MainStreet Bancshares, Inc.

Well good afternoon and thank you for joining our virtual earnings webcast. My name is Jeff Dick. I'm the Chairman and CEO of Main Street Bank Shares, Inc. and Main Street Bank. I'm joined here today with our CFO, Tom Schmelleck, our Chief Lending Officer, Tom Floyd, and our Chief Accountant, Alex Bari. If you'd like, 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'll open for questions after the presentation. We have two analysts on the webcast with us today, Chris Marinak from Jannie 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. As a point of pride, on October 20th, Director Daryl Green had his NFL jersey officially retired by the Washington Commanders. Above and beyond the amazing athleticism Daryl constantly displayed on the field, he is a highly successful entrepreneur and he's led a life of service to all segments of our community. We're very proud and fortunate to have him as a director. But moving into the slide deck, we'd be remiss if we didn't point you to our Safe Harbor page that describes the context of forward-looking statements. We use certain non-GAAP measures, which are identified as such within the presentation materials. We are a Virginia community bank serving 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 strength of our market because we're in a region that hosts the federal government, but we have world-class universities, hospital systems, airports, tourism, data centers, and at least 16 Fortune 500 companies. As such, we also have low unemployment and high median household incomes for our workforce. During today's presentation, we're going to be sharing three key takeaways. These are based upon the assumption that the Fed is done raising interest rates and that rates will either remain the same or go down in the future. The first takeaway is that our financial performance for 2024 is not indicative of our future expectations. We have been working to lower our deposit costs, which will translate into net interest margin expansion. We'll hear from Alex on this topic later. We continue to fund the allowance for credit losses in a way that is directionally consistent with the volume and quality of our loan portfolio. To that end, the loan portfolio remains strong. You'll hear from Tom Floyd that we are dealing decisively and successfully with problem loans And we should see the trend of criticized, classified, and non-performing loans reduce. We'll also hear from Alex on the allowance for credit losses as well. The second takeaway is that traditional deposit growth is a challenge in our market. Actually, it's not only in our market. In reality, it's a challenge in many markets across the country. The board and management continue to be engaged and enthusiastic in our pursuit of a banking as a service solution, because we believe that it is a strong solution for acquiring low cost deposits and it is consistent with our digital strategy. Nevertheless, based upon recent investor comments and feedback, the board thought it would be appropriate to engage an independent consulting group for a pulse check on our Avenue solution. I'll share some of their findings later in the presentation. The third takeaway is that Avenue Version 1 is now in service. I'll talk more about this later in the presentation as well. At this point, I'll turn the presentation over to Alex Berry. Alex is our Chief Accountant. He works closely with Tom Schmelleck to ensure the accuracy of all our books and records. Alex is going to talk you through our financial performance. Alex Berry Thank you, Jeff.

On slide six, we summarize our financial performance over the past four quarters, as well as our 2024 year-to-date performance. As we previously disclosed, we are reporting an earnings per common share loss of four cents in the third quarter as a direct result of taking action on a handful of problem loans. The loss for the quarter impacted several quarterly financial ratios, particularly earnings, our net interest margin, and efficiency ratio. But these are not indicative of our year-to-date or future performance expectations. And I'd like to spend a few minutes breaking down why. Impacting the third quarter's earnings, we charged off 1.9 million as we transferred ownership of 21.8 million of real estate loans. And 1 million in provision expense was added to ensure the allowance or credit losses remains directionally consistent based on current levels of classified and non-performing loans. However, we will see later in the presentation that we expect improved metrics throughout our loan classifications going forward. Our third quarter annualized net interest margin was impacted by 984,000 in accrued interest income that was reversed in relation to loans placed on non-accrual status. This resulted in a quarterly net interest margin of 3.05% and a year-to-date net interest margin of 3.19%. Anecdotally speaking, without these interest reversals, our net interest margin would have been 3.25% for the quarter and 3.32% year to date. That really speaks to how the core earning engine, our net interest margin, is stable and improving. During the third quarter, our core deposits were 78% of total deposits, highlighting our community engagement and building new relationships. Elaborating a little further on future net interest margin expansion, specifically on how we are addressing the funding costs, we previously talked about how our business banking team are getting new low cost deposit opportunities. And I'm excited to share that of the 95 million in new core deposits during the quarter, 35% were non-interest bearing. However, these new relationships were primarily built towards the end of quarter three so we will see the full effect of these new deposits during quarter four. We also have access to wholesale funding to supplement strategic growth if needed. Our non-core deposit balances increase strategically to capitalize on market conditions that will reduce funding costs and shorten the duration of our term deposits. It's important to point out that 55% of our non-core deposits can be adjusted immediately, so we are well positioned to replace these funds quickly with new, lower rate deposits. Additionally, as the Fed begins its rate reduction cycle, we will be adjusting our variable rates swiftly, and we have 183 million in callable CDs that we will be strategically calling away entirely or replacing at more attractive rates. Having a positive impact on funding costs and expanding our net interest margin. Lastly, in contributing to future net interest margin expansion, we are continuing to fund new quality loans that are underwritten and stress tested in the current rate environment. Gross loans were relatively flat for the quarter with new loan fundings of 82 million, which will point to continued interest income growth, further enhancing our future net interest margin expectations. We expect low single-digit loan growth during the fourth quarter. Now I would like to talk about our expense run rate and what we are expecting going into quarter four. Non-interest expenses decreased slightly quarter over quarter after excluding 594,000 in non-recurring expenses related to loan sales and disposition. Management remains focused on expense control and efficiency. The run rate for the fourth quarter will be 50 basis points per month In addition, with Avenue version one in service, we will begin amortizing the intangible software at 150,000 per month and incurring 385,000 in additional non-capitalized expenses per month. While the additional non-interest expenses will put some pressure on earnings, it is temporary and necessary as Avenue builds and gains momentum in the marketplace and will earn back its cost in fee revenue and deposit balances. It is important to reiterate that these expenses are intentional in very specific investments in people and in technology. Through these investments in innovation, the board and management are building something unique that will enhance earnings ability and create shareholder value. We have been able to bring this innovation to life while continuing to operate a profitable company, build tangible book value, and further fortify capital. The bottom line is we are well positioned for future quarters, and I look forward to keeping you updated as we execute on this strategy. 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. When we spoke with you last quarter, we highlighted our commitment to lending discipline. This approach has enabled us to develop a deep understanding of the local market, provide valuable insights, and a unique position that influences the entire life cycle of our credits. Typically, these disciplined trades lead to successful and profitable exits for our clients. However, there have been rare instances of liquidations. As we will discuss later, our local knowledge and our specialized niche have enabled us to navigate some of these liquidation situations swiftly, recovering at par. In the next few minutes, I'm excited to share these stories and provide an overview of our portfolio, our quarterly production, and a measure of our stability going forward. We finished the third quarter with $1.8 billion in outstanding loans, which is roughly the same level as the end of the second quarter. Our legal lending limit remained at $47 million and our average new loan size was 1.9 million. This highlights that as we've grown in our capacity, we continue to serve the smaller sized capital formation needs in our market. We're very comfortable in our niche. What I'm most proud about in this slide is that through an independent valuation of our loan portfolio by Abrego, even after all the interest rate rises and factors impacting commercial real estate, the liquidation exit price net of our credit mark on our loan portfolio is 100.23%. Building off what Alex shared, as our deposits reprice, we stand to benefit because 61% of our loan portfolio has rate resets beyond six months. For those 39% of loans that have rate resets within the next six months, 55% have weighted average floors of 6.65%. We're well positioned to maintain our superior yield on earning assets. Slide 15 demonstrates our skill at managing our concentration in investor commercial real estate and construction. Our concentration in construction decreased from 130% of capital at the end of the second quarter to 118% at the end of the third quarter. This is attributable to the origination of a lower volume of large construction projects due to current market dynamics, the completion and transition of existing projects, and the sale of completed projects. In the next few slides, I'll provide an overview of our criticized, classified, and nonperforming loans. The key point you'll see is that the identified problems have positive outlooks. Our criticized loans are either multifamily or hospitality assets with healthy loan-to-values. The projects are supported by sponsors that have continued to make payments to meet their obligations. We're encouraged by recent changes to the emergency rental assistance program in DC that will enable landlords to better handle tenant attempts to gain the program. Not only are we pleased by these changes, but also by the steps of our sponsors to ensure that they can continue to provide suitable rental units and additionally for payment of our loans. For the hospitality asset, the sponsors have begun marketing under the Marriott Bonvoy program, and we're encouraged that this will lead to stabilization. Slide 17 highlights our current classified loan levels, which are 4.3% total loans. The first line is comprised of two income-producing multifamily properties that are paying as agreed with a high degree of being upgraded. The second line is two projects that the borrower is selling out of where there have been recent sales that have taken place, and the sale prices support a full repayment of our loan. The third is two multifamily projects that are well located in DC, where the certificate of occupancy is expected in the next 60 days. Current rental rates support the full amortizing debt levels at an appropriate margin. The $4 million relationship is a government contractor that is pursuing several liquidity events that would repay our loan in full. We're working with the borrower to structure the loans on an amortization schedule that will repay principal and interest in the interim period. As you can see, the common thread here is that there is a high probability of a successful outcome. Slide 18 provides details of our non-performing loans. The first line highlights properties that are complete or near completion. We project the debt levels are fully supported at current market rental rates. The next category is two construction loans in the process of liquidation. These two projects are being actively resolved. one of which is expected to be resolved in the next 30 days, and the other is a high-profile foreclosure that I'll touch on later in the presentation. The remainder of the MPAs are small balances that we expect full repayment after liquidation. Slide 19 highlights the vigorous management of our non-performing loans. The results of our dispositions resulted in a 9% loss in principal value. Our niche in our market and our knowledge of the projects we finance were instrumental in being able to achieve this outcome. Within the dispositions summarized, three note sales took place at par. The three notes are representative of three different projects that were in various stages of the development process. The note sales at par value highlight the underlying health of our market, the remaining viability of the respective projects, and our ability to market the opportunities to the right investors and sponsors that will take the projects to full completion. As summarized at the bottom of the slide, total principal losses in 2024 are 0.1% of total loans. Slide 20 highlights that cumulative losses through the interest rate cycle remain below peer average. As stressors began to impact our market following unprecedented increases in interest rates, our peers began accruing losses. We did not. As we near the end of the rate cycle, we're experiencing some losses, but comparatively, our losses are significantly lower than peer averages. The next slide shows a rendering of a luxury condo building for the highly public foreclosure I mentioned a few slides back. We have received an extremely high level of interest in this asset and are confident that after the end of liquidation and collection process, we will be made whole. The owners filed the Chapter 11 bankruptcy to prevent the bank from holding an auction, which had received a very strong level of interest. There are several groups interested in the property, and the current appraised value and guarantor recourse point to a full recovery for the bank. We intend to aggressively pursue our rights and remedies in the bankruptcy proceeding. While we diligently work through our credits that present elevated levels of risk, we don't neglect our commitment to healthy growth. Illustrated on this slide, you see that we originated 82 million in new loans in the third quarter with a well-diversified mix. It's worth noting that we're not stretching for growth, focusing on supporting our existing stable of clients that have proven track records in market and strong deposit relationships with the bank. Our weighted average rate for new loans originated is 7.8%, and the weighted average maturity is 44 months. To reiterate points made earlier, this will help us with our net interest margin in a down rate scenario. Slide 23 highlights that our exposure to traditional office rents remains extremely low. As I mentioned before, we're very comfortable in our niche. Slide 24 highlights that our construction loans are performing with strong metrics. 87% of our construction loans have a customer-funded payment reserve account with an aggregate balance of roughly $15 million. As you can see, the loan-to-values are strong on a weighted basis, and the weighted average interest rate is healthy at 8.24%. Slide 25 provides details on our non-owner-occupied commercial real estate metrics. Our portfolio is well diversified by type and location with good interest rates, loan-to-values, and occupancy. In addition, our owner-occupied loans also reflect excellent diversification with a weighted average rate of 6.03% and solid loan-to-values. Slide 27 shows the trend in stress tests over the past seven quarters and the resulting impact to capital. The Q3 stress test for all earning assets reflects a worst case stress loss estimated at 42.4 million. In all quarters, we remain strongly capitalized. The stress test includes loan level testing for all construction and 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. In summary, our loan portfolio has broadly seen an increase in problem loans, but we expect these levels to decrease in the coming quarters. Our lending team has done an excellent job carving out a niche in our market. That has resulted in a superior yield in earning assets, and in more times than not, a demonstrated ability to exit relationships without loss to principal values. We remain well capitalized and are working vigorously with our borrowers where there remain positive potential outcomes. We're passionate about serving our community. We love seeing it thrive, and we're optimistic about the future. That wraps it up for our loan presentation. Back to you, Jeff. Thanks, Tom.