MainStreet Bancshares, Inc. (MNSB) Q3 2026 Earnings Call Transcript

Jeff Dick: Good afternoon, and thank you for joining our third quarter 2026 earnings webcast. My name is Jeff Dick. I'm the Chairman and CEO of MainStreet Bancshares, Inc. and MainStreet Bank. With me today is our Chief Financial Officer, Alex Vari; and our Chief Lending Officer, Tom Floyd. Chris Marinac, Director of Research for Brean Capital, will join us at the end of the call with his questions. If you'd like, you can also submit written questions through the presentation using the chat function on the web portal. This function is private, so what you write won't be visible to anyone else. We will address your questions at the end of the presentation. Before we begin, I'd like to remind everyone that today's presentation contains forward-looking statements. These statements are based on current management expectations and are subject to risks and uncertainties that could cause actual results to differ materially. For a detailed discussion of these risk factors, please refer to our SEC filings, including our most recent Form 10-K and 10-Q. We also utilize non-GAAP financial measures to supplement our results, which are reconciled in the appendix of this deck. Our market spans key high-growth verticals, government contracting and defense, technology and innovation, world-class health care, tourism, higher education and Fortune 500 companies. This market diversity continues to generate high-quality lending and deposit opportunities. MainStreet operates in one of the most affluent economically resilient markets in the nation, the Washington, D.C. metropolitan area. The regional backdrop remains exceptionally strong. The D.C. combined statistical area boasts top ranking median household income, including Loudoun County at #1 nationally and Fairfax County at #4. Recent data highlights on average home listing prices of over $830,000, median days on market at just 30 days and over 684,000 federal employees drive local purchasing power. Additionally, CBRE's REVIVE Index, which tracks economic vibrancy in Greater Washington, recently posted its highest 6-month rolling average since 2019. CBRE in the Washington Business Journal launched the REVIVE Index in early 2024 to track changes to the region's economy following the COVID-19 pandemic. The index measures thousands of data points in dozens of industries and condenses those into major areas like labor, innovation, commercial real estate, residential real estate, mobility and visitation, the federal government and investor sentiment. Ian Anderson is CBRE's Senior Director of Research and Analysis. He indicated that the broader trends are showing at least stabilization, if not growth. Of note, last month, the index showed federal employment growth, a positive shift since the 2025 workforce reductions. Our long-term growth has been anchored by disciplined strategic capital raising and an efficient footprint. Operating from 7 branch locations across Northern Virginia and Washington, D.C., our branch-light model allows us to support $2.24 billion in total assets with 164 full-time employees, achieving an exceptional asset per employee metric of $13.6 million. MNSP common stock closed the quarter at $24.74, representing 94% of our $26.36 tangible book value per share. As a component of the Russell 2000 Index, our focus remains squarely on building long-term compounding value for our shareholders through disciplined capital allocation. During today's presentation, you'll once again see directional consistency on our net interest margin, expense control and core earnings. Before we dive into our financial performance results, I want to address our credit posture directly. In the shifting macroeconomic environment, proactive asset resolution is essential to maintaining balance sheet integrity. During the third quarter, we took deliberate credit risk management steps, recognizing a $1.9 million credit provision, which includes a $1.4 million charge-off tied to the sale of real property securing a $4.5 million nonperforming loan. This provision had an after-tax impact of negative $0.21 per share on quarterly earnings. Near the end of the quarter, we downgraded a significant $28.8 million loan. Last week, the borrower revealed additional liquidity concerns and we moved the loan to nonperforming status. Although small in comparison, our active remediation process continues to bear fruit, demonstrated by the full repayment of a $475,000 nonperforming credit through collateral liquidation, where we recaptured 100% of principal, accrued interest and legal costs. Later in the presentation, Tom Floyd will talk about the team's efforts to manage and reduce the level of classified loans as well as to resolve nonperforming assets. Now I'll turn the call over to Alex Vari to review our detailed financial results and market dynamics. Alex?

Richard Vari: Thank you, Jeff. I want to take a minute just to expand a little bit on that last slide. We're obviously working through a handful of challenged credits, but it's encouraging when you're able to achieve a successful outcome like the loan you mentioned, where we were able to recover full principal workout expenses and all the interest. Workouts never occur as quickly as we'd like them to, but when the methodical process works and we can preserve capital, it's a testament to the team. Of course, not every single workout is going to have that outcome, and we have to make tough decisions on the best path forward. That sometimes means adding to a provision expense, which unfortunately can overshadow an otherwise strong core performance. That's precisely what happened this last quarter. Without the targeted credit provision we took during the quarter, the bank's core returns yielded another quarter of improved performance with a pre-provision return on average assets of 91 basis points, a return on tangible common equity of 9.61% and earnings per share increased to $0.64 per share. Slide 9 shows the quarter's reported numbers, inclusive of the $1.9 million credit provision indicated on the last slide. Our net interest margin improved quarter-over-quarter to 3.55% despite the increased funding pressure in our market. Not shown on this slide, but I think worth mentioning, we notched our fourth straight quarter of net interest income growth, which increased 3% from the previous quarter and is up 10% from the same quarter last year. On Slide 10, you will see a diligent liquidity strategy that incorporates a secured line availability that has continually grown quarter-over-quarter. We manage our loan-to-deposit ratio to maximize our net interest income and have curated the security of over $816 million in available funding sources. Our available liquidity facilities now cover over 42% of our entire deposit portfolio. On Slide 11, you will see the balance sheet is well positioned over the next 12 months. This provides us with the ability to maintain margin stability regardless of the shifting rate environment. You can see our models are pricing an additional 25 basis point hike forthcoming. Moving to Slide 12, you will see our net interest margin has expanded again to 3.55%. The margin has continued to improve over the last year in the face of increased funding competition, which is both a credit to our floating rate loan book and continued efforts of our loan and business banking teams to grow core relationships. In a couple of slides, I'll get into more specifics regarding the loan repricing opportunities we will see quarter-over-quarter and their positive impact on our margin going forward. Looking ahead, we expect the net interest margin to hold steady as our loan book sees an immediate impact on the rate hike from mid-September. Deposit pressure is present, but will lag as our market digests the rate move from last month. Slide 13 gives you a different look at our net interest margin. As expected, our cost of deposits hit the trough during the third quarter and will start to increase. Perhaps more importantly, though, you are also seeing an increase in loan yields that are and will outpace the increase in our cost of funds. As I mentioned on the last slide, we will see the full impact of the September rate hike in the fourth quarter and moving forward. On Slide 14, we dive deeper into what the loan repricing opportunities are. Building on my comments from a previous slide, you will see that we have $408 million loans indexed to prime, which increased 25 basis points in mid-September, and we will feel the full realized impact starting in the fourth quarter. We also have an additional $76 million in loans with a healthy spread of 2% to 3% to the 5-year treasury that will reprice over the next 3 quarters. With the 5-year trading near 4.78% today, these loans will be nicely accretive. Overall, our loan portfolio composition is well balanced between floating and fixed rate assets with 62% of the book tied to floating rates or repricing within the next 2 quarters and 38% of the loan portfolio at fixed rates. Over on Slide 15, you see the deposit stack is balanced between floating and fixed rate deposits. As a business bank, a large portion of our noninterest-bearing deposits are in the form of operating accounts. We are extremely focused on growing market share in this space, but not unlike any business, deposit cash flows do vary at any given time. However, it's worth noting that our average balances of noninterest-bearing deposits have increased over 8% year-over-year. On Slide 16, I want to point out that core deposits represent 82% of the entire deposit portfolio as a result of our strong relationship banking strategy. I mentioned on an earlier slide that funding cost increases will lag our floating rate assets. You can see here that the weighted average duration on time deposits supports that lag in funding cost. Slide 17 lays out our path for the remainder of the year, where our primary focus is capitalizing on our earning asset momentum and tight expense control. We are estimating to end the year at 5% loan growth for 2026. As we continue to drive top line revenue, we expect our operating costs to remain at current levels through the last quarter. At this point, I'll turn the presentation over to Tom Floyd, our Chief Lending Officer, to discuss the loan portfolio and loan performance.

Tom Floyd: Thank you, Alex. Over the next few minutes, I will provide an update about our portfolio composition, our pre- and post stress test capital ratios and our classified loan levels. Moving to Slide 18. Let's look at our portfolio structure, which remains well diversified. We grew total loans by $4 million over the quarter and remained at 5% year-to-date growth, driven entirely by our organic relationship-first approach to banking. It's worth noting that our commercial real estate concentration is back under our Board set limit of 375% as our focus remains firmly set on growing C&I and owner-occupied commercial real estate banking relationships. Additionally, we maintain excellent structural protections. 85% of our construction loans have a dedicated interest reserve deposit held at the bank. The next slide illustrates our construction loan dispersion. As you can see, 91% of our construction portfolio is within a 25-mile radius of our branch network. This dense regional concentration gives us a distinct advantage. Our team has firsthand knowledge of every submarket we lend in. We routinely inspect development sites, meet with project sponsors in person and assess asset progression to actively manage risk within the portfolio. Slide 20 highlights our capital position. We routinely stress test our balance sheet against severe economic downturn scenarios. Our pre-stress common equity Tier 1 risk-based capital ratio provides a massive cushion. Even after absorbing the losses modeled in severe hypothetical scenarios, our post-stress capital ratio consistently finishes well above the 7% regulatory threshold of well capitalized. On Slide 21, we highlight our active workout efforts on our classified and nonaccrual loans. We currently manage $46.4 million in classified performing loans, $92 million in classified nonaccruals and $1.8 million in OREO assets. A quick rundown of the nonperforming assets. Relationship 1 is a hospitality asset that we downgraded to nonperforming after quarter end. We're actively doing in-depth diligence to determine the best course of action. Relationship 2 consists of 2 properties that are in bankruptcy. We have a confirmed plan with the court that will result in either full principal payoff or a transition of the real estate assets into our OREO this quarter. Relationship 3 is a loan that is in the process of liquidation. We're pursuing collateral liquidation and guarantor recourse. Relationship 4 is a 9-unit condo sellout in Washington, D.C. The first condo is active and on the market, and the current pro forma does not indicate any exposure. Relationship 5 was resolved and sold on October 7, as mentioned earlier in the presentation. The remaining 7 relationships are being actively worked to get to the best possible outcome for the bank. The takeaway here is we do not sit on these relationships. We manage them aggressively with a sharp focus on maximizing recovery. And as Alex mentioned earlier, we're happy to have another story to report where we ended an asset resolution with the recovery of 100% of principal legal fees and interest. The D.C. market is deep and diverse, but has not been without its challenges. The relationships listed on the previous slide largely fall into these 2 categories. Multifamily landlords have lived through a challenging stretch due to the balance of landlord tenant rights in the district that were shifted during the COVID pandemic. Compounding these issues were cuts to temporary housing subsidies through the rapid rehousing and emergency rental assistance programs. Construction projects were impacted by challenges with the rising interest rate environment and inflationary period. In both cases, these events put a strain on borrower liquidity. Our borrowers remain committed to getting to the best possible outcomes given the circumstances, and we're focused on achieving the same result. In summary, we're pleased to deliver a quarter of consistent disciplined performance marked by another quarter of loan growth. Crucially, our robust stress testing demonstrates we remain strongly capitalized even in a worst-case scenario, and our classified and nonperforming assets are at manageable levels. We maintain our vigorous focus on timely successful resolutions. We're confident that our disciplined relationship-focused approach positions us to deliver consistent performance and long-term value for the shareholders and the communities we serve. That wraps it up for our loan presentation. Back to you, Jeff.

Jeff Dick: Thank you, Tom. As you heard, the lenders have been busy working on new relationships, especially in the owner-occupied and C&I space. The team is also working diligently to resolve nonperforming and classified loans. We've shared good news about the directional consistency of our net interest margin, expense control and earnings. To wrap up on Slides 21 and 22, MainStreet's underlying operating engine is performing exceptionally well. Our core earnings power is strong, driven by expanding margins, disciplined deposit costs and tight noninterest expense control. While credit resolution in a transitioning commercial real estate environment requires patience and decisive action, our capital position, liquidity buffers and deep roots in the vibrant Washington, D.C. market ensure we are managing through this cycle from a position of strength. We'll address questions that were submitted through the portal after we hear from Chris Marinac, Director of Research at Brean Capital. Chris, good afternoon.

Christopher Marinac: Jeff, can you hear me okay?

Jeff Dick: I can hear you good. Thank you.

Christopher Marinac: All right. Great. Thanks for hosting the call today. So I wanted to dig in a little bit more to just the credit quality and I appreciate your overview as well as Tom's. What else do you see in the pipeline of potential issues? And I guess I'm asking from a standpoint of higher interest rates and any stress that borrowers may be feeling that you didn't see at 9/30.

Jeff Dick: So I'll start with this one, and then I'll turn it over to Tom. But where we're at in the interest rate cycle now compared to since the 2023 time frame is profoundly different, right? Because interest rates went up 5.25%. And our stress testing, probably not unlike everybody else's stress testing sort of looks at what happens if rates go up 3%. So we still have a lot of those legacy loans that we're dealing with. So the question is still relevant. But now we're looking at -- we just had 0.25% in late September. There's maybe one more rate rise before year-end, I'm not sure. But -- so the effect is not as profound as it was. And as our slide that Tom talked about, it does show -- or I guess, Alex actually talked about, it shows that $75 million of the 5-year structure is going to be repricing. And Tom, I know we talked about that before. So I'll get your thoughts on it. And Alex, if you have anything you wanted to add.

Tom Floyd: Sure, sure. So on the $75 million that you referenced, we have the benefit of being able to recast amortization if it's needed. In a lot of cases, we don't anticipate that it will. But when we're looking to get between 2%, 3% over the treasury on a reprice, if there is stress, we can get slightly lower than $300 million if there's an absolute need. But a lot of times with the simple fact that these have paid down since origination. If you just go back to a 25-year AM, typically, there's room for coverage where you're not creating new stress. Alex, anything you want to add on that?

Richard Vari: Yes. No, I would probably just say the $408 million that are also going to see a rate increase are largely construction-related loans, and we have interest reserve balances on those that are there to accommodate for rate changes. So that's part of how we underwrite those types of loans to build in for those variances. So bottom line is we continue to work with our borrowers to try to stay in front of it. But I don't see the forthcoming rate changes to be as problematic as the ones we experienced in '23 and '24.

Christopher Marinac: Got it. Great. And then I guess just a quick follow-up. Do you have to do any additional reserve build or changes to the reserve, whether it's on the balance sheet portion or the unfunded portion from here just to accommodate future risk?

Richard Vari: Yes, happy to take that. So as you'll see that the allowance for credit losses to loans did go up a little bit this quarter. And there's a lot of dynamics in there, largely due to -- we had the charge-off where we took actions there. And what that inherently will do is raise the provision in the pool for loans to accommodate for unidentified stress in the portfolio. And so you're seeing the natural increase in the allowance just through the experiences and historical things that we're seeing. But management is looking at that every quarter and assessing the different economic impacts of our local area, the larger macro area and trying to identify where is there stress potentially in a portfolio that we're not seeing and not already being accounted for. And then, of course, you're seeing on the unfunded side, that's largely impacted by the utilization rates of the lines that are being used. And so you're seeing a natural inflow and outflow of that as well.

Christopher Marinac: Okay. Great. And then a question on deposits. Can you talk a little bit about what's potential on deposits as rates are higher? Does that give you more latitude with new customers? And just curious, I know competition is always very fierce, but do you what do you sense in terms of deposit flows the next year?

Richard Vari: Yes, yes. And you're spot on. Funding competition in our market is just always naturally competitive. And what we're seeing here, interestingly enough, it was -- we saw a lot of deposit questions and customers asking questions ahead of what a potential rate move could be. And it was almost like you had a little bit of deposit froth with the uncertainty what was going to happen. After the Fed decided to move rates, we actually saw a little bit of a pullback in rates as the market digested what happened and expectations about the future change. But we're definitely in a competitive market. We have the ability to be a little bit choosy with how we target any increases. We're being very diligent about where and how we do those. And we will have the benefit of being able to lag a lot of our deposits, particularly on the time side. We'll be able to ladder those in and get the benefit of the rate change with our floating rate book and our deposits will certainly lag that. So we'll see some margin stability just from the natural dynamics there.

Christopher Marinac: Great. And last question just goes back to your share repurchase plans and kind of where on the priority list is that going to be in the next 12 months?

Jeff Dick: So we had some good activity that any time we repurchase shares, the one thing we have to be conscientious of is our concentration of commercial real estate. And so we've got that back under the 375% as the Board's limit in that area. And we're, as Tom said, continuing to focus on C&I or owner-occupied lending. So as we get comfortable with where that number is now and as we see any opportunities, we'll be looking at the potential, but we have some room left in our current buyback.

Christopher Marinac: And Jeff, is it fair to say that capital could be growing as fast, if not faster than the balance sheet at this point?

Jeff Dick: I'm not sure of the context. I think our earnings retention has always done a good job of augmenting our capital needs. But yes, it's -- there's still good loan opportunities out there. I think the biggest challenge these days is getting reasonably cost deposits to grow with as well. So that is going to be a challenge for us. But I know the new Head of Business Banking has -- I think we brought on 3 new business bankers, and we're looking at adding to that team as we can. And hopefully, that continues to bring opportunities for new low-cost relationships overall.

Richard Vari: Well I'll just -- I'll add on there. It's evident, and I made the comment earlier in the slide deck, just our average balance of noninterest-bearing deposits are up year-over-year, and you're seeing that due to the team's efforts there and targeting new customers and going after those good low-cost relationships. So we're seeing that play out in the mechanics.

Jeff Dick: Thank you, Chris, for your questions. We always appreciate your perspective. And we've got just a few questions in the portal. The first one is asking how much of the $1.8 million net charge-off was against the big loan that went bad and...

Richard Vari: Yes. The $1.8 million charge-off there that's being mentioned, it was a $1.4 million charge-off on the one particular loan. We had a couple of other OREO properties that were disposed during the quarter that resulted in the roughly $300,000 to $400,000 of the additional charge-offs there. As we mentioned on the call, the larger loan was downgrades and nonaccrual after quarter end. And so you're not seeing that reflected there as we're still digesting that.

Jeff Dick: And so yes, we did retroactively add that to the nonperforming assets as of the quarter end, even though really the decision was made late last week. Go ahead.

Richard Vari: Yes. And just to add into this question, there was just a question about what the interest reversals were, the impact for this quarter for some of the loans that did go to nonperforming. And we actually -- we did have a couple of loans that did go to nonperforming where we did reverse the interest. But if you recall back earlier in the presentation where we had the full recovery of the loan and we got all the interest back, the interest recovered on that loan was actually more than the interest that we had to reverse with some of the other nonperforming. And so we actually saw a positive in that perspective throughout the quarter.

Jeff Dick: And ironically, the loan that we just placed on nonaccrual, actually, they have made their most recent September payment. So that's why -- and some of the things that we're dealing with on this one are really in the moment. We have some questions on -- we'll stay with the -- what our management's return on average assets and return on average total common equity goals as the most recent ratios are low.

Richard Vari: Yes. No, that's a great question. When we're thinking about our performance goals in these particular metrics, we often talk about 2023 being the best year that the banks have and what were our metrics there and how do we get back to that. So if you -- that's something that we're very focused on. And if you're looking back at what those are, that really translates to a return on average tangible common equity of 14-plus percent and return on average assets of over 1%. So that's what we're focused on where we want to be.

Jeff Dick: Yes. Okay. And what is management's assessment of the range of potential losses on the $28.8 million nonperforming loan. And again, I'll kind of start on that one. And as we indicated, it literally is happening kind of almost in real time here. And so we have ordered updated appraisals. We've ordered brokers estimates of value. We're working sort of every angle on this, but it's very fluid right now. And so unfortunately, this is all like it's real time. And I don't know if anybody else has anything to add to it, but we're sorting through this one.

Tom Floyd: That's it. I mean new information was learned by management on Friday, the 23rd. We took action at that time, and we're going to continue to do diligence actively, and we'll know more in the coming days and weeks.

Jeff Dick: And Tom, the other question here is in the last question right now is how significant are the delinquent loans in the says 50- to 89-day delinquency bucket.

Tom Floyd: Sure, yes. So there's a number of those that have been resolved since the quarter end where there's some short-term issues that we were able to get resolved. And we are constantly updating our watch list and our substandard loans. We talk about them and committee once every 2 weeks. And we do that until they're resolved. And with that list, there was some noise there at the end of the quarter, but we continue to work through that diligently. And if we identify an issue as we're going through this, we escalate it and take the appropriate steps.

Jeff Dick: So the significance, I mean, from a relative basis, some of them have been resolved percentage-wise, is there anything that you can add to that or not?

Tom Floyd: So we -- we're looking at the 30 to 90. The question is specific to 50 to 90. I mean I don't want to misspeak, but I think roughly 1/3 since quarter end, and then we're continuing to work the others rigorously so.

Jeff Dick: And yes, some of these are just perennial slow pays. But generally speaking, most of them that we were talking about earlier are -- have some good directional consistency. So it's -- we don't think -- we don't see it as highly significant at this point in time pointing to future issues or problems.

Tom Floyd: That's right.

Jeff Dick: All right. We have one that just came in. What do you expect nonperforming and classified loans to be next quarter, resolved dropping off and new being added. And so it's interesting that I can take a little bit of that because we talk about this so much in committee, and that is the $20 million relationship is either paid off or turned over to us in this quarter, later in the quarter. And if it's turned over to us, it may not get immediately resolved, but at least we'll be through the court issues at that point in time, and we'll be able to take appropriate actions in market. Tom, anything on that one?

Tom Floyd: No, exactly. It gives us the ability to transact this quarter. So whether that happens at the end of this quarter or in the beginning of the next, that's the likely time line to transact on that one. There's always a chance it will get paid in full. But again, if not, it puts us in a position that we can transact and get that one disposed of.

Jeff Dick: The $14.5 million is something similar kind of planned. There's -- in January, it's not as far through the courts, but there's going to be they'll either resolve it or sort of start the process of handing over the keys in January as well.

Tom Floyd: Correct. In the beginning of January. And then -- so that one does have a plan with the borrower to move it along. And so that one is more of a first quarter resolution on that. And then kind of just going down the list there, the $6 million, I don't believe that will be fully resolved this quarter just because if you look at sales absorption in the condo project right now, but it should start to come down each quarter as you get sales. It is only 9 units. We believe they're priced well, and those will sell and go from there. And the other ones are mix. I mean the $19 million, we have some that will come out, we believe, this quarter, some of the smaller ones, it's a little bit more of a granular pool, and we continue to try to solve those. Now there's always the potential for new information to come up as there is in any situation. So we continue to closely monitor and take the appropriate action.

Jeff Dick: Yes. So the key thing right now is that there's, what is it, 19 classified relationships that are, as you said, being looked at by committee every 2 weeks and certainly addressed by the loan officer, yourself, the Chief Credit Officer on an ongoing basis. And so they're getting good attention. And so those that we can act upon, we will continue to do that. As far as new additions to it, we're not seeing anything at this point in time, but it's -- that's not an absolute task as we learned from our most recent last few weeks having this one pop up when we thought it was actually starting to show some signs of improvement that can happen. It doesn't typically happen, but it can. And so that's one of the things that we're dealing with right now, but we're encouraged by the actions and activities that we're seeing progressing, getting some of these resolved. And you can be rest assured that we're diligently sort of on it. The team is focused. We don't have a workout specialist who's rewarded for getting rid of things at any price. We're really trying to take a precision kind of approach on this to get what's in the best interest of the company. Any other thoughts on that?

Richard Vari: I was just going to say, as I mentioned earlier, workouts never go as quickly as you'd like them to and the wheels of the court system grind slowly. And it's nice we have a few of those that will be out of that system, and we can transact on, like you said, it would be good to make some progress there.

Tom Floyd: That's right.

Jeff Dick: All right. Well, thank you, everybody, for joining us today. And we look forward to working very hard and getting improvements in the portfolio, and we'll be talking with you again at the end of the next quarter, if not before. Thank you again. I appreciate all of your investment.