MainStreet Bancshares Inc. (NASDAQ:MNSB) is a financial holding company that owns 100% of MainStreet Bank, a community commercial bank headquartered in Fairfax, Virginia. The company has a rich history spanning over two decades, having been incorporated in 2003 and commencing operations in 2004. Throughout its journey, MainStreet Bancshares has established itself as a prominent player in the Washington D.C. metropolitan area, known for its technology-forward approach and commitment to serving the needs of retail customers, small and medium-sized businesses, and professionals.
Company Background and History
MainStreet Bank was founded with the goal of providing responsive and personalized banking services to retail customers, small and medium-sized businesses, and professionals in the Washington, D.C. metropolitan area. At the time of the bank's founding, the market was seeing consolidation of financial institutions, providing an opportunity for a locally-managed community bank to differentiate itself through high-quality service and the use of advanced banking technologies. The bank operates six branch locations in Northern Virginia as well as one in Washington, D.C.
In 2019, MainStreet Bancshares completed the registration of its common stock with the Securities and Exchange Commission and listed its shares on the Nasdaq Capital Market under the ticker symbol MNSB. This move provided the company access to public capital markets to support its growth strategy. Over the years, MainStreet Bank has faced the typical challenges of a growing community bank, including building its deposit base, expanding its loan portfolio, maintaining strong asset quality, and investing in technology to serve its customers. The company successfully navigated the 2008 financial crisis and recession without significant issues, thanks to its conservative underwriting and risk management practices. In 2016, MainStreet Bank successfully integrated an acquisition of a smaller bank to expand its footprint and customer base in the region.
Financials
The company's financial performance in recent years has been marked by steady growth and profitability. In 2023, MainStreet Bancshares reported net income of $26.59 million, with an annual revenue of $79.58 million and annual operating cash flow of $31.63 million. The company's annual free cash flow stood at $25.63 million.
In the most recent quarter (Q3 2024), MainStreet Bancshares reported revenue of $33.59 million and net income of $265,000. The company experienced negative operating cash flow of $8.19 million and negative free cash flow of $5.01 million. The decrease in net income and cash flow from operations was primarily due to $984,000 in accrued interest income being reversed on loans placed on nonaccrual status, as well as $1.9 million in loan charge-offs during the quarter. The company also added $1 million to the allowance for credit losses to account for heightened risk factors and loan growth.
Despite these challenges, MainStreet Bancshares maintains a strong liquidity position. As of September 30, 2024, the company had $232.11 million in cash and cash equivalents. MainStreet Bank had no federal funds purchased outstanding and an additional secured borrowing capacity of $521.3 million. The company also had the ability to borrow up to $144 million from other financial institutions. The debt-to-equity ratio stands at 0.32, while both the current ratio and quick ratio are 1.00.
Technology-Driven Approach
One of the key drivers of MainStreet Bancshares' success has been its technology-driven approach to banking. The company was the first community bank in the Washington D.C. metropolitan area to offer a full online business banking solution, including remote check scanners on customers' desktops. Additionally, the bank was the first in Virginia to offer the Certificate of Deposit Account Registry Service (CDARS), providing customers with FDIC insurance on deposits up to $265 million.
The company's digital focus has continued to evolve, as evidenced by the recent launch of its Avenu Banking-as-a-Service (BaaS) solution. Avenu is designed to provide a full-stack embedded banking solution that connects MainStreet's fintech partners directly and seamlessly to the bank's proprietary core system. This strategic initiative aligns with the company's goal of diversifying its revenue streams and expanding its reach in the underserved BaaS market.
Liquidity and Capital Position
Despite the challenges posed by the current economic environment, MainStreet Bancshares has demonstrated its ability to navigate through turbulent times. In the third quarter of 2024, the company reported a modest loss of $0.04 per common share, primarily due to the resolution of a small number of nonperforming real estate loans. However, the company's overall capital position remains strong, with a total risk-based capital ratio of 16.96% as of September 30, 2024.
Loan Portfolio and Risk Management
The company's loan portfolio has also remained resilient, with a well-diversified mix of residential real estate, commercial real estate, construction, and commercial and industrial loans. As of September 30, 2024, the company's criticized and classified loans amounted to only 6.86% of the total gross loan portfolio, reflecting the strength of its underwriting and risk management practices.
Community Initiatives
In addition to its core banking operations, MainStreet Bancshares has also established a community development entity (CDE) subsidiary, MainStreet Community Capital, LLC. This entity aims to apply for New Market Tax Credit (NMTC) allocations from the U.S. Department of the Treasury's Community Development Financial Institutions Fund, further expanding the company's community-focused initiatives.
Business Segments
MainStreet Bancshares operates through two reportable business segments: Core Banking and Financial Technology.
The Core Banking segment encompasses the community bank operations of MainStreet Bank, offering a full range of banking services to individuals, small-to-medium-sized businesses, and professionals through both traditional and electronic delivery channels. During the nine months ended September 30, 2024, this segment generated $98.32 million in interest income and $45.39 million in net interest income on a tax-equivalent basis. Non-interest income for the Core Banking segment was $1.92 million for the same period. The segment's net income before taxes was $8.79 million, with income tax expense of $1.26 million, resulting in net income of $7.53 million.
The Core Banking segment's assets totaled $2.21 billion as of September 30, 2024, an increase of 9.4% from the $2.02 billion in assets as of December 31, 2023. This growth was primarily driven by a $70.4 million, or 4.1%, increase in the loan portfolio to $1.78 billion. The loan portfolio consists of commercial real estate loans (48.8%), construction and land development loans (20.8%), residential real estate loans (24.8%), commercial and industrial loans (5.9%), and consumer loans (1.1%).
The Financial Technology segment, which includes the company's Avenu division, provides banking-as-a-service (BaaS) solutions designed to meet the needs of fintech customers. For the nine months ended September 30, 2024, this segment reported $1.18 million in interest income and $1.14 million in net interest income on a tax-equivalent basis. Non-interest income for the segment was $528,000 during this period. The segment's net income before taxes was $1.70 million, with an income tax expense of $357,000, resulting in net income of $1.34 million.
The assets of the Financial Technology segment totaled $18.95 million as of September 30, 2024, an increase from the $14.74 million reported as of December 31, 2023. This growth reflects the company's investment in developing its proprietary BaaS solution, including a fintech core software-as-a-service (SaaS) platform, which was deployed in October 2024 and is reported separately on the statement of financial condition with a carrying amount of $18.9 million.
Future Outlook
Looking ahead, MainStreet Bancshares' focus on digital innovation, strategic partnerships, and disciplined risk management positions the company well to navigate the challenges of the current environment and capitalize on future growth opportunities. The company's commitment to serving its local community, coupled with its technology-driven approach, makes it an intriguing player in the regional banking landscape.
MainStreet Bancshares expects improved metrics throughout their loan classifications going forward. They anticipate net interest margin expansion, driven by lowering deposit costs, the ability to adjust variable rates quickly as the Fed begins a rate reduction cycle, strategically replacing $183 million in callable CDs with more attractive rates, and continuing to fund new quality loans underwritten and stress tested in the current rate environment.
Non-interest expenses are expected to have a run rate of 50 basis points per month in Q4 2024. With Avenu Version 1 in service, MainStreet Bancshares will begin amortizing the intangible software at $150,000 per month and incurring $385,000 in additional non-capitalized expenses per month. The company engaged an independent consulting group, FS Vector, to provide a "pulse check" on their Avenu banking-as-a-service (BaaS) solution. FS Vector's projections show Avenu becoming profitable in 2026.
While the launch of Avenu will put near-term pressure on earnings, MainStreet Bancshares remains confident in its long-term strategy and ability to generate value for shareholders through its innovative approach to community banking and financial technology solutions.