Executive Summary / Key Takeaways

• MainStreet Bancshares (NASDAQ: MNSB) is pivoting back to its core community banking operations in the Washington, D.C. metropolitan area, discontinuing its Banking-as-a-Service (BaaS) initiative to focus on proven strengths and efficiency.
• Recent financial performance shows positive momentum in the core bank, with net interest margin expanding to 3.30% in Q1 2025, driven by successful deposit repricing and stable loan yields, a trend expected to continue.
• Management is targeting significant expense reductions, projecting a 40% lower run rate in 2025 compared to 2024, primarily from the discontinuation of the BaaS platform, aiming to improve profitability and efficiency.
• Asset quality metrics, while showing an increase in non-performing and past-due loans in Q1 2025 compared to the prior year, are being actively managed, with a significant reduction in non-performing loans anticipated in Q2 2025 from a specific resolution.
• The company maintains strong capital levels, well exceeding regulatory requirements and internal targets even under stress scenarios, providing a solid foundation amidst ongoing economic and market uncertainties.

A Community Bank's Strategic Pivot in a Dynamic Market

MainStreet Bancshares, Inc., through its subsidiary MainStreet Bank, has carved out a niche in the competitive Washington, D.C. metropolitan area banking landscape. Founded on a branch-light, tech-forward strategy, the bank commenced operations in 2004, quickly leveraging technologies like remote deposit capture to serve small and medium-sized businesses and professionals. This early emphasis on digital delivery and personalized service aimed to differentiate MNSB from larger regional and multinational banks, positioning it to compete effectively with other community banks by offering local decision-making and tailored financial products.

The bank's strategic journey included becoming a financial holding company in 2021 to broaden its activities and establishing MainStreet Community Capital, LLC to engage in community development through initiatives like New Market Tax Credits. In recent years, recognizing the evolving challenges in traditional deposit growth, MNSB embarked on an ambitious investment in a full-stack Banking-as-a-Service (BaaS) platform, Avenu, intended to capture low-cost deposits and fee income from fintech partners.

However, the path of innovation proved challenging. The timeline and costs associated with developing and deploying the Avenu platform extended beyond initial expectations, particularly in light of heightened regulatory scrutiny and consent orders issued to other banks in the BaaS space, which necessitated delays to ensure full compliance. This extended timeline for expected return on investment ultimately led the company to make a significant strategic decision in the first quarter of 2025: to pivot away from the Avenu initiative and refocus its energy squarely on the core community banking business.

This strategic shift is now the central theme for MNSB. Management is directing resources and attention back to the foundational strengths of the bank – its relationships, local market expertise, disciplined lending practices, and established digital infrastructure within the core business. The goal is to leverage these elements to drive profitability, enhance efficiency, and deliver value to shareholders by concentrating on what the bank does best.

Core Banking Strength and Technological Foundation

MNSB's core banking segment provides a comprehensive suite of services, including diverse deposit products and a broad array of commercial, real estate, and consumer loans. The bank's operational model emphasizes technology within this core framework, offering robust online and mobile banking, remote check deposit for businesses, and participation in reciprocal deposit networks like IntraFI, which provides access to FDIC insurance coverage up to $265 million. This technological foundation supports efficiency and customer convenience, enabling the bank to compete effectively without an extensive physical branch network. While precise, directly comparable market share figures for all niche competitors are not publicly detailed, MNSB's focus on business banking and its digital tools suggest a strategic positioning aimed at capturing market share from less agile competitors.

The decision to discontinue the full-scale Avenu BaaS build-out, while representing a significant investment that did not yield the anticipated return, underscores a commitment to strategic flexibility and focusing capital where it can generate the best results. The intangible asset related to Avenu was fully written off in Q4 2024, a non-recurring item that negatively impacted 2024 earnings but had a positive effect on tangible book value. A minimal maintenance level for the Avenu software is being kept, exploring potential alternative uses or sale, while the separate Venue cannabis payments solution remains under evaluation as a distinct, potential future opportunity, leveraging some existing technological capabilities.

Financial Performance Reflecting Strategic Adjustments

MNSB's financial performance in the first quarter of 2025 provides insight into the impact of its strategic pivot and balance sheet management. Net income for Q1 2025 was $2.5 million, a decrease from $3.3 million in Q1 2024, primarily influenced by a significant increase in non-interest expenses. However, the core earning engine, net interest income, showed positive momentum, increasing by approximately $0.9 million to $16.5 million in Q1 2025 compared to $15.6 million in the prior year period.

This improvement in net interest income was driven by a $0.5 million increase in interest and fees on loans, reflecting growth in the average loan portfolio balance. Crucially, the net interest margin (NIM) expanded to 3.30% in Q1 2025, a notable increase of 34 basis points from Q4 2024 and slightly up from 3.29% in Q1 2024. This expansion occurred despite a decrease in the average yield on interest-earning assets (down 25 bps to 6.57%), highlighting the success of the bank's efforts to lower its funding costs. The average cost of interest-bearing deposits decreased significantly to 4.17% in Q1 2025 from 4.77% in Q1 2024, a direct result of strategic decisions in late 2024 and early 2025 to reprice and replace higher-cost deposits, including wholesale CDs, at more favorable rates.

Non-interest income saw an increase of $143,000 in Q1 2025, reaching $939,000, boosted by a gain on retirement of subordinated debt and higher deposit account service charges. However, total non-interest expense surged by $1.8 million to $14.3 million in Q1 2025. This increase was largely attributable to higher salaries and employee benefits (including non-recurring severance costs related to the Avenu pivot), increased loan workout expenses within other operating expenses, and higher outside services costs (professional fees, cloud services). These expenses reflect the costs associated with winding down the Avenu initiative and managing asset quality.

Total assets saw a slight decrease of $5.3 million to $2.22 billion at March 31, 2025, compared to December 31, 2024. Net loans increased nominally by $1.2 million to $1.81 billion. Deposit balances remained relatively stable quarter-over-quarter at $1.91 billion, although the mix shifted, with non-interest-bearing demand deposits increasing and interest-bearing demand and money market deposits decreasing, while savings/NOW and time deposits increased. The bank strategically increased its reliance on wholesale deposits in Q1 2025 to manage liquidity and interest rate sensitivity, with total wholesale deposits rising to $577.9 million.

Asset Quality and Risk Management

MNSB operates in a market with inherent risks, particularly concerning commercial real estate (CRE) concentrations. As of March 31, 2025, the bank's construction, land development, and other land loans represented 115.6% of consolidated risk-based capital, and total CRE loans (as defined by Agency guidance) were 388.2% of consolidated risk-based capital. While these ratios indicate significant concentrations, management emphasizes its extensive experience, rigorous underwriting, and proactive risk management framework, including quarterly stress testing of earning assets. Post-stress capital ratios consistently exceed both regulatory "well capitalized" thresholds and the bank's own higher minimum targets.

Asset quality metrics showed some deterioration in Q1 2025 compared to the prior year. Non-performing loans stood at $21.7 million at March 31, 2025, stable since year-end 2024 but up from $9.3 million a year earlier. Management is actively addressing these, noting that approximately 52% of the current non-performing balance is tied to a single relationship expected to be resolved with a full payoff in June 2025, which would significantly reduce the total non-performing loan balance to around $10.5 million. The remaining balance is spread across a small number of relationships. Past due loans (30-59 days) also saw a temporary increase to $40.1 million at quarter-end, primarily due to timing issues for a limited number of borrowers, with over half brought current since the quarter closed.

Criticized and classified loans have increased compared to Q1 2024, with management attributing the rise in criticized loans mainly to two multi-family relationships impacted by rising rates and local policies, and classified loans to a segment originated in 2021 facing cost increases and delays. Despite these challenges, management is working diligently towards resolutions, expecting improvement in classified loan levels. The allowance for credit losses on loans was $19.5 million at March 31, 2025, stable since year-end 2024. The provision for credit losses on loans was $0 in Q1 2025, reflecting stable non-performing loan levels and limited loan growth during the quarter. Management believes the current allowance is sufficient based on available information and expects the trend to normalize as non-performing loans are resolved.

Outlook and Competitive Positioning

MNSB's outlook is now firmly rooted in optimizing its core banking operations. Management projects low-single-digit loan growth for 2025, focusing on segments like owner-occupied commercial real estate and C&I lending where they see ample opportunity in their market niche. They are deliberately slowing investor CRE lending due to market uncertainties.

A key driver for future profitability is the expected continued expansion of the net interest margin. This is anticipated to result from the ongoing repricing of maturing CDs at lower rates throughout 2025 and the bank's ability to maintain attractive yields on new loan originations. Management is also highly focused on expense control, projecting a significant reduction in the overall non-interest expense run rate for 2025 compared to 2024, largely due to the discontinuation of the Avenu platform. This efficiency drive is expected to improve profitability metrics going forward.

In the competitive landscape, MNSB positions itself against larger regional banks like Regions Financial (RF) and Huntington Bancshares (HBAN), which benefit from greater scale and broader geographic reach, often resulting in lower operating costs per unit and higher overall profitability metrics (e.g., RF's TTM Net Margin of 20% and ROE of 11% vs. MNSB's TTM Net Margin of -9.14% and ROE of -5%). MNSB competes by emphasizing its local expertise, personalized service, and technological capabilities within its niche. Its digital platform, offering services like remote deposit and extensive ATM access, provides efficiency advantages that counter the scale of larger rivals. Against smaller regional peers like Riverview Bancorp (RVSB), which shows more consistent, albeit modest, revenue growth (RVSB TTM Revenue Growth 2.82% vs. MNSB's estimated 5-10% annual growth trajectory), MNSB aims to differentiate through its specific business-focused lending niches and digital service delivery. While MNSB's recent profitability has been impacted by non-recurring items and asset quality challenges, its core NIM expansion and planned expense reductions signal a path towards improved financial performance relative to peers. The bank's strong capital position also provides a buffer against potential future credit cycles or market volatility, a key factor in a competitive environment.

Conclusion

MainStreet Bancshares is undergoing a strategic recalibration, shedding its ambitious but costly BaaS initiative to concentrate on its core strengths as a community bank in the vibrant D.C. metropolitan area. The Q1 2025 results demonstrate positive momentum in the core business, particularly in net interest margin expansion driven by effective deposit cost management. While asset quality requires continued vigilance and active management, specific resolutions are expected to improve key metrics in the near term. The commitment to significant expense reductions in 2025 positions the bank for enhanced efficiency and profitability. MNSB's competitive stance relies on leveraging its local market knowledge, relationship banking model, and established technological capabilities to differentiate itself and capture opportunities within its targeted lending and deposit segments. For investors, the thesis hinges on the successful execution of this focused strategy, translating core banking strength, cost controls, and improving asset quality into sustainable earnings growth and enhanced shareholder value.