”
Withdrawal of Series A Preferred Stock
Any holder of depositary shares may receive the number of whole shares of Series A Preferred Stock and any money or other property represented by the depositary shares held by such holder
after surrendering the depositary receipts representing such depositary shares to the depositary, paying any taxes, governmental charges and fees provided for in the Deposit Agreement and complying with any
other requirement of the Deposit Agreement. Holders of depositary shares making these withdrawals will be entitled to receive such whole shares of Series A Preferred Stock, but holders of such whole shares
of Series A Preferred Stock will not be entitled to deposit that Series A Preferred Stock under the Deposit Agreement or to receive depositary shares for such Series A Preferred Stock after withdrawal. If the
depositary shares surrendered by the holder in connection with withdrawal exceed the number of depositary shares that represent the number of whole shares of Series A Preferred Stock to be withdrawn, the
depositary will deliver to that holder at the same time a new depositary receipt evidencing the excess number of depositary shares.
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Amendment and Termination of the Deposit Agreement
We may amend the form of depositary receipt evidencing the depositary shares and any provision of the Deposit Agreement at any time and from time to time by agreement with the depositary
without the consent of the holders of depositary receipts. However, any amendment that would materially and adversely alter the rights of the holders of depositary receipts or that would be materially and
adversely inconsistent with the rights granted to the holders of the Series A Preferred Stock will not be effective unless the holders of at least a majority of the affected depositary shares then outstanding
approve the amendment. We will make no amendment that impairs the right of any holder of depositary shares, as described above under “—Withdrawal of Series A Preferred Stock,” to receive shares of
Series A Preferred Stock and any money or other property represented by those depositary shares, except in order to comply with mandatory provisions of applicable law. Holders who retain or acquire their
depositary receipts after an amendment becomes effective will be deemed to have agreed to the amendment and will be bound by the amended Deposit Agreement.
The Deposit Agreement will automatically terminate if:
•
•
all outstanding depositary shares have been redeemed; or
a final distribution in respect of the Series A Preferred Stock has been made to the holders of depositary receipts in connection with any liquidation, dissolution or winding up of the
Company.
We may terminate the Deposit Agreement at any time upon not less than 35 days’ prior notice to the depositary, and the depositary will give notice of that termination to the record holders of
all outstanding depositary shares not less than 30 days before the termination date. In the event of such termination, the depositary will deliver or make available for delivery to holders of depositary receipts,
upon surrender of such depositary receipts, the number of whole or fractional shares of Series A Preferred Stock as are represented by the depositary shares evidenced by such depositary receipts.
Upon termination of the Deposit Agreement, the depositary will discontinue the transfer of depositary receipts, will suspend the distribution of dividends and will not give any further notices
(other than notice of such termination) or perform any further acts under the Deposit Agreement, except that the depositary will continue to collect dividends and other distributions pertaining to Series A
Preferred Stock and will continue to deliver Series A Preferred Stock certificates together with such dividends and distributions.
At any time after the expiration of three years from the date of termination, the depositary may sell the Series A Preferred Stock and hold the proceeds of such sale, without interest, for the
benefit of the holders of depositary receipts who have not then surrendered their depositary receipts. After making such sale, the depositary will be discharged from all obligations under the Deposit
Agreement, except to account for such proceeds.
Charges of Depositary
We will pay the charges of the depositary in connection with any redemption of the Series A Preferred Stock at our option and all withdrawals of Series A Preferred Stock by holders of
depositary shares as previously agreed between us and the depositary. We will also pay all taxes and governmental charges arising solely from the existence of the Deposit Agreement. Holders of depositary
shares will pay all other transfer fees, taxes and governmental charges and, such other charges as are expressly provided in the Deposit Agreement to be for their accounts. All other charges and expenses of the
depositary, the registrar, and the transfer agent incident to the performance of their respective obligations arising from the depositary arrangements will be paid by us.
Resignation and Removal of Depositary
The depositary may resign at any time by delivering to us notice of its resignation and we may at any time remove the depositary, with any such resignation or removal taking effect upon the
appointment of a successor depositary and its acceptance of such appointment. Such successor depositary will be appointed by us within 60 days after delivery of the notice of resignation or removal.
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Miscellaneous
The depositary will forward to the holders of the depositary shares all notices and reports from us that we are required to furnish to the holders of the Series A Preferred Stock.
Neither the depositary nor we will be liable if it or we are prevented or delayed by law or any circumstances beyond its or our control in performing our respective obligations under the Deposit
Agreement. Our obligations and the obligations of the depositary under the Deposit Agreement will be limited to the performance of such duties as are set forth in the Deposit Agreement. Neither we nor the
depositary shall be subject to any liability under the Deposit Agreement, other than for bad faith, gross negligence or willful misconduct.
Neither we nor the depositary, the registrar or the transfer agent will be obligated to prosecute or defend any legal proceedings in respect of any depositary shares or the Series A Preferred
Stock unless a satisfactory indemnity is furnished. We and the depositary may rely upon written advice of counsel or independent accountants, or information provided by persons presenting Series A Preferred
Stock for deposit, holders of depositary shares or other persons believed to be competent and on documents believed to be genuine.
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Exhibit 23.1
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We consent to the incorporation by reference in the Registration Statements on Form S-3 (No. 333-241000) and Form S-8 (No. 333-233077 and 333-233078) of MainStreet Bancshares, Inc. of our report dated
March 23, 2021, relating to the consolidated financial statements of MainStreet Bancshares, Inc., appearing in the Annual Report on Form 10-K of MainStreet Bancshares, Inc. for the year ended December 31,
2020.
/s/ YOUNT, HYDE & BARBOUR, P.C.
Winchester, Virginia
March 23, 2021
Exhibit 31.1
I, Jeff W. Dick, certify that:
Certification
1.
2.
3.
4.
I have reviewed this annual report on Form 10-K of MainStreet Bancshares, Inc.;
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;
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;
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)
(b)
(c)
(d)
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;
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability
of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
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
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: March 23, 2021
/s/ Jeff W. Dick
Jeff W. Dick
Chairman and Chief Executive Officer
(principal executive officer)
Exhibit 31.2
I, Thomas J. Chmelik, certify that:
Certification
1.
2.
3.
4.
I have reviewed this annual report on Form 10-K of MainStreet Bancshares, Inc.;
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;
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;
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)
(b)
(c)
(d)
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;
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability
of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
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
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: March 23, 2021
/s/ Thomas J. Chmelik
Thomas J. Chmelik
Senior Executive Vice President and
Chief Financial Officer
(principal financial officer)
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
Exhibit 32.0
In connection with the annual report on Form 10-K of MainStreet Bancshares, Inc. (the “Company”) for the fiscal year ended December 31, 2020 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.
2.
The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and
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)
March 23, 2021
By: /s/ Thomas J. Chmelik
Thomas J. Chmelik
Senior Executive Vice President and
Chief Financial Officer
(principal financial officer)
March 23, 2021