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DATE
Tuesday, July 22, 2025 at 2 p.m. ET
CALL PARTICIPANTS
- Chairman and Chief Executive Officer — Jeff Dick
- Chief Financial Officer, Bank — Alex Vari
- Chief Lending Officer — Tom Floyd
- Chief Financial Officer, Company — Tom Chmelik
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TAKEAWAYS
- Earnings Per Share (EPS) -- $0.53, with nonrecurring items; adjusted core EPS would be $0.56.
- Return on Average Assets (ROAA) -- 0.86%, with nonrecurring adjustments; adjusted ROAA would be 0.91%.
- Return on Average Tangible Common Equity -- 8.84%, including the impact of all current period items.
- Net Interest Margin (NIM) -- 3.75%, reflecting a quarter-over-quarter expansion as lower funding costs drove the improvement.
- Total Funding Costs -- Decreased by 20 basis points to 3.29%, benefiting NIM.
- Liquidity and Credit Facilities -- Available facilities and liquidity at 38% of the deposit portfolio as of period end.
- Loan Portfolio Composition -- $1.8 billion total loans; 30% nonowner-occupied commercial real estate, 21% owner-occupied CRE, 18% construction, 14% multifamily, 11% residential real estate, 6% commercial and industrial.
- Commercial Real Estate (CRE) Concentration -- Ended period at 366% of capital, below the Board-set limit of 375%.
- Core Deposit Growth -- Noninterest-bearing and low-cost deposits increased $6 million; reliance on noncore deposits declined 19% and contributed to NIM expansion.
- Nonrecurring Items -- $1.5 million nonrecurring revenue driven by loan interest and fee recovery and other gains; $1.8 million nonrecurring expenses from personnel downsizing, contract terminations, and accrual realignment.
- Loan-to-Deposit Ratio Management -- Maintained at approximately 100% to support earnings power and optimize funding structure.
- Government Contracting Portfolio Utilization -- 29 asset-based credit lines with $13 million balances (16% utilization vs. $79.2 million commitment); average deposit relationship of $75.5 million, representing 580% of outstanding and 95% of commitments.
- CRE Growth Strategy -- Intentional management within Board policy, leveraging a pipeline with significant non-CRE and owner-occupied CRE opportunities.
- Yield Curve Exposure -- 70% of loan portfolio has rate resets longer than six months; 30% with rate resets within six months, 45% of which have a 6.5% weighted average floor rate.
- Share Repurchase Activity -- No material shares repurchased during the quarter aside from Russell 2000 Index-related reconstitution activity; authorized buyback capacity remains above $3 million.
SUMMARY
Management expects continued stability in net interest margin and further opportunities from upcoming CD repricing and a strong loan pipeline. They project additional expense reductions while acknowledging adjusted cost assumptions for ongoing regulatory and talent requirements in a major metropolitan banking environment. Executives see loan growth guidance in the low single-digit range, with a focus on risk management and relationship-driven origination. The company aims for a 1% return on average assets as the profitability threshold for maintaining independence and strategic positioning. Management reported improved asset quality and a positive trend in criticized and classified loans, while maintaining vigilance in monitoring underlying asset prices and credit trends.
- Tom Floyd described credit quality as favorable and stated, "we are pleased with the trends we're seeing with regards to credit quality," highlighting the company's comfort with real estate and government contracting book exposures.
- Jeff Dick confirmed all significant Avenu platform shutdown costs have been incurred, and no material expenses are anticipated going forward.
- Executives asserted that regulatory-driven CRE policy limits do not impede current growth plans due to asset mix and capital growth.
- Emission of higher-cost deposits remains a focus, with business bankers and lenders collaborating to expand relationships in underpenetrated markets.
INDUSTRY GLOSSARY
- Loan-to-Deposit Ratio: A measure of the bank's total loans relative to its total deposits, used to assess balance sheet structure.
- Core Deposits: Non-brokered, typically lower cost and stable deposit funding sourced from local customer relationships.
- Commercial Real Estate (CRE) Concentration: The ratio of commercial real estate loans to the bank's capital, regulated by Board and external policies.
- Net Interest Margin (NIM): The difference between interest income generated and interest paid out, expressed as a percentage of average earning assets.
Full Conference Call Transcript
Jeff Dick: 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 MainStreet Bancshares, Inc. and MainStreet Bank. With me today is our Bank Chief Financial Officer, Alex Vari; our Chief Lending Officer, Tom Floyd; and our company Chief Financial Officer, Tom Chmelik. Chris Marinac, 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 D.C. government, and we monitor those actions to assess their impact on our business strategy. You'll see that Slide 4 recaps our growth story, and there's not a whole lot more to say on that slide. The next slide, we are a Virginia community bank serving the Washington, D.C. metropolitan area for over 21 years. We have a great organic growth story using a branch-light strategy. MNSB 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 will 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 Vari.
Richard Vari: Thank you, Jeff. On Slide 7, we summarized our financial performance over the last 5 quarters, with this last quarter illustrating our commitment to be a high achieving community bank. Earnings per share increased to $0.53, 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 strong quarterly results. Contributing factors during the quarter included improvements in nonperforming 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 8, we recognize it's important to understand expectations for future quarters and want to call out a few onetime nonrecurring transactions during the quarter on both the revenue and expense side. You can see we had nonrecurring revenue of $1.5 million, consisting of a recovery of accrued interest and fees on a previous loan and recognition of some noninterest income gains. Focusing on core community banking, we had nonrecurring expenses of $1.8 million related to personnel downsizing, contract terminations and realigning certain accruals. Without these nonrecurring adjustments, our EPS would have been $0.56 and our return on average assets would have been 0.91%.
Slide 9 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 and 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 noninterest and low-cost deposits, helping to replace higher cost funding and expand our net interest margin. Core deposits remained consistent with the prior quarter, while noninterest-bearing and low-cost deposits grew by $6 million during the quarter. We also reduced our reliance on noncore 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 a community bank in a major metropolitan market. Attracting and retaining talented bankers, expanding our customer footprint and the ever-growing regulatory burden across 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.
Tom Floyd: 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 nonowner-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 7 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 lines 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 outstanding 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 6 months with the remaining 30% with rate resets within 6 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 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 nonperforming assets. Slide 23 shows the trend in stress tests over the past 8 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.
Jeff Dick: 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 Marinac, Director of Research at Janney Montgomery Scott. Chris?
Christopher Marinac: Jeff, can you hear me okay?
Jeff Dick: I can, yes.
Christopher Marinac: All right. Great. I wanted to ask about sort of loan pipelines and loan growth and kind of what's a sustainable pace, both in the next couple of quarters as well as you think through your business plan in the next couple of years?
Jeff Dick: Okay. Tom Floyd, do you want to take that?
Tom Floyd: 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. So...
Jeff Dick: Yes. And you'll remember, too, in the first part of the year, 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 we're in a...
Christopher Marinac: 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?
Richard Vari: Yes. 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 on the funding side here in the back half of the year.
Unknown Executive: And I think the business bankers focusing on the core deposits that they're focusing on the noninterest-bearing is really helping out, and we're seeing some of those things that they're working on right now.
Jeff Dick: And on the sort of the total balance sheet management side, it's funny. There are times where over the years where you could just focus on growing one side over the other. This is the 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 the earnings power of the company. And then likewise, 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, keep our loan-to-deposit ratio right around 100% and not just growing for growth's sake, but really trying to manage the balance sheet to get the -- to maximize our earnings power of the company.
Christopher Marinac: Great. And my other question just has to do with asset quality in general. I mean my impression is that the criticized and classifieds are moving in a positive direction. I'm just kind of 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.
Tom Floyd: Yes, 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.
Christopher Marinac: And then I'll just sneak one more in. Just in general, the government contracting business that you see, whether it's in your bank or just around you in the marketplace, is that stabilizing? Or is the uncertainty that existed earlier this year kind of still in place?
Tom Floyd: 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 get comfortable with or take our eye off the ball. And so 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.
Jeff Dick: Yes. 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 part of -- we've actually changed our borrowing base certificate. And one of the things that we asked 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. And the lenders are in fairly frequent conversation with those borrowers as well. Tom, I don't know if you.
Tom Floyd: And we're only advancing on billed receivables. We don't advance on unbilled receivables at all.
Jeff Dick: And I think for our term debt structure in the [ gov con ] portfolio, Tom indicated that was like $2.5 million outstanding. So that's also very strong. At this point in time, we'll turn to -- we've got a few questions from you all on the phone this afternoon. So...
Unknown Executive: 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?
Richard Vari: Yes. 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 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 noninterest and low-cost deposits, which is really beneficial to -- or really speaking to the efforts that they're doing there.
I would also say the lending team is really engaged in 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.
Tom Floyd: Absolutely. I'd appreciate that. We are 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 so...
Richard Vari: Yes. And anecdotally, I've heard just the referrals that the lenders are giving the business bankers and vice versa and really collaborating to penetrate more into the market than we have before and kind of to build those have been successful, and I think we're seeing good opportunities on that side.
Unknown Executive: Will there be any costs associated with closing down Avenu in future quarters?
Jeff Dick: So I'll take that one. We -- 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 are 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 we're always trying to get those maintenance costs as low as possible, but you're not going to see anything, I believe, significant in the future. Do you agree, Alex?
Richard Vari: Yes, I agree with that.
Jeff Dick: Okay.
Unknown Executive: How many shares were repurchased in the second quarter?
Richard Vari: Yes, good question. We didn't see any block trades occur in the second quarter other than when we were admitted to the Russell 2000 and the reconstitution. So there wasn't a lot of opportunity for those.
Unknown Executive: With regulatory limits on CRE, will the bank's growth be limited?
Tom Floyd: 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 component, which obviously doesn't count against that ratio. So we are very excited about that. And with low single digit as what we've discussed as our guidance, we see no issue there.
Jeff Dick: And I think the growth in capital, too, as we're going to see in the coming quarters, will obviously augment some of those ratios.
Unknown Executive: Did you repurchase any shares in the quarter? If not? No.
Jeff Dick: I already asked that one.
Unknown Executive: Sorry, my apologies. What are your profitability goals for 2026 ROA and ROE?
Richard Vari: Yes. Yes, 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 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.
Unknown Executive: And I think on the ROE, I mean, if we get close to 1%, that's going to be back into the double-digit numbers where we were historically.
Unknown Executive: What levels of profitability do you need to produce to justify the bank's independence?
Jeff Dick: 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. And so 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 or than we can with whatever opportunity we might be looking at. Whether it's a merger or an acquisition either way.
And that's really what drives us more than anything else is constantly seeing what opportunities there are in the market and then sort of determining, 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 in our recent quarters, 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 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 e-mail 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 the 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 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, 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 MainStreet Bank, and we look forward to talking in the future.
As always, if you have any other questions or comments, please feel free to reach out. We're happy to talk with you. Thank you.