My name is Jeff Dick. I'm the Chairman and CEO of MainStreet Bancshares, Inc., and MainStreet Bank. With me today is our bank Chief Financial Officer, Alex Berry, our Chief Lending Officer, Tom Floyd, and our company Chief Financial Officer, Tom Schmelick. Chris Marinack, Director of Research for Janney Montgomery Scott, will join us at the end of the call today with his questions. If you'd like, you can also submit written questions throughout the presentation using the web portal. We will address your questions at the end of the presentation. If we miss your question during the discussion, please reach out after the webcast. I'd like to take a moment to point out the Safe Harbor page that describes the context of forward-looking statements that we may make today.
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 Fortune 500 companies, it's a great place to do business. By the numbers, the median household income is at $125,000. The average home price is just over $900,000, and the average time on market is 29 days. We continue to have a seller's market for housing. The 2023 census tallied 410,000 federal employees. While that number is a little lower now, it remains substantive. The D.C. market remains vibrant, and we continue to see plenty of good opportunities.
Yes, our market can be impacted by both the federal and D.C. government, and we monitor and respond to those actions and act accordingly to address their impact on our business strategy. We are a Virginia-chartered bank, and we've been rooted in the Washington, D.C. Metropolitan community for over 21 years. We have a great reputation in our market with a good organic growth story. We have a branch-light strategy relying upon the delivery of banking services using robust technology that allows us to put our bank in your office. We're expanding our footprint to Middleburg, Virginia, and will have the branch open soon. We've actually had a small office there for about a year now.
Devon Porter, son of the renowned banking duo, Rod Porter and Georgia Derrico, is a proverbial chip off the block and has been doing a phenomenal job of building our market presence in the Middleburg community. He's already accumulated nearly $100 million of low-cost deposits. Slide 7 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 84% tangible book value. On October 21st, we filed an 8-K indicating that the company refreshed its share repurchase plan to increase the capacity to $10 million. The Board will be looking at filing a 10b5-1 plan during the November meeting when we're outside of the trading blackout period. During today's presentation, you'll see directional consistency on our net interest margin, expense control, and earnings. Asset quality remains strong, and we are well capitalized.
At this point, I'll turn the presentation over to our Bank CFO, Alex Vari.
Thank you, Jeff. On slide 8, we summarize our financial performance over the last five quarters and are excited about the continued momentum we've seen in our metrics. Earnings per share was $0.52. Our return on average assets was 0.85%. Our return on average tangible common equity was 8.40%, and our net interest margin was 3.42%. We continue to see expansion in our core net interest income, a steady decline in our cost of funds, and our diligent expense management is bearing fruit. We will continue to see opportunities to lower our funding costs and build on our deposit franchise as we expand our footprint. We have made a lot of progress in a short period, but we recognize we have more work ahead of us to meet performance levels expected by ourselves and our shareholders.
Page 9 highlights our intentional management of our loan-to-deposit ratio to maximize our net interest income. Our liquidity position remains strong with ample funding sources, particularly in our secured credit availability. As of the quarter end, we have liquidity facilities for well over a third of our entire deposit portfolio. Moving to slide 10, you will see steady improvement to our core net interest margin. You will see some fluctuation in our reported net interest margin as we recorded some non-recurring recovered interest in the prior quarter, as well as some non-recurring reversal of interest on three relationships moved to non-accrual this quarter. We don't expect a deviation each quarter, but given these meaningful non-recurring events, we wanted to show you a normalized net interest margin. In fact, the majority of the loans that impacted this quarter have subsequently already been resolved in positive outcomes.
While these isolated transactions create some temporary noise, you can see from the graph the core portfolio is trending very positively. Driving that trend is our ability to reduce our funding costs by 3 basis points over the last quarter and 79 basis points from the same quarter last year. Looking at where the core net interest margin is headed, we believe the margin will hold steady and could see progress in this interest rate environment as we have over $50 million in CDs repricing in the next quarter and over $150 million in the next six months. Slide 11 shows resilience and consistency in our deposit portfolio mix. Slide 12 shows our discipline in managing the balance sheet through different economic conditions. Leading up to 2022, we purposely positioned our balance sheet to respond quickly and favorably to a rising rate environment.
As the landscape has shifted, we took action and have put ourselves in a strong position to navigate the current interest rate cycle. On Slide 13, you will see details on how we were able to manage interest rate risk to achieve the shape you saw on the previous slide. Almost 60% of all deposits are set to reprice immediately as interest rates move, and 100% of the remaining deposits reprice within three quarters. This intentional management, coupled with our successful efforts to shift more assets to fixed rates, as Tom will talk about later, has positioned us nicely for core revenue generation. We have continued to focus on replacing higher cost funding across all products over the past quarter. Total deposits grew by $13 million by taking advantage of wholesale offerings, which at times offers more attractive yields than our local market.
Our core deposit yields decreased 14 basis points while our non-core deposits decreased 8 basis points from the prior quarter. Slide 14 lays out our estimated expense run rate for the fourth quarter. We are highly encouraged to see the expense management steps taken earlier this year are contributing meaningfully to the bottom line. We will continue to look for ways to reduce expenses, and we expect 2026 to look more like the second half of this year, with ongoing improved efficiency. At this point, I'll turn the presentation over to Thomas Floyd, our Chief Lending Officer, to discuss our loan portfolio and loan performance.
Thanks, Alex. I'm incredibly proud of the hard work from the team in the third quarter, and our consistent strong performance is a testament to that effort. Over the next few minutes, I'm excited to delve into the details about our portfolio composition, portfolio trends, and briefly discuss our non-performing and classified loans. The third quarter reflected another period of strong performance, underscoring our confidence in our capacity to deliver sustainable value over time. In the third quarter, we grew loans by 1%, and this slide provides an overview of our diversified loan portfolio as of the end of the quarter. Our total outstanding loans are $1.8 billion distributed as follows. 31% is non-owner occupied commercial real estate. 23% is owner occupied commercial real estate. 17% is construction. 12% is multifamily. 11% is residential real estate with the remaining 6% commercial and industrial.
Additionally, it's worth noting that nearly all of our construction portfolio has a suitable interest reserve held with the bank. Slide 16 highlights our commercial real estate concentration over the last seven quarters. We've always efficiently managed our exposure here and finished the quarter at 356% of capital. The reduction in commercial real estate exposure reflects our disciplined approach to lending as we remain selective and prudent in evaluating opportunities in the current environment. Slide 17 is a lens into our government contracting portfolio. Before I dive into the slide, I want to assure you that we're in constant contact with our borrowers in this highly dynamic space to ensure we're appropriately supporting our clients in effectively managing risk. Our portfolio has 27 asset-based lines of credit in place, where all advances are supported by a borrowing base of billed receivables.
These receivables are deposited directly into our bank from our clients' respective customers, and the funds are used to automatically curtail their corresponding credit lines. As you can see, these 29 lines have balances of $9.5 million outstanding, with total commitments of $71.2 million, which equates to a 13% utilization rate. Over the average line's lifetime, this has been relatively consistent. Our entire government contracting book only has $1.9 million in outstanding term debt. These loans are amortizing rapidly with an average remaining term of 27 months. It's worth noting that the average deposit relationships attributable to this portfolio is $79.1 million over the quarter. The portfolio's strong deposit to credit relationship provides a significant funding advantage, with deposits averaging nearly seven times the outstanding credit. We're in day 27 of the government shutdown.
The key point I'd like to stress here is that we remain proactive in our communication efforts with our clients and committed to working with our customers to meet their needs during this time. You haven't seen this slide before, but with recent headlines surrounding loans to non-depository financial institutions, let's address our holdings directly. We have $35 million in loans to non-depository financial institutions, which is strategically broken down into two distinct categories. The first is loans that facilitate note sales of $25 million. These loans are made within our standard policy guidelines to bring in new, well-capitalized sponsors with strong liquidity to complete existing projects, ensuring project stability and completion. The second is loans to private lenders of $10 million. These notes are highly secure. The underlying real estate has a low leverage profile with an average loan to value on the underlying collateral less than 50%.
In conclusion, no cockroaches here. The next slide highlights that our loan portfolio is well-positioned for stable or falling rates. 65% of our portfolio has rate resets beyond six months, with the remaining 35% with rate resets within six months. Of those loans with a faster reset, 57% have a weighted average floor rate of 5.89%. As we wrap up 2025, we anticipate this will help our net interest margin as rates are expected to remain stable or decrease. If you recall, the earnings-at-risk slide from Alex's comments earlier, this is what feeds into the asset repricing side of the equation. Slide 21 shows our average trend in new loan size moving downward over the last several years. This highlights that in the current environment, we're sticking to smaller-sized opportunities within our market.
Slide 22 shows the trend in stress tests over the past eight quarters and the resulting impact to capital. The third quarter stress test for all earning assets reflects a worst-case stress loss estimated at $48.82 million. In all quarters, we remain strongly capitalized. The stress test includes loan level testing for all construction and investor commercial real estate. For all 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 life insurance, we determine the liquidation value. Slide 23 illustrates that our classified and non-performing assets remain at manageable and controlled levels. This stability is supported by our extensive historical track record of successful resolution of such loans.
Based on this established expertise, we maintain an optimistic outlook and anticipate positive outcomes as we continue our diligent work toward resolutions. In summary, we're pleased to deliver a quarter of consistent, disciplined performance marked by a 1% growth in the loan portfolio and a strategic focus on smaller quality opportunities and on building out full relationships. We've maintained a well-diversified loan book, actively managed across all categories. 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, supported by a proven historical track record of timely, successful resolution. We remain confident that our disciplined, relationship-focused approach positions us to deliver consistent performance and a long-term value for our shareholders and the communities we serve. That wraps it up for our loan presentation. Back to you, Jeff.
Thank you, Tom. I hope one of your key takeaways from listening to Tom speak about our loan portfolio is that we actively review and engage with our borrowers on an ongoing basis, and we take measures to address issues as and when they occur, often while there is still runway left to act. From the results of our loan and credit team's constant eye on loan quality and Alex and the team's attention to balance sheet management, we've shared good news about the directional consistency of our net interest margin, expense control, and earnings. Finally, as we are in budgeting season now, we are focused on continued performance improvement. With that, again, we'll address questions that were submitted through the portal after we hear from Chris Marinac, Director of Research at Janney Montgomery Scott. Chris, good afternoon.
Hey, Jeff. Can you hear me okay?
I can. Thank you.
All right. Perfect. Thank you for posting today's call. Can we go back to the stress scenario? What has changed? I know it's just a slight difference from June to September, but just wanted to kind of go back through that one more time and understand if perhaps that would move positively in any given quarter as next year develops.
Yeah. I'll take a stab at that first and then you're talking about the pre- and post-stress test capital ratios?
Yes, correct.
Yes.
The dollars of losses that were implied.
Yeah. Firstly, obviously, in the fourth quarter of 2024, we had the capital reset when we wrote off the intangible asset. You see the ratios come down. I think the other important thing to look at on this graphic is when you go from fourth quarter of 2023, where interest rates started rising in this environment in March of 2023, right? I don't know, we had 5% by the fourth quarter or so. As we go into this interest rate cycle of constant rising rates through two-thirds of 2024, you'd expect to see some higher stress loss estimates as we move through the cycle. Indeed, that's exactly what happened. The spread between the pre- and post- didn't really ever move too much. It was always around that 2.3%-2.6%. The dollar amounts of the stress loss estimates.
We stressed all of the CRE loans three ways through changing the interest rate with immediate effect, occupancy rate with immediate effect, and/or the cap rate up by 2% with immediate and sustained effect. With the interest rate stress tests, you would expect more to fail that because rates had already gone up 5.25%. You would expect to see in the CRE lease portfolio, more assets being subjected to that stress test and failing because of the higher interest rate. Again, that doesn't mean a loss. It just means that they failed one of the three tests that we operate under. To me, it's completely normal that we would see a slight up creep in stress loss estimates.
I suspect as interest rates start to go down, probably a year to a year and a half from now, you'll start to see that really start to come down too.
Probably also just to add on that, the loan portfolio itself grew. The dollars itself, like you said-
Yeah
the spread stayed the same, but as the loan portfolio grows, the dollars of that same spread are going to naturally increase as well.
Yeah.
Got you. Are there changes to the preferred dividend going forward, or will that still be at the same level?
No, there should be no changes to that at this time.
Okay.
It's locked in at 10%.
Yeah.
Great. That's what I thought. Okay. As you think about ongoing provision expense, do you have any visibility on charge-offs? I mean, they seem to behave for this quarter, but just curious on how much variability there may be, and does the charge-off that we may see in the next few quarters kind of go back to the stressed scenario at all?
That's a great question, and it's kind of a crystal ball answer. The good news is, with what we see in the portfolio today, there's nothing really lingering out there that we're just saying, "Oh, gosh, I hope this continues to perform." The portfolio, I think, is in pretty good shape. We've taken steps in a few instances to either bring in additional sponsors, bring in additional capital. We've made a couple of rate concessions here and there for a short term, but it's really rate concessions that it's leading what the market, what the Fed will be doing with rates and catch up to that very quickly. We don't anticipate any additional losses at this time. Again that's a tough one to answer. Tom Floyd, I don't know if you have anything to add.
Yeah, I think that we continue to work with our borrowers. We have a demonstrated history now of resolving challenged credits that have not resulted in large amounts of charge-offs. Yes, there's been some, but by and large, there haven't been charge-offs of principal. We've had some loss of interest in certain circumstances more recently, but we're able to get principal values fully recovered. I think the original question was around comparing charge-off to the stress loss as well.
Yeah. How we might see them into the future?
Yeah
as we work through any lingering loans.
Yeah. The workout situation that we detailed with its own specific slide was a great resolution that certainly won't happen in every case. It's impossible to predict for sure, but we do feel optimistic that we'll continue to see favorable outcomes. It's impossible to say with 100% certainty.
Okay. We saw the expense guide in the quarter. Do you have any thoughts about fee income in terms of its sustainability at the current level?
Yeah. We indicated in the quarter we had some non-recurring there. We had an opportunity to buy some debt back there. If you're taking that out, we've had a very sustained fee income trajectory over the last several quarters. I expect that to remain steady and see some progress as we continue trying to find opportunities to give more services to our customers and help them grow in their needs.
Great. Thanks, Alex. I guess just the last question just goes back to kind of the general return of capital. It feels like the buyback will continue. Just curious if there's an upper bound to how much you would return to capital in terms of a percentage of annual earnings after dividends, something along those lines.
What we've really been focused on in the past, we've run commercial real estate concentration ratio up to 375%, which is the board's tolerance. There's different uses of capital. That's been an effective use for us because we've gotten a very nice return on that. We've dialed back our lending into the commercial real estate market right now just a little bit, and it's been comfortable at 356% for a while. That's probably what's more driving the opportunity for a buyback is we now have some room on the commercial real estate side, and so we could buy back some of that capital. Pretty much upwards of that $10 million, I think we could buy back, and we'd still say within that 375% concentration limit. I don't know that we would go to that entire extreme.
As you know, for a bank like us in the small-cap world, if you're trying to do that on a daily basis, that would take a good amount of time because we're limited to a percentage of the average weekly volume. As we look at the opportunities that may occur with block trades and that becomes a whole another opportunity as it shows.
Great. Thanks for taking my questions. I appreciate it.
Thank you. Always a pleasure to hear from you. Andrew, we've got a few questions from shareholders that are online.
Yep. The first question is, with the current price to tangible book value of the common stock, how aggressively will you repurchase shares and what is the current capacity of the buyback program?
I think that we pretty much answered that question just now, but I appreciate seeing it again. Like I said, I think the opportunity is twofold. It's what we can buy back on the average week and what we can buy back in blocks. We have the room because the commercial real estate exposure coming down sometimes.
Yeah. The average daily that we could actually buy is between 3,000 and 4,000 shares. When opportunities for blocks come up, it's going to be the large opportunity for us when those do happen. We do see those from time to time. We also will be filing at the next board meeting a 10b5-1 program, so it will allow us to do it when we are in blackouts, because currently right now we were in a blackout and we were not allowed to buy any blocks or anything that came up at this point in time.
Yeah, through Wednesday. The 10b5-1, I think.
I'm sorry, Tuesday.
Yeah.
Yeah. I got them all mixed.
That's all right. All right. That's good. Thank you.
All right. The next question relates to, Are all of the costs associated with the Avenu program removed from the business, and how much was the third quarter impacted by Avenu?
Yeah, good question. We've seen expenses come down expeditiously as we've communicated and expected, and there's nominal cost that we have for that as we continue to evaluate what we're going to be doing with that. We're excited about that.
Yeah. It's really about the board. We're looking at different opportunities, different outcomes before we just take it completely out of the cloud and everything. It's extremely nominal at this point in time.
The next question is, there was a desire in the past for the bank to be in the cannabis industry. Is there still an effort of that by the bank? If so, how many customers do you have representing and how much in deposits?
The short answer is zero. It's interesting. Banking cannabis is certainly permitted as a Fed member state bank here in Virginia. They're open to it for the operating accounts. As we look at opportunities and talking to people from an M&A perspective and everything, I think there's a lot of bigger banks that still don't really have any interest in banking cannabis, and so we're being very careful from that standpoint. Obviously, banking on the deposit side is easier because if you did decide to not do that anymore, you can part company with those customers. On the loan side, certainly not as easy because you have to wait until that loan's been repaid. Mostly cannabis operators these days are looking for a full relationship because things have progressed in that industry and they're getting a lot more open opportunities for banking.
Okay. The next question is, we mentioned a new branch with nearly $100 million in deposits. What is the expected forward growth and mix of those deposits?
Yeah, good question. Just kind of looking at deposits overall, as well as opportunities that we're seeing with the new branch. I think certainly with the new branch, we're excited about the relationships there. It's been already a good source of lower cost deposits for us. Just in the market overall, I think there are some really good opportunities for deposit generation. We've seen consolidation in our market, so there's, of course, opportunities to connect with new customers as things get shuffled around there. I think from a deposit mix, we're going to be able to see growth in volume. Of course, I think we think the mix is going to be a continuation of what we have. Of course, we're always going after the low-cost deposits, building relationships.
With relationships come a variety of different types of deposits, both in duration and rate and things like that. We're excited about the opportunities.
Yeah. I think the other side of that is, will they be able to continue to generate at the current volume? It all depends. Like I said before, Devin is a known commodity, if you will, in that market. He's very good at what he does. People enjoy working with him and he's got a very good network. Like I said, we're very pleased to have him on board. We'll see what he can do. I think $100 million before it even opens is pretty phenomenal. That's a good thing.
Okay. The next question is, can you talk about the net interest margin versus the core net interest margin in Q2 versus Q3?
Sure. Yeah, happy to expand on that a little bit. As we laid out in the slide, over the last two quarters, we had a couple of transactions that kind of create a little bit of noise. If you recall, in Q2, we had the recovery of some interest income from a previous credit. We were able to take that into Q2 as we resolved that credit, which caused kind of a one-time jump in our reported net interest margin. We thought it was prudent, last quarter, to communicate that we recognize that that's not going to be forward-looking or the ongoing net interest margin. We kind of provided last quarter what a normalized margin would be for the core portfolio.
Kind of fast-forwarding to this quarter, we had a little bit of noise as well in this quarter, where there was a couple of loans that had to be moved to non-accrual. Some interest had to be reversed on that. That's a non-recurring transaction. What that did is you sort of had an artificially high net interest margin last quarter and an artificially low net interest margin this quarter, just on the face of it. We thought it would be prudent to show you not only what needed to be reported as far as the actuals, but if you were to isolate and take out these non-recurring couple of items, what would a normalized, forward-looking net interest margin look like?
That's what we put on the slide there to kind of indicate and show what the core portfolio, how it's performing, how it's been trending, taking out a couple of one-off items.
Just to be clear, Alex, there's probably a couple of other non-accrual loans that are on the books. You didn't add back that interest or anything, correct? You just-
Correct. Yeah. It was only new activity that happened this quarter. It was not inclusive of things that were already on the book. It was one-time this quarter items.
I think when you and I talked about that earlier when we were putting the slide deck together, you felt comfortable doing that because a majority of those loans that had gone on non-accrual during the quarter have already been sort of changed so that they're back and accruing interest.
Yeah. That's a great point. I mentioned earlier three relationships where we had to move that back. In large part, the majority of those, almost all of those are back into a performing status. That's where we feel comfortable where, again, I'm using the term kind of core net interest margin.
Yeah
To describe what we think is going to be happening kind of on a go-forward basis.
Yeah. One of the things we've always tried to do is be as transparent as we can, and we feel like we did that in the second quarter, where we showed that we felt like some of that was the net interest that we recaptured certainly wouldn't be recurring. We took that out and showed the core. Likewise with this quarter, worked a little bit in the reverse, but I think it shows a very positive trend as we go in the future. I think that's an effective way to look at this. Tom, did you-
Yeah, I was going to say that we don't look at what's been on non-accrual for quite a while.
Yeah.
Because if we did, that actually is about 4 basis points if you were to add that back in, but we're not adding that back in at all, so.
Okay. Any final thoughts or comments based upon the questions or anything that we've heard today before we sign off? We're always happy to talk with anybody, any of our investors offline, and just let us know. We'll find some time to talk with you as soon as we possibly can, as this is all very important. We're excited as a company to have recovered from 2024 in a very fast way. We're well on our way of getting back to where we want to be. We're not there yet. It has been a quick recovery. We're excited about reporting that. We know that as we go into planning for 2026, that's one of the most important key issues that we're going to be focused on with the ultimate goal of getting those metrics back to what we would consider a high-performing bank.
We appreciate your time today. Like I said, we're always happy to speak with you offline if you feel like you want some more color around the answers that we provided or any of the slides that we provided. In the meantime, thank you very much, and we'll talk with everybody again soon. Thank you.