MainStreet Bancshares, Inc. is a financial holding company that owns 100% of MainStreet Bank, a Virginia-based community bank serving the Washington D.C. metropolitan area. The company has a long and storied history, having been founded in 2003 and commencing operations in 2004. Over the past two decades, MainStreet Bank has established itself as a well-respected and technologically-forward institution, catering to the diverse financial needs of its retail customers, small and medium-sized businesses, and professional clientele.
Business Overview and Financial Performance
MainStreet Bancshares, Inc. was incorporated under the laws of the Commonwealth of Virginia in 2003. The company’s primary activity is the ownership and management of its wholly-owned subsidiary, MainStreet Bank, which was chartered in 2004 and opened for business on May 26, 2004. MainStreet Bank is headquartered in Fairfax, Virginia and operates six bank branches in Virginia and one in Washington D.C.
In 2019, the company achieved a significant milestone when it was approved to list shares of its common stock on the Nasdaq Capital Market. This was followed by another important development in 2020 when MainStreet Bancshares completed the registration of its common stock with the Securities and Exchange Commission through the filing of a Form 10. This strategic move allowed the company to become a public reporting company subject to the periodic reporting requirements under the Securities Exchange Act of 1934, enhancing its transparency and accountability to shareholders.
Financials
MainStreet Bancshares’ financial performance has shown mixed results in recent years. For the fiscal year ended December 31, 2023, the company reported revenue of $124.12 million, up from $74.84 million in 2022. Net income for 2023 was $26.59 million, down slightly from $26.67 million in the prior year. Operating cash flow for 2023 was $31.63 million, compared to $33.54 million in 2022, while free cash flow came in at $25.63 million, slightly lower than the $25.76 million generated in the previous year.
However, the most recent quarter (Q3 2024) saw a significant decrease in financial performance. Revenue for the quarter was $33.59 million, but net income dropped to just $265,000. Operating cash flow turned negative at -$8.19 million, with free cash flow also negative at -$5.01 million. This decline was primarily attributed to a $1.9 million charge-off and $1 million in additional provision expense related to problem loans.
The company’s loan portfolio, which stood at $1.71 billion as of December 31, 2023, has been a source of both strength and challenge. While the portfolio has continued to grow, with a 4.1% increase year-over-year, the company has also had to navigate a rising tide of non-performing loans. As of the end of 2023, non-performing loans totaled $1.0 million, up from just $346,000 at the end of 2022. This has put pressure on the company’s allowance for credit losses, which stood at $16.51 million at the close of 2023, up from $14.11 million a year earlier.
The company’s deposit base has also been a mixed bag, growing to $1.69 billion as of December 31, 2023, up from $1.48 billion at the end of 2022. However, the composition of these deposits has shifted, with a decrease in non-interest bearing demand deposits being offset by increases in interest-bearing accounts. This, combined with rising interest rates, has put pressure on the company’s net interest margin, which declined from 4.32% in 2022 to 4.12% in 2023.
Navigating Challenges with Innovation
In the face of these challenges, MainStreet Bancshares has sought to differentiate itself through technological innovation. In 2021, the company established MainStreet Community Capital, LLC, a wholly-owned subsidiary focused on applying for and receiving New Market Tax Credit (NMTC) allocations. This strategic move has allowed the company to provide financing and investment in low-income communities, while also generating tax credits to offset its own tax burden.
More recently, in October 2024, MainStreet Bancshares launched its Avenu division, a banking-as-a-service (BaaS) solution designed to serve the needs of fintechs, social media solutions, application developers, money movers, and entrepreneurs. This platform provides a full-stack embedded banking solution, connecting partners directly and seamlessly to MainStreet Bank’s proprietary software.
While the initial expenses associated with the launch of Avenu have impacted the company’s profitability in the short term, management remains confident in the long-term potential of this strategic initiative. According to an independent analysis conducted by FS Vector, a Washington, D.C.-based consulting firm, MainStreet’s Avenu platform compares favorably to peers in its ability to help the bank meet regulatory expectations, and the fintech ecosystem includes many companies seeking the type of relationship Avenu offers.
Business Segments
MainStreet Bancshares operates through two main reportable segments: Core Banking and Financial Technology.
The Core Banking segment encompasses the community bank where MainStreet Bank offers a full range of banking services to individuals, small to medium-sized businesses, and professionals through both traditional and electronic delivery. This includes deposit accounts such as business and consumer checking, premium interest-bearing checking, business account analysis, savings, and certificates of deposit. On the lending side, the Core Banking segment provides a broad array of commercial, real estate, and consumer loans. Additionally, the bank offers internet banking, mobile banking apps, remote deposit capture, and online cash management services for its business customers.
In the third quarter of 2024, the Core Banking segment generated the majority of the company’s total revenue. Net interest income for this segment was $15.06 million, accounting for 98.2% of the company’s consolidated net interest income. Non-interest income from the Core Banking segment was $667,000, or 75.3% of total non-interest income. The segment’s pre-tax income was $660,000.
The Core Banking business has continued to grow, with total assets increasing 9.3% to $2.21 billion as of September 30, 2024, compared to $2.02 billion at the end of 2023. This growth was primarily driven by a $70.4 million, or 4.1%, increase in the loan portfolio to $1.78 billion. The bank has maintained a well-diversified commercial real estate portfolio, with owner-occupied commercial real estate loans comprising 35.2% of the total commercial real estate book as of the third quarter.
The Financial Technology segment, which includes the Avenu division, provides banking-as-a-service (BaaS) solutions designed to meet the needs of fintech customers. This includes serving money service businesses, payment processors, and other fintech companies by offering a proprietary BaaS platform that includes a fintech core, compliance training, and other embedded banking services.
In the third quarter of 2024, the FinTech segment contributed $307,000 in net interest income and $219,000 in non-interest income, accounting for 2.0% and 24.7% of the company’s consolidated results, respectively. The segment’s pre-tax income was $563,000.
The FinTech division has been a valuable source of low-cost deposits and fee income for the company. As of September 30, 2024, the segment had $18.95 million in total assets, up from $14.74 million at the end of 2023, reflecting continued investment and growth in the Avenu platform. In October 2024, the company deployed its new software-as-a-service (SaaS) fintech core, which had $18.9 million in capitalized development costs on the balance sheet at the end of the third quarter.
Risks and Outlook
Despite the challenges faced by MainStreet Bancshares, the company remains well-capitalized, with a total risk-based capital ratio of 17.18% as of December 31, 2023, well above the regulatory minimum of 10.0%. The company’s liquidity position also remains strong, with a cash and cash equivalents balance of $114.51 million at the end of 2023.
Liquidity
MainStreet Bancshares maintains a strong liquidity position to support its operations and growth. As of December 31, 2023, the company reported a debt-to-equity ratio of 0.32, indicating a conservative approach to leverage. The company’s cash and cash equivalents stood at $114.51 million, providing a solid buffer for immediate liquidity needs.
In terms of available credit, MainStreet Bank had no federal funds purchased outstanding and an additional secured borrowing capacity of $521.30 million as of December 31, 2023. Furthermore, the bank had the ability to borrow up to $144 million from other financial institutions, providing significant flexibility in managing its liquidity needs.
The company’s current ratio stood at 0.10 as of December 31, 2023, while its quick ratio was 0.30. These ratios, while lower than some industry peers, reflect the nature of the banking business where a significant portion of assets are tied up in loans and investments.
Looking ahead, MainStreet Bancshares faces a number of risks, including continued pressure on net interest margins, the potential for further deterioration in asset quality, and the execution risk associated with the Avenu initiative. The company has also faced scrutiny from short-sellers, with a report published in 2023 questioning the viability of the Avenu business model.
However, the company remains optimistic about its future prospects. In its most recent quarterly report, MainStreet Bancshares highlighted its focus on improving funding costs, growing its loan portfolio, and scaling the Avenu platform. The company has also received independent validation of the Avenu solution, with FS Vector noting its potential to help the bank generate low-cost deposits and diversify its revenue streams.
Future Guidance and Projections
While MainStreet Bancshares reported an earnings per common share loss of $0.04 in Q3 2024 due to actions taken on problem loans, the company has stated that this loss is not indicative of their year-to-date or future performance expectations. Looking forward, MNSB expects to see improved metrics in their loan classifications and an expansion of their net interest margin.
The company anticipates that the net interest margin expansion will be driven by several factors, including lowering deposit costs, with 35% of the $95 million in new core deposits during Q3 being non-interest bearing. Additionally, MNSB plans to strategically replace $183 million in callable CDs at more attractive rates and fund new quality loans that have been underwritten and stress-tested in the current rate environment.
For Q4 2024, MNSB has provided expense guidance of a non-interest expense run rate of 50 basis points per month. The company also expects an additional $150,000 per month in amortization of Avenu intangible software and $385,000 per month in non-capitalized Avenu expenses.
Regarding the Avenu platform, FS Vector, MNSB’s independent consultant, has provided optimistic projections. They anticipate Avenu becoming profitable in 2026, with $225 million in deposits by that time. FS Vector has also provided quarterly deposit balance projections and associated Federal funds rate forecasts for Avenu from 2025 through 2027.
Conclusion
MainStreet Bancshares, Inc. is a community bank that has weathered its fair share of challenges in recent years, from rising interest rates to asset quality concerns. However, the company’s commitment to innovation, particularly through the launch of its Avenu BaaS platform, has positioned it to capitalize on emerging opportunities in the fintech landscape.
While the road ahead may not be without its obstacles, MainStreet Bancshares’ strong capital position, diversified revenue streams, and forward-thinking approach suggest that the company is well-equipped to navigate the challenges of the current environment and deliver long-term value for its shareholders. The company’s focus on improving its core banking operations while simultaneously investing in fintech solutions demonstrates a balanced strategy that aims to address both current market demands and future growth opportunities.
Disclaimer: This article is for informational purposes only. It does not constitute financial, legal, or other types of advice. While every effort has been made to ensure the accuracy of the information presented here, the author and the publisher do not make any guarantees about the completeness, reliability, and accuracy of this information.