8-K: MainStreet Bancshares Reports Third Quarter Loss Amid Loan Portfolio Adjustments, Core Deposits Rise

MainStreet Bancshares reported a loss of -$0.04 per common share for the third quarter of 2024, primarily due to addressing nonperforming real estate loans, while also seeing growth in core deposits.

Summary

• MainStreet Bancshares, Inc. reported a net loss of -$0.04 per common share for the third quarter of 2024.
• This loss was primarily due to the company addressing a small number of nonperforming real estate loans.
• Year-to-date earnings per common share stand at $0.60.
• The company's third quarter net interest margin was 3.05%, impacted by a $984,000 reversal of accrued interest income related to nonaccrual loans.
• The year-to-date net interest margin is 3.19%.
• MainStreet charged off $1.9 million in nonperforming loans and allocated $1 million to provision expense.
• Total deposits increased to $1.9 billion, with core deposits reaching $1.47 billion, representing 78% of total deposits.
• Noninterest-bearing core deposits grew by $33 million during the quarter.
• The company has $233 million of its $423 million noncore deposits available for repricing as rates fall.
• The Avenu Banking-as-a-Service (BaaS) solution was launched just before the end of the third quarter of 2024.
• The first fintech using Avenu is expected to be released in early November, with four more to follow.
• The company expects the level of problem loans to improve going forward.
• Total principal losses incurred year-to-date 2024 are approximately 0.1% of total loans.

Sentiment

Score: 5

Explanation: The sentiment is neutral to slightly negative due to the reported loss in Q3, but there are positive aspects such as deposit growth and the launch of the Avenu platform. The negative impact of non-performing loans and the initial costs of the new platform temper the positive aspects.

Positives

• Total deposits expanded to $1.9 billion.
• Core deposits reached $1.47 billion, representing 78% of total deposits.
• Noninterest-bearing core deposits grew by $33 million during the quarter.
• The company has $233 million of noncore deposits available for repricing as rates fall.
• The Avenu BaaS solution was launched, offering new revenue streams and customer segments.
• The company expects the level of problem loans to improve from this point.
• The total principal losses incurred year-to-date 2024 approximates just 0.1% of total loans.

Negatives

• The company reported a loss of -$0.04 per common share for the third quarter of 2024.
• The third quarter net interest margin was impacted by a $984,000 reversal of accrued interest income.
• The company charged off $1.9 million of nonperforming loans during the quarter.
• The expenses associated with launching Avenu will impact profitability until break-even is reached.

Risks

• The company is dealing with nonperforming real estate loans, which negatively impacted earnings.
• The launch of the Avenu BaaS solution will initially impact profitability until it reaches break-even.
• Fluctuations in market rates of interest and loan and deposit pricing could affect future results.
• Adverse changes in the overall national economy or specific market areas could impact performance.
• The company faces risks related to maintaining client relationships and key personnel.

Future Outlook

The company expects the level of problem loans to improve and anticipates that the Avenu BaaS solution will provide long-term growth and profitability after reaching break-even. The company is focused on getting the first fintech to general release in early November, and another four fintechs to follow soon thereafter.

Management Comments

• Alex Vari, Chief Accountant for MainStreet Bank, stated that the third quarter annualized net interest margin was impacted by $984,000 in accrued interest income that was reversed in relation to loans placed on nonaccrual status.
• Chris Johnston, Chief Credit Officer for MainStreet Bank, noted that the quarter showed the underlying strength of a portfolio shaped by a rigorous credit culture and that the lending team has demonstrated great resolve in addressing troubled loans.
• Abdul Hersiburane, President of MainStreet Bank, highlighted the growth of noninterest bearing core deposits by $33 million during the quarter.
• Jeff W. Dick, Chairman & CEO of MainStreet Bancshares, Inc. and MainStreet Bank, stated that Avenu provides a full-stack embedded banking solution and that the team is focused on getting the first fintech to general release in early November.

Industry Context

The launch of the Avenu BaaS solution aligns with the trend of financial institutions adopting digital banking solutions to reach new customer segments and diversify revenue streams. The focus on fintech partnerships is also a growing trend in the banking industry.

Comparison to Industry Standards

• MainStreet's net interest margin of 3.05% for the quarter is below the average for US banks, which is closer to 3.3% to 3.5% for the same period, indicating a potential area for improvement.
• The charge-off rate of 0.1% of total loans is relatively low compared to some regional banks that have seen charge-offs closer to 0.2% to 0.3% in the same period, suggesting a strong credit culture.
• The growth in core deposits is a positive sign, as many banks are struggling to attract and retain deposits in the current environment. MainStreet's 78% core deposit ratio is above the average for many regional banks.
• The launch of the Avenu BaaS platform is a strategic move to compete with larger banks and fintech companies that are increasingly offering embedded banking solutions. This is similar to moves by companies like Goldman Sachs with their Marcus platform and other regional banks partnering with fintechs.

Stakeholder Impact

• Shareholders are negatively impacted by the reported loss in Q3, but may see long-term benefits from the Avenu platform.
• Employees may be impacted by the changes in the company's strategy and the launch of the new platform.
• Customers may benefit from the new digital banking services offered through the Avenu platform.
• Suppliers and creditors may be impacted by the company's financial performance and strategic changes.

Next Steps

• The company will focus on getting the first fintech using the Avenu platform to general release in early November.
• The company will work to improve the level of problem loans.
• The company will continue to monitor and manage its loan portfolio and credit quality.

Key Dates

Keywords

MainStreet Bancshares, MNSB, MNSBP, Banking-as-a-Service, BaaS, Avenu, Nonperforming Loans, Core Deposits, Net Interest Margin, Financial Results, Third Quarter, Fintech