MainStreet Bancshares, Inc.

Good afternoon and thank you for joining our Virtual Earnings webcast. My name is Jeff Dick and I'm the Chairman and CEO of Main Street Bank Shares, Inc. and Main Street Bank. I'm joined today with our CFO, Tom Schmelleck, our Chief Lending Officer, Tom Floyd, our Chief Accountant, Alex Vary, and our Chief Risk Officer, Ben Bababal. This presentation will take about 15 minutes. We'll open up for questions for the remainder of the hour. We do have two analysts on the webcast with us today, Chris Marinak from Janie Montgomery Scott and Matt Brees from Stevens, Inc. Both gentlemen will be able to ask their questions and share their comments directly following the presentation. You can submit written questions throughout the presentation using the viewing portal. If we miss your question during the discussion, please reach out after the webcast. We'd be remiss if we didn't point you to our Safe Harbor page that describes the context of forward-looking statements. Finally, we use certain non-GAAP measures, which are identified as such within the presentation materials. Before I get started, I need to apologize for an error in the slide deck that we published this morning. On slide number 38, we listed the weighted average loan-to-value for our multifamily portfolio as 90%. I can't believe we didn't catch that. The correct number is 69%, not 90. This carries over and changes the weighted average of the entire loan to value for the whole investor commercial real estate portfolio to 63%. Again, my apologies. So having said that, we're changing things up a little this time, starting with Avenue and then moving on to the company's performance. A lot has happened in the banking as a service sector this year, and much has been written about the banks that offer banking as a service through intermediaries. I'll highlight a few of the articles that sum up the situation. Starting with S&P Global Market Intelligence, who reported that US banks with financial technology partnerships accounted for an outsized share of severe enforcement actions in 2023. The American Banker highlighted that banks are ultimately responsible for the activities their partners engage in. Financial institutions have been forced by regulators to heighten oversight of their fintech partners, strengthen compliance, and more. Banking Dive Financial Analytics reported that regulatory scrutiny will likely separate committed banks from those with just casual interest. And finally, Kate Drew writes in Forbes that the model using a banking as a service provider as a middleman is all but dead. And in its place will likely emerge a more resilient banking as a service proposition that puts the banks in the driver's seat when it comes to compliance and focuses on FinTechs with sustainable businesses and realistic objectives in financial services. We agree, we absolutely believe that the opportunities are boundless for banks that provide banking as a service in a responsible way. We've said it from the start, after gaining experience with a couple of FinTechs early on, we realized that we needed to have a robust system with modern API connectivity to steer the FinTechs down the proper path. The FinTech uses our ledger as their core, which gives us real time access and control. If something happens to the FinTech, we have the ledger with all the transactions and balances. And there's no question whether the deposits are FDIC insured. We integrated as much compliance as we could with customer identification, transaction monitoring, and management, complaint management, monitoring systems, and strong security. We marry up that technology with hands-on training that includes helping the FinTech to customize their policies that reflect their banking activities. The American Banker published an article on us emphasizing that our focus is to offer banking as a service the right way. Avenue offers an embedded banking solution that connects FinTechs directly to our FinTech core. We aren't a sponsor bank or an intermediary. We provide a full solution for our FinTech partners. Our one miss was underestimating the amount of time it would take to build and launch the technology that we designed. With hindsight, The timing is now perfect as we launch a solution that is purpose-built to meet the compliance and safety and soundness needs required not only by us, but also by the industry. Our first client is finalizing their integration and working fast to get up to scale. We have two more clients shifting from the sandbox into a pre-production phase. We have another FinTech in the sandbox and one that recently signed their master services agreement with us. We have another that's negotiating now the fine points of the master service agreement, and that would be our sixth fintech that enters the queue. The team is expanding to accommodate the activity. They are working hard to integrate fintechs, and they're still finding some time to focus on future functionality. We've capitalized $15.3 million building the Avenue solution. The build has been done as efficiently as possible. Management and the board believe that this is the right strategy for the company to remain competitive. Low cost deposits are becoming more and more scarce. This solution will allow the bank a much further reach into the consumer market than we could have ever achieved through traditional branching and marketing. And it's likely to be less expensive overall as well. Legacy Avenue deposits produced 619,000 in interest and fees over the first quarter, which covered almost two thirds of Avenue's expenses. We estimate that we'll reach break even with Avenue once we get to about 225 million in deposits, and that does remain our goal for 2024. Turning to the bank, we've done well during this interest rate cycle, despite some pretty taxing externalities. You'll see that we've had deposit cost challenges starting in the fourth quarter last year into the first quarter of this year. More about that later. We are a Virginia community bank celebrating our 20th year of business. We serve the Washington DC metropolitan area, and we have a great organic growth story using a branch light strategy. We've always been a tech forward bank with strong online and mobile banking technology. We trade on the NASDAQ Capital Markets Index. The DC market is a great place to do business. We always talk about the strengths of our market because we are in a region that hosts the federal government. But we also have world-class universities, hospital systems, airports, tourism, data centers, at least 16 Fortune 500 companies, and let's not forget the Stanley Cup-bound Washington Capitals. We also have low unemployment and a very high median household income for our workforce. As you're likely aware, the Class A office market within Washington DC itself is weak, but those buildings are generally financed by real estate investment trusts and life companies. In contrast, Class A space in Reston Town Center is near full capacity. Regardless of where we are, you'll see later in the presentation that we do very little pure office space lending. Demand for housing is high, supply very low. Our builders are selling homes as fast as they can be constructed. Condos are selling a little slower, but they are selling. We still do not compete on price. We compete on quality and service. For us, every day is game day. M&SB common stock is an undervalued opportunity. We closed the quarter with a market price at 77% of tangible book. Last Friday's close was at 73% of tangible book. Today is even less. Our asset quality is strong. Our risk management is robust. Our 2023 performance was overall superior to the peers. The one thing that's vexing us, deposit costs, is the very thing we are solving with our Avenue solution. Think about it. We have six branches. Most banks our size have 26 branches. If we built 20 more branches, we would spend substantially more per year on those branches than we'll spend on Avenue per year. And we'd still be paying market price for the deposits. Instead, we built a best-in-class solution to meet the fintech market where they are. Fintechs need a bank like us. For fintechs, we provide permanence with our partnership. We provide a solution that is faster to market. We provide our fintech partners with RegTech regulatory technology, and we provide better pricing because there's no middleware mouths to feed. Most important, we eliminate a fintech's need to have a backup bank because we're here to stay. We are the resilient solution fintechs have been waiting for. You have a choice, of course. You can wait to see our success. As the British say, the proof of the pudding is in the eating. At that point, will you get us at 73 cents on the dollar? Will you get us a tangible book? Or will our market price reflect the performance of a small cap bank stock that has bridged the gap between banking, FinTech, and RegTech? This is an exciting time as we continue our transformative journey. At this point, I'm going to turn the presentation over to Alex Varee. Alex is our Chief Accountant. He works closely with Tom Schmellick to ensure the accuracy of our books and records. Alex is going to talk you through our financial performance.

Thank you, Jeff. Slide 22 summarizes our financial performance over the past four quarters. This quarter is down slightly, due primarily to increased deposit costs. I'll summarize in the following five ratios. Our EPS for the quarter is 36 cents. Our efficiency ratio is 76%. Our annualized return on average assets is 0.65%. Our return on average equity is 5.97%. Our net interest margin is 3.24%. Our net loans increased 22 million for the quarter, and our total deposits increased 47 million. Total assets held relatively steady quarter on quarter, as did net charge us at three one-hundredths of a percent. Our liquidity remains strong with good ratios throughout. We have $507 million available in secured advances through the Federal Home Loan Bank of Atlanta and an additional $129 million in unsecured lines from six different providers. As you look at slide 24, you will see that our cumulative cycle loan beta is 52%, and our cumulative cycle deposit beta is 61%. The graph tells the story best. Our earning assets were well positioned for the interest rate cycle, shifting in lockstep with changes to the effective Fed funds rate. Deposit rates lagged nicely until the collapse of SVB, First Republic, Signature, and Silvergate. After that point, deposit rates became very competitive across the nation. This is depicted nicely in slide 25, which shows our quarterly net interest margin through the interest rate cycle. We are focused on controlling our deposit costs as we move forward. Our core deposits remain healthy at 76% of total deposits. Non-interest bearing demand deposits encompass 20%, 26% of core deposits. and the overall weighted average cost of core deposits is 3.32%. Non-core deposits represent 24% of total deposits with a weighted average rate of 4.89%. It is important to note that 173 million of the term deposits with a weighted maturity of 42 months are callable at our discretion. At this point, I'll turn the presentation over to Tom Floyd, our Chief Lending Officer, to discuss our loan portfolio and loan performance.

Thank you, Alex. As we look at the loan portfolio, it's worth remembering that so much of lending is about discipline. We have disciplined underwriting, which starts with an independent team of analysts. The team produces comprehensive credit memos that over the years have been commended by regulators, auditors, and loan review specialists. This is an important first step in controlling and minimizing the riskiness of the loans we underwrite. Equally important is the discipline of loan pricing, we are a commodity business we don't set interest rates we set a risk spread which we define our credit risk policy alone pricing isn't just about setting the rate it's also about setting the duration for the rate just as we focus on writing floating rate loans during the low flat interest rate cycle leading up to 2022 we've now shifted the portfolio so that 64 of the loans have fixed rates And 56% of the floating rate loans have floors with a weighted average of 6.29%. For the fixed rate loans, slide 29 shows a nice laddering of maturities over the next five years and beyond. We continue to proactively manage our portfolio. And part of that process is to engage our customers to learn whether they're having any cash flow or liquidity concerns and work to address them now so that we maintain healthy relationships going forward. Slide 30 shows that we are managing our concentration on investor commercial real estate and construction. This is our best asset, and it continues to perform at a very high level for us. Slide 31 shows the results of our hard work. We charged off three one-hundredths of a percent of gross loans in the first quarter, and just one-half of one percent of our total gross loans are non-performing. We're optimistic that 80% of the non-performing loan balances will be favorably resolved before year end. Just 2.12% of our total gross loans are criticized or classified at this time. We originated 54 million of new loans during the first quarter with a weighted average rate of 8.37% with good loan to value ratios. Our office exposure has reduced from 23 million to 15 million. We had an $8 million office construction loan that was completed and became under-occupied. Slide 34 reflects a construction portfolio that is diversified both by type and by location. The construction book has a weighted average interest rate of 8.49 percent with good loan-to-values throughout. It's important to note that 86 percent of the construction portfolio loans have interest reserves that in each case were funded by the customer. The remaining 14 percent of construction loans are to customers with strong liquidity and a good track record of performance. Likewise, our non-owner-occupied commercial real estate is also diversified by type and location with a weighted average interest rate of 6.14% with good loan-to-values and good occupancy. Our owner-occupied loans also reflect good diversification and a weighted average rate of 5.97% and good loan-to-values. The Q1 stress test for all earning assets reflects a worst case stress loss estimated at 38.7 million. The stress test includes loan level testing for all construction investor commercial real estate. For all other loan categories, we use the balance in each call report category multiplied by our worst ever loss for that call report category. For investments, we use the market price. And finally, for bank owned life insurance, we determine the liquidation value. Slide 38 shows the trend in stress tests over the past five quarters and the resulting impact capital. In all quarters, we remain strongly capitalized. That wraps it up for our loan presentation. As you can see, our goal is to be as transparent as possible. I'll turn it over to our CFO, Tom Schmelleck, to wrap things up.