MainStreet Bank Q2 2026 Earnings Call Transcript

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Provided by Quartr
July 20, 2026

Key Takeaways

  • Positive Sentiment: MainStreet reported EPS of $0.58, driven by more than 4% sequential net interest income growth. Net interest margin improved to 3.53%, while return on average assets and return on tangible common equity rose to 0.85% and 8.88%, respectively.
  • Neutral Sentiment: The bank said liquidity remains strong, with over $810 million in available funding sources covering 42% of deposits. Management also said balance-sheet interest rate risk has been effectively neutralized, helping support margin stability.
  • Neutral Sentiment: Loan growth was solid, with the portfolio up 5% year to date and over 4% in the quarter, led by owner-occupied real estate and expanding government contracting relationships. Management reiterated a 5% to 7% full-year loan growth target.
  • Negative Sentiment: Management acknowledged deposit pricing pressure in its competitive D.C. market and expects funding costs to rise slightly. They still expect the net interest margin to be mostly stable, but said it could move by a few basis points through the rest of the year.
  • Negative Sentiment: Credit issues remain manageable but unresolved, with $54.4 million in classified performing loans and $61.3 million in classified non-accruals. The company said its two largest non-performers are in court and that some losses may still be realized, though it does not expect anything material relative to total outstandings.
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Earnings Conference Call
MainStreet Bank Q2 2026
00:00 / 00:00

There are 4 speakers on the call.

Operator

Good afternoon, and thank you for joining our second quarter 2026 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 chief financial officer, Alex Vari, and our chief lending officer, Tom Floyd. Chris Marinac, director of research for Green Capital, will join us at the end of the call today with his questions. If you would like, you can also submit written questions throughout the presentation using the chat function on the web portal. This function is private, so what you write will not be visible to anyone else. We will address your questions at the end of the presentation. I would like to take a moment to point to our Safe Harbor page that describes the context of forward-looking statements that we may make today.

Operator

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 the federal government. With our major universities, tourism, data centers, world-class medical facilities, and resident Fortune 500 companies, it continues to be a great place to do business. The Department of Government Efficiency recently wound down and left town. The D.C. market is sometimes perceived as not a good market, often in conjunction with concerns about politics. Yes, politics affects our marketplace. In the last 22 years, the overall effect has been nominal in the community banking space. Since we opened our doors in 2004, we have experienced five presidential administrations, four D.C. mayors, seven Virginia governors, and four Maryland governors.

Operator

We have also experienced economic and political pressures over that same period, including the Great Recession, where real estate prices actually held up strong inside the beltway, the budget control and sequestration period, where community banks felt some secondary impact from hits taken by reduced government and corporate spending. During this period specifically, we did have a couple of C&I relationships collapse. The COVID-19 and remote work period, where community banks felt some impact from the hospitality crisis. Community banks did not finance the big office buildings that felt the brunt of the shifting workplace culture. Washington, D.C. also did not experience the great urban shift felt by so many of the large cities in the United States. During this period, the liquidity for some of our borrowers was impacted by higher interest rates on projects that became protracted due to supply shortages, cost increases, work slowdowns, and permitting delays.

Operator

A few of those borrowers are having difficulty right now, and we are working with them. The overarching point for us is that we are in a solid, resilient market. By the numbers, the median household income is $135,089. The average home listing price is $831,000, and the median days on market is 30 days. Still a seller's market. Anecdotally, I recently sold my house in one day with multiple offers. Federal Reserve economic data from December 2025 indicates that we have 684,000 government employees in the D.C. metropolitan area. Our market remains vibrant, and we continue to see good opportunities. We remain tuned in to local, national, and global geopolitical activities, and when things happen, we determine the potential impact to our market and to our business strategy. Over the past two years, we have been hovering around that $2.2 billion total asset mark.

Operator

We've focused on smart balance sheet management, which has involved efforts to replace higher cost funding. We've made progress on that front, but we recognize that as a community bank in the Washington, D.C. market, our ongoing funding costs may very well remain a little higher than our peer group across the country. We opened our doors in May of 2004 as a Virginia chartered community bank. We've been rooted in the Washington, D.C. metropolitan community now for over 22 years. Slide seven shows that MNSB is a small-cap stock that trades on the Nasdaq Capital Market and is listed on the Russell 2000 Index. As of quarter end, we traded at 94% of tangible book value, which is now at $26.30 per share. During today's presentation, you'll once again see directional consistency on our net interest margin, expense control, and earnings.

Operator

Asset quality remains good, and we are well capitalized. You will also see that we are working toward resolution for eight performing relationships and 13 non-performing relationships. In light of that, we've provided some historical references to show that our loss experience over time has been nominal as we work with our borrowers. Our goal is to continue that successful track record. At this point, I will turn the presentation over to our bank CFO, Alex Vari.

Speaker 1

Thank you, Jeff. Slide eight highlights our solid performance during the quarter. We increased earnings per share to $0.58 by growing net interest income over 4% during the quarter. It's encouraging to see our focus on earnings growth producing results. Our net interest margin improved to 3.53%, while our return on average assets and return on tangible common equity improved to 0.85% and 8.88%, respectively. With our third straight quarter of net interest income expansion and tight expense control, our efforts to improve core earnings quarter-over-quarter continue to bear fruit. We remain focused on our process and progress to drive higher returns for our shareholders. On slide nine, you will see a diligent liquidity strategy that incorporates a secure line availability that has grown quarter-over-quarter.

Speaker 1

We continually manage our loan-to-deposit ratio to maximize our net interest income, and have curated the security of over $810 million in available funding sources. Our available liquidity facilities cover 42% of our entire deposit portfolio, giving us flexibility to support our growth initiatives. On slide 10, you will see we have effectively neutralized the interest rate risk on the balance sheet. This provides us with the ability to maintain margin stability regardless of the shifting rate environment. Our loan portfolio composition is well-balanced between fixed and floating rate assets, with 42% of the loan book at fixed rates, while 58% are floating rates or will reprice after two quarters. Moving to slide 11, you will see our net interest margin has expanded again with our core and reported net interest margins converging at 3.53%.

Speaker 1

Just as a reminder, we have presented the core and reported net interest margins to exclude non-recurring transactions and give you a view of how the bank has been performing overall. The portfolio has been resilient over the last year, which is consistent with the bank's history. On slide 12, we outline the bank's NIM over the last 22 years, demonstrating that the bank primarily operates a floating-rate loan portfolio that yields a strong net interest margin throughout cycles. With one brief exception in 2009, the bank has consistently returned a net interest margin above 3%. Turning to slide 13, you will see our second quarter net interest margin expanded from both increased yields on assets and lower cost of funds. To no one's surprise, market dynamics are now shifting. We do expect additional deposit pressure in our highly competitive market.

Speaker 1

Looking at where our NIM is headed over the rest of the year, we are expecting funding cost pressures to increase slightly. We operate a short-duration loan portfolio with funding duration that matches. With our projected funding, offsetting loan reprices, and a steady increase in average non-interest-bearing balances, we anticipate single-digit movement in the net interest margin through the rest of the year. Moving to slide 14, which builds directly on the previous slide, you can see how our consistent risk premium translates directly into higher asset yields. This disciplined approach to credit pricing actively safeguards and enhances our net interest margin, even in volatile yield curve environments. Our customers aren't just buying a transaction, they are paying for the quality and premium execution our team delivers.

Speaker 1

On slide 15, you can see that while we price our assets to capture that credit risk premium, the actual loss experience over our lifetime is incredibly small compared to the risk-adjusted returns we generate. As demonstrated across multiple major economic disruptions, including the Great Recession, sequestration, the COVID shock, and the recent rate hike cycles, our credit quality has remained exceptionally resilient. While we aren't immune from credit fluctuation cycles, our lifetime net charge-offs over two decades stand at just $12.6 million. This track record proves that our pricing model is highly efficient. We consistently captured the premium, while our structural credit discipline limits actual credit losses incurred. On slide 16, you'll see a deposit mix that is a direct reflection of our business customer focus strategy. Quarter-over-quarter, we have continued to grow deposits while lowering the cost of those deposits.

Speaker 1

Given the intensifying deposit pricing pressure in our market, we are challenging our teams to pursue relationships with high-value deposits and to optimize relationship profitability. On slide 17, I want to touch on our success of using wholesale deposits to supplement strong loan growth. We continue to see good loan opportunities, as evidenced by our loan growth of over 4% in the second quarter alone. As we've done for many years, we fund strong loan growth with wholesale deposits and backfill those deposits with lower-cost core funding. This strategy has been a successful way to grow our portfolio and maintain attractive margin. If you recall, our consistent net interest margin over the years from the previous slide. Slide 18 lays out our path for the remainder of the year, where our primary focus is capitalizing on our earning asset momentum.

Speaker 1

We are targeting 5%-7% loan growth for the year. As we continue to drive top-line revenue, we expect our operating costs to remain at current levels through 2026. Lastly, on slide 19, we grew the book value of our shares by 9% year-over-year, primarily through the earnings power of the franchise. We have supplemented that growth by executing strategic share buybacks over that same time period. In the last quarter alone, we repurchased 207,000 shares at a price accretive to our shareholders. While we are focused on driving sustainable core earnings, the board will consider future buyback opportunities when appropriate. At this point, I'll turn the presentation over to Tom Floyd, our Chief Lending Officer, to discuss our loan portfolio and loan performance.

Speaker 2

Thank you, Alex Vari. Over the next few minutes, I am excited to guide you through our portfolio composition and highlight our key growth areas. I will also provide a closer look at our underlying loan characteristics and discuss our robust capital position. Finally, I'll give an overview of our classified and non-accrual levels. Moving to slide 20, let's look at our portfolio structure, which remains well-diversified. Year-to-date, we have grown the overall portfolio by 5%, a result driven entirely by our organic relationship-first approach to banking. A major highlight of this growth is our owner-occupied real estate book, which expanded by $97 million over the last year as we continue to partner with strong local operating businesses. Additionally, we maintain excellent structural protections. 88% of our construction loans have a dedicated interest reserve held at the bank.

Speaker 2

Slide 21 provides a closer look at our government contracting portfolio, a sector where we are building traction. I'm pleased to report that our business development efforts are yielding strong results. This quarter, we onboarded several high-quality relationships, driving a substantial increase in outstanding balances quarter-on-quarter. Beyond asset growth, this portfolio continues to serve as an exceptional source of stable core deposits. We are also excited to welcome Oliver James, a key new addition to our team, who will help us capitalize on these opportunities and accelerate our positive momentum in the space. Moving to slide 22, you will see that as our legal lending limit has grown, our average new loan size has remained relatively small. This highlights the strength of our market and that we are able to hit healthy growth goals while maintaining consistently low average loan sizes.

Speaker 2

By keeping our average loan size small and granular, we preserve pricing power and spread credit risk broadly across many different borrowers. Slide 23 illustrates the geographical dispersion of our construction portfolio. As you can see, the vast majority of our construction projects are within a 25-mile radius of our branch network. This regional concentration gives us a distinct advantage. Our team has firsthand knowledge of every sub-market we lend in. We routinely inspect development sites, meet with project sponsors in person, and assess asset progression to actively manage risk within the portfolio. Slide 24 highlights our capital resilience. We routinely stress test our balance sheet against severe economic downturn scenarios. Our pre-stress common equity Tier 1 risk-based capital ratio provides a massive cushion. Even after absorbing the losses modeled in these severe hypothetical scenarios, our post-stress capital ratio consistently finishes well above the 7% regulatory threshold of well-capitalized.

Speaker 2

On Slide 25, we highlight our active workout efforts in our classified and non-accrual loans. We currently manage $54.4 million in classified performing loans, $61.3 million in classified non-accruals, and $900,000 in other real estate-owned assets. The takeaway here is we do not sit on these relationships. We manage them aggressively with a sharp focus on maximizing recovery, consistent with the historical performance shown on slide 15. In summary, we're pleased to deliver a quarter of consistent, disciplined performance marked by continuing growth in owner-occupied real estate and building momentum in our government contracting niche. Crucially, our robust stress testing demonstrates we remain strongly capitalized even in a worst-case scenario, and our classified and non-performing assets are at manageable levels. We maintain our vigorous focus on timely, successful resolutions.

Speaker 2

We're confident that our disciplined, relationship-focused approach positions us to deliver consistent performance and long-term value for our shareholders and the communities we serve. That wraps it up for our loan presentation. Back to you, Jeff.

Operator

Thank you, Tom. As you heard, the lenders have been busy working on new relationships, especially in the owner-occupied and government contracting space. The team is also working diligently to resolve non-performing and classified loans. We've shared good news about the directional consistency of our net interest margin, expense control, and earnings. We'll address questions that were submitted through the portal after we hear from Chris Marinac, Director of Research at Brean Capital. Chris, good afternoon. Chris, are you there with us? Chris? I apologize. We may be having some technical difficulties getting connected with Chris here this afternoon. While we're waiting, there is one question that was asked, "What is the average price of the repurchased shares this quarter?" We don't have that number in front of us, but we'll get back to you with that number. Very much we're accretive to book in all cases.

Operator

Okay, Chris, are you there now? He's on, but he's not coming through.

Speaker 3

Newt, can you hear me?

Operator

There we are. Sorry about that.

Speaker 3

All right. Well, thank you for hosting the call and for having me. I appreciate it. I just have a few questions. Can you just talk further, extending what Alex was talking about in terms of the deposit opportunity that you see? I know that pricing and pressures are there, as he had mentioned. I'm just kind of curious on the more macro deposit opportunity that you still see in your footprint.

Operator

One of the things we were talking about quite a bit over the last couple of months is we are a branch-light franchise. The business banking team that we've had with us has been doing a great job at kind of keeping us where we are with just a little bit of a growth. We are in the process right now of bringing on a few more business bankers, and we will continue to try to do that because we still think that there's some great opportunities to bringing on the small business customers that has that nice deep relationship where you get their operating accounts. The collective cost of funds is generally better than if you're just having to pay wholesale funds at the margin. That's the best opportunity that we have.

Operator

We've been successful in the past to bring on experienced business bankers that have good relationships and that's what we're pursuing again.

Speaker 3

Great. That's helpful. Thank you for that background. Just a quick kind of credit question. Obviously had good, clean credit loss issue or stats this quarter. Just curious if we should expect to see more of the same in the near term, or if we should budget just a little bit of loan charge-offs in general.

Operator

Chris, we don't have any losses identified at this point. Our two largest non-performers are in the court system at this time, and they're working themselves through. I can assure you that we're doing everything we can to maximize collection, and we've got a great history of doing that. Those things are ongoing, and we continue to stay diligent in our focus to bring those to full resolution.

Speaker 2

Yeah. I think beyond that, we don't have any plans to discount anything and send it out. I suspect in order to get through the resolution of the book that we have right now, that we will see a little bit of loss. To what that is, I don't know. I don't think it's going to be material for the entire outstandings that we have. Yeah, it's hard to say at this point. I don't think you'd be wrong dialing in a little bit, but I don't know what that size is.

Speaker 3

Sure.

Speaker 2

Every day, we're trying to get closer to what those numbers might be. Okay. Nope, not a problem. I had a buyback question. If I'm counting correctly, over the last, I think, six quarters, you've been able to take about 10% of the share count down. I presume the pace may be a little slower in the next six quarters. Just in general, your appetite is still to repurchase shares, and you still have capacity to do so. Just want to confirm that.

Operator

Yeah. The capacity right now is throttled a little bit by the commercial real estate concentration. As we are able to continue to retain earnings and grow, we are trying to do less in the investor CRE space and more into the owner-occupied and the C&I space. As we're able to do that Alex, I think the focus is going to be on buying back shares as long as it's prudent to do so, right?

Speaker 1

Yeah. That's right. We're making sure we're keeping that balance. The buyback plan is active. We do have capacity, we're always looking at that. Got it. Okay. Last question from me is just the tax rate. Should we be presuming the tax rate stays kind of where it has been this last few quarters, or anything different?

Speaker 1

Yeah. I would keep it constant here for the next couple of quarters, we can reassess that. It's a little bit elevated at the moment. Just we have a little bit of extra accrual in there. Yeah, you can keep that consistent for the next couple of quarters.

Speaker 3

Okay, great. Well, thank you for taking my questions, and I appreciate it, and look forward to the next quarter.

Operator

Yeah. Thank you very much, Chris Marinac. It is nice having an analyst in the room because the average buyback was $24.09. We have that one answered. The stress test analysis, we are doing it, we use an internal model, and it is one that I was really focused on building, following the regulatory supervision. From a conservative standpoint, one of the things I did when I was building, you make assumptions before you have the real data coming in, and especially, we had zero classified for the longest period of time. Ironically, this coming from a former regulator, hard to imagine, but the assumptions I made with regard to when assets get classified, it sort of puts a double jeopardy. That is one of the reasons you see a bit of a significant increase in the worst-case stress test.

Operator

We have decided to leave that calculation alone until we get through this cycle. We will be making some adjustments to it, but I did not want to make adjustments to it while we are sort of two-thirds of the way, three-quarters of the way through from a consistency standpoint. You can be rest assured that that is about as

Operator

Significant of a numbers. Based upon our historical performance, you should not ever see the likes of that actually happening. The next question is regarding the timing of the existing non-performing assets.

Speaker 2

Into that question, as I mentioned, the two largest are in the court system, which unfortunately is moving a little slow. We don't just rest on that. We look for opportunities to bring things to closure throughout those processes. Those things are frankly to predict right on the money, but it doesn't mean we don't stop trying to do that. I think we're doing everything we can to get those down as quickly and as responsibly as possible to make sure we maximize recovery.

Operator

Yeah. Again, it's at the hands of a judge right now.

Speaker 2

That's right.

Operator

That slows things down. There's also a question about the expected margin change in the second half of the year, assuming stable rates. Alex, do you want to take that?

Speaker 1

Yeah. No, great question. Largely, we expect the margin to hold constant with where you're seeing it today. We do have deposits that are going to reprice, and as I mentioned on the call, that we are expecting some deposit pressures, just given kind of what's happening in the environment and the market that we're in. We also have a healthy amount of loans that are repricing at attractive rates. You're going to have those offset the cost of deposits that are repricing. You might see a couple of basis points shift here and there, depending on the unforeseen things that happen. In large part, we expect it to hold pretty constant.

Operator

Yeah. We've got our existing business banker team working very diligently to try and to find those good, solid relationships that bring in some of those lower cost operating accounts.

Speaker 1

Yeah. One thing I will just touch on just in the second quarter, being a business bank, we generally see a lot of our operating accounts, our low-cost operating accounts go out with the tax season. We do see outflows there. It's expected. A lot of that comes back. One of the things I know we're really proud of is just the incremental increase in our average non-interest-bearing deposits over time. Like that book is growing, despite some of the seasonality of what businesses have to go through. I know the team is working really hard to make that happen and continue to focus on that.

Operator

Yeah, that's right. There's one more question right now, and that is how much is left in the current buyback program?

Speaker 1

Yeah. There's about $5 million left in the current buyback right now.

Operator

Okay. That can always be changed. again-

Speaker 1

Sure

Operator

our buybacks will be, like I said, throttled for the immediate future, based upon the concentration in commercial real estate. Earnings also augment that. we're looking-

Speaker 1

That's right

Operator

forward to some opportunities. It's been good overall. Very much appreciate all of the questions that came in this afternoon. As always, we're happy to take any conversations offline as well. We'll be in New York next week for the KBW conference, and we're always at the other conferences throughout the year as well, including the Brean Capital when that one comes up. We're looking forward to that. Thank you very much for your investment in us, and we will continue to do our best to get asset quality back to where we want it to be and continue to perform at these good numbers and look forward to talking with you in the future

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