MainStreet Bancshares Q4 2024 Earnings Call Transcript

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Provided by Quartr
January 27, 2025
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Jeff Dick
Jeff Dick
Chairman & CEO at MainStreet Bancshares

Good afternoon and thank you for joining our virtual earnings webcast. My name is Jeff Dyck. I'm the Chairman and CEO of Main Street Bancshares Inc. And Main Street Bank. I'm joined here today with our Chief Lending Officer, Tom Floyd our Chief Accountant, Accountant, Alex Barry and of course, our CFO, Tom Talley.

Jeff Dick
Jeff Dick
Chairman & CEO at MainStreet Bancshares

If you'd like, you can submit written questions throughout the presentation using the viewing portal. We will address your questions at the end of this presentation. If we miss your question during the discussion, please reach out after the webcast. Chris Marinac will not be joining us on the call today. He did submit questions in advance, and we will address them after the session.

Jeff Dick
Jeff Dick
Chairman & CEO at MainStreet Bancshares

Also, Matt Breeze of Stephen Fink no longer provides coverage for our company. We'd be remiss if we didn't point you to our Safe Harbor page that describes the content of the forward looking statements. We use certain non GAAP measures, which are identified as such within the presentation materials. The D. C.

Jeff Dick
Jeff Dick
Chairman & CEO at MainStreet Bancshares

Market is still a great place to do business. We always talk about the strength of our market because we are in a region that hosts the federal government. But we do also 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 income for our workforce. Slide 4 reminds you of our growth story over the past 20 years.

Jeff Dick
Jeff Dick
Chairman & CEO at MainStreet Bancshares

I think there's an interesting correlation to be made from our early years to the present time. We started with a technology strategy of putting our bank in our customer's office. You may recall back in 2004 that the Check 21 Act became law shortly after we opened, which allowed for the remote deposit of a digital image of a check. Acquiring customers with the concept of scanning and remotely depositing checks using our online banking solution wasn't easy. It was new.

Jeff Dick
Jeff Dick
Chairman & CEO at MainStreet Bancshares

When we first met with a possible customer, we would give them a presentation and they would typically reply with, the presentation, they would typically reply with, well, that's interesting. Let me know when you have a branch nearby. We persevered. It took a while to get customers comfortable with our solution. Once they had it, they couldn't do without it.

Jeff Dick
Jeff Dick
Chairman & CEO at MainStreet Bancshares

Growth was slow in the beginning, but it quickly picked up. All these years later, we are still the largest provider of remote deposits of any bank serviced by our core processor, Jack Henry. Today, we're in a similar situation. We have a great solution. We need to get it in front of the right customers in order to grow.

Jeff Dick
Jeff Dick
Chairman & CEO at MainStreet Bancshares

We're working harder than ever to make that happen. We are a Virginia community bank serving the Washington DC Metropolitan area. And we have a great organic growth story using a branch like strategy. We've always been a tech forward bank with strong online and mobile banking technology. We are traded on an NASDAQ Capital Markets Exchange.

Jeff Dick
Jeff Dick
Chairman & CEO at MainStreet Bancshares

As of year end 2024, we had a market cap of $138,000,000 with slightly more than 7,600,000 shares outstanding. Our tangible book value was $23.77 Slide 7 provides an overview of the intangible impairment determination that the Board and management recently positioned. We determined that the implementation delays affected our expectations for the Avenue Software as a Service solution. After the accounting team put together its impairment analysis, the Board and management agreed with their conclusions to fully impair the capitalized intangible assets. Alex will talk you through this process in just a few minutes.

Jeff Dick
Jeff Dick
Chairman & CEO at MainStreet Bancshares

Before I turn things over to Alex, you'll see that the 3 key issues we'll be addressing in today's presentation are focused on impact of intangible capitalized assets, the good progress that we've made in working through our small market breakout and the outlook for revenue. At this point, I will turn the presentation over to Alex Barry. Alex is our Chief Accountant. He works closely with Alex Malik to share the accuracy of all of our books and records. Alex is going to talk you through the impairment process as well as performance.

Alex Vari
Alex Vari
Chief Accounting Officer at MainStreet Bancshares

Alex? Thank you, Jeff. On Slide 8, we summarize our financial performance over the past 4 quarters as well as for the fiscal year 2019. For the year, we are reporting a loss on a share of $1.60 a return on average assets of negative 0.47 percent, a return on average equity of negative 4.44 percent and a net interest margin of 3 point 13%. Our performance ratios were impacted by an impairment of our intangible assets recognized during the Q4.

Alex Vari
Alex Vari
Chief Accounting Officer at MainStreet Bancshares

As you will see later in the slide deck, we provide 4 performance ratios after the non recurring adjustment. As we discussed in our quarterly calls earlier this year, our ratios were also directly impacted by taking action on a handful of problem loans. We have made significant progress finding solutions to non performing loans and we remain strongly capitalized and look forward to the opportunities we have in 2025. During 2024, we reversed $1,900,000 of interest income and a net charge off of $4,500,000 An additional $2,900,000 provision expense was added to ensure the allowance for credit losses remains directionally consistent for portfolio growth and recent history. As you can see, the non recurring credit issuances impacted our earnings per common share by $0.67 our return on average assets by 24 basis points, our return on average equity by 2 24 basis points and our net interest margin by 8 basis points.

Alex Vari
Alex Vari
Chief Accounting Officer at MainStreet Bancshares

As we will discuss later in the presentation, our credit metrics will drive improvement in our key performance ratios and will be reflected in our overall allowance for credit losses that returns to our historic leverage. During the Q4, as Board and management balanced Avenue's 2025 growth and expense run rate, we made tough decisions about carrying back development, personnel and focusing on revenue generation. Those conversations triggered a discussion about whether our changes constituted the need for an impairment analysis to be performed in accordance with generally accepted accounting principles or GAAP. In agreement with that accounting analysis, we wrote the intangible assets to 0 effective at the end of the fiscal year, and this negatively impacted several performance ratios. You see the total amount of non recurring impairment adjustments for the fiscal year after accounting for taxes negatively impacted our earnings per share by $2.14 our return on average assets by 76 basis points and our return on average equity of $324,000,000 As these adjustments are non recurring, we expect to see improved and normalized performance metrics through 2025.

Alex Vari
Alex Vari
Chief Accounting Officer at MainStreet Bancshares

Turning to Slide 10, you will see how the impact of the impairment actually had a positive effect on tangible book value of $0.48 per common share. As tangible book value already included the full value of any tangible assets, recognizing the decrease in intangible assets, net of the tax impact, which really improves this metric. Moving to Slide 11. The interest rate environment and cost of money have been challenging 2020. It is impacting bank accounts across the spectrum. Anecdotally, I saw an article on a survey of Community Bank's CEO and 54% of their stated deposit costs as their number one challenge in 2025. Here you will see we ended the year with a healthy net interest margin of 3.13%. Our deposit market remains very competitive as we often compete with super regional and multinational banks, requiring deep relationship building in our communities. In the Q4, we continue to build new deposit relationships that will fortify and grow our franchise in the next 2 years. We used excess liquidity to exercise call options on $60,000,000 in high DDs. We did incur some deposit carrying costs while we executed these options.

Alex Vari
Alex Vari
Chief Accounting Officer at MainStreet Bancshares

That added 9 basis points of additional compression on our net interest margin for this quarter only. We are positioning balance sheet for a strong 2025. Without the additional carrying cost, our net interest margin would remain the same as the prior quarter. We will continue exercising our callable CDs throughout the Q1 as we are laser focused on both our funding expense. We are continuing to fund new quality loans that are underwritten stress tests in the current rate environment.

Alex Vari
Alex Vari
Chief Accounting Officer at MainStreet Bancshares

Net new loan funding were $36,000,000 over the last quarter and $108,000,000 for fiscal year, which points to continued interest income growth, further enhancing our future and exit margin expectations. For the fiscal year 2025, we expect low single digit loan growth. On Slide 12, you will see our non interest bearing deposits represent 23% of our core deposit base and 17% of all deposits. We have an additional $132,000,000 in callable CDs.

Jeff Dick
Jeff Dick
Chairman & CEO at MainStreet Bancshares

That will be just one second, there's a message.

Jeff Dick
Jeff Dick
Chairman & CEO at MainStreet Bancshares

Is there industry with the audio? It could be just the one that If anybody else is having any issues, please let us know. And I apologize. Okay. Okay.

Jeff Dick
Jeff Dick
Chairman & CEO at MainStreet Bancshares

You're fading out a little bit. So I would just ask, we'll speak up a little bit more, try to get this resolved.

Alex Vari
Alex Vari
Chief Accounting Officer at MainStreet Bancshares

We'll start on Slide 12. On Slide 12, you will see our non interest bearing deposits represent 23% of our core deposit base and 17% of all deposits. We have an additional $122,000,000 in callable CDs that will be accretive to our net interest margin as they are called.

Alex Vari
Alex Vari
Chief Accounting Officer at MainStreet Bancshares

We continue to grow core deposits in a meaningful way, adding $187,000,000 during 2024. Our non core deposit balances increased strategically to capitalize market conditions that will reduce funding costs and shorten the duration of our term deposits. As the FOMC react to market conditions, they have begun to lower expectations by continued rate cuts in 2025, making it even more important that banks in competitive markets find niche markets to accumulate low cost deposits. Now turning to 2025, our projected run rate is what we are expecting going into the year. Adjusting for the non recurring transactions, non interest expenses increased a nominal 6 basis points quarter over quarter.

Alex Vari
Alex Vari
Chief Accounting Officer at MainStreet Bancshares

Management has taken action to reduce expenses and increase expense control and efficiency. At this point in 2025, we are projecting a run rate of 83 basis points per month through the Q1. Of course, we will continue to update you as the year progresses. 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
Tom Floyd
Executive Vice President & Chief Lending Officer at MainStreet Bancshares

Thank you, Alex. 2024 was a challenging year, a year that I'm very proud of and looking forward to reviewing with you. Over the next few minutes, I'm excited to share details about our loan portfolio composition, trends in credit quality, our annual growth and a measure of our stability going forward. You will see that over the Q4, we achieved positive movement in terms of total non performing asset levels and positive trends in total past due levels. Coupled with our commitment to serving our vibrant client base, we remain optimistic about the future.

Tom Floyd
Tom Floyd
Executive Vice President & Chief Lending Officer at MainStreet Bancshares

Our loan portfolio is well positioned for stable or falling rate. 61% of our portfolio has rate resets beyond 6 months with the remaining 39% with rate resets within 6 months. Of those, 55% have weighted average flow rate 6.34%. As we move forward into 2025, we anticipate this will help our net interest margin as rates are expected to remain stable or decrease. Our legal lending limit remained at $47,000,000 and our average new loan size was 1,900,000 dollars As we mentioned last quarter, this highlights that as we've grown in our capacity, we continue to serve the smaller size capital formation needs in our market.

Tom Floyd
Tom Floyd
Executive Vice President & Chief Lending Officer at MainStreet Bancshares

We're very comfortable in our mix. Slide 16 highlights that our loan portfolio is diversified with healthy metrics. The non owner occupied loans comprise 30% of the portfolio and include hospitality, industrial, mixed use, retail and a small amount of office. The weighted average yield is 6.47 percent and the weighted average loan to value is 60%. Construction loans comprised 21% of the total book and are comprised of mixed use, multifamily, residential, retail and full storage.

Tom Floyd
Tom Floyd
Executive Vice President & Chief Lending Officer at MainStreet Bancshares

Our weighted average yield is 7.8% and the weighted average loan to value is 61%. Owner occupied accounts for 19% of the portfolio and is comprised of end users across roughly a dozen industries. This is a highly competitive asset class and the weighted average yield is 5.95% with a weighted average loan to value of 68%. Multifamily loans account for 13% of the portfolio and have a weighted average yield of 6.45 percent and a weighted average loan to value of 73%. Slide 17 highlights that our CRE concentration is managed well. At the end of the Q4, pre impairment, our CRE concentration was 3 75 percent of capital, which is at the limit set by our Board. As you can see, we consistently manage the levels set by our Board.

Tom Floyd
Tom Floyd
Executive Vice President & Chief Lending Officer at MainStreet Bancshares

And through proactive management, we'll add that number back within the policy limit over the next few months. Through normal business activities, we can accomplish this with a negligible impact to our existing clients. It's worth highlighting that in our series, we only have $13,000,000 in exposure to the office space, but the primary source of repayment is dependent on market rate office rent. Slide 18 shows the trend in stress tests over the past 8 quarters and the resulting impact to capital. The Q4 stress test for all earning assets reflects the worst case stress loss estimated at $45,100,000 In all quarters and even after year end impairment, we remain strongly capitalized.

Tom Floyd
Tom Floyd
Executive Vice President & Chief Lending Officer at MainStreet Bancshares

The stress test includes loan level testing for all construction and investor commercial real estate. For 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 license terms, we determine the liquidation value. Slide 19 highlights the vigorous management of our non performing loans over the course of 2024.

Tom Floyd
Tom Floyd
Executive Vice President & Chief Lending Officer at MainStreet Bancshares

Overall, we were able to reduce non performing assets by 62% over the course of the year for an ending balance of 21,700,000 Our aggressive action resulted in the overall deal with the total principal loss coming to just 10% in terms of the loans that we resolved in 2024. Slide 20 shows a decrease in our classified loan levels. Over the quarter, we decreased classified loans from 4.31 percent of total gross loans to 2.94% of total gross loans. We continue to rigorously and aggressively work our non performing loans and expect positive outcomes, which we'll highlight later in the presentation. The next slide is a positive trend in terms of past due loans.

Tom Floyd
Tom Floyd
Executive Vice President & Chief Lending Officer at MainStreet Bancshares

As you can see, over the last three quarters, we are trending downward. With total loans 30 days past due at the end of the quarter at virtually 0. Slide 22 highlights our prudent balance sheet management and our allowance for credit losses is directionally consistent with recent performance. As discussed in the stress testing slide, we remain strongly capitalized. Based on positive trends in our past dues and our rigorous management of our non performing assets, we anticipate this trend will normalize in 2025.

Tom Floyd
Tom Floyd
Executive Vice President & Chief Lending Officer at MainStreet Bancshares

Slide 23 is a brief snapshot of our remaining classified and non accrual loans. As you can see, the common thread is that there is a high probability of successful outcome. The next slide highlights the recent change being made in DC to help strengthen our local community. This creative approach to modernizing obsolete offices along with recent developments on federal workers returning to the office are welcome changes to our local landscape. Rising ties raise all shifts, but all in all, the recent changes are positive and reasons to be optimistic.

Tom Floyd
Tom Floyd
Executive Vice President & Chief Lending Officer at MainStreet Bancshares

Slide 25 highlights our consistent loan growth. Even through the various economic conditions and economic backdrops, our team has demonstrated a consistent ability to grow. In summary, we've grown the loan portfolio by 6% in 2024. At the same time, our portfolio has broadly seen a decrease in problem just as we told you that we expected last quarter. Our lending team has done an excellent job serving our clients in our market that has resulted in a superior yield and earning assets and in more times than not, a demonstrated ability to exit relationships with minimal losses to principal values.

Tom Floyd
Tom Floyd
Executive Vice President & Chief Lending Officer at MainStreet Bancshares

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.

Jeff Dick
Jeff Dick
Chairman & CEO at MainStreet Bancshares

Thank you, Tom.

Jeff Dick
Jeff Dick
Chairman & CEO at MainStreet Bancshares

Our Banking as a Service balance sheet for 2024 now reflects the 62,000 in other assets and $41,000,000 in low or no cost deposits. The income statement reflects the net loss of $3,600,000 from normal operations. Looking at the pipeline, there's 5 FinTech signed contracts. The first is fully live, but proceeding slowly at this point. Venue will go into beta as soon as the due diligence is finished for the client number 1 and should go live quickly from that point.

Jeff Dick
Jeff Dick
Chairman & CEO at MainStreet Bancshares

We're thinking beta will be about 2 weeks, maybe 3 weeks at the most. As an aside from that, the API integration team is actually a common a timeline for FinTech to move through process in 60 to 90 days. The 3 clients that are in the queue behind Venue are currently moving at a slower pace at their choices. Venue is moving fast and has a lot of potential. In my mind, the client with the next most potential is one waiting for their California Money Transmitter license.

Jeff Dick
Jeff Dick
Chairman & CEO at MainStreet Bancshares

Once that FinTech We control the app, the network, the virtual terminal for checkout and the merchant services solution. Each aspect of the solution is very simple and very elegant. The cannabis retail itself industry is large cannabis driven and we see a tremendous opportunity. Slide 30 shows data from our March 2024 forecast estimating the U. S.

Jeff Dick
Jeff Dick
Chairman & CEO at MainStreet Bancshares

Legal cannabis retail market at 35 $200,000,000 for 2025. Slide 31 tells us that there are 12,452 cannabis licenses in the United States. The slide also shows us the retail volume of sales in 20 1 of the 38 states where cannabis retail sales are illegal. The weighted average sales per store in 2024 for those 21 states was $3,500,000 per year. Slide 32 shows the venue opportunity.

Jeff Dick
Jeff Dick
Chairman & CEO at MainStreet Bancshares

Again, the total addressable market is 12,452 stores, collectively doing over 1,000,000,000 in monthly sales. 70% of that is in cash. We've taken a conservative approach to our projections. We assume we convert 1 third of those weighted average sales per store into digital payments. We then assume we'd add about 1 100 stores to the network this year.

Jeff Dick
Jeff Dick
Chairman & CEO at MainStreet Bancshares

Candidly, once our sales panels are in place, we think we should be able to do much better than that. The power of the venue solution is at the point we start to see some saturation. With just 20% of the total retail stores and less than 1 third of the sales from each of those stores, we could end up earning transaction fees of $90,000,000 or more. This is a captive network at this point. In order to get there quickly, we are actively negotiating a few sales channels to take Venue forward.

Jeff Dick
Jeff Dick
Chairman & CEO at MainStreet Bancshares

We're working with a very few credible independent sales organizations, ISO, that have big sales teams. They're excited that the opportunity, the competition is virtually non existent to what we offer. We'll also be working with our banking associations as cannabis associates in our efforts to gain market share. For 2025, we've estimated the average outstanding deposits for Avenue for the year to be $135,000,000 an emphasis on average. Properly executing this strategy alongside the fee income and expense reductions that we've taken will get Avenue to a profitable point in 2025.

Jeff Dick
Jeff Dick
Chairman & CEO at MainStreet Bancshares

The Board and management know that strategic execution is pivotal to the company's success and future. The core bank is strong and well positioned. The avenue and venue teams are relentless in their endeavor to execute and sell the market what they can deliver. At this point, we're going to start questions with that we received from Chris Marinac, who is the Director of Research at Janney Montgomery Scott. After that, we'll address questions that were submitted earlier in the day and through the portal.

Jeff Dick
Jeff Dick
Chairman & CEO at MainStreet Bancshares

So, I'm going to start by reading a few crystal questions. First one is an Alex question or Tom Smelly question. The asset impairment makes sense. Will the other measures that you also put in place be meaningful as we take avenue forward?

Alex Vari
Alex Vari
Chief Accounting Officer at MainStreet Bancshares

Yes.

Alex Vari
Alex Vari
Chief Accounting Officer at MainStreet Bancshares

That's a great question. And they are. We took action to decrease our expenses and focus on revenue. I mentioned those actions were reducing some personnel costs. We renegotiated contract, very focused on reducing expense, the efficiency and trying to as lean as possible and really focus on revenue.

Alex Vari
Alex Vari
Chief Accounting Officer at MainStreet Bancshares

And I think that's going to be meaningful for us to the bottom line. Tom, anything to add?

Tom Floyd
Tom Floyd
Executive Vice President & Chief Lending Officer at MainStreet Bancshares

Yes. As you said, it was very helpful to see expenses as we went through to decrease for this year. And we'll constantly continue to look for other expenses to continue to work through as time goes on.

Jeff Dick
Jeff Dick
Chairman & CEO at MainStreet Bancshares

The next question is still on Avenue. Does the Avenue solution that we have in place today fully support our cannabis opportunity? What does that look like and how long will that take to see meaningful saturation? And yes, the version 1 of Avenue that went into place in October 1, 2024 has everything that the menu solution needs in order to be successful. The small remaining team that's focused on Avenue will continue to harden the software solution to make it more efficient, works faster and more scalable.

Jeff Dick
Jeff Dick
Chairman & CEO at MainStreet Bancshares

But it's working and all of the health and testing for Avenue for Venue, I'm sorry, has been very successful. We are working ISO reseller relationship in place as quickly as we can and get everything moving so that we can start to really focus on onboarding cannabis retailers. This is a bit of a chicken and egg kind of situation. We onboard the campus retailers. We do in store marketing.

Jeff Dick
Jeff Dick
Chairman & CEO at MainStreet Bancshares

We do other types of marketing to get to consumers. They download the app from the app stores and sort of off to the races. But it really is getting as many cannabis retailers on board as quickly as we can that will drive, I think, the ultimate adaption. So we're excited. We're looking at working hard on that.

Jeff Dick
Jeff Dick
Chairman & CEO at MainStreet Bancshares

The next question is the pre ROA of 53 basis points achievable in 2025. And is there room to improve upon it? Alex, I want to comment.

Alex Vari
Alex Vari
Chief Accounting Officer at MainStreet Bancshares

Yes. Yes. Hamid, just to add.

Jeff Dick
Jeff Dick
Chairman & CEO at MainStreet Bancshares

The short answer is yes, absolutely. We have a number of things that are impacting that. So when we're looking at our 2024 performance and some credit issues and non recurring transactions, those are behind us. And so we won't be having those going into 2025.

Jeff Dick
Jeff Dick
Chairman & CEO at MainStreet Bancshares

Couple of other things I'm thinking about, certainly a trend in the last quarter, our net interest income by dollars is increasing. We have an increase in net interest income by about 4.5% over 4%, which is nice trend to see. As I mentioned earlier, we in the Q4, we exercised $60,000,000 worth of callable CDs that were accretive to our net interest margin. We have another $120,000,000 sort of in the chamber, if you will, right, that will be a prudent to our funding as we continue to follow. And just we are seeing continued deposit opportunities in our market as well as new land growth.

Jeff Dick
Jeff Dick
Chairman & CEO at MainStreet Bancshares

So we have a lot of opportunities to be excited about in 25.

Tom Floyd
Tom Floyd
Executive Vice President & Chief Lending Officer at MainStreet Bancshares

Yes. And the other thing is the decrease in the non performing assets will help the margin also. And hopefully with some of the things that we're working through on former NPAs or non performing assets, recovery of interest that we believe we will see in the coming year.

Jeff Dick
Jeff Dick
Chairman & CEO at MainStreet Bancshares

Excellent.

Jeff Dick
Jeff Dick
Chairman & CEO at MainStreet Bancshares

This is a Tom Floyd question. Do you think the loan growth opportunity exists in our market or planned loan growth?

Tom Floyd
Tom Floyd
Executive Vice President & Chief Lending Officer at MainStreet Bancshares

I absolutely do. And as I said, we love our market. It's a large market. We have less than 1% market share in our market. So, for us to get low single digit loan growth, there's an abundance of opportunities for the type of lending we are trying to do, which is owner occupied, owner operate end user businesses.

Tom Floyd
Tom Floyd
Executive Vice President & Chief Lending Officer at MainStreet Bancshares

Those opportunities give us the opportunity to get full banking relationships. They're very much in the community, SBA lending and other types of owner occupied C and I. So, we're absolutely in our market.

Jeff Dick
Jeff Dick
Chairman & CEO at MainStreet Bancshares

This is a follow on question. You've answered some of this, but the types of specific lending that we're looking at trying to focus on for 2025. And maybe as you look think about that, I think a natural follow-up would be what types of loans, if there's any that intend to stay away from?

Tom Floyd
Tom Floyd
Executive Vice President & Chief Lending Officer at MainStreet Bancshares

So, absolutely, the unoccupied funding is something that we're going to look to do a lot of this year. In terms of loans, we'll be approaching with caution with the financing and the government contracting space, where your payments on build receivables, things of that nature we're going to be very cautious with. We certainly have a good customer base with government contracts and we continue to support their asset base needs. We will be more cautious of acquisition financing going forward.

Jeff Dick
Jeff Dick
Chairman & CEO at MainStreet Bancshares

Tom Shmelik, you are a veteran of D. C. Native. Does the new administration in Congress prevent any barriers that's well worth trying to achieve?

Thomas Chmelik
Thomas Chmelik
Senior EVP, CFO, Corporate Secretary & Director at MainStreet Bancshares

I mean, one thing that we've always done is, whether the switch is, whether it's public or Democrat, and as they come in, they move slowly.

Thomas Chmelik
Thomas Chmelik
Senior EVP, CFO, Corporate Secretary & Director at MainStreet Bancshares

So there will be some changes, but albeit it will be slow. We still have a government here, it's not leaving anytime tomorrow. He's not taking it out of town. But I think it's going to be interesting to see what does happen. I think it's just not here, it's all across the countries.

Thomas Chmelik
Thomas Chmelik
Senior EVP, CFO, Corporate Secretary & Director at MainStreet Bancshares

And as I said, we still have a vibrant economy. Without the federal government, there's a lot of other things to go on here, as Jeff alluded to at the beginning of the slide presentation.

Jeff Dick
Jeff Dick
Chairman & CEO at MainStreet Bancshares

Yes. And it's interesting, the mandate for federal workers returning back to work, I think is going to be significant. When COVID hit in Washington, DC, like out of like, I'm sure many of the major cities, all of the very small, what we call, monoclonal So the shoe repair, the breakfast, coffees, Starbucks coffee shops.

Jeff Dick
Jeff Dick
Chairman & CEO at MainStreet Bancshares

So just all of those little businesses dried up because there was no traffic, no foot traffic in the city for years, and it's still not what it was. So, there is even opportunities as those spots are still empty. I think the businesses come back once the federal workers come back and need those services again. So, those are wonderful SBA opportunities because of the right size for that.

Tom Floyd
Tom Floyd
Executive Vice President & Chief Lending Officer at MainStreet Bancshares

That's a great point. And we've added to the talent of our team with some very experienced SBA staff. So, we are excited with that going forward.

Jeff Dick
Jeff Dick
Chairman & CEO at MainStreet Bancshares

Again, accounting question for the Q1 of 2025, you indicated 3 basis points monthly increase in the run rate. Where does that ever start from? Is that from the end of the just the Q4, is that from 2024?

Alex Vari
Alex Vari
Chief Accounting Officer at MainStreet Bancshares

Right. Yes.

Alex Vari
Alex Vari
Chief Accounting Officer at MainStreet Bancshares

And so that's starting with the year to date, 2024 normalized net interest expense. So when you take out the non recurring non interest expenses, it gets you to about $51,900,000 We're using that as our point to say 83 basis points per month from there. And I'd like to just point out that due to the cost cutting things and the focus on reducing expenses, that's actually about a 40% reduction in run rate from where we were in 2024. So, we're really excited about things we've done, what we're looking for in 2025.

Jeff Dick
Jeff Dick
Chairman & CEO at MainStreet Bancshares

I mean, that is a significant 40%.

Jeff Dick
Jeff Dick
Chairman & CEO at MainStreet Bancshares

And that's one of the things that we're really focused on. We try to improve the performance metrics for the coming year. We'll sort of bounce back and forth. Again, a loan question, it was for credit losses question more specifically. And the question is, if I added about 10 basis points of the losses projected for 2025, would that be about right? I'll let you start, Tom.

Tom Floyd
Tom Floyd
Executive Vice President & Chief Lending Officer at MainStreet Bancshares

Yes. I think if you wanted to be conservative, that and solve it candidly. We've seen a lot of improvements in our credit quality metrics over the last quarter. And so, we're optimistic about our direction. And we believe that what we have into our APL should cover everything we need to clean up. So, yes.

Jeff Dick
Jeff Dick
Chairman & CEO at MainStreet Bancshares

Yes. There's always absolute unknown.

Jeff Dick
Jeff Dick
Chairman & CEO at MainStreet Bancshares

But, at that I know the lenders, credit administration, loan review, everything else has really scoured the portfolio and it's in very good shape at this point.

Jeff Dick
Jeff Dick
Chairman & CEO at MainStreet Bancshares

So, those were Chris' questions. There's a couple more here and then I'm on my mobile phone that I was trying to read. There's one here that says, can we spend a little bit more time discussing just the net, the core results of the bank? And I think if you went back to the slide that shows thinking about that, let's focus just a bit on most core results sort of ex credit, ex impairment. How does that how will that go into 25?

Jeff Dick
Jeff Dick
Chairman & CEO at MainStreet Bancshares

We've talked about a little bit, but I think just hope you're well.

Alex Vari
Alex Vari
Chief Accounting Officer at MainStreet Bancshares

Yes. Happy to touch on that. So, if Slide 9, we really laid out what the key performance ratios kind of would have been for the core, had you taken out the capital impairment. And frankly, 2024 was a challenging year.

Alex Vari
Alex Vari
Chief Accounting Officer at MainStreet Bancshares

We had deposit costs are challenging. And so those are things that the bank is continuing with. But I think the things that we're focused on are the things that I kind of mentioned before that we have a lot of levers that we can pull as far as reducing funding costs, the things that we're doing with our deposits. We have I know we're talking less about Avenue, but Avenue 1, Version 1 is behind us. Those expenses are being paired back and we're being there.

Alex Vari
Alex Vari
Chief Accounting Officer at MainStreet Bancshares

The bank had a very deep net interest margin at 3.13 for the year. We're proud of that. We believe that we are primed to continue expanding that. And as I mentioned, we're adding new loans, net interest income is growing. And we still have, as I put earlier, sort of powder and the keg to continue lowering that funding cost being some of the things that we did with the balance sheet in managing that.

Thomas Chmelik
Thomas Chmelik
Senior EVP, CFO, Corporate Secretary & Director at MainStreet Bancshares

Tom, that also led to the loan yields. We are still getting loan yields that we've always gotten. I mean, we provide service and that's what we've always said to everybody. That's what we do and we get paid for what we do here. So that will continue to see that an issue going forward with the type of loans that we're doing.

Jeff Dick
Jeff Dick
Chairman & CEO at MainStreet Bancshares

And with improving credit metrics, we're going to continue to see increased profitability metrics on the back of that, certainly just looking at the bank. I've had a couple of questions that have come in. What does we've significantly pared down future work at this point mean? I'll own that. It was poorly written.

Jeff Dick
Jeff Dick
Chairman & CEO at MainStreet Bancshares

It's in reference to the changes that we've made with the future software developments. When we look at Avenue, Version 1 is in production. As I said previously, we need a core small team that will continue to work too hard and make it more make the solution more efficient to take care of any of the small things that go from day to day when other solutions update their systems and that type of a thing. And there are actually 2 services that were well underway, 2 developments. 1 is the ability to add debit card functions to the solutions so that a fintech could offer white label to the clients.

Jeff Dick
Jeff Dick
Chairman & CEO at MainStreet Bancshares

That actually helped a lot in bringing in larger balances. And so that's the reason that that one was put in. The other one that's underway is we're developing what we need to do for an RDFI, which is sorry, ACH terminology, but it allows the customer with FinTech to direct deposit some or all of their paycheck right into that account. So again, both of those are really focused on going after clients for FinTechs that could use that feature and functionality, which would then translate into higher balances being maintained for those accounts. Pretty much anything beyond that has been put on hold.

Jeff Dick
Jeff Dick
Chairman & CEO at MainStreet Bancshares

And the reductions that enforce those have been taken, that was questioned by somebody when would that happen, that has been taken. Everything has been streamlined with immediate effect and very serious about what we're trying to do because achieve what we've stated here today. We've had to act on that. The good news is, as we are able to present Avenue as successful and venue as successful, we will look to look at whatever what other features and functionalities down the road when we can support and justify it might be necessary in order to continue to gain purchase in the space. So, we talked about the run rate expense levels being decreased by 40%.

Jeff Dick
Jeff Dick
Chairman & CEO at MainStreet Bancshares

Let's see. How do current expectations compare to what was presented in the 3rd quarter revenue projection presentation from the consultants? So, again, I shared that average number of $135,000,000 that's probably in line with the deposit gathering side of things. It's just an average number as opposed to the primary number to get to at some point in the future. It's probably it's just more realistic, I think, to look at average balance outstanding.

Jeff Dick
Jeff Dick
Chairman & CEO at MainStreet Bancshares

From an expense standpoint, we've actually pared down those expenses fairly significantly. That was shown in that. Those were our numbers that we had with them, but those actions, as I said, have been taken. So it is it should produce a better outcome. So this one with the impairment, how should we make sense of the intangible asset take this down to 0 versus some other percent.

Alex Vari
Alex Vari
Chief Accounting Officer at MainStreet Bancshares

Yes, I see it. It's interesting the accounting guidance there, it gives you a and tells you here is the criteria and here is how do you look at it. I think in our we use the income approach and things with the new product that has yet to really generate cash flow, It's a little bit more difficult to tie down to a specific number. And so, you're using projections and looking at it from that perspective. So, it is difficult to assess in terms of absolute as the accounting guidance gives it.

Alex Vari
Alex Vari
Chief Accounting Officer at MainStreet Bancshares

We took the fact that we had in the best possible way and finish out our analysis.

Jeff Dick
Jeff Dick
Chairman & CEO at MainStreet Bancshares

Tom, anything to add?

Tom Floyd
Tom Floyd
Executive Vice President & Chief Lending Officer at MainStreet Bancshares

No. You got spot on.

Jeff Dick
Jeff Dick
Chairman & CEO at MainStreet Bancshares

Another avenue question.

Jeff Dick
Jeff Dick
Chairman & CEO at MainStreet Bancshares

Were the delays in avenues primarily driven by efficient market demand, technological development challenges or heightened competitive pressures. So, I think we've been actually pretty clear on that. Saw the 21 consent orders that we put in place in 2023, 2024. We looked at those and we really addressed the contents. And it was a matter of not wanting to have to make work around, but to have all that technology properly integrated.

Jeff Dick
Jeff Dick
Chairman & CEO at MainStreet Bancshares

Now, there were some technological issues again that we could have work around, but that we decided to just fix. Those were 3rd parties. And so, if you say it's 100% ones, it cannot be out. But ultimately, it was impacted by lower desire from a compliance, regulatory and otherwise perspective in order to do it right, get it right the first time. We thought that was very important.

Jeff Dick
Jeff Dick
Chairman & CEO at MainStreet Bancshares

So we wouldn't have that solution with bringing the market until October 1st. And when we brought it to market, we've been aggressive since then working with clients to get into the space. We're dealing with them at fair speed. We are again also out of the market looking at a lot of different opportunities to continue to grow with other FinTech providers that have more potential. Are there any questions from Yes.

Executive

Questions about admin. And I'll paraphrase some of these. How many customers does Avenue post?

Jeff Dick
Jeff Dick
Chairman & CEO at MainStreet Bancshares

And so, the only 10 year old week, the only fully live is PaySeq. We talked about that earlier.

Jeff Dick
Jeff Dick
Chairman & CEO at MainStreet Bancshares

And that's been slow to take up. They went live on December 31st. And they're going at their pace. They all download other customers, they have a customer base for this. And that's one of the things that sort of influenced the apparent decision as well.

Executive

Can you provide additional details of that expected in 2024? For 2025.

Jeff Dick
Jeff Dick
Chairman & CEO at MainStreet Bancshares

Does that mean So that's really a function of the opportunities that we have. And we think that some of that's going to come from the venue opportunity. We didn't really focus much on the cannabis retailers operating in that.

Jeff Dick
Jeff Dick
Chairman & CEO at MainStreet Bancshares

That's an opportunity that we're exploring. There's also, again, they're not under contract yet. There's been some very good potentials out there and that's what we're trying to bring in. So, I apologize, I can't share names, I can't share options, but they're working very hard to bring these in and it's going to change. I think one of the key things to recognize is what happens if that materializes.

Jeff Dick
Jeff Dick
Chairman & CEO at MainStreet Bancshares

And that's really what drives the future of Avenue. I'd like to look at it from the positive snap, but it materializes. We do everything that is meant to move on and grow. We have to be realistic about the alternative. And the Board and management have discussed that too and we'll take action with action today.

Executive

What is the expected expenses in 2025?

Jeff Dick
Jeff Dick
Chairman & CEO at MainStreet Bancshares

So, they've been pared down. There's opportunity, fixed and variable costs. I'm thinking the variable is a function helpful the solution is. But, I think it's reasonable to say, we focused on as lean as possible.

Jeff Dick
Jeff Dick
Chairman & CEO at MainStreet Bancshares

We had the team that's able to operate the functionality that we have now. But, we're very much keeping those operating expenses as lean as possible. We are revisiting certain contracts that are in place to try to lower the cost on those contracts. But as I stated before, if we achieve the income that we have in these slide deck, that would be a positive result that will cover all the expenses with the cushion.

Executive

And then, again, forward asking, 40% reduction for expenses. What was 40% comprised of?

Alex Vari
Alex Vari
Chief Accounting Officer at MainStreet Bancshares

Yes. I'll quickly clarify that. So that's not avenue specific. We were talking about a reduction in the run rate for the Company.

Alex Vari
Alex Vari
Chief Accounting Officer at MainStreet Bancshares

And it wasn't I apologize if I it's not a 40% reduction in expenses. When you're looking at the run rate that we've had in 2024 compared to the run rate that we're projecting in 2025, it's a 40% reduction in the run rate. We're anticipating 83 basis points per month, which is a reduction of the rate that we had in 2024. And that was done through the cost cutting reductions and the expense things that we were discussing previously here. Sounds like that's the last question.

Jeff Dick
Jeff Dick
Chairman & CEO at MainStreet Bancshares

Okay. So, I'm sorry, there's one more on the call here. I don't need to find it so I can read it properly. Again, with regard to Avenue, please elaborate on what are the operational changes versus the revaluation? Jonas, I'm not 100% sure what that means.

Jeff Dick
Jeff Dick
Chairman & CEO at MainStreet Bancshares

I'm going to reach out to the author of that and address it offline. We have talked about the operational change. I think it's been through that. So perhaps I have answered the question already, the efficiencies that we've gained. But that was the that is definitely the first significance of the 2.

Jeff Dick
Jeff Dick
Chairman & CEO at MainStreet Bancshares

There was more savings built into pairing things down. As Todd said, renegotiating the agreements have started to renegotiate and reset expectations. The Board, I think, and reset expectations. The Board, I think I guess I didn't say this, but the Board just met for 2.5 days here at our headquarters. We went through some very good strategic planning, very comprehensive market evaluations, the accounting team and all of the leadership of the bank.

Jeff Dick
Jeff Dick
Chairman & CEO at MainStreet Bancshares

We really participated in what can we do from an efficiency standpoint to get things operate as lean as we can for this coming year. None of us were happy with 2024's overall performance. Having said that, I think we as a group, we worked as hard as we ever have in order to get it there. But when I look at 2024, it's really a lot of work to get things into the right place, to get things very focused, so that now we're in a position to really take off and get some extremely strong positive momentum. So, we're excited for that.

Jeff Dick
Jeff Dick
Chairman & CEO at MainStreet Bancshares

There's challenges before us that we'll be able to prove to the market. And we thank you for your continued investment in Main Street Bank. And if you do have questions, by all means, please reach out. We will be at an investor conference starting Wednesday morning through Thursday. But, we will try to get back to you if we can get together to talk through any questions that you have after this.

Jeff Dick
Jeff Dick
Chairman & CEO at MainStreet Bancshares

Thank you again for taking time to be with us today. We very much appreciate it. I hope you have a good rest of the day. Thank

Executives
    • Jeff Dick
      Jeff Dick
      Chairman & CEO
    • Alex Vari
      Alex Vari
      Chief Accounting Officer
    • Tom Floyd
      Tom Floyd
      Executive Vice President & Chief Lending Officer
    • Thomas Chmelik
      Thomas Chmelik
      Senior EVP, CFO, Corporate Secretary & Director
Analysts
    • Executive
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Key Takeaways

  • Intangible impairment: Full write-off of Avenue Software SaaS intangibles due to implementation delays reduced 2024 EPS by $2.14 but boosted tangible book value by $0.48 and paves the way for normalized 2025 performance.
  • 2024 core performance: Reported a $1.60 loss per share, ROA of –0.47% and ROE of –4.44%, impacted by nonrecurring charges and problem-loan actions, while a 3.13% net interest margin and credit reversals point to improvement next year.
  • Funding and deposits: Noninterest-bearing deposits now represent 23% of core funding, $60 million in callable CDs were redeemed and $122 million remain to be called, positioning the bank to lower funding costs as rates stabilize.
  • Loan portfolio strength: Grew loans by $108 million in 2024 with a well-diversified CRE mix, achieved a 62% reduction in nonperforming assets, and maintain strong capital ratios with low-single-digit loan growth targeted for 2025.
  • Banking-as-a-Service growth: Signed five FinTech contracts for the Venue payments platform, launching a cannabis retail pilot that could convert cash sales into digital payments and generate substantial fee income.
AI Generated. May Contain Errors.
Earnings Conference Call
MainStreet Bancshares Q4 2024
00:00 / 00:00

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