MainStreet Bancshares, Inc.

Good afternoon and thank you for joining our second quarter 2025 earnings webcast. My name is Jeff Dick. I am the Chairman and CEO of Main Street Bank Shares, Inc. and Main Street Bank. With me today is our Bank Chief Financial Officer, Alex Barry, our Chief Lending Officer, Tom Floyd, and our Company Chief Financial Officer, Tom Shmelick. Chris Marinak, Director of Research for Janney Montgomery Scott, will join us at the end of the call today with his questions. If you'd like, you can also submit written questions throughout the presentation using the web portal. We'll address your questions at the end of the presentation. If for some reason we miss your question during the discussion, please reach out to us after the webcast. I'd like to take a moment to point you to our Safe Harbor page that describes the context of forward-looking statements that we may make today. Please also know that we may use certain non-GAAP measures which are identified as such within the presentation materials. The D.C. metropolitan area is much more than host to just the federal government. With our major universities, tourism, data centers, world-class medical facilities, and Fortune 500 companies, it is a great place to do business. We still have low unemployment and good median household incomes. Housing is still undersupplied and it remains a seller's market. While the market is vibrant and we see good opportunities, we are affected by the actions taken by the federal and DC governments. And we monitor those actions to assess their impact on our business strategy. You'll see that slide four recaps our growth story, and there's not a whole lot more to say on that slide. The next slide, we're a Virginia community bank serving the Washington DC metropolitan area for over 21 years. We have a great organic growth story using a branch light strategy. M&SB is a small cap stock that trades on the NASDAQ Capital Markets Exchange and is listed on the Russell 2000 Index. As of quarter end, we traded at 78% of tangible book value. During today's presentation, you'll hear good news about our net interest margin expansion, our solid earnings, and our strong asset quality. And at this point, I'll turn the presentation over to our bank CFO, Alex Ferry.

Thank you, Jeff. On slide seven, we summarize our financial performance over the last five quarters, with this last quarter illustrating our commitment to be a high-achieving community bank. earnings per share increased to 53 cents, our return on average assets to 0.86%, our return on average tangible common equity to 8.84%, and our net interest margin to 3.75%. We are very excited to report such strong quarterly results. Contributing factors during the quarter included improvements in non-performing loans while recovering a meaningful amount of accrued interest, continuing to lower our cost of funds and improve our net interest margin. We are seeing good loan opportunities as we look at our third and fourth quarter pipeline. On slide eight, we recognize it's important to understand expectations for future quarters and want to call out a few one-time non-recurring transactions during the quarter on both the revenue and expense side. You can see we had non-recurring revenue of $1.5 million consisting of a recovery of accrued interest and fees on a previous loan in recognition of some non-interest income gains. Focusing on core community banking, we had non-recurring expenses of $1.8 million related to personnel downsizing, contract terminations, and realigning certain accruals. Without these non-recurring adjustments, our EPS would have been 56 cents and our return on average assets would have been 0.91%. Slide nine highlights our intentional management of our loan to deposit ratio to maximize our net interest income, which has increased for the third consecutive quarter. Our liquidity position remains strong with ample funding sources, particularly in our secured credit availability. As of the quarter end, we have liquidity in available credit facilities to match 38% of our deposit portfolio. Moving to slide 10, you will see continued improvement to our net interest margin. While we are reporting a quarterly net interest margin of 3.75%, our core net interest margin also showed meaningful expansion quarter over quarter. Our net interest margin rose primarily as our cost of funds continued to contract. our total funding costs reduced 20 basis points to 3.29% during the quarter. Looking at where the net interest margin is headed, we believe the margin will hold steady and could see progress as we have 152 million in CDs repricing in the second half of the year and a robust loan pipeline. Slide 11 shows resilience and consistency in our deposit portfolio mix. On slide 12, you will see our business banking team continues to attract and grow non-interest and low-cost deposits, helping to replace higher cost funding and expand our net interest margin. Core deposits remain consistent with the prior quarter, while non-interest bearing and low-cost deposits grew by $6 million during the quarter. We also reduced our reliance on non-core deposits by 19%, which was accretive to our net interest margin. Slide 13 lays out our estimated expense run rate for the remainder of the year. We continue to be committed to driving operating expense down as we focus on core community banking. We were able to achieve our strong quarterly performance at the current operating level. While we are projecting additional expense reductions, we have revised our estimations for the second half of the year that include operating costs of the community bank in a major metropolitan market. attracting and retaining talented bankers, expanding our customer footprint and the ever-growing regulatory burden our costs all community banks must face. We believe we are well positioned in the marketplace to build on our strong quarterly performance for the second half of the year. On slide 14, we typically get questions about stock buybacks. We have an active buyback plan in place with capacity of just over $3 million to repurchase shares. We will continue to look at opportunities to execute buybacks in line with our 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. I'm incredibly proud of the hard work everyone on the team put in during the second quarter, and our consistent, strong performance is a testament to that effort. Over the next few minutes, I'm excited to delve into the details and trends about our portfolio composition. I'll also highlight the proactive steps we're taking to actively manage risk. We've experienced positive trends in our workout credits, and I look forward to sharing more specifics on that as well. Our commitment to serving our community remains unwavering, and we are optimistic about what the future holds. Slide 15 provides an overview of our diversified loan portfolio as of the end of the quarter. Our total loan outstanding are $1.8 billion distributed as follows. 30% is non-owner-occupied commercial real estate. 21% is owner-occupied commercial real estate. 18% is construction. 14% is multifamily. 11% is residential real estate, and 6% is commercial and industrial. Additionally, it's worth noting that nearly all of our construction portfolio has a suitable interest reserve held at the bank. Slide 16 highlights our commercial real estate concentration over the last seven quarters. We've always effectively managed our exposure here and finished the quarter at 366% of capital. Our board sets our limit at 375%. So we've been strategically building our pipeline to maximize our opportunity to grow assets. And based on the pipeline and number of quality opportunities in our market, we're confident we can continue to operate at our comfort threshold. You may be familiar with the asset on slide 17, as we've discussed it in the last few presentations. Not all stories have a happy ending, but I'm happy to report this one does. we've collected 100% of principal, interest at the default rate, and all fees. This is the outcome we anticipated, and it's excellent to see this resolution come to pass. Slide 18 is a lens into our government contracting portfolio. Before I dive into this slide, I want to assure you that we're in constant contact with our borrowers in this highly dynamic space to ensure we're appropriately supporting our clients and effectively managing risk. Our portfolio has 29 asset-based lines of credit in place where all advances are supported by a borrowing base of billed receivables. These receivables are deposited directly into our bank from our clients' respective customers, and the funds are used to automatically curtail their corresponding credit lines. As you can see, these 29 lines have balances of $13 million outstanding with total commitments of $79.2 million, which equates to a 16% utilization rate. Over the average line's lifetime, this is relatively consistent. Our entire government contracting book only has $2.5 million in outstanding term debt. These loans are amortizing rapidly with an average remaining term of 30 months. It's worth noting that the average deposit relationship attributable to this portfolio is $75.5 million over the quarter, which equates to 580% of outstandings and 95% of commitments. The next slide highlights that our loan portfolio is well positioned for stable or falling rates. 70% of our portfolio has rate resets beyond six months, with the remaining 30% with rate resets within six months. Of those loans with a faster reset, 45% have a weighted average floor rate of 6.5. As we progress in 2025, we anticipate this will help our net interest margin as rates are expected to remain stable or decrease. Slide 20 is a snapshot of our year-to-date production and volume of loans participated to other banks. As you'll see, our originations have resulted in 97 million outstanding in loans year-to-date, and we've participated out 13 million over the same period. This is a testament to our lending process, which is relationship-driven and supported by superior credit underwriting, resulting in strong market demand for our organic loan production. Slide 21 shows our trend in average new loan size moving downward while our legal lending limit has increased. This highlights that in the current environment, we're sticking to smaller sized opportunities within our market. Slide 22 shows we have a nominal level of classified loans and non-performing assets. Slide 23 shows the trend in stress tests over the past eight quarters and the resulting impact to capital. The Q2 stress test for all earning assets reflects a worst case stress loss estimated at 46.79 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 team has done an excellent job serving our clients while managing risk over the second quarter of 2025, and we continue to see our efforts with our workout credits pay off, no pun intended. We're passionate about serving our community and we love seeing it thrive, and we are optimistic about the future. That wraps it up for our loan presentation. Back to you, Jeff.

Thanks, Tom. As I indicated at the top of the hour, and as you've heard during this brief presentation, we've shared good news about our net interest margin expansion, our solid earnings, and our strong asset quality. We'll address the questions that have been submitted through the portal after we hear from Chris Marinak, Director of Research at Jani Montgomery Scott. Chris, good morning, or good afternoon, I'm sorry.

Hey, Jeff, can you hear me okay?

I can, yes.

All right, great. I wanted to ask about loan pipelines and loan growth and what's a sustainable pace, both in the next couple of quarters as well as as you think through your business plan in the next couple of years.

Okay. Tom Floyd, do you want to take that?

Sure. Great question, Chris. So in the beginning of the year, we had given guidance for low single-digit loan growth, and we still feel like that's good guidance. We've had a little bit of a retraction in the first quarter, but that we view as normal just based on the timing of payoffs and when we can get the right opportunities closed and booked. We're looking for not just growth for growth's sake, but the right opportunities, and we are very encouraged with what we have in the pipeline.

And you'll remember, too, in the first part of the year, the first half of the year, with the change in administration and the effects of Doge and other things, we did sort of try to constrain our lending while we waited to see the total impact on the economy that was going to come from that. We think things have settled down now.

So with that pace of growth, I mean, there seems to be limited pressure on funding. So do you see the funding mix continuing to get more favorable and perhaps giving you further relief on the margin?

Yeah, as I mentioned in the presentation, we're going to have opportunities to reprice some of our funding. Deposits in our market, of course, are challenging, but our business bankers are doing a great job getting out there, growing relationships, picking up new relationships. And so I think between what we're able to do, repricing CDs and developing new relationships and new deposits, that's going to help us in the funding side here in the back half of the year.

And I think the business bankers focusing on the core deposits that they're focusing on a non-interest bearing is really helping out. And we're seeing some of those things that they're working on right now.

And on the sort of the total balance sheet management side, you know, it's It's funny, there are times where over the years where you could just focus on growing one side over the other. This is a time where we're really looking at growing both sides in a fairly lockstep manner. And as Tom Floyd alluded to earlier, looking a little bit more at what loans are going to help to maximize growth. you know the earnings power of the company and then likewise you know on the deposit side do we need to bring in those deposits right now can we let them some of the other higher cost deposits run off you know keep our our loan to deposit ratio right around 100 and uh you know not just growing for growth's sake but really trying to trying to manage the balance sheet to get the to maximize our earnings power of the company

My other question has to do with asset quality in general. My impression is that the criticizing classifieds are moving in a positive direction. I'm just curious what else you see on the horizon, either for new issues that could fester or just general valuation trends as we're now at the midpoint of the year?

Yeah, great question. We are pleased with what we're seeing in terms of credit quality across the board. We're continuing to monitor asset prices of underlying real estate. We, as we've discussed previously, have a very low exposure to office space, but we still keep an eye on all of the asset levels in our market. We're seeing a slight uptick in days on market for residential real estate, but it's still not at a level that is concerning. It's still a seller's market. So we are going to continue to monitor these things very closely. But right now we are pleased with the trend we're seeing. No one knows exactly what the future holds, but we are pleased with the trends we're seeing with regards to credit quality.

And now I'm just going to sneak one more in. Just in general, you know, the government contracting business that you see, whether it's in your bank or just around you in the marketplaces, stabilizing or is the uncertainty that existed earlier this year kind of still in place?

We do believe that it's stabilizing. It's a dynamic marketplace and there's lots of news coming out constantly. So it's something we have to make sure that we don't, you know, get comfortable with or take our eye off the ball. And so, you know, the key is just continually to be in communication with our customers to make sure we're appropriately managing risk. But overall, I do think that there is a sense that there's a little more stability than there was a few months ago.

Great. I'll see the floor up. Thank you very much for taking my questions.

Yeah, Chris, as always, thank you as well. And the one thing I would tag on to the government contracting question, because I think it's a really good one, but we've actually changed our borrowing base certificate. And one of the things that we ask the customer to do is to really attest that there's not been any change to their contract structures. And so we get that on at least a monthly basis. the lenders are in fairly frequent conversation with those borrowers as well.

And we're only advancing on billed receivables. We don't advance on billed receivables at all.

And I think for our term debt structure in the GovCom portfolio, Tom indicated that was like $2.5 million standing. So that's also very strong. At this point in time, we've got a few questions from you all on the phone this afternoon.

We've got some good questions in the queue today. First up, can you talk about efforts on growing core deposits since Avenue has been shut down?

Yeah, kind of what we talked about a little bit earlier, we like to keep the loan to deposit ratio high to maximize the earnings potential of the company. And where we're focusing, the business bankers are really engaged in getting into You know, some of the markets where maybe they didn't have as much of a presence before really trying to get new relationships and grow those deposits. You can see their efforts there by over the last quarter, we had growth in our non-interest and low-cost deposits, which is really, you know, really beneficial to or, you know, really speaking to the efforts that they're doing there. I would also say the lending team is really engaged with their customers and bringing in deposits as we're looking at deals and making sure we're really focused on that as well. I don't know if there's anything you want to add to that, Tom, from the lending side?

Absolutely. I appreciate that. We're at our best when we work as a team with the business banking and lending side, working in concert with expanding existing relationships and identifying the right opportunities. So it's something that we take very seriously in terms of focusing on teamwork and working together to build relationships. So we are very excited, like I said, about the pipeline that we've built. and the diversified industries that we have an opportunity to serve and work with.

Yeah, and, you know, anecdotally I've heard just, you know, the referrals, you know, that the lenders are giving the business bankers and vice versa and really, you know, collaborating to, you know, penetrate more into the market than we have before and kind of build those have been successful. And I think we're seeing good opportunities on that side.

Will there be any costs associated with closing down Avenue in future quarters?

So I'll take that one. We the the bulk of the costs. with staffing and the different systems that we're utilizing in order to run that have been all incurred. We're in strictly a maintenance mode at this point in time, as we look to see if there's any future value that we can find from the solution. But so, you know, there's a lot of work to be done. We're always trying to get those maintenance costs as low as possible, but you're not gonna see anything, I believe, significant in the future. Do you agree, Alex?

Yeah, I agree with that. Okay. How many shares were repurchased in the second quarter?

Yeah, good question. You know, we didn't see any block trades, you know, occur in the second quarter, you know, other than, you know, when we were admitted to the Russell 2000 and the reconstitution. So there just wasn't a lot of opportunity for those, so.

With regulatory limits on CRE, will the bank's growth be limited?

No, we've always done a good job operating within our board set policy. And I will say that with the opportunities in our pipeline right now, we have a very wide range of industries that are non-CRE, with owner-occupied CRE being a major industry. a major component, which obviously doesn't count against that ratio. So we are very excited about that. And with low single digit as as what we've, you know, discussed is our, uh, guidance that we see no issue there.

And I think the growth in capital to as we're going to see in the coming quarters will obviously augment some of those ratios.

Did you repurchase any shares in the quarter? If not, no? I already asked that one. Oh, sorry, my apologies. What are your profitability goals for 2026, ROA and ROE?

Yeah, great question. I think our quarterly results show that we're well on our way to a 1% ROA. There's always uncertainty with market conditions and what the rate environment is going to look like, but we're seeing good loan opportunities. We're seeing good deposit opportunities. We're we're trending in a very positive way. And so I think those things are going to put us on that trajectory to be where we want to be.

And I think on the ROE, I mean, if we get close to the 1%, that's going to be back into the double digit numbers where we were historically.

What levels of profitability do you need to produce to justify the bank's independence?

That's a great question. And we feel like it certainly has to be 1% or more as the standard. And we don't look at it as much as justifying the bank's independence as we do looking at the opportunities that are right for the bank at this time. As we consider good corporate alternatives, that's really one of the key things that we hone in on is do we feel like we can produce a better income stream independently than we can with whatever opportunity we might be looking at. whether it's a merger or an acquisition either way. And, you know, that's really what drives us more than anything else is, you know, constantly seeing what opportunities there are in the market and then sort of determining, you know, okay, what does this look like compared to what we can produce on our own? And so that's really the best way to answer that because, as you know, there's not a magic number inside of that other than if you can't get at least back up into that 1% range, it probably doesn't make sense for a bank in a major metropolitan area. And just to kind of refocus a bit, we've always talked about You know, in our recent quarters, the deposit getting is one of the more difficult low cost deposit getting is one of the most difficult challenges that we have in front of us. And the team is doing an excellent job. And as Tom said, indicated the business bankers and the lenders are working in lockstep to try to sort of shake any opportunity that they have. Ironically, the large banks can sometimes be our better friends because in certain cases they're using AI now to decision funds availability on check deposits and We've heard some interesting stories from our customers or our new customers who have come to us because they've had a deposit, sizable deposit go through. They know the funds cleared on the other side and they got an email out of the blue that said your funds are going to be held for 21 days. And they learned that it was a decision made with artificial intelligence. And so you take the good with bad, but in those cases, it's a bad outcome for the customer at that institution. It's a great outcome for a community bank that deals more with relationships We don't do anything foolish either. We make sure funds clear, but it certainly doesn't take 21 days. So, you know, again, we find the opportunities where we can. And a lot of our business bankers came out of the large banks and they just do a terrific job for us in maintaining those relationships and digging into the community. So very much appreciate everybody's comments today and look forward to reporting hopefully, you know, quarters like this as we go forward, and we're on track to do so, but we never know what the economy might do. So again, thank you very much, and we appreciate your investment in Main Street Bank, and we look forward to talking in the future. As always, if you have any other questions, comments, please feel free to reach out. We're happy to talk with you. Thank you.