MNSB 10-Q Quarterly Report Sept. 30, 2022 | Alphaminr
MainStreet Bancshares, Inc.
ALPHAMINR

MNSB 10-Q Quarter ended Sept. 30, 2022

Balance Sheet
Cash Flow
Income Statement
main20220930b_10q.htm
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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2022

OR

☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to to

Commission file number: 001-38817

mlogo.jpg

MainStreet Bancshares, Inc.

(Exact Name of Registrant as Specified in Its Charter)

Virginia

81-2871064

(State or Other Jurisdiction of

Incorporation or Organization)

(I.R.S. Employer

Identification No.)

10089 Fairfax Boulevard , Fairfax , VA 22030

(Address of Principal Executive Offices and Zip Code)

( 703 ) 481-4567

(Registrant ’ s Telephone Number, Including Area Code)

Not applicable

(Former name, former address and former fiscal year, if changed since last report)

Securities registered pursuant to Section 12(b) of the Act.

Title of each class

Trading

Symbol(s)

Name of each exchange

on which registered

Common Stock

MNSB

The Nasdaq Stock Market LLC

Depositary Shares (each representing a 1/40 th interest in a share of 7.50% Series A Fixed-Rate Non-Cumulative Perpetual Preferred Stock)

MNSBP

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, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer”, “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer

☐

Accelerated filer

☐

Non-accelerated filer

☒

Smaller reporting company

☒

Emerging growth company

☒

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☒

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). ☐ Yes    ☒  No

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: As of November 7, 2022, there were 7,435,193 outstanding shares, par value $4.00 per share, of the issuer’s common stock.

INDEX

PART I – FINANCIAL INFORMATION

3

Item 1 – Consolidated Financial Statements

3

Notes to Consolidated Financial Statements

8

Item 2 – Management’s Discussion and Analysis of Financial Condition and Results of Operations

24

Item 3 – Quantitative and Qualitative Disclosures about Market Risk

39

Item 4 – Controls and Procedures

39

PART II – OTHER INFORMATION

40

Item 1 – Legal Proceedings

40

Item 1A – Risk Factors

40

Item 2 – Unregistered Sales of Equity Securities and Use of Proceeds

41

Item 6 – Exhibits

41

SIGNATURES

42

2

PART I – FINANCIAL INFORMATION

Item 1 – Consolidated Financial Statements – Unaudited

MAINSTREET BANCSHARES, INC. AND SUBSIDIARY

Consolidated Statements of Financial Condition as of  September 30, 2022 and December 31, 2021 (Dollars in thousands, except share and per share data)

At September 30, 2022 (unaudited) At December 31, 2021 (*)

Assets

Cash and due from banks

$ 50,636 $ 61,827

Federal funds sold

54,098 31,372

Cash and cash equivalents

104,734 93,199

Investment securities available-for-sale, at fair value

162,319 99,913

Investment securities held-to-maturity, at amortized cost

17,670 20,349

Restricted securities, at cost

16,436 15,609

Loans, net of allowance for loan losses of $ 12,994 and $ 11,697 , respectively

1,448,071 1,341,760

Premises and equipment, net

14,523 14,863

Other real estate owned, net

— 775

Accrued interest and other receivables

8,273 7,701

Bank owned life insurance

36,996 36,241

Computer software, net of amortization

7,258 2,493

Other assets

43,835 14,499

Total Assets

$ 1,860,115 $ 1,647,402

Liabilities and Stockholders’ Equity

Liabilities

Non-interest bearing deposits

$ 566,016 $ 530,678

Interest bearing demand deposits

93,695 69,232

Savings and NOW deposits

54,240 85,175

Money market deposits

254,190 267,730

Time deposits

585,783 459,148

Total deposits

1,553,924 1,411,963

Subordinated debt, net

72,146 29,294

Other liabilities

44,045 17,357

Total Liabilities

1,670,115 1,458,614

Stockholders’ Equity

Preferred stock, $ 1.00 par value, 2,000,000 shares authorized; 28,750 shares issued and outstanding as of September 30, 2022 and December 31, 2021

27,263 27,263

Common stock, $ 4.00 par value, 10,000,000 shares authorized; issued and outstanding 7,425,432 shares (including 243,786 nonvested shares) for September 30, 2022 and 7,595,781 shares (including 229,257 nonvested shares) for December 31, 2021

28,728 29,466

Capital surplus

63,231 67,668

Retained earnings

80,534 64,194

Accumulated other comprehensive income (loss)

( 9,756 ) 197

Total Stockholders’ Equity

190,000 188,788

Total Liabilities and Stockholders’ Equity

$ 1,860,115 $ 1,647,402

*         Derived from audited consolidated financial statements.

See Notes to the Unaudited Consolidated Financial Statements

3

MAINSTREET BANCSHARES, INC. AND SUBSIDIARY

Unaudited Consolidated Statements of Income for the Three and Nine months ended September 30, 2022 and 2021 (Dollars in thousands, except per share data)

For the Three Months Ended September 30,

For the Nine Months Ended September 30,

2022

2021

2022

2021

Interest Income

Interest and fees on loans

$ 20,261 $ 15,162 $ 54,900 $ 46,211

Interest on investments securities

Taxable securities

378 318 1,136 910

Tax-exempt securities

261 267 796 802

Interest on federal funds sold

1,013 38 1,241 73

Total Interest Income

21,913 15,785 58,073 47,996

Interest Expense

Interest on interest bearing DDA deposits

175 60 345 170

Interest on savings and NOW deposits

43 38 122 127

Interest on money market deposits

496 148 766 645

Interest on time deposits

2,275 1,795 5,236 6,039

Interest on Federal Home Loan Bank advances and other borrowings

— — 83 —

Interest on subordinated debt

828 541 2,108 1,346

Total Interest Expense

3,817 2,582 8,660 8,327

Net Interest Income

18,096 13,203 49,413 39,669

Provision for (recovery of) Loan Losses

— 290 1,280 ( 1,470 )

Net Interest Income After Provision For (Recovery of) Loan Losses

18,096 12,913 48,133 41,139

Non-Interest Income

Deposit account service charges

601 642 1,810 1,802

Bank owned life insurance income

254 252 755 646

Loan swap fee income

518 — 619 —

Net gain on held-to-maturity securities

— — 4 3

Net gain (loss) on sale of loans

( 211 ) ( 40 ) ( 168 ) 474

Other non-interest income

186 632 753 1,562

Total Non-Interest Income

1,348 1,486 3,773 4,487

Non-Interest Expense

Salaries and employee benefits

5,874 4,847 17,025 14,276

Furniture and equipment expenses

760 716 2,076 1,743

Advertising and marketing

704 438 1,684 1,115

Occupancy expenses

400 399 1,093 1,092

Outside services

611 292 1,545 908

Administrative expenses

253 202 658 493

Other non-interest expenses

1,291 1,567 4,268 4,517

Total Non-Interest Expense

9,893 8,461 28,349 24,144

Income Before Income Taxes

9,551 5,938 23,557 21,482

Income Tax Expense

1,808 1,155 4,462 4,124

Net Income

$ 7,743 $ 4,783 $ 19,095 $ 17,358

Preferred Stock Dividends

539 539 1,617 1,617

Net Income Available To Common Shareholders

$ 7,204 $ 4,244 $ 17,478 $ 15,741

Net Income Per Common Share:

Basic

$ 0.97 $ 0.56 $ 2.31 $ 2.09

Diluted

$ 0.97 $ 0.56 $ 2.31 $ 2.09

See Notes to the Unaudited Consolidated Financial Statements

4

MAINSTREET BANCSHARES, INC. AND SUBSIDIARY

Unaudited Consolidated Statements of Comprehensive Income for the Three and Nine months ended September 30, 2022 and 2021 (Dollars in thousands)

For the Three Months Ended September 30,

For the Nine Months Ended September 30,

2022

2021

2022

2021

Comprehensive Income, net of taxes

Net Income

$ 7,743 $ 4,783 $ 19,095 $ 17,358

Other comprehensive loss, net of tax:

Unrealized losses on available for sale securities arising during the period (net of tax benefit, ($850) and ($90) , respectively, for the three months ended September 30, and ($2,641) and ($213) , respectively for the nine months ended September 30)

( 3,199 ) ( 349 ) ( 9,965 ) ( 760 )

Add: reclassification adjustment for amortization of unrealized losses on securities transferred from available for sale to held to maturity (net of tax, $1 and $1 , respectively, for the three months ended September 30, and $3 and $4 , respectively, for the nine months ended September 30)

4 5 12 15

Other comprehensive loss

( 3,195 ) ( 344 ) ( 9,953 ) ( 745 )

Comprehensive Income

$ 4,548 $ 4,439 $ 9,142 $ 16,613

See Notes to the Unaudited Consolidated Financial Statements

5

MAINSTREET BANCSHARES, INC. AND SUBSIDIARY

Unaudited Consolidated Statements of Stockholders’ Equity for the Three and Nine months ended September 30, 2022 and 2021 (Dollars in thousands)

Accumulated Other

Preferred

Common

Capital

Retained

Comprehensive

Stock

Stock

Surplus

Earnings

Loss

Total

Balance, June 30, 2022

$ 27,263 $ 29,178 $ 64,822 $ 73,702 $ ( 6,561 ) $ 188,404

Vesting of restricted stock

— 10 ( 10 ) — — —

Stock based compensation expense

— — 609 — — 609

Common stock repurchased

— ( 460 ) ( 2,190 ) — — ( 2,650 )

Dividends on preferred stock

— — — ( 539 ) — ( 539 )

Dividends on common stock

— — — ( 372 ) — ( 372 )

Net income

— — — 7,743 — 7,743

Other comprehensive loss

— — — — ( 3,195 ) ( 3,195 )

Balance, September 30, 2022

$ 27,263 $ 28,728 $ 63,231 $ 80,534 $ ( 9,756 ) $ 190,000

Accumulated Other

Preferred

Common

Capital

Retained

Comprehensive

Stock

Stock

Surplus

Earnings

Income (Loss)

Total

Balance, December 31, 2021

$ 27,263 $ 29,466 $ 67,668 $ 64,194 $ 197 $ 188,788

Vesting of restricted stock

— 399 ( 399 ) — — —

Stock based compensation expense

— — 1,743 — — 1,743

Common stock repurchased

— ( 1,137 ) ( 5,781 ) — — ( 6,918 )

Dividends on preferred stock

— — — ( 1,617 ) — ( 1,617 )

Dividends on common stock

— — — ( 1,138 ) — ( 1,138 )

Net income

— — — 19,095 — 19,095

Other comprehensive loss

— — — — ( 9,953 ) ( 9,953 )

Balance, September 30, 2022

$ 27,263 $ 28,728 $ 63,231 $ 80,534 $ ( 9,756 ) $ 190,000

Accumulated Other

Preferred

Common

Capital

Retained

Comprehensive

Stock

Stock

Surplus

Earnings

Income (Loss)

Total

Balance, June 30, 2021

$ 27,263 $ 29,446 $ 66,667 $ 55,676 $ 576 $ 179,628

Vesting of restricted stock

— 16 ( 16 ) — — —

Stock based compensation expense

— — 501 — — 501

Dividends on preferred stock

— — — ( 539 ) — ( 539 )

Net income

— — — 4,783 — 4,783

Other comprehensive loss

— — — — ( 344 ) ( 344 )

Balance, September 30, 2021

$ 27,263 $ 29,462 $ 67,152 $ 59,920 $ 232 $ 184,029

Accumulated Other

Preferred

Common

Capital

Retained

Comprehensive

Stock

Stock

Surplus

Earnings

Income (Loss)

Total

Balance, December 31, 2020

$ 27,263 $ 29,130 $ 66,116 $ 44,179 $ 977 $ 167,665

Vesting of restricted stock

— 332 ( 332 ) — — —

Stock based compensation expense

— — 1,368 — — 1,368

Dividends on preferred stock

— — — ( 1,617 ) — ( 1,617 )

Net income

— — — 17,358 — 17,358

Other comprehensive loss

— — — — ( 745 ) ( 745 )

Balance, September 30, 2021

$ 27,263 $ 29,462 $ 67,152 $ 59,920 $ 232 $ 184,029

See Notes to the Unaudited Consolidated Financial Statements

6

MAINSTREET BANCSHARES, INC. AND SUBSIDIARY

Unaudited Consolidated Statements of Cash Flows (Dollars in thousands)

For the nine months ended September 30,

2022

2021

Cash Flows from Operating Activities

Net income

$ 19,095 $ 17,358

Adjustments to reconcile net income to net cash provided by operating activities:

Depreciation, amortization, and accretion, net

1,625 1,390

Deferred income tax expense (benefit)

( 59 ) 239

Provision for (recovery of) loan losses

1,280 ( 1,470 )

Writedown of other real estate owned

70 22

Loss on sale of other real estate owned

4 —

Loss (gain) on sale of loans

168 ( 474 )

Stock based compensation expense

1,743 1,368

Income from bank owned life insurance

( 755 ) ( 646 )

Subordinated debt amortization expense

229 164

Gain on disposal of premises and equipment

— ( 30 )

Gain on call of held-to-maturity securities

( 4 ) ( 3 )

Amortization of operating lease right-of-use assets

233 357

Change in:

Accrued interest receivable and other receivables

( 572 ) 4,789

Other assets

( 26,875 ) 6,253

Other liabilities

26,688 ( 4,251 )

Net cash provided by operating activities

22,870 25,066

Cash Flows from Investing Activities

Activity in available-for-sale securities:

Payments

5,783 4,980

Maturities

145,000 317,000

Purchases

( 226,215 ) ( 347,449 )

Activity in held-to-maturity securities:

Purchases

— ( 5,499 )

Called

2,595 1,775

Purchases of equity securities

( 224 ) —

Proceeds on sale of loans

868 31,304

Proceeds on sale of other real estate owned

701 —

Purchases of restricted investment in bank stock

( 4,873 ) ( 750 )

Redemption of restricted investment in bank stock

4,125 327

Net (increase) decrease in loan portfolio

( 108,627 ) 11,694

Purchase of bank owned life insurance

— ( 10,000 )

Computer software developed

( 4,765 ) ( 1,165 )

Proceeds from sale of premises and equipment

— 51

Purchases of premises and equipment

( 614 ) ( 1,285 )

Net cash provided by (used in) investing activities

( 186,246 ) 983

Cash Flows from Financing Activities

Net increase in non-interest deposits

35,338 104,660

Net increase (decrease) in interest bearing demand, savings, and time deposits

106,623 ( 128,540 )

Net increase in subordinated debt, net issuance costs

42,623 25,637

Cash dividends paid on preferred stock

( 1,617 ) ( 1,617 )

Cash dividends paid on common stock

( 1,138 ) —

Repurchases of common stock

( 6,918 ) —

Net cash provided by financing activities

174,911 140

Increase in Cash and Cash Equivalents

11,535 26,189

Cash and Cash Equivalents, beginning of period

93,199 107,528

Cash and Cash Equivalents, end of period

$ 104,734 $ 133,717

Supplementary Disclosure of Cash Flow Information

Cash paid during the period for interest

$ 7,869 $ 7,801

Cash paid during the period for income taxes

$ 3,941 $ 5,291

Right of use assets obtained in exchange for new operating lease liabilities

$ — $ 1,907

See Notes to the Unaudited Consolidated Financial Statements

7

MAINSTREET BANCSHARES, INC. AND SUBSIDIARY

Notes to Unaudited Consolidated Financial Statements

Note 1. Organization, Basis of Presentation and Impact of Recently Issued Accounting Pronouncements

Organization

MainStreet Bancshares, Inc. (the “Company”) is a bank holding company incorporated under the laws of the Commonwealth of Virginia whose primary activity is the ownership and management of MainStreet Bank (the “Bank”). On October 12, 2021, the Company filed an election with the Federal Reserve Board to be a financial holding company in order to engage in a broader range of financial activities than are permitted for bank holding companies generally. The Company is authorized to issue 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 are currently 28,750 shares of preferred stock outstanding. The 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 Board of Governors of the Federal Reserve System (the “Federal Reserve”).

On April 18, 2019, the Company completed the registration of its common stock with the Securities Exchange Commission (the “SEC”) through its filing of a General Form for Registration of Securities on Form 10 (“Form 10” ), pursuant to Section 12 (b) of the Securities Exchange Act of 1934. The Company is considered an “emerging growth company” under the Jumpstart Our Business Startups Act of 2012, or the “JOBS Act,” and as defined in Section 2 (a) of the Securities Act of 1933, as amended, or the “Securities Act.” We are also a “smaller reporting company” as defined in Exchange Act Rule 12b - 2. As such, we may elect to comply with certain reduced public company reporting requirements in future reports that we file with the SEC.

The Company was approved to list shares of our common stock on the Nasdaq Capital Market under our current symbol “MNSB” as of April 22, 2019. We were approved to list depositary shares of preferred stock on the Nasdaq Capital Market under the symbol “MNSBP” as of September 16, 2020. Each depositary share represents a 1/40 th ownership interest in a share of 7.50 % Series A Fixed-Rate Non-Cumulative Perpetual Preferred Stock.

The Bank is headquartered in Fairfax, Virginia where it also operates a branch. The Bank was incorporated on March 28, 2003, and received its charter from the Bureau of Financial Institutions of the Commonwealth of Virginia (the “Bureau”) on March 16, 2004. The Bank commenced regular operations on May 26, 2004, and is supervised by the Bureau and the Federal Reserve. The Bank is a member of the Federal Reserve System and the Federal Deposit Insurance Corporation. The Bank places special emphasis on serving the needs of retail customers, small and medium-sized businesses and professionals in the Washington, D.C. metropolitan area.

In August 2021, MainStreet Bancshares, Inc. established MainStreet Community Capital, LLC, a wholly owned subsidiary, to be a community development entity (“CDE”). This CDE will be an intermediary vehicle for the provision of loans and investments in Low-Income Communities (“LICs”). In January 2022, the Community Development Financial Institutions Fund (“CDFI”) of the United States Department of the Treasury certified MainStreet Community Capital, LLC as a registered CDE.

On October 25, 2021, MainStreet Bancshares, Inc. formally introduced Avenu™, a division of MainStreet Bank. Avenu™ provides an embedded banking solution that connects our partners (fintechs, application developers, money movers, and entrepreneurs) directly and seamlessly to our Software as a Service (SaaS) solution.  Our SaaS solution is entering beta testing with a soft launch scheduled around the end of 2022.

Basis of Presentation

The accompanying financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America (“US GAAP”) for interim information and with the instructions to the Quarterly Report on Form 10 -Q, as applicable to a smaller reporting company. Accordingly, they do not include all the information and footnotes required by US GAAP for complete financial statements.

The financial statements are unaudited; but in the opinion of management include all adjustments (consisting only of normal recurring adjustments) necessary for a fair presentation thereof. The balances as of December 31, 2021 have been derived from the audited consolidated financial statements. These financial statements should be read in conjunction with the audited consolidated financial statements and accompanying notes thereto contained in the Form 10 -K filed by the Company with the SEC on March 23, 2022. The results of operations for the three and nine months ended September 30, 2022 are not necessarily indicative of the results that may be expected for the year ending December 31, 2022 , or any other period.

Use of estimates – The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America, requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of income and expenses during the reporting period. Actual results could differ from the estimates.

8

The Company’s critical accounting policies relate ( 1 ) the allowance for loan losses, ( 2 ) fair value of financial instruments, and ( 3 ) 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. In connection with the determination of the allowances for losses on loans management obtains independent appraisals for significant properties.

Impact of Recently Issued Accounting Pronouncements

In June 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2016 - 13, “Financial Instruments – Credit Losses (Topic 326 ): Measurement of Credit Losses on Financial Instruments.” The amendments in this ASU, among other things, require the measurement of all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. Financial institutions and other organizations will now use forward-looking information to better inform their credit loss estimates. Many of the loss estimation techniques applied today will still be permitted, although the inputs to those techniques will change to reflect the full amount of expected credit losses. In addition, the ASU amends the accounting for credit losses on available-for-sale debt securities and purchased financial assets with credit deterioration. The FASB has issued multiple updates to ASU 2016 - 13 as codified in Topic 326, including ASU’s 2019 - 04, 2019 - 05, 2019 - 10, 2019 - 11, 2020 - 02, and 2020 - 03. These ASU’s have provided for various minor technical corrections and improvements to the codification as well as other transition matters. Smaller reporting companies who file with the SEC and all other entities who do not file with the SEC are required to apply the guidance for fiscal years, and interim periods within those years, beginning after December 15, 2022. The Company is working with a third party to develop our methodology using historical and qualitative data based on the requirements of ASU 2016 - 13 and have begun to test parallel models. We have scheduled a third party to perform a model validation of our methodology and assumptions to be completed by the fourth quarter of 2022. We are in the process of assessing new internal controls to be placed as well as policies and procedures that need to be developed with the new model. Preliminary analysis shows that there will not be a significant impact to our current allowance for loan losses upon adoption.

Effective November 25, 2019, the SEC adopted Staff Accounting Bulletin (SAB) 119. SAB 119 updated portions of SEC interpretative guidance to align with FASB ASC 326, “Financial Instruments – Credit Losses.” It covers topics including ( 1 ) measuring current expected credit losses; ( 2 ) development, governance, and documentation of a systematic methodology; ( 3 ) documenting the results of a systematic methodology; and ( 4 ) validating a systematic methodology.

In March 2020, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2020 - 04 “Reference Rate Reform (Topic 848 ): Facilitation of the Effects of Reference Rate Reform on Financial Reporting.” These amendments provide temporary optional guidance to ease the potential burden in accounting for reference rate reform. The ASU provides optional expedients and exceptions for applying generally accepted accounting principles to contract modifications and hedging relationships, subject to meeting certain criteria, that reference LIBOR or another reference rate expected to be discontinued. It is intended to help stakeholders during the global market-wide reference rate transition period. The guidance is effective for all entities as of March 12, 2020 through December 31, 2022. Subsequently, in January 2021, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2021 - 01 “Reference Rate Reform (Topic 848 ): Scope.” This ASU clarifies that certain optional expedients and exceptions in Topic 848 for contract modifications and hedge accounting apply to derivatives that are affected by the discounting transition. The ASU also amends the expedients and exceptions in Topic 848 to capture the incremental consequences of the scope clarification and to tailor the existing guidance to derivative instruments affected by the discounting transition. An entity may elect to apply ASU No. 2021 - 01 on contract modifications that change the interest rate used for margining, discounting, or contract price alignment retrospectively as of any date from the beginning of the interim period that includes March 12, 2020, or prospectively to new modifications from any date within the interim period that includes or is subsequent to January 7, 2021, up to the date that financial statements are available to be issued. An entity may elect to apply ASU No. 2021 - 01 to eligible hedging relationships existing as of the beginning of the interim period that includes March 12, 2020, and to new eligible hedging relationships entered into after the beginning of the interim period that includes March 12, 2020. The Company is monitoring developments into rates that may be acceptable alternatives to LIBOR and working with those we have a relationship with that could be impacted by a change in reference rate from LIBOR. The Company is assessing ASU 2020 - 04 and its impact on the Company’s transition away from LIBOR for its loan and other financial instruments.

In August 2020, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2020 - 06 “Debt – Debt with Conversion and Other Options (Subtopic 470 - 20 ) and Derivatives and Hedging – Contracts in Entity’s Own Equity (Subtopic 815 - 40 ): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity.” The ASU simplifies accounting for convertible instruments by removing major separation models required under current U.S. GAAP. Consequently, more convertible debt instruments will be reported as a single liability instrument and more convertible preferred stock as a single equity instrument with no separate accounting for embedded conversion features. The ASU removes certain settlement conditions that are required for equity contracts to qualify for the derivative scope exception, which will permit more equity contracts to qualify for it. The ASU also simplifies the diluted earnings per share (EPS) calculation in certain areas. In addition, the amendment updates the disclosure requirements for convertible instruments to increase the information transparency. For public business entities, excluding smaller reporting companies, the amendments in the ASU are effective for fiscal years beginning after December 15, 2021, and interim periods within those fiscal years. For all other entities, the standard will be effective for fiscal years beginning after December 15, 2023, including interim periods within those fiscal years. Early adoption is permitted. The Company does not expect the adoption of ASU 2020 - 06 to have a material impact on its consolidated financial statements.

9

In March 2022, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2022 - 02, “Financial Instruments-Credit Losses (Topic 326 ), Troubled Debt Restructurings and Vintage Disclosures.” ASU 2022 - 02 addresses areas identified by the FASB as part of its post-implementation review of the credit losses standard (ASU 2016 - 13 ) that introduced the CECL model. The amendments eliminate the accounting guidance for troubled debt restructurings by creditors that have adopted the CECL model and enhance the disclosure requirements for loan refinancings and restructurings made with borrowers experiencing financial difficulty. In addition, the amendments require a public business entity to disclose current-period gross write-offs for financing receivables and net investment in leases by year of origination in the vintage disclosures. The amendments in this ASU should be applied prospectively, except for the transition method related to the recognition and measurement of TDRs, an entity has the option to apply a modified retrospective transition method, resulting in a cumulative-effect adjustment to retained earnings in the period of adoption. For entities that have adopted ASU 2016 - 13, ASU 2022 - 02 is effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. For entities that have not yet adopted ASU 2016 - 13, the effective dates for ASU 2022 - 02 are the same as the effective dates in ASU 2016 - 13. Early adoption is permitted if an entity has adopted ASU 2016 - 13. An entity may elect to early adopt the amendments about TDRs and related disclosure enhancements separately from the amendments related to vintage disclosures. The Company is currently assessing the impact that ASU 2022 - 02 will have on its consolidated financial statements.

In March 2022, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2022 - 01, “Derivatives and Hedging (Topic 815 ), Fair Value Hedging—Portfolio Layer Method.” ASU 2022 - 01 clarifies the guidance in ASC 815 on fair value hedge accounting of interest rate risk for portfolios of financial assets and is intended to better align hedge accounting with an organization’s risk management strategies. In 2017, FASB issued ASU 2017 - 12 to better align the economic results of risk management activities with hedge accounting. One of the major provisions of that standard was the addition of the last-of-layer hedging method. For a closed portfolio of fixed-rate prepayable financial assets or one or more beneficial interests secured by a portfolio of prepayable financial instruments, such as mortgages or mortgage-backed securities, the last-of-layer method allows an entity to hedge its exposure to fair value changes due to changes in interest rates for a portion of the portfolio that is not expected to be affected by prepayments, defaults, and other events affecting the timing and amount of cash flows. ASU 2022 - 01 renames that method the portfolio layer method. For public business entities, ASU 2022 - 01 is effective for fiscal years beginning after December 15, 2022, and interim periods within those fiscal years. The Company does not expect the adoption of ASU 2022 - 01 to have a material impact on its consolidated financial statements.

Recently Adopted Accounting Developments

In May 2021, the FASB issued ASU 2021 - 04, “Earnings Per Share (Topic 260 ), Debt - Modifications and Extinguishments (Subtopic 470 - 50 ), Compensation - Stock Compensation (Topic 718 ), and Derivatives and Hedging – Contracts in Entity’s Own Equity (Subtopic 815 - 40 ): Issuer’s Accounting for Certain Modifications or Exchanges of Freestanding Equity – Classified Written Call Options (a consensus of the FASB Emerging Issues Task Force).” The ASU addresses how an issuer should account for modifications or an exchange of freestanding written call options classified as equity that is not within the scope of another Topic. Early adoption is permitted. ASU 2021 - 04 was effective for the Company on January 1, 2022. There was no material impact on the Company’s consolidated financial statements.

Note 2. Investment Securities

Investment securities available-for-sale was comprised of the following:

September 30, 2022

(Dollars in thousands)

Amortized Cost

Gross Unrealized Gains

Gross Unrealized Losses

Fair Value

U.S. Treasury Securities

$ 99,984 $ 9 $ — $ 99,993

Collateralized Mortgage Backed

27,425 — ( 4,798 ) 22,627

Subordinated Debt

9,970 — ( 1,024 ) 8,946

Municipal Securities:

Taxable

10,682 — ( 2,718 ) 7,964

Tax-exempt

22,862 6 ( 3,784 ) 19,084

U.S. Governmental Agencies

3,737 3 ( 35 ) 3,705

Total

$ 174,660 $ 18 $ ( 12,359 ) $ 162,319

10

Investment securities held-to-maturity was comprised of the following:

September 30, 2022

(Dollars in thousands)

Amortized Cost

Gross Unrealized Gains

Gross Unrealized Losses

Fair Value

Municipal Securities:

Tax-exempt

$ 15,170 $ 8 $ ( 517 ) $ 14,661

Subordinated Debt

2,500 — — 2,500

Total

$ 17,670 $ 8 $ ( 517 ) $ 17,161

Investment securities available-for-sale was comprised of the following:

December 31, 2021

(Dollars in thousands)

Amortized Cost

Gross Unrealized Gains

Gross Unrealized Losses

Fair Value

U.S. Treasury Securities

$ 20,000 $ — $ — $ 20,000

Collateralized Mortgage Backed

31,521 151 ( 790 ) 30,882

Subordinated Debt

8,720 31 ( 47 ) 8,704

Municipal Securities:

Taxable

10,704 13 ( 160 ) 10,557

Tax-exempt

22,978 1,182 ( 17 ) 24,143

U.S. Governmental Agencies

5,725 — ( 98 ) 5,627

Total

$ 99,648 $ 1,377 $ ( 1,112 ) $ 99,913

Investment securities held-to-maturity was comprised of the following:

December 31, 2021

(Dollars in thousands)

Amortized Cost

Gross Unrealized Gains

Gross Unrealized Losses

Fair Value

Municipal Securities:

Tax-exempt

$ 17,849 $ 795 $ — $ 18,644

Subordinated Debt

2,500 — — 2,500

Total

$ 20,349 $ 795 $ — $ 21,144

The scheduled maturities of securities available-for-sale and held-to-maturity at September 30, 2022 were as follows:

September 30, 2022

Available-for-Sale

Held-to-Maturity

(Dollars in thousands)

Amortized Cost

Fair Value

Amortized Cost

Fair Value

Due in one year or less

$ 99,984 $ 99,993 $ — $ —

Due from one to five years

1,000 965 2,091 2,061

Due from after five to ten years

12,890 11,482 9,084 8,984

Due after ten years

60,786 49,879 6,495 6,116

Total

$ 174,660 $ 162,319 $ 17,670 $ 17,161

11

Securities with a fair value of $ 3.7 million and $ 410,492 were pledged at September 30, 2022 and December 31, 2021 , respectively,

The following tables summarize the unrealized loss positions of securities available-for-sale and held-to-maturity as of September 30, 2022 and December 31, 2021 :

September 30, 2022

Less than 12 Months

12 Months or Longer

Total

(Dollars in thousands)

Fair Value

Unrealized Loss

Fair Value

Unrealized Loss

Fair Value

Unrealized Loss

Available-for-sale:

U.S. Treasury Securities

$ — $ — $ — $ — $ — $ —

Collateralized Mortgage Backed

4,966 ( 676 ) 17,583 ( 4,122 ) 22,549 ( 4,798 )

Subordinated Debt

5,622 ( 698 ) 2,574 ( 326 ) 8,196 ( 1,024 )

Municipal securities:

Taxable

3,744 ( 923 ) 4,220 ( 1,795 ) 7,964 ( 2,718 )

Tax-exempt

17,489 ( 3,301 ) 1,183 ( 483 ) 18,672 ( 3,784 )

U.S Governmental Agencies

— — 1,239 ( 35 ) 1,239 ( 35 )

Total

$ 31,821 $ ( 5,598 ) $ 26,799 $ ( 6,761 ) $ 58,620 $ ( 12,359 )

Held-to-maturity:

Municipal securities:

Tax-exempt

11,576 ( 517 ) — — 11,576 ( 517 )

Total

$ 11,576 $ ( 517 ) $ — $ — $ 11,576 $ ( 517 )

December 31, 2021

Less than 12 Months

12 Months or Longer

Total

(Dollars in thousands)

Fair Value

Unrealized Loss

Fair Value

Unrealized Loss

Fair Value

Unrealized Loss

Available-for-sale:

Collateralized Mortgage Backed

$ 11,922 $ ( 215 ) $ 12,043 $ ( 575 ) $ 23,965 $ ( 790 )

Subordinated Debt

4,673 ( 47 ) — — 4,673 ( 47 )

Municipal Securities:

Taxable

5,484 ( 63 ) 3,482 ( 97 ) 8,966 ( 160 )

Tax-exempt

2,594 ( 17 ) — — 2,594 ( 17 )

U.S Government Agencies

— — 5,445 ( 98 ) 5,445 ( 98 )

Total

$ 24,673 $ ( 342 ) $ 20,970 $ ( 770 ) $ 45,643 $ ( 1,112 )

The factors considered in evaluating securities for impairment include whether the Bank intends to sell the security, whether it is more likely than not that the Bank will be required to sell the security before recovery of its amortized cost basis, and whether the Bank expects to recover the security’s entire amortized cost basis. These unrealized losses are primarily attributable to current financial market conditions for these types of investments, particularly changes in interest rates, causing bond prices to decline, and are not attributable to credit deterioration.

At September 30, 2022 , there were sixteen collateralized mortgage backed securities with fair values totaling $ 5.0 million were in an unrealized loss position of less than 12 months and nine securities totaling $ 17.6 million in an unrealized loss position of more than 12 months. At September 30, 2022 fifteen subordinated debt securities with fair values totaling approximately $ 5.6 million were in an unrealized loss position of less than 12 months and six securities totaling $ 2.6 million in an unrealized loss position of more than 12 months. At September 30, 2022 thirty seven municipal securities with fair values totaling approximately $ 21.2 million were in an unrealized loss position of less than 12 months and eight securities totaling $ 5.4 million in an unrealized loss position of more than 12 months. At September 30, 2022 seven U.S. government agencies with fair values totaling approximately $ 1.2 million were in an unrealized loss position of more than 12 months. At September 30, 2022 , there were twenty-four held-to-maturity municipal securities with a fair value of $ 11.6 million in an unrealized loss position. The Bank does not consider any of the securities in the available for sale or held to maturity portfolio to be other-than-temporarily impaired at September 30, 2022 and December 31, 2021 .

Certain municipal securities originally purchased as available for sale were transferred to held to maturity during 2013. The unrealized loss on the securities transferred to held to maturity is being amortized over the expected life of the securities. The unamortized, unrealized loss, before tax, at September 30, 2022 and December 31, 2021 was $ 13,434 and $ 29,016 , respectively.

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Note 3. Loans Receivable

Loans receivable were comprised of the following:

(Dollars in thousands)

September 30, 2022

December 31, 2021

Residential Real Estate:

Single family

$ 163,222 $ 161,362

Multifamily

209,676 137,705

Farmland

157 1,323

Commercial Real Estate:

Owner-occupied

228,108 173,086

Non-owner occupied

410,002 361,101

Construction and Land Development

366,689 337,173

Commercial – Non Real-Estate:

Commercial & Industrial

74,482 164,014

Consumer – Non Real-Estate:

Unsecured

127 185

Secured

13,501 22,986

Total Gross Loans

1,465,964 1,358,935

Less: unearned fees, net

( 4,899 ) ( 5,478 )

Less: allowance for loan losses

( 12,994 ) ( 11,697 )

Net Loans

$ 1,448,071 $ 1,341,760

The unsecured consumer loans above include $ 127,000 and $ 185,000 of overdrafts reclassified as loans at September 30, 2022 and December 31, 2021 , respectively.

The commercial and industrial loans above include $ 1.8 million and $ 58.3 million in Paycheck Protection Program loans at September 30, 2022 and December 31, 2021 , respectively.

13

The following tables summarize the activity in the allowance for loan losses by loan class for the three and nine months ended September 30, 2022 and 2021 .

Allowance for Credit Losses By Portfolio Segment

Real Estate

For the three months ended September 30, 2022

Residential

Commercial

Construction

Consumer

Commercial

Total

(Dollars in thousands)

Beginning Balance

$ 1,994 $ 6,514 $ 3,044 $ 90 $ 1,340 $ 12,982

Recoveries

— — — 12 — 12

Provision

20 203 73 ( 49 ) ( 247 ) —

Ending Balance

$ 2,014 $ 6,717 $ 3,117 $ 53 $ 1,093 $ 12,994

Ending Balance:

Individually evaluated for Impairment

$ — $ — $ — $ — $ — $ —

Collectively evaluated for Impairment

$ 2,014 $ 6,717 $ 3,117 $ 53 $ 1,093 $ 12,994

For the nine months ended September 30, 2022

Beginning Balance

$ 1,672 $ 5,689 $ 2,697 $ 99 $ 1,540 $ 11,697

Recoveries

— — — 17 — 17

Provision

342 1,028 420 ( 63 ) ( 447 ) 1,280

Ending Balance

$ 2,014 $ 6,717 $ 3,117 $ 53 $ 1,093 $ 12,994

Ending Balance:

Individually evaluated for Impairment

$ — $ — $ — $ — $ — $ —

Collectively evaluated for Impairment

$ 2,014 $ 6,717 $ 3,117 $ 53 $ 1,093 $ 12,994

Real Estate

For the three months ended September 30, 2021

Residential

Commercial

Construction

Consumer

Commercial

Total

(Dollars in thousands)

Beginning Balance

$ 1,160 $ 5,822 $ 2,621 $ 132 $ 1,398 $ 11,133

Recoveries

— — — — 5 5

Provision

184 17 ( 5 ) ( 24 ) 118 290

Ending Balance

$ 1,344 $ 5,839 $ 2,616 $ 108 $ 1,521 $ 11,428

Ending Balance:

Individually evaluated for Impairment

$ — $ — $ — $ — $ — $ —

Collectively evaluated for Impairment

$ 1,344 $ 5,839 $ 2,616 $ 108 $ 1,521 $ 11,428

For the nine months ended September 30, 2021

Beginning Balance

$ 1,223 $ 6,552 $ 3,326 $ 371 $ 1,405 $ 12,877

Charge-offs

— — — ( 4 ) — ( 4 )

Recoveries

— — — 14 11 25

Provision

121 ( 713 ) ( 710 ) ( 273 ) 105 ( 1,470 )

Ending Balance

$ 1,344 $ 5,839 $ 2,616 $ 108 $ 1,521 $ 11,428

Ending Balance:

Individually evaluated for Impairment

$ — $ — $ — $ — $ — $ —

Collectively evaluated for Impairment

$ 1,344 $ 5,839 $ 2,616 $ 108 $ 1,521 $ 11,428

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 September 30, 2022 and December 31, 2021 :

September 30, 2022

Loans Receivable

(Dollars in thousands)

Ending Balance

Ending Balance: Individually Evaluated for Impairment

Ending Balance: Collectively Evaluated for Impairment

Residential Real Estate

$ 373,055 $ 149 $ 372,906

Commercial Real Estate

638,110 1,095 637,015

Construction and Land Development

366,689 — 366,689

Commercial & Industrial

74,482 — 74,482

Consumer

13,628 — 13,628

Total

$ 1,465,964 $ 1,244 $ 1,464,720

14

December 31, 2021

Loans Receivable

(Dollars in thousands)

Ending Balance

Ending Balance: Individually Evaluated for Impairment

Ending Balance: Collectively Evaluated for Impairment

Residential Real Estate

$ 300,390 $ 147 $ 300,243

Commercial Real Estate

534,187 1,076 533,111

Construction and Land Development

337,173 — 337,173

Commercial & Industrial

164,014 8 164,006

Consumer

23,171 — 23,171

Total

$ 1,358,935 $ 1,231 $ 1,357,704

The following table summarizes information in regard to impaired loans by loan portfolio class as of September 30, 2022 and December 31, 2021 :

September 30, 2022

December 31, 2021

(Dollars in thousands)

Recorded Investment

Unpaid Principal Balance

Related Allowance

Recorded Investment

Unpaid Principal Balance

Related Allowance

With no related allowance recorded

Residential Real Estate:

Single family

$ 149 $ 149 $ — $ 147 $ 147 $ —

Commercial Real Estate

Non-owner Occupied

1,095 1,095 — 1,076 1,076 —

Commercial & Industrial

— — — 8 8 —

Total

$ 1,244 $ 1,244 $ — $ 1,231 $ 1,231 $ —

The following table presents additional information regarding the impaired loans for the three and nine months ended September 30, 2022 and 2021 :

Three Months Ended September 30,

2022

2021

(Dollars in thousands)

Average Record Investment

Interest Income Recognized

Average Record Investment

Interest Income Recognized

With no related allowance recorded

Residential Real Estate:

Single family

$ 149 $ 4 $ 150 $ 2

Commercial Real Estate

Non-owner Occupied

1,095 26 1,076 16

Commercial & Industrial

— — 28 —

Total

$ 1,244 $ 30 $ 1,254 $ 18

Nine Months Ended September 30,

2022

2021

(Dollars in thousands)

Average Record Investment

Interest Income Recognized

Average Record Investment

Interest Income Recognized

With no related allowance recorded

Residential Real Estate:

Single family

$ 149 $ 10 $ 225 $ 6

Commercial Real Estate

Non-owner Occupied

1,095 69 1,080 49

Commercial & Industrial

— — 39 2

Total

$ 1,244 $ 79 $ 1,344 $ 57

15

There were no loans placed on nonaccrual as of September 30, 2022 and December 31, 2021 .

Credit quality risk ratings include regulatory classifications of Pass, Watch, Special Mention, Substandard, Doubtful and Loss. Loans classified as Pass have quality metrics to support that the loan will be repaid according to the terms established. Loans classified as Watch have similar characteristics as Pass loans with some emerging signs of financial weaknesses that should be monitored closer. Loans classified as Special Mention have potential weaknesses that deserve management’s close attention. If uncorrected, the potential weaknesses may result in deterioration of prospects for repayment. Loans classified substandard have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They include loans that are inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. Loans classified doubtful have all the weaknesses inherent in loans classified substandard with the added characteristic that collection or liquidation in full, based on current conditions and facts, is highly improbable. Loans classified as a loss are considered uncollectible and are charged to the allowance for loan losses. Loans not classified are rated pass.

The following tables summarize the aggregate Pass and criticized categories of Watch, Special Mention, and Substandard within the Company’s internal risk rating system as of September 30, 2022 and December 31, 2021 . At these dates no loans were classified as doubtful.

September 30, 2022

(Dollars in thousands)

Pass

Watch

Special Mention

Substandard

Total

Residential Real Estate:

Single Family

$ 162,350 $ — $ 725 $ 147 $ 163,222

Multifamily

209,676 — — — 209,676

Farmland

157 — — — 157

Commercial Real Estate:

Owner occupied

228,108 — — — 228,108

Non-owner occupied

384,597 15,273 — 10,132 410,002

Construction & Land Development

366,689 — — — 366,689

Commercial – Non Real Estate:

Commercial & Industrial

73,451 — — 1,031 74,482

Consumer – Non Real Estate:

Unsecured

127 — — — 127

Secured

13,501 — — — 13,501

Total

$ 1,438,656 $ 15,273 $ 725 $ 11,310 $ 1,465,964

December 31, 2021

(Dollars in thousands)

Pass

Watch

Special Mention

Substandard

Total

Residential Real Estate:

Single Family

$ 160,234 $ — $ 734 $ 394 $ 161,362

Multifamily

137,705 — — — 137,705

Farmland

1,323 — — — 1,323

Commercial Real Estate:

Owner occupied

168,352 4,734 — — 173,086

Non-owner occupied

297,873 46,379 15,275 1,574 361,101

Construction & Land Development

317,846 19,327 — — 337,173

Commercial – Non Real Estate:

Commercial & Industrial

159,634 145 857 3,378 164,014

Consumer – Non Real Estate:

Unsecured

185 — — — 185

Secured

22,986 — — — 22,986

Total

$ 1,266,138 $ 70,585 $ 16,866 $ 5,346 $ 1,358,935

16

The following tables present the segments of the loan portfolio summarized by aging categories as of September 30, 2022 and December 31, 2021 :

September 30, 2022

(Dollars in thousands)

30-59 Days Past Due

60-89 Days Past Due

Greater than 90 Days

Total Past Due

Current

Total Loans Receivable

Nonaccrual

Residential Real Estate:

Single Family

$ — $ — $ — $ — $ 163,222 $ 163,222 $ —

Multifamily

— — — — 209,676 209,676 —

Farmland

— — — — 157 157 —

Commercial Real Estate:

Owner occupied

— — — — 228,108 228,108 —

Non-owner occupied

2,489 — — 2,489 407,513 410,002 —

Construction & Land Development

— — — — 366,689 366,689 —

Commercial – Non Real Estate:

Commercial & Industrial

— — 228 228 74,254 74,482 —

Consumer – Non Real Estate:

Unsecured

— — — — 127 127 —

Secured

23 — — 23 13,478 13,501 —

Total

$ 2,512 $ — $ 228 $ 2,740 $ 1,463,224 $ 1,465,964 $ —

December 31, 2021

(Dollars in thousands)

30-59 Days Past Due

60-89 Days Past Due

Greater than 90 Days

Total Past Due

Current

Total Loans Receivable

Nonaccrual

Residential Real Estate:

Single Family

$ — $ — $ — $ — $ 161,362 $ 161,362 $ —

Multifamily

— — — — 137,705 137,705 —

Farmland

— — — — 1,323 1,323 —

Commercial Real Estate:

Owner occupied

— — — — 173,086 173,086 —

Non-owner occupied

— — — — 361,101 361,101 —

Construction & Land Development

— — — — 337,173 337,173 —

Commercial – Non Real Estate:

Commercial & Industrial

— — — — 164,014 164,014 —

Consumer – Non Real Estate:

Unsecured

— — — — 185 185 —

Secured

46 25 — 71 22,915 22,986 —

Total

$ 46 $ 25 $ — $ 71 $ 1,358,864 $ 1,358,935 $ —

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. A TDR is restored to accrual status when the obligation is brought current, has performed in accordance with the modified contractual terms for a reasonable period, generally six months, and the ultimate collectability of the total contractual principal and interest is no longer in doubt.

17

Troubled Debt Restructuring

According to United States generally accepted accounting principles, restructuring a debt constitutes a TDR if the creditor, for economic or legal reasons related to the debtor’s financial difficulties, grants a concession to the debtor that it would not otherwise consider.  The CARES Act states that from March 1, 2020, until the end of the year (unless the President terminates the COVID- 19 emergency declaration sooner), financial institutions may elect to suspend the TDR accounting principles for loan modifications related to COVID- 19. The Consolidated Appropriations Act of 2021, enacted in December 2020, extended this relief to the earlier of January 1, 2022 or the first day of a bank’s fiscal year that begins after the national emergency ends.

The Company may identify loans for potential restructure primarily through direct communication with the borrower and evaluation of the borrower’s financial statements, revenue projections, tax returns, and credit reports. Even if the borrower is not presently in default, management will consider the likelihood that cash flow shortages, adverse economic conditions and negative trends may result in a payment default in the near future.

As of September 30, 2022 , and December 31, 2021 , the Company did not have any TDRs, respectively.

Note 4. Intangible Assets

The carrying amount of computer software developed was $ 7.3 million and $ 2.5 million at September 30, 2022 and December 31, 2021 . The following table presents the changes in the carrying amount of computer software developed during the nine months ended September 30, 2022 .

As of September 30, 2022

As of December 31, 2021

(Dollars in thousands)

Gross Carrying Amount

Accumulated Amortization

Gross Carrying Amount

Accumulated Amortization

Amortizable intangible assets:

Computer software

$ 7,258 $ — $ 2,493 $ —

Total

7,258 $ — $ 2,493 $ —

The Company is still in the development stage of computer software where costs are capitalized. Capitalization ceases when the software is substantially complete and ready for its intended use. At that time the intangible asset will be amortized on a straight-line bases over the estimated useful life of the asset. As of September 30, 2022 , the Company has not recorded any amortization on its intangible computer software. We anticipate the amortization period for intangible computer software to be ten years, once placed in service.

Note 5. Derivatives and Risk Management Activities

The Company uses derivative financial instruments (“derivatives”) primarily to assist customers with their risk management objectives. The Company classifies these items as free standing derivatives consisting of customer accommodation interest rate loan swaps (“interest rate loan swaps”). The Company enters into interest rate swaps with certain qualifying commercial loan customers to meet their interest rate risk management needs. The Company simultaneously enters into interest rate swaps with dealer counterparties, with identical notional amounts and terms. The net result of these interest rate swaps is that the customer pays a fixed rate of interest and the Company receives a floating rate. These back-to-back interest rate loan swaps qualify as financial derivatives with fair values reported in “Other assets” and “Other liabilities” in the consolidated financial statements. Changes in fair value are recorded in other noninterest expense and net to zero because of the identical amounts and terms of the interest rate loan swaps.

The following tables summarize key elements of the Company’s derivative instruments as of September 30, 2022 and December 31, 2021 .

September 30, 2022

Customer-related interest rate contracts

Dollars in thousands)

Notional Amount

Positions

Assets

Liabilities

Collateral Pledges

Matched interest rate swap with borrower

$ 252,284 45 — $ 27,972 $ 3,364

Matched interest rate swap with counterparty

$ 252,284 45 $ 27,972 — $ 3,364

18

December 31, 2021

Customer-related interest rate contracts

Dollars in thousands)

Notional Amount

Positions

Assets

Liabilities

Collateral Pledges

Matched interest rate swap with borrower

$ 210,793 40 $ 2,097 — $ 15,120

Matched interest rate swap with counterparty

$ 210,793 40 — $ 2,097 $ 15,120

The Company is able to recognize fee income upon execution of the interest rate swap contract. The Company recorded interest rate swap fee income of $ 518,000 and $ 619,000 for the three and nine months ended September 30, 2022 , respectively. The Company did not record any interest rate swap fee income for the three and nine months ended September 30, 2021 .

Note 6. Fair Value Presentation

In accordance with FASB ASC 820, “Fair Value Measurements and Disclosure”, the Bank uses fair value measurements to record fair value adjustments to certain assets and liabilities and to determine fair value disclosures. The fair value of a financial instrument is the price that would be received to sell an asset or paid to transfer a liability (“an exit price”) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants at the measurement date. Fair value is best determined based upon quoted market prices. However, in many instances, there are no quoted market prices for the Bank’s various financial instruments. In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques. Those techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. Accordingly, the fair value estimates may not be realized in an immediate settlement of the instrument.

The fair value guidance provides a consistent definition of fair value, which focuses on exit price in the principal or most advantageous market for the asset or liability in an orderly transaction (that is, not a forced liquidation or distressed sale) between market participants at the measurement date under current market conditions. If there has been a significant decrease in the volume and level of activity for the asset or liability, a change in valuation technique or the use of multiple valuation techniques may be appropriate. In such instances, determining the price at which willing market participants would transact at the measurement date under current market conditions depends on the facts and circumstances and requires the use of significant judgment. The fair value is a reasonable point within the range that is the most representative of fair value under current market conditions.

In accordance with the guidance, a hierarchy of valuation techniques is based on whether the inputs to those valuation techniques are observable or unobservable. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect the Bank’s market assumptions. The three levels of the fair value hierarchy under FASB ASC 820 based on these two types of inputs are as follows:

Level 1 –Valuation is based on quoted prices in active markets for identical assets and liabilities that the reporting entity has the ability to access at the measurement date.

Level 2 –Valuation is based on observable inputs including quoted prices in active markets for similar assets and liabilities, quoted prices for identical or similar assets and liabilities in less active markets, and model-based valuation techniques for which significant assumptions can be derived primarily from or corroborated by observable data in the market.

Level 3 –Valuation is based on model-based techniques that use one or more significant inputs or assumptions that are unobservable in the market.

The following describes the valuation techniques used by the Bank to measure certain financial assets and liabilities recorded at fair value on a recurring basis in the financial statements:

Securities available for sale

Securities available for sale are recorded at fair value on a recurring basis. Fair value measurement is based upon quoted market prices, when available (Level 1 ). If quoted market prices are not available, fair values are measured utilizing independent valuation techniques of identical or similar securities for which significant assumptions are derived primarily from or corroborated by observable market data. Third party vendors compile prices from various sources and may determine the fair value of identical or similar securities by using pricing models that consider observable market data (Level 2 ). In certain cases where there is limited activity or less transparency around inputs to the valuation, securities are classified within Level 3 of the valuation hierarchy. As of September 30, 2022 , and December 31, 2021 , the Bank’s entire portfolio of available for sale securities are considered to be Level 2 securities.

Derivative asset (liability) – interest rate swaps on loans

As discussed in “Note 5: “Derivative Financial Instruments”, the Bank recognizes interest rate swaps at fair value on a recurring basis. The Bank has contracted with a third party vendor to provide valuations for these interest rate swaps using standard valuation techniques and therefore classifies such interest rate swaps as Level 2.

19

The following tables provide the fair value for assets required to be measured and reported at fair value on a recurring basis as of September 30, 2022 and December 31, 2021 :

September 30, 2022

(Dollars in thousands)

Level 1

Level 2

Level 3

Total

Assets:

Investment securities available-for-sale:

U.S. Treasury Securities

$ — $ 99,993 $ — $ 99,993

Collateralized Mortgage Backed

— 22,627 — 22,627

Subordinated Debt

— 8,946 — 8,946

Municipal Securities:

Taxable

— 7,964 — 7,964

Tax-exempt

— 19,084 — 19,084

U.S. Government Agencies

— 3,705 — 3,705

Derivative asset – interest rate swap on loans

— 27,972 — 27,972

Total

$ — $ 190,291 $ — $ 190,291

Liabilities:

Derivative liability – interest rate swap on loans

— 27,972 — 27,972

Total

$ — $ 27,972 $ — $ 27,972

December 31, 2021

(Dollars in thousands)

Level 1

Level 2

Level 3

Total

Assets:

Investment securities available-for-sale:

U.S. Treasury Securities

$ — $ 20,000 $ — $ 20,000

Collateralized Mortgage Backed

— 30,882 — 30,882

Subordinated Debt

— 8,704 — 8,704

Municipal Securities:

Taxable

— 10,557 — 10,557

Tax-exempt

— 24,143 — 24,143

U.S. Government Agencies

— 5,627 — 5,627

Derivative asset – interest rate swap on loans

— 2,097 — 2,097

Total

$ — $ 102,010 $ — $ 102,010

Liabilities:

Derivative liability – interest rate swap on loans

— 2,097 — 2,097

Total

$ — $ 2,097 $ — $ 2,097

Certain assets are measured at fair value on a nonrecurring basis in accordance with GAAP. Adjustments to the fair value of these assets usually result from the application of lower-of-cost-or-market accounting or write-downs of individual assets.

The following describes the valuation techniques used by the Bank to measure certain assets recorded at fair value on a nonrecurring basis in the financial statements:

Impaired loans

Loans are designated as impaired when, in the judgment of management based on current information and events, it is probable that all amounts due according to the contractual terms of the loan agreement will not be collected when due. The measurement of loss associated with impaired loans can be based on either the observable market price of the loan or the fair value of the collateral. Collateral may be in the form of real estate or business assets including equipment, inventory, and accounts receivable. Most of the collateral is real estate. The value of real estate collateral is determined utilizing an income or market valuation approach based on an appraisal conducted by an independent, licensed appraiser outside of the Bank using observable market data (Level 2 ). However, if the collateral value is significantly adjusted due to differences in the comparable properties, or is discounted by the Bank because of marketability, then the fair value is considered Level 3. The value of business equipment is based upon an outside appraisal if deemed significant, or the net book value on the applicable business’ financial statements if not considered significant. Likewise, values for inventory and accounts receivables collateral are based on financial statement balances or aging reports (Level 3 ). Impaired loans allocated to the Allowance for Loan Losses are measured at fair value on a nonrecurring basis. Any fair value adjustments are recorded in the period incurred as provision for loan losses on the Statements of Income.

20

Other real estate owned

Other real estate owned (“OREO”) is measured at fair value less cost to sell, based on an appraisal conducted by an independent, licensed appraiser outside of the Bank. If the collateral value is significantly adjusted due to differences in the comparable properties, or is discounted by the Bank because of marketability, then the fair value is considered Level 3. OREO is measured at fair value on a nonrecurring basis. Any initial fair value adjustment is charged against the Allowance for Loan Losses. Subsequent fair value adjustments are recorded in the period incurred and included in other noninterest expense on the Statements of Income.

The Company did not have any assets that were measured at fair value on a nonrecurring basis as of September 30, 2022 .

The following table summarizes the value of the Bank’s assets as of December 31, 2021 that were measured at fair value on a nonrecurring basis during the period:

December 31, 2021

(Dollars in thousands)

Level 1

Level 2

Level 3

Total

Assets:

Other Real Estate Owned, net

$ — $ — $ 775 $ 775

Total

$ — $ — $ 775 $ 775

The following table presents quantitative information about Level 3 fair value measurements for financial assets measured at fair value on a nonrecurring basis as of December 31, 2021.

Fair Value Measurements at December 31, 2021

(Dollars in thousands)

Fair Value

Valuation Technique(s)

Unobservable Inputs

Range of Inputs

Other Real Estate Owned, net

$ 775

Appraisals

Discount to reflect current market conditions and estimated selling costs.

6 % - 10 %

Total

$ 775

Fair Value of Financial Instruments

FASB ASC 825, Financial Instruments, requires disclosure about fair value of financial instruments, including those financial assets and financial liabilities that are not required to be measured and reported at fair value on a recurring or nonrecurring basis. ASC 825 excludes certain financial instruments and all nonfinancial instruments from its disclosure requirements. Accordingly, the aggregate fair value amounts presented may not necessarily represent the underlying fair value of the Company. In accordance with ASU 2016 - 01, the Company uses the exit price notion, rather than the entry price notion, in calculating the fair values of financial instruments not measured at fair value on a recurring basis.

The following tables reflect the carrying amounts and estimated fair values of the Company’s financial instruments whether or not recognized on the Consolidated Balance Sheets at fair value.

September 30, 2022

Carrying

Estimated

Quoted Prices in Active Markets for Identical Assets

Significant Other Observable Inputs

Significant Unobservable Inputs

(Dollars in thousands)

Amount

Fair Value

Level 1

Level 2

Level 3

Assets:

Cash and cash equivalents

$ 104,734 $ 104,734 $ 104,734 $ — $ —

Restricted securities

16,436 16,436 — 16,436 —

Securities:

Available for sale

162,319 162,319 — 162,319 —

Held to maturity

17,670 17,161 — 17,161 —

Loans, net

1,448,071 1,456,080 — — 1,456,080

Derivative asset – interest rate swap on loans

27,972 27,972 — 27,972 —

Bank owned life insurance

36,996 36,996 — 36,996 —

Accrued interest receivable

7,072 7,072 — 7,072 —

Liabilities:

Deposits

$ 1,553,924 $ 1,546,449 $ — $ 968,141 $ 578,308

Subordinated debt, net

72,146 62,624 — 62,624 —

Derivative liability – interest rate swaps on loans

27,972 27,972 — 27,972 —

Accrued interest payable

748 748 — 748 —

21

December 31, 2021

Carrying

Estimated

Quoted Prices in Active Markets for Identical Assets

Significant Other Observable Inputs

Significant Unobservable Inputs

(Dollars in thousands)

Amount

Fair Value

Level 1

Level 2

Level 3

Assets:

Cash and cash equivalents

$ 93,199 $ 93,199 $ 93,199 $ — $ —

Restricted securities

15,609 15,609 — 15,609 —

Securities:

Available for sale

99,913 99,913 — 99,913 —

Held to maturity

20,349 21,144 — 21,144 —

Loans, net

1,341,760 1,346,048 — — 1,346,048

Derivative asset – interest rate swap on loans

2,097 2,097 — 2,097 —

Bank owned life insurance

36,241 36,241 — 36,241 —

Accrued interest receivable

6,735 6,735 — 6,735 —

Liabilities:

Deposits

$ 1,411,963 $ 1,415,551 $ — $ 952,815 $ 462,736

Subordinated debt, net

29,294 29,570 — 29,570 —

Derivative liability – interest rate swaps on loans

2,097 2,097 — 2,097 —

Accrued interest payable

462 462 — 462 —

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 September 30, 2022 and December 31, 2021 .

Note 7. Earnings Per Common Share

Basic earnings per common share excludes dilution and is computed by dividing net income available to common shareholders by the weighted average number of common shares outstanding for the period. Diluted earnings per share reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock which then shared in the earnings of the Bank. There were no such potentially dilutive securities outstanding in 2022 or 2021.

The weighted average number of shares used in the calculation of basic and diluted earnings per common share includes unvested restricted shares of the Company’s common stock outstanding. Applicable guidance requires that outstanding un-vested share-based payment awards that contain voting rights and rights to non-forfeitable dividends participate in undistributed earnings with common shareholders.

For the Three Months Ended September 30,

For the Nine Months Ended September 30,

(Dollars in thousands, except for per share data)

2022

2021

2022

2021

Net income

$ 7,743 $ 4,783 $ 19,095 $ 17,358

Preferred stock dividends

( 539 ) ( 539 ) ( 1,617 ) ( 1,617 )

Net income available to common shareholders

$ 7,204 $ 4,244 $ 17,478 $ 15,741

Weighted average number of common shares issued, basic and diluted

7,463,719 7,571,214 7,561,567 7,547,254

Net income per common share:

Basic and diluted income available per common share

$ 0.97 $ 0.56 $ 2.31 $ 2.09

22

Note 8. Accumulated Other Comprehensive Income (Loss)

The following table presents the cumulative balances of the components of accumulated other comprehensive income (loss), net of deferred taxes, as of September 30, 2022 and December 31, 2021 :

September 30, 2022

December 31, 2021

Unrealized (loss) gain on securities

$ ( 12,606 ) $ 265

Unrealized loss on securities transferred to HTM

( 13 ) ( 29 )

Tax benefit (expense)

2,863 ( 39 )

Total accumulated other comprehensive (loss) income

$ ( 9,756 ) $ 197

Note 9. Leases

Right-of-use assets and lease liabilities are included in other assets and other liabilities, respectively, in the Consolidated Statements of Financial Condition. Lease liabilities represent the Company’s obligation to make lease payments and are presented at each reporting date as the net present value of the remaining contractual cash flows. Cash flows are discounted at the Company’s incremental borrowing rate in effect at the commencement date of the lease. The incremental borrowing rate was equal to the rate of borrowing from the FHLB that aligned with the term of the lease contract. Right-of-use assets represent the Company’s right to use the underlying asset for the lease term and are calculated as the sum of the lease liability and if applicable, prepaid rent, initial direct costs, and any incentives received from the lessor.

The Company’s long-term lease agreements are classified as operating leases. Certain of these leases offer the option to extend the lease term and the Company has included such extensions in its calculation of the lease liabilities to the extent the options are reasonably assured of being exercised. The lease agreements do not provide for residual value guarantees and have no restrictions or covenants that would impact dividends or require incurring additional financial obligations.

Cash paid for amounts included in the measurement of lease liabilities during the nine months ended September 30, 2022 was $ 327,000 . During the nine months ended September 30, 2022 and 2021 , the Company recognized lease expense of $ 363,000 and $ 514,000 , respectively.

As of September 30,

(Dollars in thousands)

2022

Lease liabilities

$ 7,447

Right-of-use assets

$ 6,806

Weighted-average remaining lease term – operating leases (in months).

165.4

Weighted-average discount rate – operating leases

2.80 %

For the nine months ended September 30,

(Dollars in thousands)

2022

Lease Cost

Operating lease cost

$ 363

Total lease costs

$ 363

Cash paid for amounts included in measurement of lease liabilities

$ 327

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 September 30, 2022 , all of the Company’s lease obligations are classified as operating leases. The Company does not have any finance lease obligations.

23

A maturity analysis of operating lease liabilities and reconciliation of the undiscounted cash flows to the total of operating lease liabilities as of September 30, 2022 is as follows:

(Dollars in thousands)

2022

$ 157

2023

638

2024

654

2025

671

2026

689

Thereafter

6,148

Total undiscounted cash flows

$ 8,957

Discount

( 1,510 )

Lease liabilities

$ 7,447

Item 2 – Management ’ s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion and analysis is intended as a review of significant factors affecting the Company’s consolidated financial condition and results of operations for the periods indicated. This discussion and analysis should be read in conjunction with the accompanying consolidated financial statements and the related notes and the Company’s Annual Report on Form 10-K, which contains audited consolidated financial statements of the Company as of and for the year ended December 31, 2021, previously filed with the SEC on March 23, 2022. Results for the three and nine months ended September 30, 2022 are not necessarily indicative of results for the year ending December 31, 2022 or any future period.

Forward-Looking Statements

This Quarterly Report on Form 10-Q contains certain forward-looking statements and information relating to the Company within the meaning of the Private Securities Litigation Reform Act of 1995 that are based on the beliefs of management as well as assumptions made by and information currently available to management. Forward-looking statements can be identified by the fact that they do not relate strictly to historical or current facts. They often include words like “believe,” “expect,” “anticipate,” “estimate,” and “intend” or future or conditional verbs such as “will,” “should,” “could,” or “may” and similar expressions or the negative thereof. Important factors that could cause actual results to differ materially from those in the forward–looking statements included herein include, but are not limited to:

●

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 certain of our financial instruments;

●

adverse changes in the securities markets;

●

changes in laws or government regulations or policies affecting financial institutions, including changes in regulatory structure and in regulatory fees and capital requirements;

●

the impact of significant changes in accounting procedures or requirements on our financial condition or results of operations;

●

our ability to enter new markets successfully and capitalize on growth opportunities;

●

our ability to successfully integrate acquired entities;

●

changes in consumer spending, borrowing and savings habits;

●

changes in accounting policies and practices;

●

changes in our organization, compensation and benefit plans;

●

our ability to attract and retain key employees;

●

changes in our financial condition or results of operations that reduce capital;

●

changes in the financial condition or future prospects of issuers of securities that we own;

●

the concentration of our business in the Northern Virginia as well as the greater Washington, DC metropolitan area and the effect of changes in the economic, political and environmental conditions on those markets;

●

adequacy of or increases in the allowance for loan losses;

24

●

cyber threats, attacks or other data security events;

●

fraud or misconduct by internal or external parties;

●

reliance on third parties for key services;

●

deterioration of our asset quality, including an increase in loan delinquencies, problem assets and foreclosures;

●

future performance of our loan portfolio with respect to recently originated loans;

●

additional risks related to new lines of business, products, product enhancements or services;

●

results of examination of us by our regulators, including the possibility that our regulators may require us to increase our allowance for loan losses or to write-down assets or take other supervisory action;

●

the effectiveness of our internal controls over financial reporting and our ability to remediate any future material weakness in our internal controls over financial reporting;

●

liquidity, interest rate and operational risks associated with our business;

●

implications of our status as a smaller reporting company and as an emerging growth company;

●

a work stoppage, forced quarantine, or other interruption or the unavailability of key employees; and

● the continuing impact of the novel coronavirus disease (COVID-19) outbreak and measures taken in response for which future developments are highly uncertain and difficult to predict.

Should one or more of these risks or uncertainties materialize or should underlying assumptions prove incorrect, actual results may vary materially from those described herein. We caution readers not to place undue reliance on forward-looking statements. The Company disclaims any obligation to revise or update any forward-looking statements contained in this Form 10-Q to reflect future events or developments.

Overview

As used herein, the “Company,” “we,” “our,” and “us” refer to MainStreet Bancshares, Inc. and its subsidiary, and the “Bank” refers to MainStreet Bank.

MainStreet Bancshares, Inc.

MainStreet Bancshares, Inc. is a bank holding company that owns 100% of MainStreet Bank and MainStreet Community Capital, LLC. On October 12, 2021, the Company filed an election to be a financial holding company with the Board of Governors of the Federal Reserve System (the “Federal Reserve”). The Company elected financial holding company status in order to engage in a broader range of financial activities than are permitted for bank holding companies generally.

The Company and its subsidiaries are incorporated in and chartered by the Commonwealth of Virginia. The Company’s executive offices are located at 10089 Fairfax Boulevard, Fairfax, Virginia. Our telephone number is (703) 481-4567, and our internet address is www.mstreetbank.com. The information contained on our website shall not be considered part of this Quarterly Report on Form 10-Q, and the reference to our website does not constitute incorporation by reference of the information contained on the website.

MainStreet Bank

MainStreet Bank is a community commercial bank incorporated in and chartered by the Commonwealth of Virginia. The Bank is a member of the Federal Reserve Bank of Richmond, and its deposits are insured by the FDIC. The Bank opened for business on May 26, 2004, and is headquartered in Fairfax, Virginia. We currently operate six Bank branches; located in Herndon, Fairfax, McLean, Clarendon, Leesburg in Virginia, and one in Washington D.C.

We emphasize providing responsive and personalized services to our clients. Due to the consolidation of financial institutions in our primary market area, we believe there is a significant opportunity for a local bank to provide a full range of financial services. By offering highly professional, personalized banking products and service delivery methods and employing advanced banking technologies, we seek to distinguish ourselves from larger, regional banks operating in our market area and believe we are able to compete effectively with other community banks.

We believe we have a solid franchise that meets the financial needs of our clients and communities by providing an array of personalized products and services delivered by seasoned banking professionals with decisions made at the local level. We believe a significant customer base in our market prefers to do business with a local institution that has a local management team, a local Board of Directors and local founders and that this customer base may not be satisfied with the responsiveness of larger regional banks. By providing quality services, coupled with the opportunities provided by the economies in our market area, we have generated and expect to continue to generate organic growth.

We service Northern Virginia as well as the greater Washington, D.C. metropolitan area. Our goal is to deliver a customized and targeted mix of products and services that meets or exceeds customer expectations. To accomplish this goal, we have deployed a premium operating system that gives customers access to up-to-date banking technology. These systems and our highly skilled staff have allowed us to compete with larger financial institutions. The combination of sophisticated technology and personal service sets us apart from our competition. We strive to be the leading community bank in our market.

25

We offer a full range of banking services to individuals, small to medium-sized businesses and professionals through both traditional and electronic delivery. We were the first community bank in the Washington, D.C. metropolitan area to offer a full online business banking solution, including remote check scanners on a business customer’s desktop. We offer mobile banking apps for iPhones, iPads and Android devices that provide for remote deposit of checks. In addition, we were the first bank headquartered in the Commonwealth of Virginia to offer CDARS, the Certificate of Deposit Account Registry Service, an innovative deposit insurance solution that provides FDIC insurance on deposits up to $150 million. We believe that enhanced electronic delivery systems and technology increase profitability through greater productivity and cost control and allow us to offer new and better products and services.

Our products and services include: business and consumer checking, premium interest-bearing checking, business account analysis, savings, certificates of deposit and other depository services, as well as a broad array of commercial, real estate and consumer loans. Internet account access is available for all personal and business accounts, internet bill payment services are available on most accounts, and a robust online cash management system is available for business customers.

Avenu TM

On October 25, 2021, MainStreet Bancshares, Inc. formally introduced Avenu TM , a division of MainStreet Bank. Avenu TM represents the Company’s suite of Banking as a Service (“BaaS”) solutions designed to meet the banking needs of Fintech customers. We believe our approach to providing a proprietary BaaS solution is unique. Our transformational subledger combined with our high-touch compliance training goes beyond the industry standards to ensure that our Fintech partners will prosper. This division of MainStreet Bank currently serves money service businesses, payment processers, and Banking as a Service customers and provides the Bank with valuable low-cost deposits and additional streams of fee income. Our BaaS solution is in the late stage of development. A major component of the BaaS solution includes a fintech core, which is Software as a Service (SaaS).

MainStreet Community Capital, LLC

In August 2021, the Company created a community development entity (“CDE”) subsidiary, MainStreet Community Capital, LLC, a Virginia limited liability company, to apply for New Market Tax Credit (“NMTC”) allocations from the U.S. Department of Treasury’s Community Development Financial Institutions Fund. To promote development in economically distressed areas, the NMTC program was established under the Community Renewal Tax Relief Act of 2000 to provide tax incentives for capital investment in disadvantaged market areas that have not experienced economic expansion. The program establishes a tax credit for investment in a CDE and ongoing compliance with the program is accomplished through a governing board and an advisory board which maintains accountability to residents and businesses in the aforementioned disadvantaged areas. This CDE will be an intermediary vehicle for the provision of loans and investments in Low-Income Communities (“LICs”). In January 2022, the Community Development Financial Institutions Fund (“CDFI”) of the United States Department of the Treasury certified MainStreet Community Capital, LLC as a registered CDE.

Impact of Inflation

The United States is experiencing rising inflation. In response, the Federal Open Markets Committee (FOMC) raised the Federal Funds rate 25 basis points in March 2022.  Since March, the FOMC met four times and raised the Federal Funds rate an additional 275 basis points.  In addition to raising the Federal Funds rate, the Federal Reserve may take other means necessary to fulfill its dual mandate.

The effects of rising inflation and the actions of the Federal Reserve, as well as the economy at large may impact the Bank’s customers, including their willingness and ability to repay their obligations, to invest, to save or to spend. This impact could affect the Bank’s customers general appetite for banking products and the credit health of the Bank’s customer base. The timing and impact of inflation and rising interest rates on our business and related financial results will depend on future developments, which are highly uncertain and difficult to predict.

Critical Accounting Policies

The accounting and financial reporting policies of the Company conform to accounting principles generally accepted in the United States of America and to general practices within the banking industry. Accordingly, the financial statements require certain estimates, judgments, and assumptions, which are believed to be reasonable, based upon the information available. These estimates and assumptions affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of income and expenses during the periods presented. Critical accounting policies comprise those that management believes are the most critical to aid in fully understanding and evaluating our reported financial results. These policies require numerous estimates or economic assumptions that may prove inaccurate or may be subject to variations which may significantly affect our reported results and financial condition for the current period or in future periods.

Following the announcement by the U.K.’s Financial Conduct Authority in July 2017 that it will no longer persuade or require banks to submit rates for the London InterBank Offered Rate (LIBOR) after 2021.  The Company has opted to use the published Secured Overnight Funding Rate (SOFR) as a substitute and replacement for any financial instruments that are or would otherwise be tied to the LIBOR index.

26

Our critical accounting policies involving significant judgments and assumptions used in the preparation of the consolidated financial statements as of September 30, 2022, since our Annual Report on Form 10-K for the year ended December 31, 2021 was filed, we have removed computer software and income taxes as critical account polices. Any additional changes are discussed in our Recently Issued Accounting Pronouncements.

Comparison of Statements of Income for the Three Months Ended September 30, 2022 and 2021

General

Total revenue increased $6.0 million to $23.3 million for the three months ended September 30, 2022 from $17.3 million for the three months ended September 30, 2021. These increases in total revenue were offset by increases in total expenses. Total expenses increased $2.7 million to $13.7 million for the three months ended September 30, 2022 from $11.0 million for the three months ended September 30, 2021.  The increase in revenue for the three months ended September 30, 2022 was primarily due to increases in net interest income of $4.9 million over the same period in 2021. Income was positively impacted by interest earned on federal funds sold, which earned $1.0 million in additional interest for the three months ended September 30, 2022 than the same period in 2021. These increases in income were offset by increases of $1.0 million in salaries and employee benefits for the three months ended September 30, 2022 compared to the three months ended September 30, 2021. Net income increased $3.0 million to $7.7 million for the three months ended September 30, 2022 from $4.8 million for the three months ended September 30, 2021.

Interest Income

Total interest income increased $6.1 million, or 38.8%, to $21.9 million for the three months ended September 30, 2022 from $15.8 million for the three months ended September 30, 2021. The increase was primarily the result of an increase in interest and fees on loans of $5.1 million and an increase in interest on federal funds sold of $1.0 million. Total average interest-earning assets increased $145.3 million, to $1.74 billion for the three months ended September 30, 2022 from $1.60 billion for the same period in 2021 primarily because of an increase of $0.19 billion in the average balance of loans, a $9.1 million increase in the average balance of investment securities and was offset by a decrease of $52.0 million in the average balance of federal funds sold and interest-earning deposits, as these funds were deployed into loans and securities. The average yield on our interest-earning assets increased 107 basis points to 5.01% for the three months ended September 30, 2022 as compared to 3.94% for the three months ended September 30, 2021 primarily because of higher average yields on interest earning assets due to market conditions, loans related to PPP lending with a rate of 1% paying off, and the Federal Reserve increasing the benchmark interest rates by 150 basis points over the course of the quarter.

Interest and fees on loans increased $5.1 million, to $20.3 million for the three months ended September 30, 2022 from $15.2 million for the same period in 2021. This increase was primarily due to an increase in the average yield on loans and the average loans outstanding increasing $0.19 billion, which increased to $1.45 billion as of September 30, 2022 from $1.26 billion as of September 30, 2021. The average yield on loans increased 78 basis points, or 16.2%, for the three months ended September 30, 2022 as compared to the three months ended September 30, 2021. Included in average loans for the three months ended September 30, 2022, $2.8 million was attributable to average PPP loans. PPP loans have an interest rate of 1% and as the level of PPP loan repayments accelerate, the Bank is seeing loan yields rise to a normalized level. The Federal Reserve increased the federal interest rate by 150 basis points throughout the quarter so the impact of this increase will not be fully demonstrated until the fourth quarter.

Interest income on federal funds sold and interest-earning deposits increased by $1.0 million to $1.0 million for the three months ended September 30, 2022, from $0.0 million for the three months ended September 30, 2021. The increase was primarily due to an increase in the average yield on these deposits despite the average balances decreasing over the same time period. The average balance of interest-earning deposits and federal funds sold decreased $52.0 million to $182.3 million for the three months ended September 30, 2022 from $234.4 million for the same period in 2021. The average yield increased to 2.20% for the three months ended September 30, 2022 from 0.06% for the same period in 2021. The Bank deployed the balances in these accounts to fund loan growth during the third quarter of 2022.

27

Interest on investment securities increased by $54,000 to $639,000 for the three months ended September 30, 2022 from $585,000 for the three months ended September 30, 2021. Interest on investments in U.S Treasury, U.S. Government Agencies, and U.S Municipals decreased in total $8,000, or 2.6%, to $317,000 for the three months ended September 30, 2022, from $325,000 for the three months ended September 30, 2021. Interest on mortgage-backed securities increased by $13,000, or 12.3%, to $114,000 for the three months ended September 30, 2022, from $101,000 for the three months ended September 30, 2021. Subordinated debt interest income increased by $39,000, or 42.6%, to $132,000 for the three months ended September 30, 2022, from $93,000 for the three months ended September 30, 2021. The average yield on taxable securities increased  12 basis points, to 2.03%  and the average yield on tax-exempt securities decreased 19 basis points, to 3.44% on a tax equivalent basis for the three months ended September 30, 2022, from 1.91% and 3.63%, respectively, for the same period in 2021. As increased market rates resulted in declining value in investments, investment income increased due to the average balance of investment securities increasing by $9.1 million, to $112.0 million for the three months ended September 30, 2022, from $102.9 million for the three months ended September 30, 2021.

I nterest Expense

Total interest expense increased $1.2 million, to $3.8 million for the three months ended September 30, 2022 from $2.6 million for the three months ended September 30, 2021, primarily due to a $0.5 million increase in interest expense on time deposits and a $0.3 million increase in interest expense on money market deposits. There were additional increases in interest expense primarily due to newly issued subordinated debt in 2021 and 2022 and were included in the three months ended September 30, 2022 over the three months ended September 30, 2021

Interest expense on deposits increased $948,000 to $3.0 million for the three months ended September 30, 2022 from $2.0 million for the three months ended September 30, 2021 primarily as a result of an increase in average interest-bearing deposit yields and balances. The increase in average deposit balances was $30.6 million to $981.6 million during the three months ended September 30, 2022 as compared to $951.0 million for the three months ended September 30, 2021. The increase in the average balance of interest-bearing deposits was primarily a result of an $28.6 million increase in the average balance of interest-bearing demand deposit accounts and by a $68.6 million increase in the average balance of time deposits. The average cost of deposits was 121 basis points for the three months ended September 30, 2022, compared to 85 basis points for the three months ended September 30, 2021. The average rate paid on money market deposits increased 58 basis points to 0.77% for the three months ended September 30, 2022 from 0.19% for the three months ended September 30, 2021. The average rate paid on interest-bearing demand deposits increased 37 basis points to 0.74% for the three months ended September 30, 2022 from 0.37% for the three months ended September 30, 2021 primarily due to market competition and the interest rate environment. The average cost of certificates of deposit increased by 17 basis points to 1.57% for the three months ended September 30, 2022 as compared to 1.40% for the three months ended September 30, 2021. The increase in the average balance of interest-bearing demand deposits for the three months ended September 30, 2022, primarily was the result of our continued effort to attract and retain low-cost deposits, and to reduce our reliance on wholesale deposits.

The average balance of subordinated debt increased $31.5 million for the three months ended September 30, 2022, due to $30 million in refinanced debt issued in 2021 and an additional $43.7 million issued in the nine months ended September 30, 2022

Net Interest Income

Net interest income increased approximately $4.9 million, or 37.1%, to $18.1 million for the three months ended September 30, 2022 from $13.2 million for the three months ended September 30, 2021 because of our net interest-earning assets increasing $83.2 million to $687.3 million for the three months ended September 30, 2022 from $604.1 million for the three months ended September 30, 2021. The interest rate spread increased by 66 basis points to 3.57% for the three months ended September 30, 2022 from 2.91% for the three months ended September 30, 2021, on a tax equivalent basis. The net interest margin increased by 84 basis points from 3.30% for the three months ended September 30, 2021 to 4.14% for the three months ended September 30, 2022 on a tax equivalent basis. Refer to “Use of Certain Non-GAAP Financial Measures,” below, for a reconciliation of adjusted net interest margin.

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Average Balances, Net Interest Income, Yields Earned and Rates Paid

The following table shows for the periods indicated the total dollar amount of interest from average interest-earning assets and the resulting yields, as well as the interest expense on average interest-bearing liabilities, expressed both in dollars and rates, and the net interest margin. All average balances are based on daily balances.

For the Three Months Ended September 30,

2022

2021

Average Balance

Interest Income/ Expense(6)

Yield/ Cost(5)(6)

Average Balance

Interest Income/ Expense(6)

Yield/ Cost(5)(6)

(Dollars in thousands)

Interest-earning assets:

Loans (1)

$ 1,446,679 $ 20,261 5.56 % $ 1,258,485 $ 15,162 4.78 %

Investment securities:

Taxable

73,914 378 2.03 % 65,974 318 1.91 %

Tax-exempt

38,074 330 3.44 % 36,919 338 3.63 %

Federal funds and interest-bearing deposits

182,331 1,013 2.20 % 234,363 38 0.06 %

Total interest-earning assets

1,740,998 $ 21,982 5.01 % 1,595,741 $ 15,856 3.94 %

Non-interest-earning assets

61,479 88,521

Total assets

$ 1,802,477 $ 1,684,262

Interest-bearing liabilities:

Interest-bearing demand deposits

$ 93,569 $ 175 0.74 % $ 64,966 $ 60 0.37 %

Savings and NOW deposits

55,100 43 0.31 % 75,968 38 0.20 %

Money market deposits

257,091 496 0.77 % 302,848 148 0.19 %

Time deposits

575,832 2,275 1.57 % 507,254 1,795 1.40 %

Total interest-bearing deposits

981,592 2,989 1.21 % 951,036 2,041 0.85 %

Federal funds purchased

2 — — 2 — —

Subordinated debt

72,107 828 4.56 % 40,609 541 5.29 %

Total interest-bearing liabilities

1,053,701 $ 3,817 1.44 % 991,647 $ 2,582 1.03 %

Non-interest-bearing liabilities:

Demand deposits and other liabilities

558,337 510,008

Total liabilities

1,612,038 1,501,655

Stockholders’ equity

190,439 182,607

Total liabilities and stockholders’ equity

$ 1,802,477 $ 1,684,262

Net interest income

$ 18,165 $ 13,274

Interest rate spread (2)

3.57 % 2.91 %

Net interest-earning assets (3)

$ 687,297 $ 604,094

Net interest margin (4)

4.14 % 3.30 %

Average interest-earning assets to average interest-bearing liabilities

165.23 % 160.92 %

(1)

Includes loans classified as non-accrual

(2)

Interest rate spread represents the difference between the average yield on average interest–earning assets and the average cost of average interest-bearing liabilities.

(3)

Net interest earning assets represent total average interest–earning assets less total interest–bearing liabilities.

(4)

Net interest margin represents net interest income divided by total average interest-earning assets.

(5) Annualized.

(6)

Income and yields for all periods presented are reported on a tax-equivalent basis using the federal statutory tax rate of 21%. Refer to “Use of Certain Non-GAAP Financial Measures.”

29

Rate/ Volume Analysis

The following table presents the effects of changing rates and volumes on net interest income for the periods indicated. The rate column shows the effects attributable to changes in rate (changes in rate multiplied by prior average volume). The volume column shows the effects attributable to changes in volume (changes in average volume multiplied by prior rate). Changes attributable to both volume and rate are allocated between the volume and rate categories. The net column represents the sum of the prior columns.

For purposes of this table, changes attributable to both rate and volume, which cannot be segregated, have been allocated proportionately, based on the changes due to rate and the changes due to volume.

For the Three Months Ended

September 30, 2022 and 2021

Increase (Decrease) Due to

Total Increase

Volume

Rate

(Decrease)

(In thousands)

Interest-earning assets:

Loans

$ 2,438 $ 2,661 $ 5,099

Investment securities:

Taxable

39 21 60

Tax exempt

50 (58 ) (8 )

Federal funds and interest-bearing deposits

(55 ) 1,030 975

Total interest-earning assets

2,472 3,654 6,126

Interest-bearing liabilities:

Interest-bearing demand deposits

29 86 115

Savings and NOW accounts

(203 ) 551 348

Money market deposit accounts

(42 ) 47 5

Time deposits

331 149 480

Total deposits

115 833 948

Subordinated debt

979 (692 ) 287

Total interest-bearing liabilities

1,094 141 1,235

Change in net interest income

$ 1,378 $ 3,513 $ 4,891

Provision for Loan Losses

Management believes that the provision recorded for the period ended September 30, 2022 reflects a balance sufficient to provide for each allowance segment, using objective data and information available to us at this time in evaluating our standard analysis of local/national economic data, changes in underwriting quality, portfolio concentrations, experience of lending team, and credit quality. We will continuously review the loan portfolio to determine the depth and breadth of potential loan losses. As we obtain additional information and to more accurately assess the full nature and extent of elevated risk to the loan portfolio that may arise, additional provision expenses may be required.

The provision for loan losses, which is an operating expense, is maintained to ensure that the allowance for loan losses is maintained at levels we consider necessary and appropriate to absorb both probable and reasonably estimated credit losses at a balance sheet date. In determining the level of the allowance for loan losses, we consider past and current loss experience, evaluations of real estate collateral, current economic conditions, volume and type of lending, adverse situations that may affect a borrower’s ability to repay a loan and the levels of non-performing loans. The amount of the allowance is based on estimates, and actual losses may vary from such estimates as more information becomes available over time or economic conditions change. This evaluation is inherently subjective, as it requires estimates and assumptions that are susceptible to significant revision as circumstances change as more information becomes available. The allowance for loan losses is assessed monthly and provisions are made for loan losses as required in order to maintain the allowance.

The provision for loan losses decreased by $290,000 to a provision for loan losses of $0 for the three months ended September 30, 2022 from a provision for loan loss of $290,000 for the three months ended September 30, 2021. Loan originations, which totaled approximately $85.2 million for the three months ended September 30, 2021 decreased $2.0 million compared to loan originations, of $83.2 million for the three months ended September 30, 2022. The Company has not provisioned any allowance for loan losses for remaining PPP loans as they are 100% guaranteed by Small Business Administration. The Company did not have any non-performing loans at September 30, 2021 or September 30, 2022.

On September 22, 2022, the Company completed the sale of a loan note for a customer that had stopped making payments and declared bankruptcy. The Company incurred a loss of $211,000 on this transaction that was properly accounted for in its Statement of Income as a loss on the sale of a loan. This credit had previously identified weaknesses and deemed to be of substandard quality with an appropriate reserve allocation.  We determined that the best course of action was to sell the note at a discount to an interested party.  Had the loan sale not occurred, the Company would have recorded a specific allocation to the provision for loan losses and proceeded with an orderly liquidation of collateral.

During the three months ended September 30, 2022, special mention loans decreased $15.6 million for a balance of $1.0 million, primarily due to credit upgrades. Substandard loans decreased $13.0 million as of September 30, 2022 for a balance of $11.3 million. Of the substandard loans as of September 30, 2022, 78% are connected to the hospitality industry. These loans were initially impacted by the pandemic and were downgraded out of an abundance of caution while cash flows and occupancy levels have continued to increase to pre-pandemic levels. Management does not believe there will be losses associated with these credits. During the three months ended September 30, 2022, there were no charge-offs incurred, and recoveries of $13,000 were received.

30

Non-Interest Income

Non-interest income decreased $138,000, or  9.3%, to $1.3 million for the three months ended September 30, 2022 from $1.5 million for the three months ended September 30, 2021. The decrease in non-interest income was primarily due decreases in mortgage origination and prepayment penalty fee income in the three months ended September 30, 2022 compared to the same period in 2021. The decrease associated with revenue streams was offset by an increase in loan swap fee income recognized of $518,000 for the three months ended September 30, 2022. The Company continues to focus on increasing fee income through loan swaps as it strategically benefits our customers.

Non-Interest Expense

Non-interest expense increased $1.4 million, or 16.9%, to $9.9 million for the three months ended September 30, 2022 from $8.5 million for the three months ended September 30, 2021 primarily because of increases in salary and employee benefits of $1.0 million and outside service expenses of $319,000. Salaries and employee benefits expense increased by $1.0 million to $5.9 million for the three months ended September 30, 2022 from $4.8 million for the three months ended September 30, 2021primarily as a result of twenty-nine new employees and the related salary and benefit expenses for these additional employees. Outside service expenses increased $319,000, or 109.2%, to $611,000 for the three months ended September 30, 2022 from $292,000 for the three months ended September 30, 2021 due to investments in technology and costs associated with Avenu. Franchise taxes decreased approximately $21,000 to $365,000 for the three months ended September 30, 2022 from $386,000 for the three months ended September 30, 2021 because of the make up of the Company’s capital as of September 30, 2022 compared to the balance sheet as of September 30, 2021. FDIC insurance premiums decreased approximately $255,000 to $60,000 for the three months ended September 30, 2022 from $315,000 for the three months ended September 30, 2021 due to smaller than anticipated assessments from the FDIC. Advertising and marketing expenses increased $266,000, or 60.7%, to $704,000 for the three months ended September 30, 2022 from $438,000 for the three months ended September 30, 2021 due to timing of contracts and continued investment in expanding the Company's brand.

Income Tax Expense

Income tax expense increased $653,000, or 56.5%, to a tax expense of $1.8 million for the three months ended September 30, 2022 from a tax expense of $1.2 million for the three months ended September 30, 2021. The increase in federal income tax expense for the three months ended September 30, 2022 compared to the same period a year ago was driven by the increase in income before income taxes of $3.6 million, to income before income tax of $9.6 million as of September 30, 2022 compared to income before income tax expense of $5.9 million for the same period in the prior year. The Company was able to apply and claim a research and development tax credit of approximately $89,000 for its associated work in developing a software platform in 2021 and anticipates similar activity in 2022. As a result of expanding its footprint, the Company has included assessments in income tax expense for potential state tax liabilities which totaled $179,000 for the three months ended September 30, 2022. For the three months ended September 30, 2022, the Company had an effective tax expense rate of 18.9%, compared to effective tax expense rate of 19.5% for the three months ended September 30, 2021.

Comparison of Statements of Income for the Nine Months Ended September 30, 2022 and 2021

General

Net income increased $1.7 million to $19.1 million for the nine months ended September 30, 2022 from $17.4 million for the nine months ended September 30, 2021. The increase in net income for the nine months ended September 30, 2022 was primarily due to increased levels of net interest income in response to the rising rate environment throughout 2022. During the nine months ended September 30, 2022, the Company’s net interest income increased $9.7 million over the same period in 2021. Net income was also affected by increases of $2.7 million in salaries and employee benefits for the nine months ended September 30, 2022 compared to the same period in 2021.

Interest Income

Total interest income increased $10.1 million, or 21.0%, to $58.1 million for the nine months ended September 30, 2022 from $48.0 million for the nine months ended September 30, 2021. The increase was primarily the result of an increase in interest and fees on loans of $8.7 million and an increase in interest on federal funds and interest-bearing deposits of $1.2 million. Total average interest-earning assets increased $41.6 million, to $1.65 billion for the nine months ended September 30, 2022 from $1.61 billion for the same period in 2021 primarily because of an increase of $126.7 million in the average balance of loans, a $17.6 million increase in the average balance of investment securities and was offset by a decrease of $102.7 million in the average balance of federal funds and interest-bearing deposits as a large portion of our cash was used to fund loan growth late throughout the year. The average yield on our interest-earning assets increased 71 basis points to 4.71% for the nine months ended September 30, 2022 as compared to 4.00% for the nine months ended September 30, 2021 primarily because of higher average yields on interest earning assets due to market conditions, loans related to PPP lending with a rate of 1% paying off, and the Federal Reserve increasing the benchmark interest rates by 300 basis points.

Interest and fees on loans increased $8.7 million, to $54.9 million for the nine months ended September 30, 2022 from $46.2 million for the same period in 2021. This increase was primarily due to an increase in the average yield on loans and the average loans outstanding increasing $126.7 million, which increased to $1.42 billion as of September 30, 2022 from $1.29 billion as of September 30, 2021. The average yield on loans increased 39 basis points, or 8.2%, for the nine months ended September 30, 2022 as compared to the nine months ended September 30, 2021. Included in average loans for the nine months ended September 30, 2022, $17.6 million was attributable to average PPP loans. PPP loans have an interest rate of 1% and as the level of PPP loan repayments accelerate, the Bank is seeing loan yields rise to a normalized level. The Federal Reserve increased the federal interest rate by 300 basis points over the first nine months so we continue to see the impact of these increases as we progress towards the end of the year.

Interest income on federal funds sold and interest-earning deposits increased by $1.2 million to $1.2 million for the nine months ended September 30, 2022, from $73,000 for the nine months ended September 30, 2021. The increase was primarily due to an increase in the average yield on these federal funds despite the average balances decreasing over the same time period. The average balance of interest-earning deposits and federal funds sold decreased $102.7 million to $121.8 million for the nine months ended September 30, 2022 from $224.5 million for the same period in 2021. The average yield increased to 1.36% for the nine months ended September 30, 2022 from 0.04% for the same period in 2021. The Bank deployed the balances in these accounts to fund loan growth during the first nine months of 2022.

31

Interest on investment securities increased by $220,000 to $1.9 million for the nine months ended September 30, 2022 from $1.7 million for the nine months ended September 30, 2021. Interest on investments in U.S Treasury, U.S. Government Agencies, and U.S Municipals decreased in total $2,000, or 0.2%, to $969,000 for the nine months ended September 30, 2022, from $972,000 for the nine months ended September 30, 2021. Interest on mortgage-backed securities increased by 50,000, or 18.5%, to $321,000 for the nine months ended September 30, 2022, from $271,000 for the nine months ended September 30, 2021. Subordinated debt interest income increased by $117,000, or 43.1%, to $388,000 for the nine months ended September 30, 2022, from $271,000 for the nine months ended September 30, 2021. The average yield on taxable securities decreased 5 basis points, to 2.07%  and the average yield for tax-exempt securities decreased 18 basis points, on a tax equivalent basis, for the nine months ended September 30, 2022, from 2.12% and 3.66%, respectively, for the same period in 2021.  Despite decreasing yields, investment income increased due to the average balance of investment securities increasing by $17.6 million, to $112.2 million for the nine months ended September 30, 2022, from $94.6 million for the nine months ended September 30, 2021

Interest Expense

Total interest expense increased $333,000, to $8.7 million for the nine months ended September 30, 2022 from $8.3 million for the nine months ended September 30, 2021, primarily due to a $762,000 increase in interest expense on subordinated debt and a $175,000 increase in interest expense on interest-bearing demand deposits. These increases were offset by a decrease of $803,000 in interest expense in time deposits. The increase in subordinated debt is primarily due to refinancing subordinated debt in 2021 and newly issued subordinated debt in 2022 that was included in the nine months ended September 30, 2022 as opposed to the nine months ended September 30, 2021. There were additional increases in interest expense on Federal Home Loan Bank advances of $83,000 in the nine months ended September 30, 2022 over the same period in 2021.

Interest expense on deposits decreased $512,000 to $6.5 million for the nine months ended September 30, 2022 from $7.0 million for the nine months ended September 30, 2021 primarily as a combination result of some decreases in average interest-bearing deposit yields and balances. The decrease in average deposit balances was $76.5 million to $917.8 million during the nine months ended September 30, 2022 as compared to $994.3 million for the nine months ended September 30, 2021. The decrease in the average balance of interest-bearing deposits was primarily a result of a $92.7 million decrease in the average balance of money market deposit accounts but was offset by a $19.5 million decrease in the average balance of interest-bearing demand deposits. The average cost of deposits remained the same at 94 basis points for both the nine months ended September 30, 2022 as for the nine months ended September 30, 2021. The average rate paid on money market deposits increased 15 basis points to 0.40% for the nine months ended September 30, 2022 from 0.25% for the nine months ended September 30, 2021. The average rate paid on interest-bearing demand deposits increased 19 basis points to 0.53% for the nine months ended September 30, 2022 from 0.34% for the nine months ended September 30, 2021 primarily due to market competition. The average cost of certificates of deposit decreased by 22 basis points to 1.37% for the nine months ended September 30, 2022 as compared to 1.59% for the nine months ended September 30, 2021. The increase in the average balance of interest-bearing demand deposits for the nine months ended September 30, 2022, primarily was the result of our continued effort to attract and retain low-cost deposits. and to reduce our reliance on wholesale deposits.

Interest expense on advances from the Federal Home Loan Bank increased $83,000 to $83,000 for the nine months ended September 30, 2022, from $0 for the nine months ended September 30, 2021 as a result an average balance of $24.0 million of outstanding advances on the Federal Home Loan Bank for the nine months ended September 30, 2022 compared to no advances for the nine months ended September 30, 2021. The average balance of subordinated debt increased $62.8 million for the nine months ended September 30, 2022, due to an additional $30 million in refinanced debt issued in 2021 and $43.7 million issued in the nine months ended September 30, 2022.

Net Interest Income

Net interest income increased approximately $9.7 million, or 24.6%, to $49.4 million for the nine months ended September 30, 2022 from $39.7 million for the nine months ended September 30, 2021 because of our net interest-earning assets increasing $63.1 million to $649.4 million for the nine months ended September 30, 2022 from $586.3 million for the nine months ended September 30, 2021. The interest rate spread increased by 64 basis points to 3.56% for the nine months ended September 30, 2022 from 2.92% for the nine months ended September 30, 2021. The net interest margin increased by 70 basis points from 3.31% for the nine months ended September 30, 2021 to 4.01% for the nine months ended September 30, 2022 on a tax equivalent basis. Refer to “Use of Certain Non-GAAP Financial Measures,” below, for a reconciliation of adjusted net interest margin.

32

Average Balances, Net Interest Income, Yields Earned and Rates Paid

The following table shows for the periods indicated the total dollar amount of interest from average interest-earning assets and the resulting yields, as well as the interest expense on average interest-bearing liabilities, expressed both in dollars and rates, and the net interest margin. All average balances are based on daily balances.

For the Nine Months Ended September 30,

2022

2021

Average Balance

Interest Income/ Expense (6)

Yield/ Cost(5)(6)

Average Balance

Interest Income/ Expense(6)

Yield/ Cost(5)(6)

(Dollars in thousands)

Interest-earning assets:

Loans (1)

$ 1,420,013 $ 54,900 5.17 % $ 1,293,359 $ 46,211 4.78 %

Investment securities:

Taxable

73,496 1,136 2.07 % 57,503 910 2.12 %

Tax-exempt

38,703 1,008 3.48 % 37,072 1,015 3.66 %

Federal funds and interest-bearing deposits

121,832 1,241 1.36 % 224,521 73 0.04 %

Total interest-earning assets

1,654,044 $ 58,285 4.71 % 1,612,455 $ 48,209 4.00 %

Non-interest-earning assets

71,361 76,758

Total assets

$ 1,725,405 $ 1,689,213

Interest-bearing liabilities:

Interest-bearing demand deposits

$ 86,836 $ 345 0.53 % $ 67,345 $ 170 0.34 %

Savings and NOW deposits

66,714 122 0.24 % 72,591 127 0.23 %

Money market deposits

252,992 766 0.40 % 345,662 645 0.25 %

Time deposits

511,242 5,236 1.37 % 508,722 6,039 1.59 %

Total interest-bearing deposits

917,784 6,469 0.94 % 994,320 6,981 0.94 %

Federal funds purchased

2 — — 1 — —

Subordinated debt

62,807 2,108 4.49 % 31,815 1,346 5.66 %

Federal Home Loan Bank advances

24,011 83 0.46 % — — —

Total interest-bearing liabilities

1,004,604 $ 8,660 1.15 % 1,026,136 $ 8,327 1.08 %

Non-interest-bearing liabilities:

Demand deposits and other liabilities

531,115 486,510

Total liabilities

1,535,719 1,512,646

Stockholders’ Equity

189,686 176,567

Total liabilities and stockholders’ equity

$ 1,725,405 $ 1,689,213

Net interest income

$ 49,625 $ 39,882

Interest rate spread (2)

3.56 % 2.92 %

Net interest-earning assets (3)

$ 649,440 $ 586,319

Net interest margin (4)

4.01 % 3.31 %

Average interest-earning assets to average interest-bearing liabilities

164.65 % 157.14 %

(1)

Includes loans classified as non-accrual

(2)

Interest rate spread represents the difference between the average yield on average interest–earning assets and the average cost of average interest-bearing liabilities.

(3)

Net interest earning assets represent total average interest–earning assets less total interest–bearing liabilities.

(4)

Net interest margin represents net interest income divided by total average interest-earning assets.

(5) Annualized.

(6)

Income and yields for all periods presented are reported on a tax-equivalent basis using the federal statutory tax rate of 21%. Refer to “Use of Certain Non-GAAP Financial Measures.”

33

Rate/ Volume Analysis

The following table presents the effects of changing rates and volumes on net interest income for the periods indicated. The rate column shows the effects attributable to changes in rate (changes in rate multiplied by prior average volume). The volume column shows the effects attributable to changes in volume (changes in average volume multiplied by prior rate). Changes attributable to both volume and rate are allocated between the volume and rate categories. The net column represents the sum of the prior columns.

For purposes of this table, changes attributable to both rate and volume, which cannot be segregated, have been allocated proportionately, based on the changes due to rate and the changes due to volume.

For the Nine Months Ended

September 30, 2022 and 2021

Increase (Decrease) Due to

Total Increase

Volume

Rate

(Decrease)

(In thousands)

Interest-earning assets:

Loans

$ 4,740 $ 3,949 $ 8,689

Investment securities:

Taxable

262 (36 ) 226

Tax exempt

60 (67 ) (7 )

Federal funds and interest-bearing deposits

(65 ) 1,233 1,168

Total interest-earning assets

4,997 5,079 10,076

Interest-bearing liabilities:

Interest-bearing demand deposits

60 115 175

Savings and NOW accounts

(13 ) 8 (5 )

Money market deposit accounts

(283 ) 404 121

Time deposits

50 (853 ) (803 )

Total deposits

(186 ) (326 ) (512 )

Federal Home Loan Bank advances

83 — 83

Subordinated debt

1,243 (481 ) 762

Total interest-bearing liabilities

1,140 (807 ) 333

Change in net interest income

$ 3,857 $ 5,886 $ 9,743

Provision for Loan Losses

Management believes that the provision recorded for the period ended September 30, 2022 reflects a balance sufficient to provide for each allowance segment, using objective data and information available to us at this time in evaluating our standard analysis of local/national economic data, changes in underwriting quality, portfolio concentrations, experience of lending team, and credit quality. We will continuously review the loan portfolio to determine the depth and breadth of potential loan losses. As we obtain additional information and to more accurately assess the full nature and extent of elevated risk to the loan portfolio that may arise, additional provision expenses may be required.

The provision for loan losses, which is an operating expense, is maintained to ensure that the allowance for loan losses is maintained at levels we consider necessary and appropriate to absorb both probable and reasonably estimated credit losses at a balance sheet date. In determining the level of the allowance for loan losses, we consider past and current loss experience, evaluations of real estate collateral, current economic conditions, volume and type of lending, adverse situations that may affect a borrower’s ability to repay a loan and the levels of non-performing loans. The amount of the allowance is based on estimates, and actual losses may vary from such estimates as more information becomes available over time or economic conditions change. This evaluation is inherently subjective, as it requires estimates and assumptions that are susceptible to significant revision as circumstances change as more information becomes available. The allowance for loan losses is assessed monthly and provisions are made for loan losses as required in order to maintain the allowance.

Provision for loan losses increased by $2.8 million to a provision for loan losses of $1.3 million for the nine months ended September 30, 2022 from a non-recurring recovery of provision expense of $1.5 million for the nine months ended September 30, 2021, primarily related to recovering most of the special COVID pandemic provision in 2021. The provision for loan losses for the nine months ended September 30, 2022 represents normal loan loss provisioning associated with loan growth. Loan originations, which totaled approximately $264.9 million for the nine months ended September 30, 2021 increased $70.7 million compared to loan originations of $335.7 million for the nine months ended September 30, 2022. The Company has not provisioned any allowance for loan losses for remaining PPP loans as they are 100% guaranteed by Small Business Administration. The Company did not have any non-performing loans at September 30, 2021 or at September 30, 2022. During the nine months ended September 30, 2021 the Company increased some qualitative assumptions in the allowance for loan loss model to account for potential economic uncertainty and potential hidden credit risk.

During the nine months ended September 30, 2022, special mention loans decreased $16.1 million for a balance of $725,000. Substandard loans increased $6.0 million for a balance of $11.3 million as of September 30, 2022 Of the substandard loans, 79% are connected to the hospitality industry. These loans were initially impacted by the pandemic and were downgraded out of an abundance of caution while cash flows and occupancy levels have continued to increase to pre-pandemic levels. Management does not believe there will be losses associated with these credits. During the nine months ended September 30, 2022, there were no charge-offs incurred, and recoveries of $18,000 were received.

34

Non-Interest Income

Non-interest income decreased $714,000, or 15.9%, to $3.8 million for the nine months ended September 30, 2022 from $4.5 million for the nine months ended September 30, 2021. The decrease in non-interest income was because mortgage originations and other loan fees were down $340,000 and $370,000, respectively, for the nine months ended September 30, 2022, compared to the same period in the prior year. These decreases were offset by increases in loan swap fee income of $619,000 and $109,000 in bank owned life insurance income for the nine months ended September 30, 2022. The deposit account services fees largely remained consistent in the nine months ended September 30, 2022 and the same period in 2021. The Company continues to focus on increasing fee income through loan swaps as it strategically benefits our customers.

Non-Interest Expense

Non-interest expense increased $4.2 million, or 17.4%, to $28.3 million for the nine months ended September 30, 2022 from $24.1 million for the nine months ended September 30, 2021 primarily because of increases in salary and employee benefits of $2.7 million and advertising and marketing expenses of $569,000. Salaries and employee benefits expense increased by $2.7 million to $17.0 million for the nine months ended September 30, 2022 from $14.3 million for the nine months ended September 30, 2021primarily as a result of twenty nine employees and the related salary and benefit expenses for these additional employees. Advertising and marketing expenses increased $569,000, or 47.4%, to $1.7 million for the nine months ended September 30, 2022 from $1.1 million for the nine months ended September 30, 2021 due to new strategic partnerships and timing of initiatives. Other outside services expense increased $637,000, or 70.2%, to $1.5 million for the nine months ended September 30, 2022 as the Company continues to build out its Avenu platform. Franchise taxes decreased approximately $93,000 to $1.1 million for the nine months ended September 30, 2022 from $1.2 million for the nine months ended September 30, 2021 because of the make up of the Company’s capital as of September 30, 2022 compared to the balance sheet as of September 30, 2021. FDIC insurance premiums decreased approximately $585,000 to $450,000 for the nine months ended September 30, 2022 from $1.0 million for the nine months ended September 30, 2021 due to lower than anticipated assessments from the FDIC.

Income Tax Expense

Income tax expense increased $338,000, or 8.2%, to a tax expense of $4.5 million for the nine months ended September 30, 2022 from a tax expense of $4.1 million for the nine months ended September 30, 2021. The increase in federal income tax expense for the nine months ended September 30, 2022 compared to the same period a year ago was driven by the increase in income before income taxes of $2.1 million, to income before income tax of $23.6 million for the nine months ended September 30, 2022 compared to income before income tax expense of $21.5 million for the same period in the prior year. The Company was able to apply and claim a research and development tax credit of approximately $89,000 for its associated work in developing a software platform and anticipates similar activity in 2022. As a result of expanding its footprint, the Company has included assessments in income tax expense for potential state tax liabilities which totaled $403,000 for the nine months ended September 30, 2022. For the nine months ended September 30, 2022, the Company had an effective tax expense rate of 18.9%, compared to effective tax expense rate of 19.2% for the nine months ended September 30, 2021.

Comparison of Statements of Financial Condition at September 30, 2022 and December 31, 2021

Total Assets

Total assets increased $212.7 million, or 12.9%, to $1.9 billion at September 30, 2022 from $1.6 billion at December 31, 2021. The increase was primarily the result of increases in the loan portfolio of $106.3 million, $62.4 million in securities available-for-sale and $29.3 million in other assets. These increases were offset by a decrease of $2.7 million in held-to-maturity securities as of September 30, 2022.

Investment Securities

Investment securities increased $59.7 million, or 49.7%, from $120.3 million at December 31, 2021 to $180.0 million at September 30, 2022. The increase was primarily in the available-for-sale portfolio, particularly in U.S treasury securities. At September 30, 2022, our held-to-maturity portion of the securities portfolio, at amortized cost, was $17.7 million, and our available-for-sale portion of the securities portfolio, at fair value, was $162.3 million compared to our held-to-maturity portion of the securities portfolio of $20.3 million and our available-for-sale portion of the securities portfolio of $99.9 million at December 31, 2021.

Net Loans

Net loans increased $106.3 million, or 7.9%, to $1.45 billion at September 30, 2022 from $1.34 billion at December 31, 2021. Residential real estate loans increased $72.7 million, or 24.2%, to $373.1 million at September 30, 2022 from $300.4 million at December 31, 2021. Commercial real estate loans increased by $103.9 million from $534.2 million at December 31, 2021 to $638.1 million at September 30, 2022. Commercial and industrial loans decreased by $89.5 million from $164.0 million at December 31, 2021 to $74.5 million at September 30, 2022. Paycheck Protection Program ("PPP") loans comprised $1.8 million of this portfolio as of September 30, 2022. Commercial and industrial loans, excluding PPP loans, decreased by $33.0 million from December 31, 2021 to September 30, 2022. Construction loans increased $29.5 million to $366.7 million at September 30, 2022 from $337.2 million at December 31, 2021. Consumer loans decreased by $9.6 million from $23.2 million at December 31, 2021 to $13.6 million at September 30, 2022. The $9.6 million decrease in consumer loans is primarily a result of management’s decision to let the indirect lending portfolio amortize off the balance sheet.

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Allowance for Loan Losses

The allowance for loan losses represents an amount that, in our judgment, will be adequate to absorb probable losses inherent in the loan portfolio. The provision for loan losses increases the allowance, and loans charged off, net of recoveries, reduce the allowance. The table below summarizes the allowance activity for the periods indicated:

For the Nine Months Ended September 30,

For the Year Ended December 31,

2022

2021

(Dollars in thousands)

Balance at beginning of year

$ 11,697 $ 12,877

Charge-offs:

Consumer

— (32 )

Total charge-offs

— (32 )

Recoveries:

Commercial and industrial

— 11

Consumer

17 16

Total recoveries

17 27

Net (charge-offs) recoveries

17 (5 )

Provision for (recovery of) loan losses

1,280 (1,175 )

Balance at end of period

$ 12,994 $ 11,697

Ratios:

Net charge offs to average loans outstanding

0.00 % 0.00 %

Allowance for loan losses to non-performing loans at end of period

N/A N/A

Allowance for loan losses to gross loans at end of period

0.89 % 0.86 %

Deposits

Deposits increased $142.0 million, or 10.1% to $1.55 billion at September 30, 2022 from $1.41 billion at December 31, 2021. Our core deposits decreased $50.0 million, or 4.5%, to $1.16 billion at September 30, 2022 from $1.11 billion at December 31, 2021. Non-interest bearing demand deposits increased $35.3 million, or 6.7%, to $566.0 million at September 30, 2022 from $530.7 million at December 31, 2021.  Interest bearing demand deposits increased $24.5 million, or 35.3%, to $93.7 million at September 30, 2022 from $69.2 million at December 31, 2021. Certificates of deposits increased $126.6 million, or 27.6%, to $585.8 million at September 30, 2022 from $459.1 million at December 31, 2021. Offsetting these increases were savings and NOW deposits which decreased $30.9 million, or 36.3% to $54.2 million at September 30, 2022 from $85.2 million at December 31, 2021. The increase in interest bearing demand deposit accounts and time deposits were primarily the result of executing on a strategy to continue decreasing our cost of funds while continuing to driving loan growth.

Nonperforming Assets

The following table presents information regarding nonperforming assets at the dates indicated:

September 30,

December 31,

2022

2021

(Dollars in thousands)

Other real estate owned

— 775

Total non-performing assets

$ — $ 775

Ratios:

Total non-performing loans to gross loans receivable

0.00 % 0.00 %

Total non-performing loans to total assets

0.00 % 0.00 %

Total non-performing assets to total assets

0.00 % 0.05 %

36

Liquidity and Capital Resources

Liquidity Management. Liquidity describes our ability to meet the financial obligations that arise in the ordinary course of business. Liquidity is primarily needed to meet the borrowing and deposit withdrawal requirements of our customers and to fund current and planned expenditures. Deposits are the primary source of funds for lending and investing activities; however, the Company also utilizes wholesale deposits as a funding source in addition to customer deposits. Scheduled payments, as well as prepayments, and maturities from portfolios of loans and investment securities also provide a stable source of funds. FHLB advances, other secured borrowings, federal funds purchased, and other short-term borrowed funds, as well as longer-term debt issued through the capital markets, all provide supplemental liquidity sources. The Company’s funding activities are monitored and governed through the Company’s asset/liability management process. MainStreet Bank had no Federal Home Loan Bank advances outstanding and unused borrowing capacity of $448.4 million as of September 30, 2022. Additionally, at September 30, 2022, we had the ability to borrow up to $104.0 million from other financial institutions.

The Board of Directors, management, and the Asset Liability Committee (ALCO) are responsible for establishing and monitoring our liquidity targets and strategies in order to ensure that sufficient liquidity exists for meeting the borrowing needs and deposit withdrawals of our customers as well as unanticipated contingencies. We believe that we have enough sources of liquidity to satisfy our short and long-term liquidity needs as of September 30, 2022.

We monitor and adjust our investments in liquid assets based upon our assessment of expected loan demand; expected deposit flows; yields available on interest-earning deposits and securities; and the objectives of our asset/liability management program. Excess liquid assets are invested generally in interest-earning deposits and short-and intermediate-term securities.

While maturities and scheduled amortization of loans and securities are predictable sources of funds, deposit flows and loan prepayments are greatly influenced by general interest rates, economic conditions, and competition. Our most liquid assets are cash and cash equivalents, which include federal funds sold and interest-earning deposits in other banks. The levels of these assets are dependent on our operating, financing, lending and investing activities during any given period. At September 30, 2022, cash and cash equivalents totaled $104.7 million. The Company has availability on secured and unsecured lines for an additional $552.4 million. Finally, securities classified as available-for-sale, which provide additional sources of liquidity, totaled $162.3 million at September 30, 2022.

Our cash flows are provided by and used in three primary activities: operating activities, investing activities, and financing activities. Net cash provided by operating activities was $22.9 million and $25.1 million for the nine months ended September 30, 2022 and September 30, 2021, respectively. There were no sales of securities in the nine months ended September 30, 2022 or for nine months ended September 30, 2021. Net cash used in investing activities, which consist primarily of disbursements for loan originations and the purchase of securities, offset by principal collections on loans and proceeds from maturing securities, was $186.2 million and net cash provided of $983,000 for the nine months ended September 30, 2022 and September 30, 2021, respectively. Net cash provided by financing activities was $174.9 million and $140,000 for the nine months ended September 30, 2022 and 2021, respectively, which consisted primarily of increases subordinated debt net of issuance costs of $42.6 million offset and increases in interest bearing deposits of $106.6 million for the nine months ended September 30, 2022.

We are committed to maintaining a strong liquidity position. We monitor our liquidity position daily. We anticipate that we have sufficient funds to meet our current funding commitments. Certificates of deposit due within one year of September 30, 2022, totaled $424.3 million of total deposits. If these deposits do not remain with us, we will be required to seek other sources of funds, including other deposits, Federal Home Loan Bank advances and commitments from other financial institutions. Depending on market conditions, we may be required to pay higher rates on such deposits or borrowings than we currently pay. We believe, however, based on experience that a significant portion of such deposits will remain with us. We can attract and retain deposits by adjusting the interest rates offered.

Effects of Inflation. Inflation has caused a substantial rise in interest rates during 2022, which has had a negative effect in the securities market. As a result of rising interest rates, the Company has recorded an accumulated other comprehensive loss on securities available for sale of approximately $9.8 million as compared to recording other comprehensive income in the amount of $197,000 as of December 31, 2022.  Thus, this has ran counter to total equity growth during 2022 even though net earnings has been strong. Management does not anticipate these losses to be other than temporary as these unrealized losses do not currently appear related to any credit deterioration within the portfolio but from higher interest rates.

Capital Management. MainStreet Bank is subject to various regulatory capital requirements, including a risk-based capital measure. The risk-based capital guidelines include both a definition of capital and a framework for calculating risk-weighted assets by assigning balance sheet assets and off-balance sheet items to broad risk categories. At September 30, 2022, MainStreet Bank exceeded all regulatory capital requirements and was considered “well capitalized” under regulatory guidelines.

On January 19, 2022, the Board of Directors of the Company declared an initial cash dividend to common shareholders. Subsequent quarterly dividends have been declared and paid since that time. The Board of Directors will consider future dividends on a quarterly basis after its review of the Company’s financial condition, results of operations, and other factors.

Regulatory Capital

Information presented for September 30, 2022 and December 31, 2021, reflects the Basel III capital requirements that became effective January 1, 2015 for the Bank. Under these capital requirements and the regulatory framework for prompt corrective action, the Bank must meet specific capital guidelines that involve quantitative measures of the Bank’s assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices. The Bank’s capital amounts and classifications are also subject to qualitative judgments by regulators about components, risk- weightings and other factors.

37

The Basel III Capital Rules, a comprehensive capital framework for U.S. banking organizations, became effective for the Company and the Bank on January 1, 2015 (subject to a phase-in period for certain provisions). Under the Basel III rules, the Company must hold a capital conservation buffer above the adequately capitalized risk-based capital ratios. The capital conservation buffer for 2022 is 2.50%. Quantitative measures established by regulation to ensure capital adequacy require the Company to maintain minimum amounts and ratios of Total capital, Common Equity Tier 1 capital, and Tier 1 capital (as defined in the regulations) to risk weighted assets (as defined), and of Tier 1 capital (as defined) to average assets (as defined). Management believes, as of September 30, 2022, the Company and the Bank meet all capital adequacy requirements to which each is subject.

The Bank’s actual capital amounts and ratios are presented in the table (dollars in thousands):

Actual

Capital Adequacy Purposes

To Be Well Capitalized Under the Prompt Corrective Action Provision

(Dollars in thousands)

Amount

Ratio

Amount

Ratio

Amount

Ratio

As of September 30, 2022

Total capital (to risk-weighted assets)

$ 266,660 16.39 % $ 130,184 ≥ 8.0% $ 162,730 > 10.0%

Common equity tier 1 capital (to risk-weighted assets)

$ 253,666 15.59 % $ 73,229 ≥ 4.5% $ 130,184 > 8.0%

Tier 1 capital (to risk-weighted assets)

$ 253,666 15.59 % $ 97,638 ≥ 6.0% $ 130,184 > 8.0%

Tier 1 capital (to average assets)

$ 253,666 14.01 % $ 72,422 ≥ 4.0% $ 90,527 > 5.0%

As of December 31, 2021

Total capital (to risk-weighted assets)

$ 227,359 16.06 % $ 113,249 ≥ 8.0% $ 141,562 ≥ 10.0%

Common equity tier 1 capital (to risk-weighted assets)

$ 215,662 15.23 % $ 63,703 ≥ 4.5% $ 113,249 ≥ 8.0%

Tier 1 capital (to risk-weighted assets)

$ 215,662 15.23 % $ 84,937 ≥ 6.0% $ 113,249 ≥ 8.0%

Tier 1 capital (to average assets)

$ 215,662 12.90 % $ 66,898 ≥ 4.0% $ 83,622 ≥ 5.0%

Off-Balance Sheet Arrangements and Contractual Obligations

Commitments. As a financial services provider, we routinely are a party to various financial instruments with off-balance-sheet risks, such as commitments to extend credit and unused lines of credit. While these contractual obligations represent our future cash requirements, a significant portion of commitments to extend credit may expire without being drawn upon. Such commitments are subject to the same credit policies and approval process accorded to loans we make. At September 30, 2022, we had outstanding loan commitments of $393.4 million and no outstanding stand-by letters of credit. We anticipate that we will have sufficient funds available to meet our current lending commitments.

Use of Certain Non-GAAP Financial Measures

The accounting and reporting policies of the Company conform to U.S. GAAP and prevailing practices in the banking industry. However, certain non-GAAP measures are used by management to supplement the evaluation of the Company’s performance. These measures include adjusted net interest income and net interest margin.

Management believes that the use of these non-GAAP measures provides meaningful information about operating performance by enhancing comparability with other financial periods and other financial institutions. The non-GAAP measures used by management enhance comparability by excluding the effects of items that do not reflect ongoing operating performance, including non-recurring gains or charges. These non-GAAP financial measures should not be considered an alternative to U.S. GAAP-basis financial statements, and other bank holding companies may define or calculate these or similar measures differently. A reconciliation of the non-GAAP financial measures used by the Company to evaluate and measure the Company’s performance to the most directly comparable U.S. GAAP financial measures is presented below.

38

For the three months ended September 30,

For the nine months ended September 30,

(Dollars in thousands, except for per share data)

2022 2021 2022 2021

Net interest margin, fully-taxable equivalent (FTE)

Net interest income (GAAP)

$ 18,096 $ 13,203 $ 49,413 $ 39,669

FTE adjustment on tax-exempt securities

69 71 212 213

Net interest income (FTE) (non-GAAP)

18,165 13,274 49,625 39,882

Average interest earning assets

1,740,998 1,595,741 1,654,044 1,612,455

Net interest margin (GAAP)

4.12 % 3.28 % 3.99 % 3.29 %

Net interest margin (FTE) (non-GAAP)

4.14 % 3.30 % 4.01 % 3.31 %

Item 3 – Quantitative and Qualitative Disclosures about Market Risk

Not required for smaller reporting companies

Item 4 – Controls and Procedures

Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 (the “Exchange Act”)) as of September 30, 2022. Based on their evaluation of the Company’s disclosure controls and procedures, the Company’s Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures designed to ensure that information required to be disclosed by the Company in reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission rules and regulations are designed and operating in an effective manner.

No change in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15(d)-15(f) under the Exchange Act) occurred during the third fiscal quarter of 2022 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting. There has been no significant effect or impact on internal controls over financial reporting with the Company’s transition to a remote/work from home environment.

39

PART II – OTHER INFORMATION

Item 1 – Legal Proceedings

At September 30, 2022, the Company was not involved in any pending legal proceedings other than routine legal proceedings occurring in the ordinary course of business which involve amounts in the aggregate believed by management to be immaterial to the financial condition and operating results of the Company. In addition, no material proceedings are pending or known to be threatened or contemplated against the Company or its subsidiary by governmental authorities.

Item 1A – Risk Factors

Not required for smaller reporting companies. Reference is made to “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2021, filed with the SEC on March 23, 2022. For a discussion of certain risk factors affecting the Company, see our disclosure under “Forward-Looking Statements” in Part I, Item 2 in this Form 10-Q.

Item 2 – Unregistered Sales of Equity Securities and Use of Proceeds

On May 18, 2022, the Company announced that the Board of Directors had authorized a new plan to repurchase up to $7.5 million of the Company’s outstanding common stock in open market transactions or privately negotiated transactions, including pursuant to a trading plan in accordance with Rule 10b-18 under the Securities Exchange Act of 1934. The new stock repurchase program replaces the Company’s previous program. During the three months ended September 30, 2022, 115,000 shares of common stock were repurchased.

The following information provides details of the Company’s common stock repurchases for the three months ended September 30, 2022:

(Dollars in thousands, except for per share amounts)

Total Number of Shares Purchased

Average Price Paid per Share

Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs

Maximum Number (or Approximate Dollar Value) of Shares that May Yet be Purchased Under the Plans or Programs

July 1, 2022 - July 31, 2022

115,000 $ 23.04 115,000 $ 4,850

August 1, 2022 - August 31, 2022

— $ — — $ —

September 1, 2022 - September 30, 2022

— $ — — $ —

Total

115,000 $ 23.04 115,000

40

Item 6 – Exhibits

31.1

Rule 13a-14(a) Certification of the Chief Executive Officer *

31.2

Rule 13a-14(a) Certification of the Chief Financial Officer *

32.0

Section 1350 Certification *

101.INS

Inline XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document

101.SCH

Inline XBRL Taxonomy Extension Schema Document

101.CAL

Inline XBRL Taxonomy Extension Calculation Linkbase Document

101.DEF

Inline XBRL Taxonomy Extension Definition Linkbase Document

101.LAB

Inline XBRL Taxonomy Extension Label Linkbase Document

101.PRE

Inline XBRL Taxonomy Extension Presentation Linkbase Document

101

The following financial statements from the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2022 formatted in Inline XBRL, filed herewith: (i) the Consolidated Balance Sheets (unaudited), (ii) the Consolidated Statements of Income (unaudited), (iii) the Consolidated Statements of Comprehensive Income (unaudited), (iv) the Consolidated Statements of Stockholders’ Equity (unaudited), (v) the Consolidated Statements of Cash Flows (unaudited) and (vi) the Notes to Consolidated Financial Statements (unaudited)

104

The cover page from the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2022, formatted in Inline XBRL (included with Exhibit 101)

*         Filed herewith

41

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

MAINSTREET BANCHSHARES, INC

(Registrant)

Date: November 10, 2022

By:

/s/ Jeff W. Dick

Jeff W. Dick

Chairman & Chief Executive Officer

(Principal Executive Officer)

Date: November 10, 2022

By:

/s/ Thomas J. Chmelik

Thomas J. Chmelik

Senior Executive Vice President and

Chief Financial Officer

(Principal Financial Officer)

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TABLE OF CONTENTS