MainStreet Bancshares Inc
NASDAQ:MNSB
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MainStreet Bancshares Inc
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Good afternoon, everyone, and thank you for joining our virtual earnings webcast. My name is Jeff Dick, and I'm the Chairman and CEO of MainStreet Bancshares, Inc. and 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 will take about 12 minutes. We'll open for questions for the remainder of the hour. Please feel free to submit your questions at any time during the presentation through the portal. We also have two analysts on the webcast with us today: Chris Marinac from Janney Montgomery Scott; and Matt Breese from Stephens Inc. Both gentlemen will be able to ask their questions and share their comments directly following the presentation. If we miss your question during the discussion, please reach out after the webcast.
As always, 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 the presentation materials.
The D.C. market continues to be a great place to do business. There are pockets such as the Class A office market that are weakening. You'll see later in the presentation that we do very little pure office space lending. Within our market, and not unlike many parts of the country, the inventory of existing homes available for sale is down. It makes sense. Homeowners don't want to let go of their low-interest, fixed-rate mortgages. But the demand for housing right now is higher than supply, which is great news for our homebuilders.
For the broader economy, we know that the first half of 2023 included tension in the banking system emanating from rising rates and compounded by a few regional bank failures. Warren Buffett is credited with saying, "You'll find out who's swimming naked when the tide rolls out." Well, truer words were never spoken. And banks like SVB, Signature and First Republic quickly showed up as companies devoid of proper risk management cover.
Under the guise of, the more things change, the more they stay the same, I recently met with a long-standing customer who received venture capital money for one of his businesses. I wish I could say I was surprised to hear that when they were directing him to bank with a certain bank, fortunately, he told him he's already with the best bank and wasn't interested in moving.
By now, most of you know that we aren't your typical community bank. Every opportunity we pursue starts with an assessment of risk and reward. We must be able to understand, manage and control the risk. And the reward for that risk must be good. That is why our net interest margin is now generally superior to our peer banks. We don't compete on price. We compete on quality and service.
Our commercial lending team has a reputation in our market for execution. Our lenders understand the bank's risk appetite and pricing expectations. Our credit administration and loan operations teams knows that execution is our superpower. We have a saying throughout the bank, every day is game day. We're proud of our year-to-date performance, which I'll summarize in the following 6 ratios. Our earnings per share is $1.86. Our efficiency ratio is 53.48%. Our annualized return on average assets is 1.6%. Our return on average equity is 14.87%. Our net interest margin is 4.45%. And our tangible book value is $22.73.
Our liquidity remains strong and well managed. We strive to keep our liquidity coverage ratio over 100% to manage and control our 30-day liquidity needs, and we keep our high-quality liquid assets over 3% to meet unanticipated short-term funding needs. Additionally, we keep considerable availability on our secured and unsecured lines of credit. And of course, we still have the bank term funding program and the Fed discount window.
Our deposit profile remains healthy with core deposits at 74% and 76% of deposit balances insured by the FDIC. Looking forward, we anticipate one last 25 basis point rate rise this week and then likely flat for the remainder of the year, stable rates in the mid-2024 and continued contraction of consumer spending and tightening of commercial credit.
Again, we have a very good net interest margin story. This slide focuses on the trailing 12-month net interest margin, which has been over 4% for 1.5 years now and which we project will stay over 4% through the remainder of 2023. We've provided three scenarios on the looking forward for the second half of 2023: our most likely scenario, with the rates up 25 basis points and then holding steady at 4.24% at the end of the year; the high scenario, up 75 basis points between now and the end of the year; and the low scenario, which is down 25 basis points in December. The high and the low actually result in just a minor deviation, both down just 1 basis point from the 4.24%.
Our shift from noninterest-bearing to interest-bearing deposits is also consistent with the national trend. This graph shows a sharp jump in our cost of deposits in late March and early April, which is pretty consistent with the timing effects on deposits nationwide after SVB collapsed. We've kept our core deposit ratio at 74%, but some of our customers have shifted their balances from DDA into insured interest-bearing accounts. Again, 76% of those deposit balances are FDIC insured. According to the FDIC, the national average insured deposit balances for banks between $1 billion and $5 billion is actually 66.8%.
Our balance sheet is asset-sensitive. And while we don't anticipate declining rates in the near term, we've been reducing our downside risk by putting interest rate floors in place on floating rate loans and fixing loan rates on renewals and new loans where appropriate. So far, for 2023, 63% of the $150 million that we've originated in floating rate loans have floors with an average rate of 7.68%. We've also booked $102 million in fixed rate loans this year. Given the efforts that we've put in place, we've already successfully shifted our stressed asset sensitivity in a down interest rate environment to be within the Board's earnings at risk tolerance.
The commercial real estate loans that we booked in the second quarter are in good sectors for our market with good rates and terms. We've booked 1 office loan for $199,000 to a good customer with a strong loan to value. Our overall trend in criticized and classified loans remains consistent. Our lenders do a great job of identifying and reporting any issues in loans as early as possible, which gives us an opportunity to work through the issues before they become concerns.
We've managed to reduce our investor CRE exposure down slightly to 363% of capital, which is intentional given the current economy. Loans to investor office space has been a hot topic this year. Candidly, I didn't do a very good job explaining our exposure to the investor office space in our first quarter discussion. I think this slide does a much better job showing our very low $13 million exposure to pure office space. Our construction portfolio is nicely diversified. In the office category for construction, the entire $9.4 million will be owner occupied upon completion.
Finally, I like this map. It gives you a good indication of the diversification of our investor commercial real estate loans by type and by location. Loans outside of our market are generally to customers who reside within our market.
Our June 30 stress test shows results that are consistent with previous quarters. The stress test includes all earning assets. When we deduct the current worst-case estimate of $32.5 million from our capital, we remain very well capitalized. As we go forward, we are assuming that our monthly expense rate will increase between 2.5% and 3% per month for the remainder of the year. This includes amortizing our software solution.
We continue to learn about cryptocurrencies but we aren't engaged in any activity. We've converted all of our loans from LIBOR to SOFR, and we're always happy to talk about M&A opportunities.
Shifting gears to our Avenu Software-as-a-Service solution. I'm very pleased to report that Avenu is live. Our first client has passed all phases of sandbox testing and have been given the production key. They will be limited to testing until they provide us with responses on a few cybersecurity updates and ensure that their consumer disclosures are properly populated and formatted. We've been judicious on our overall development spend, which is currently at $12.4 million. The team is now fully staffed and in complete control of the solution.
Legacy Avenu deposits continue at just over $46 million, and the team has also done a great job of earning their keep during this development phase. Between service charge income and funds transfer pricing income, the team has managed to offset nearly 93% of their noncapitalized expenses. As we go live with our first client, we have 4 more clients that have signed agreements and are ready to go. There are another 4 who have their agreements and are completing their due diligence. There's 6 more after that who are waiting to see us go live before they want to get fully into the queue.
But to say that it's difficult to project growth for Banking-as-a-Service clients is an understatement. Our success is tied to each client's success. A client with an excellent solution isn't assured success. What we do know is that the opportunities for the Banking-as-a-Service industry are significant and continually growing. We also know that some of the middleware players have already exited the market prior to even launching their solution due to funding constraints. With that said, the team is working very hard and will do their level best to achieve the projections that we provided.
We project a range of new DDA balances between $5 million and $25 million for 2023 and between $50 million and $125 million for 2024. We project that this year's fee income will be less than $100,000 and next year's fees will be between $400,000 and $1.25 million. Finally, we are happy to be back in the Russell 2000 Index. Our stock has been outperforming other community banks in our market but not to the levels that we'd like to see.
At this point, we'll open the line to our analysts for questions. Afterwards, we'll address the questions you submitted through the portal.
I think today we are starting with Chris Marinac. Chris, if you're ready for us, do you have any questions or comments?
Jeff, can you talk about the timing of sort of ongoing deposit rate changes and then maybe some of the kind of loan repricing and how the catch-up of loan yields will play out?
So deposit pricing is going to be obviously an industry problem for the short term. We feel like a lot of the deposits that we have adjusted for our business customers, we've done. As opposed to setting them across the board higher, we've negotiated with each of our clients. And at this point in time, we feel that they're pretty happy with where we're at. We may need to increase a little bit if rates go up 25 basis points. Clearly, if they got more than that, we'll have to adjust.
On the loan side, I think we're -- with this next 25 basis points, we'll see a little jump in all of our variable rate funding. But -- so that's why we tried to project -- this time, we tried to project the net interest margin through year-end. And in our simulation model we do, it is taking into account any changes that we have dialed into the balance sheet. So I think that's going to be a good indication of where we're at.
All right. Great. And then just one quick follow-up is just on expenses. Is the expense guide a growth rate from this quarter? Or is that an expense ratio? I just want to interpret that correctly.
Yes. It's a growth rate from the previous quarter. However, the large amount has to do with, as it was put into the deck, the increase in the non-capitalized expenses which were $275,000 in there and also the -- which is the $120,000 which is going to be amortized. The $12.4 million will start in September.
And before I turn it over to Matt, one of the things that had come up as a question earlier was, in the big slide deck, we had talked about our intention to pay dividends pending any market conditions or anything. I want to make it very clear that it is our intention to continue to pay the dividends, preferred and common. What I should have been clearer on is saying that the only thing that would prevent us from doing that would be some sort of almost catastrophic event in the market or in our loan quality or something, which we're not anticipating at this time.
So Matt, have you joined us today? Do you have any questions?
Yes. Can you hear me?
Yes.
Great. Just to follow up on Chris' expense question, kind of a three-parter. OpEx came in better than I was thinking this quarter and the outlook looks a little better as well, meaning the pace of growth from here looks to be a bit slower. I'm curious, just to level set, what are your expectations by the end of the year, so 4Q '23 quarterly expenses? Does some of this level of growth provided in the presentation, should we expect that to carry into 2024? And then third part of this is by then, by the end of this year, what are the expected annualized and ongoing expenses just for Avenu?
Well, let me answer the first question on the expenses. I think that what I've -- what we've given you right now has -- yes, will basically be pretty much fully loaded at that point in time. And then other than additional inflationary pressures that would cause obviously things to continue to increase in the next year, we don't anticipate any large expenses going forward.
So I think what we -- the guidance that we've given you there is pretty solid. And yes, there was a slight decrease from the first quarter into the second quarter on expenses. So -- and once again, as we've always said, we will try to control expenses as best we can with everything that we have going on. Our efficiency ratio, we want to make sure that we keep it solidly in the 50s where we are today, and that's our ultimate goal.
Can you repeat the other question?
Yes, the last part. Just by the end of the year, once things are fully loaded, what is the ongoing annual kind of expense run rate just for Avenu?
I think we don't have that broken out. We have to get back to you on that one.
Yes, we didn't calculate that. That is something that we could include in the next quarter's deck. Yes.
Yes.
Okay. Maybe going to Page 15 of the presentation. I just wanted to be clear, what we're looking at here is it says it's a trailing 12-month NIM. And so by the fourth quarter '23, we should be thinking about that the quarterly NIM is something lower than the 4.23%, 4.24% because it includes the trailing 4 quarters. Is that the right read?
Yes.
Okay. So the fourth quarter NIM should -- by this math, we'd actually be closer to like 3.95% to 4%. Is that in the ballpark?
I didn't see that number. I just asked for this. And so I think that's something we could probably provide a clarification after the call.
Okay. And then, Jeff, you had mentioned that you're taking measures to diminish some of the asset sensitivity. What is the updated impact to NII if rates were to fall 100 bps??
And we didn't -- we have that information in the boardroom. We didn't put that in this slide just because we didn't feel like it was relevant. I can tell you that the limits that the Board put in place for down 100, 200, 300 and 400 are in line or slightly less than what we found our peer banks to have. And so we're pretty comfortable that it's not a hurtful representation.
I indicated that we put -- we started putting forward -- so we've got floors in a lot of our floating rate loans. We've redoubled the efforts. And then where they're renewing, we put what was a lower rate into a higher rate now. And then like I said, we're also fixing a lot of the rates. So those efforts combined with, on the deposit side, shifting from time deposits to money market deposits, really did a lot of good to help that sensitivity.
And we'll keep working on that. We do feel like we have some time to continue to make that better and better. But like I said, right now, we're within the limits. We're just not disclosing what those are.
Got it. Okay. Yes. If I look at the last 10-K, which I think has the last update in it, it shows that down 100 NII is down close to $20 million or 17.65%. I'd just be curious how meaningfully that down 17.65% has changed.
Yes. So we'll look at that and maybe have some -- just discussions on how meaningful it will be to put that in because down 100 might be relevant. So we'll definitely take a look at that.
And then just last one. Just a quick update on expectations for loan and deposit growth through the end of the year.
I mean, right now we're still in the mid-single digits. And that's where we believe, as we said in the first quarter, that's what we think will fall out for loan growth.
For loan growth loan, yes. So -- and I would say, if anything, it would be in the lower single digits and then, yes, we're doing our level best to keep that in lockstep with deposits. Deposit growth right now is a challenge. That's why we're hoping and we're pushing as much as we are for the success of Avenu to assist in getting that up, rightsized.
Okay. There's a few questions this time. First question, could you provide additional color on Avenu staffing? I thought about putting in an org chart and I definitely will next time. But we're staffed from the production -- the engineering to the development. I think I showed in there, we've got our cybersecurity staff is, I think, 5 strong. And yes, so we've got the QA -- it's a full complement. It's a fully developed staff that's taken over the project at this point in time. Definitely, we'll put in an org chart at the next presentation, of course, without names so that nobody will poach them.
But the other question is could you provide info on the assumptions in your capital stress test for loan losses? We did a little bit more of that last time. I can tell you, on our construction testing, as I said, the safest places are before the project starts and when it's absolutely finished. In between that, we know that $1 in doesn't equate to a $1 of increased value. And in fact, we do exponential discounting throughout the process in order to, I think, fairly represent the project's value. Of course, when it's getting closer and closer to being finished, that starts to hit $1.
But we feel very comfortable in the process we have there. We actually get updates from a third party each month on the completion status of each product by a percentage basis. And so I think it's extremely thorough. We've been very satisfied with what we see on the CRE, on the investor side. We stress test income, vacancy and cap rate and -- I'm drawing a blank right now on the ratios that we use for the stress. You recall, Andrew? It's -- on the income approach, the interest level we stress 2% immediate and sustained.
Vacancy is 5%.
Vacancy is 5% and the cap rate is 2%. Yes. So that, we do that for all the earning asset investor CRE. For the rest of the portfolio, we use a standard that the OCC came out with which is where, from a call report standpoint, we take the worst quarter ever, the loss in the worst quarter ever, and then we apply that to the current balance in that category. On the AOCI, we determine that from an independent third party as well as the market value of the portfolio and BOLI and that type of thing, so yes.
Does the margin projection through year-end assume a similar migration rate of dollars from noninterest-bearing deposits or lower cost interest-bearing deposits into higher cost money? Yes. We use an independent third party. It's IHS. We use their market projections and we correlate that to the balances that we have at the present time. And we've already seen that sort of, as you said, lowering of noninterest-bearing deposits into interest-bearing deposits. So that gets taken care of or taken forward.
With interest-bearing deposit betas nearing 55%, what is your expectation of full cycle?
I mean, I think because of the large increase that we saw from the first quarter to the second quarter, I think we're seeing that leveling off at this point in time.
Yes.
I mean, obviously, we're going to see one more rate increase which will have a slight effect into the third and fourth quarter, but it should level off at this point in time.
Yes. So unless there's some more unanticipated rate increases, we shouldn't see too much more fluctuation in the deposit beta.
With noninterest-bearing deposits down 20% linked quarter, how do you think these balances go? We feel like we've seen kind of the end of it from a business perspective. Because they need a fairly stable amount of flow in their operating account.
Yes, I would agree with that, Jeff. Most of those accounts, what you see now are the operating accounts, the day-to-day operations of these businesses. And they obviously don't have a lot of excess cash to put into other types of accounts at this point in time.
At what deposit and revenue figures by year-end 2024 would you deem Avenu a success? We've spoken to that before. And I think we're fairly consistent with what we said before. I think given the current sort of interest rate environment, $100 million in deposit production from Avenu with sort of the fee income that comes along with that would make it a success. Everything on top of that would be, I think, cream. So that's the ultimate minimum goal that we're shooting for. I think that will be that success trigger. And we know we can do better than that.
Where are your current CD rates versus the 3.71% average in the slide deck? Our actually published CD rates are lower than that. I think what you're seeing there is we have done some wholesale funding, and that's obviously at the margin. So that's blended in with the CDs that we've raised.
That is correct, Jeff. Yes.
Yes. And we also did a 5% CD in late March, April sold into our local market. And did that have a call on it?
It did not.
No? Okay. All right. Have we missed any questions here? Let's see.
We will be obviously updating Avenu performance on a quarterly basis. Chuck, I wasn't sure the entire question that you have there, I'm not sure if some of it got cut off. Or maybe I'll follow up with you after the call. But yes, we'll be giving updates on a quarter-on-quarter basis.
You want to address Eric's last question there? Because it's...
I didn't see it. You want to read? I'm not sure.
Yes. It's regarding the large wire fraud that took place in an Indiana bank and what we're doing about fraud in our case. And we have systems in place monitoring this on an ongoing basis. We have a team of people, not only wire fraud but check fraud. And we have actually been able to thwart various things that we have seen. We have, knock on wood, not lost any money from any of these attempts on us.
Yes, it's interesting. One of the main sources of wire fraud is still e-mail instruction interruption. And when that first started happening, they would have to change something in the To line, which -- so if you were looking at that, you would be able to tell. They've gotten so good now that they can disrupt the flow, change the recipient instructions and then let it back on its way. And there's no change in the To or From. So we continuously reach out to our customers and remind them that if they received any wire instructions via e-mail, that they need to actually call someone that they know at the company and confirm those instructions.
And actually now, we still call back on large wires. But we ask, did you receive this instruction via e-mail? And we -- so on each one. So we're doing everything that we can. We have our team. The fraud team now is a few people. I'm happy to say that we just caught a pretty significant kite, where we ended up not losing any money. And so knock on wood, that's -- it's -- the team is just very, very dedicated and very thorough. But you've identified, Eric, a key problem that we're experiencing right now. They keep getting better and better at what they do.
I think -- is that...
Yes. I don't see anything else.
Again, if we didn't answer your question or didn't answer it to your full expectation, we're always still very happy to get on the phone with you and answer any other questions that we can. And very much appreciate. We tried to make -- the slide deck that I sent out this morning, we tried to make that as comprehensive as we can. That will go up on our website as well as this presentation. And hopefully, we'll continue to give you enough information to help you to make those critical decisions.
But we feel very confident and very pleased with the performance to date -- year-to-date. We think we're not seeing any trends internally that would lead us to believe that anything will happen for the rest of the year otherwise, barring any significant economic changes. So as always, we appreciate all of you who have invested in MainStreet Bancshares, Inc., and we continue to work as hard as we possibly can to earn that investment as we go forward.
Thank you very much, and I look forward to talking to you again soon.