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MainStreet Bancshares Inc
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Good afternoon, everyone, and thank you for joining our virtual earnings discussion. My name is Jeff Dick, and I'm the Chairman and CEO of MainStreet Bancshares, Inc, a MainStreet Bank. I'm joined here today with Tom Chmelik, who is the CFO and Senior Executive Vice President of the Company and the Bank.
This presentation is going to take about 11 minutes. We'll open for questions for the remainder of the hour or whatever time we need. Solution today, you'll see on the portal that you're able to submit your questions at any time during the presentation, we'll address your questions during the Q&A session. In addition, the two analysts who cover our company will be able to ask their questions and share their comments during the Q&A session. We'll consolidate similar questions, and if we don't answer your question during the discussion, we will follow-up with you.
We'd be remiss if we didn't point you to our safe harbor page that describes the context of forward looking statements. Finally, we use certain non-GAAP measures which are identified as such within our presentation materials.
As you look to our market, I'm sure everyone on the call today knows how strong and vibrant the DC metropolitan area is. We are fortunate to be in a market that includes a federal city. So, as we look at our first quarter performance, with the current tensions in banking, we actually hesitated on whether or not we should tout our earnings. After all, can a considerably run bank have record earnings without taking on too much risk?
We think that we can. And so we prepared a wonderfully defensive press release and presentation for today that tells you we are pretty good at what we do. We continue to do it to the best of our abilities. We aren't mavericks, and we had record earnings. And it's okay.
In fact, you will see roles, systems, and tools in our $2 billion bank that weren't present in the large banks that were recently in the news. Our presentation today reflects solid management and effective balance sheet planning. I'll summarize our first quarter performance and then we'll start to fill in some of the gaps.
Our annualized return on average assets is 1.75%. Our net interest - our earnings per share is a $1.01, and our tangible book value is $22.22. And our return on average total common equity is 19.82%.
Since deposits and liquidity have been on everyone's mind, we'll start with deposits. Our deposit profile remains healthy. With 71% of deposits considered to be core, 69% of all deposits are insured by the FDIC. We have a 100% loan to deposit ratio, is $11,000.
We function also on managing our liquidity. We monitor our liquidity each business day to ensure that we have sufficient high quality liquid assets to meet our anticipated funding needs 30-days forward.
Our liquidity coverage ratio was at 118%, which is above the 100% policy limit. And that includes $290 million of high quality liquid assets. And above and beyond that, we also have $436 million in secured funding and another $129 million in unsecured funding available.
And of course, if all that has to be used, we still have the Fed discount window. The credit risk is generally considered to be the greatest risk to community bank managers. We've always focused a lot of attention on credit quality. This includes everything from strong underwriting, to ongoing stress testing and everything in between.
We don't have any losses or non-performing loans. We do have 374% of our capital, concentrated in investor commercial real estate against our limit of 375%, and we work hard to manage to that level.
Since we started the bank, we haven't had a loss in the investor commercial real estate category. We stress test our earnings assets monthly. Our first quarter worst case stress test should a $37 million exposure, again in a worst case scenario. That would bring our common equity Tier 1 capital ratio from 15.06% to 13.43%. And that does include our available for sale and held-to-maturity secure portfolios.
The risks we've discussed so far aren't the only risks we actively manage. We also age interest credit risk, operations risk, technology risk, compliance and legal risk, reputation risk, and strategic risk.
We have a Chief Risk Officer who monitors our first lines of defense that provide our second lines of defense. Our Chief Risk Officer has a direct line to the Board's audited Risk Committee. An economist on staff, we see what you see in the news, and we form our opinions which translate into our board approved strategy.
To that end, we anticipate that there will be a continuing tapering to flat rates for the remainder of this year, stable rates in 2024, and that the Fed finds neutrality with a discount rate between 5% and 6%.
While we summarized our first quarter results, we also want to show you some trend data. Slide 10 shows five quarters of liquidity management. You'll see that at year-end 2022, our liquidity coverage ratio fell slightly below 100% to 97%. We funded a considerable amount of new loans in December, and we had a few business customers that had cash needs right at year end.
The good news is that small delta was covered many times over by the availability of our secured lines. Likewise, Slide 11 shows the deposit composition trend over five quarters. With interest rates so significantly on the rise, one would expect to see some migration from the non-interest bearing balance into interest bearing balances, and this is what happened during the first quarter of this year.
In Slide 12, as we run FDIC insured accounts, the top 20 non-insured deposit account represent $137 million of that balance. These clients are comfortable with the quality of our bank and haven't felt the need to use the IntraFi program for excess FDIC insurance.
Slide 13 highlights our increased deposit cost with the first quarter deposit beta in line with our projection of 51%. A fair amount of the interest bearing deposits priced up during the month of March, and our deposit costs will fully reflect that increase in the second quarter.
Slide 15 depicts the Fi quarter trend in our earning asset stress test. The small increase in loss exposure from the first quarter of '22 to the first quarter of 2023 is due to portfolio growth, and to rising interest rates. While nobody wants it to happen is comforting to know that the current capital structure could withstand a $145 million loss and we would remain well capitalized for regulatory standards.
Slide 15 tells us that even though our legal lending limit has grown to $44 million, our average loan size is still $2.6 million, which as you know is another dimension of risk diversification. The pie graph on the right side of this slide shows our loan pricing mix, which continues to be positioned well for a stable or rising interest rate environment.
Slide 16 demonstrates the consistency with which we manage our loan concentrations. We were barely slightly over our internal limit in the fourth quarter of '22, where again, we had some strong loan opportunities that we couldn't get participated until 2023. The slide also shows the cumulative loan origination and where the losses have occurred and not occurred.
Slide 17 provides additional granularity for the commercial real estate office portfolio with low loan to values you can see that there is little exposure to pure office risk. 80% of the under construction office portfolio will be owner occupied when it's completed. 50% of the office building portfolio was actually originated with the intent of converting to residential, and only one property of just $1.7 million was currently rated watch.
Slide 18 shows the conversion to the current expected credit loss model. Most of the model adjustments came from funding the credit reserves for the off balance sheet unfunded commitments. The remainder was to fund the normal growth in the portfolio.
Slide 19 shows that we pay attention to structuring our capital stack as well in order to maximize our return on investment. We managed to acquire sub debt at an attractive interest rate and our preferred shares also with an attractive dividend rate.
Slide 20 outlines our key assumptions for the remainder of 2023. This includes an increase in our monthly run rate of between 3% and 4% for the remainder of the year. A good portion of this expense is to support our Avenu solution once it is in production. We will start to amortize the cost, building it, and we are still hiring some additional staff.
Our simulation model shows a 25 to 30 basis point decline in our second quarter net interest margin due to increasing deposit costs. For this purpose, we modeled the remainder of 2023 in a flat interest rate environment. In this analysis, the net interest margin is thereafter consistent for the second half of the year.
Opportunities for loan growth are slowing a little, so we anticipate single digit growth for loans in 2023. Again, somewhat predictable in our current interest rate environment. And we anticipate that our Avenu solution will come online and start generating deposits and fee income in the second half Year.
Turning to Slide 21, and Avenu, you will see that with funds transfer pricing, Avenu's traditional business was profitable in the first quarter. The team has been aggressively preparing for launch, and one client is onboarding, and we hope to launch them in the - second quarter. Two more have signed their contracts to proceed, and there are additional clients in the queue at this time.
The team was hyper focused on our first quarter launch, but it would have required a workaround to do so. And even though the workaround wouldn't have impacted the quality or integrity of the system, we decided not to pursue it. In this turbulent environment, we felt it was more important to dot all the, I's and cross all the T's than to rush toward an internally imposed deadline.
So with that, the team has a sprint underway to resolve the need for the workaround, and the team also decided to add a simultaneous sprint to implement debit card funding, which actually delighted the client that we have who's currently onboarding. So that's something that they really wanted.
So the goal for delivering Version 1 is now April 30, at which time the onboarding client will return to integrate the two remaining APIs and prepare for their launch and they're already active in other markets, so this should be an easy lift for them.
Finally, Slide 3, excuse me, Slide 23 graphs the current price against our tangible book value. We think that the common stock is a bargain right now.
So at this point, we're going to open up our line to our analysts for questions. And afterwards, we'll address the questions that have been submitted through the portal. And Chris Marinac, if you are on welcome and do you have any questions for us?
He might not be on today. [Matt Breez], are you with us today? You may need to unmute yourself?
Hi, Jeff, this is Chris.
Hello Chris.
I can start now if you want to go to Matt first, that's fine.
No Chris, go ahead sorry.
Okay. So my question had to do with the customer attitudes and kind of their behavior given what we experienced in the month of March in the whole system? Have they pulled back can you see kind of pipelines changing, and what's your thought, just about kind of the pace of growth both in terms of assets on the loan side and then on deposits as well?
So you know, Day 1, we had customers calling us, thereafter we were calling our customer. Once they checked in, made sure everything was good they were generally content. We did have a few, I believe Tom - that you migrated into the IntraFi program on the ICS, which is our overnight money market program.
But otherwise I think, the net initial response was actually we gained some deposits I think it was like $11 million and yes actually said that the larger deposits that are on operating accounts that they stay, they need those for their operations on an ongoing basis, especially the large government contractors that we have in place.
So yes, so we haven't seen anything. We still see loan opportunities, but I think that they're a little bit harder at the moment. You know, construction, residential single family homes are still in high demand. And so that market is still - it's still out there.
I think as we've spoken with our builders, some of them were saying that they were just trying to wait to see if there's any opportunities that might come available, because it didn't seem like anybody was budging on the price for teardowns or anything like that. So it's been a bit trying for them.
Okay great. I guess my follow-up, is just about pricing in general, do you have more pricing power, particularly on the loan side than you did last quarter and prior years and to what extent does that sort of support margins from here?
So I don't think we've changed much of our pricing philosophy, certainly not on the short and we have tried to do more fixed rate. So if anything, we - may have come down 25 basis points or something in order to lock in a fixed rate, but not do so much to competitive as of, just trying to make sense to the borrower to, get them locked in to something and start to fix some of our - more of our earning assets.
Got it, great. I will yield the floor to others. Thank you very much.
All right, thank you, Chris. Matt, are you with us?
Can you hear me now?
Yes.
Great, I had to dial in.
I'm sorry.
I was hoping to turn to the expense outlook of up 3% or 4% a month. Should we contemplate 3% to 4% eight month for the remainder of the year and by my math that gets my 4Q, kind of quarterly expenses closer to $15 million? It seems like just a larger amount than I anticipated? Is that in the ballpark of what you're anticipating?
Matt, yes it is. Based on and a lot of this has to do with the staffing levels, over to Avenu once this is - actually up and running. So, we do need those people on staff to obviously maintain the software and do the things that we're doing. But with the increase in the overall DDAs from that along with fee income, there should be an equally offsetting amounts coming in on that.
Could you frame for me what some of the DDA impact could be, what the fee income impact could be? So I get a good sense of what those revenue offsets are?
It's difficult to do that right now and anything that we'd be doing like I said the first client that we have coming on board they do have a solution in other countries where we're hosting their U.S. domestic product and they felt like I think - I've said before is, they could get, I think its 20,000 accounts with an average balance of like $500 is what they're shooting for.
There's no guarantees or assurances that that would happen with us, but that would bring that one, customer up to about $20 million balance coming in and out each, which I think would be very good for a customer, the first customer that we have on this.
And I think some of the other customers or some of the other clients, I'm sorry, are probably going to be doing something similar in that nature. And so, it's hard to tell until they come online and that's going to be the significant part for us as we go forward.
Okay. I mean, by my math, the increase in expenses through year end is about $12 million, $13 million. You expect an equal offset in terms of spread revenues and fees. Maybe give me a breakdown of how much from spread revenues and how much from fee income?
Yes as, if we received obviously there's a probably another rate increase coming in the May timeframe and that will start to offset some of those expenses, so it's going to - it could be dollar-for-dollar, but it will be close.
Okay. I mean, maybe ask you more directly this quarter, you earned $1 in EPS. Do you think you can maintain over $1 in EPS while you make these investments throughout the year or is that going to be diminished a little bit as the dollars are outlaid first and the revenues might be shortly thereafter?
It's probably diminished just slightly.
Okay. Maybe on the margin guide down 25 to 30 bps next quarter, could you give us some sense for the incremental cost of deposit? And then I know you had mentioned that's expected that non-interest bearing deposit some of that will migrate into interest bearing. As you think about the margin for next quarter, what kind of further mix shift is contemplated behind them. What's the composition deposits?
I mean, I think a lot of the increase obviously is coming from the CD side, although we're trying to also bring in some additional money market accounts, which we're hopefully restructuring some of that side of the balance sheet to bring in a little more in line with the floating rate side on the asset side. So, that actually has come up, because obviously you're competing against the short-term treasury market at this point in time.
Well, what we're seeing - one of the things we're seeing is a lot of the - lot of the time deposits came into play sort of in the latter half of March.
Yes.
So that's where we saw, some of the impact in Q1. That's what we're saying, we think that we'll feel, obviously all of that impact as we have the full three months of the second quarter. And -- but we think that that's going to kind of stabilize.
Yes. I think it's stabilized. And I think the other thing we were doing too was some of these CDs that we're bringing in on the wholesale basis, we were bringing on in with callables. So that if rates obviously start to drift down, we have the ability to call these CDs back in to the bank.
Got it. Okay. Cash levels, cash levels are considerably higher than they were to your point now versus at year-end. How long do you intend to hold on to excess liquidity? What might you invest it in if you decide at some point that maybe this kind of bank failure rushes behind us and you feel safer about putting into either securities loans?
I think whatever we do is going to be short term in nature. I don't think we're going to go into any long term mortgage backs or anything like that. I mean, right now, you're right at - we're right at 5%, a little over 5% in what we're getting in the Fed funds market.
You know, I just assume and I think everyone agrees with us just to sit and be patient to see what happens and see how the - if there is any more fallout from the current banking crisis, you know, I think it's just prudent to keep cash on the books. That too is probably hurting our margins slightly too, because obviously we've increased that substantially from where we were at year end at this point in time.
But I think we typically try to maintain you know, 5% in, you know, liquid - fairly liquid near cash, high quality liquid assets. And, I think we're going to do that for the foreseeable future until any of these tensions really subside and my hope is, after everybody sees the first quarter performance and works their magic on the numbers for FDIC insurance covers everything else that they're looking at, then, things will start to subside and we can we can go back to the way, that we were managing. But, as you know, we've always been pretty conservative.
Yes. And then I guess that brings me in my last question. Obviously, the NPAs and charge-offs this quarter speak for themselves very strong. As you're seeing loans reset out of call it 2018, 2019 at lower rates to today at considerably higher rates, right, upwards of 200, 300 basis points higher. One, how are debt service coverage ratios holding up across various asset classes, are there any that you would point out that aren't doing as well as you'd expect or you could educate us on?
And then second, there's also a secondary component here as those 2018 vintages roll today that cap rates are higher. So in its entirety how do LTVs and debt service coverage ratio on these loan resets hold up? And are you having to ask for cash and refis or potential guarantees, things like that to better stable wise the loan?
I mean, so far we're seeing good cash flow data on the loan resets. It's interesting we're just taking a deep dive in the hotel industry which, we've kind of pegged as one of the higher risk assets, but on the surface, we've seen a bit of a drift downward from the total revenue that these - some of these hotels are bringing in, but we're also seeing higher expense containment because of the services that they're still not providing because people don't, I think either realize that they don't need them anymore or the owners realized that they don't need to give them.
So I think the net effect on those is around the same, and we haven't seen any issues yet with those being able to service the loans as they go forward. We haven't hit anybody coming back in looking for cash out or anything like that at this point.
And, yes, so far, there's been no issues with any sort of increase in past dues or anything that would be a precursor to something that could prove problematic.
And your question on the cap rates, you know, we never played in the A space palm where we saw cap rates that were in the high 3s or 4s. So, you know, our cap rates are still coming in the 7 to 8 range anyway. So, as I said, we never played in that pond. So they're pretty good. When you look at the average loan to value on the commercial real estate, we're pretty happy with where we are being with - where we are in Washington DC.
Understood. I know there's a lot of questions here. I appreciate taking them all. Thank you.
Yes. Thank you. Do we have any questions from the -
Yes, Ross asked are you trying to further reduce your level of uninsured depositors?
We're just trying to work with our customers to make sure that they're happy and content and stay with us. So I don't think so. I think, obviously, we're conscientious of it, because the market is conscientious of it and so there's an element of, the better that number is, the better the market is going to think about us.
But candidly, all of these non-insured deposit customers, we've talked to them time-and-time again about their options and opportunities and they're content with what they have. You said, occasionally, somebody's going to say, yes, I'd like to, use their ICS, which is again, their money market program so that they still have good access to liquidity and everything but.
A few folks have asked about the status of the buyback program and where we plan to go with it in 2023?
So, at the current price will be it will be wonderful to buyback. But capital is king right now. And anytime - the market is haunted, by anything right now, the tensions of some bad management decisions out there. We're going to keep our capital where it is. We feel like we need it, and we're going to utilize it, with our - we certainly with the Avenu product as and when that starts to gain some market share, we'll need that capital to support the deposit growth.
Ross asked, what is your total dollar exposure to the Metro office market?
So that was - I think it was about $150 million. But actually, it's kind of a, it's a bit of a, like I said I think 80% of the construction office market is really focused on turning it into residential. That's been a - it's been a hot tick at a very high success rate for a few buildings that I've seen here where they've actually, sort of gutted the entire building, did a bunch of core drills to put in the facilities for a residential.
And the nice thing about the units that they're doing this to is, office requires more parking than normal apartment buildings or condos, and so they've done some amazing things. I toured a building that was done. It was office building back in 1960 for government, secure purposes, and it's just a beautiful facility now.
And I think, we'll see more of that. And I'm sure across the country as office space diminishes in need, you will see a little bit more of that as well. But like I said, I think the whole portfolio has about a 50% loan to value against it. We've got some medical which is fully occupied, but that's only $20 million. But yes, the under construction, a lot of that is - will be turned into residential and even some of the office building itself the plans were.
It's still classified as an office building, because there are some leases that they're just waiting to run out, before they can start the project and converting it to residential. So no Class A, well no, that's not true. We have one Class A, it's a beautiful property in Tysons' Corner, less than 50% loan to value. And I think pretty close to fully occupied.
Chris asked the status of Amazon pausing the construction on their [HQ2] and how that may affect our market?
I mean, they paused it, but they've already moved in a substantial number of people. Those people are still here. They're not moving. Obviously, it's not going to be as big an increase in that Arlington area as we all thought. But it's still, if you look at all of the occupied office space and all the people that have moved in, it's a substantial number of people with very well paying jobs that are there.
You still have all of the server farms that are out in Leesburg in that area that are continuing. So there's still people moving into the area, not just Amazon.
Bradley asked, do we know the spot - deposit rates for the major categories that we offer?
I don't know on top of my head - not off the top of my head. We can certainly get those. We can get that to you yes.
Charles asked what interest earning asset growth should we be modeling for second quarter and the balance of the remainder of 2023?
Yes, so I don't think we'll be doing anything in the investment portfolio.
No, so and it's probably still going to end up to single-digits and this way we think we'll end up, obviously in the first quarter, there was one large loan that did go on the books on the last day of the month. So I think we're seeing the leveling out at this point in time. So - it's going to be in the high single-digits so.
Bradley's asking now what is your expectation for the future changes in the deposit mix?
And again, that one is going to be somewhat of a function of how successful Avenu is, and but if we were to talk about without Avenu, I would think that non-interest bearing will be leveling off somewhere close to where they are right now Tom.
I would think so at this point Tom.
Yes, because a lot of that is used for operational purposes and yes and I think CD rates are even coming down just a bit although --
They have come down -
Market rates were up a little bit again today.
Bradley is asking about the growth in non-interest expense rates in Q4 of this year. What should we expect for expense growth in 2024?
I would say once we're there with the hiring of these people, it's going to start to level off into 2024.
One last question here is that, can MainStreet Bank maintain ROA above 150 throughout 2023 and 2024?
Well, we finished the first quarter at 175. So I think that yes, and we'll always look at other expense controls as going forward too. So, we want to maintain this as close to that numbers we can.
Yes, I think that's - I think yes, that's I mean, it's going to be hard to tell and there's many variables right now with what the Fed does and whether they even have their rate increase in May, it seems like they're going to and that will still affect us positively.
So, we're very pleased with the results in Q1, we think the team, through-and-through was working extremely hard in keeping everything as well balanced instruction as we possibly can. So, we're excited to see the rest of the year. I hope the tensions in the banking industry calm down quickly as everybody's numbers come out in the market and we find out that there is no there, there, but that remains to be seen.
I really appreciate everybody coming on for the call today. Hopefully, this new system worked a little bit better. We're still getting a little bit used to it. So I apologize if it was a little - little clunky in places. But thank you again very much, and we look forward to talking to you. If anybody wants to speak offline on any of this that we've talked about today, we're always happy to take those calls as well. You know how to reach us.
Thank you very much, everybody.