MainStreet Bancshares(MNSB) - 2025 Q2 - Quarterly Report

PART I – FINANCIAL INFORMATION Item 1 – Consolidated Financial Statements This section presents the unaudited consolidated financial statements, including the Statements of Financial Condition, Income, Comprehensive Income, Stockholders' Equity, and Cash Flows, highlighting a decrease in total assets and deposits, a significant increase in net income and EPS for the quarter, and a shift in investing activities from cash usage to provision Consolidated Statements of Financial Condition This chapter details the company's financial position, showing a decrease in total assets, cash and cash equivalents, and total deposits Total Assets: | Date | Amount (in thousands) | | :--- | :--- | | June 30, 2025 | $2,114,781 | | December 31, 2024 | $2,228,098 | | Change | -$113,317 (-5.1%) | Cash and Cash Equivalents: | Date | Amount (in thousands) | | :--- | :--- | | June 30, 2025 | $133,284 | | December 31, 2024 | $207,708 | | Change | -$74,424 (-35.8%) | Total Deposits: | Date | Amount (in thousands) | | :--- | :--- | | June 30, 2025 | $1,798,547 | | December 31, 2024 | $1,907,794 | | Change | -$109,247 (-5.7%) | Unaudited Consolidated Statements of Income This chapter presents the company's income performance, indicating a substantial increase in net income and earnings per common share for the three months ended June 30, 2025 Net Income (Three Months Ended June 30): | Period | Amount (in thousands) | | :--- | :--- | | 2025 | $4,590 | | 2024 | $2,618 | | Change | +$1,972 (+75.3%) | Net Income (Six Months Ended June 30): | Period | Amount (in thousands) | | :--- | :--- | | 2025 | $7,043 | | 2024 | $5,923 | | Change | +$1,120 (+18.9%) | Earnings Per Common Share - Basic (Three Months Ended June 30): | Period | EPS | | :--- | :--- | | 2025 | $0.53 | | 2024 | $0.27 | | Change | +$0.26 (+96.3%) | Unaudited Consolidated Statements of Comprehensive Income This chapter outlines the company's comprehensive income, showing a significant increase for the three months ended June 30, 2025, and a positive shift in unrealized gains on available-for-sale securities Comprehensive Income (Three Months Ended June 30): | Period | Amount (in thousands) | | :--- | :--- | | 2025 | $4,498 | | 2024 | $2,505 | | Change | +$1,993 (+79.6%) | Unrealized gain (loss) on available for sale securities (Six Months Ended June 30): | Period | Amount (in thousands) | | :--- | :--- | | 2025 | $247 | | 2024 | $(565) | | Change | +$812 (Shift from loss to gain) | Unaudited Consolidated Statements of Stockholders' Equity This chapter details changes in stockholders' equity, reflecting an increase primarily driven by net income and stock-based compensation Total Stockholders' Equity: | Date | Amount (in thousands) | | :--- | :--- | | June 30, 2025 | $213,470 | | December 31, 2024 | $207,991 | | Change | +$5,479 (+2.6%) | - Net income for the six months ended June 30, 2025, was $7.0 million, contributing to the increase in equity[13] - Stock-based compensation expense for the six months ended June 30, 2025, was $1.2 million[13] Unaudited Consolidated Statements of Cash Flows This chapter analyzes the company's cash movements, showing decreased cash from operating activities, a shift to cash provided by investing activities, and increased cash used in financing activities Net cash provided by operating activities (Six Months Ended June 30): | Period | Amount (in thousands) | | :--- | :--- | | 2025 | $2,645 | | 2024 | $4,817 | | Change | -$2,172 (-45.1%) | Net cash provided by (used in) investing activities (Six Months Ended June 30): | Period | Amount (in thousands) | | :--- | :--- | | 2025 | $37,104 (provided) | | 2024 | $(78,784) (used) | | Change | +$115,888 (Shift from use to provide) | Net cash (used in) provided by financing activities (Six Months Ended June 30): | Period | Amount (in thousands) | | :--- | :--- | | 2025 | $(114,173) (used) | | 2024 | $50,913 (provided) | | Change | -$165,086 (Shift from provide to use) | Notes to Consolidated Financial Statements This section provides detailed notes to the unaudited consolidated financial statements, covering organizational structure, accounting policies, investment securities, loans, derivatives, fair value measurements, earnings per share, accumulated other comprehensive loss, property held for sale, and segment reporting, highlighting the Company's transition to an accelerated filer, changes in investment and loan portfolios, and the impact of strategic shifts in the Financial Technology segment Note 1. Organization, Basis of Presentation and Impact of Recently Issued Accounting Pronouncements This note describes the company's structure, accounting basis, and the impact of recent accounting pronouncements, including its transition to an accelerated filer and adoption of new segment reporting standards - MainStreet Bancshares, Inc. is a financial holding company, parent to MainStreet Bank and MainStreet Community Capital, LLC[16] - The Company transitioned from an 'emerging growth company' to an 'accelerated filer' effective December 31, 2024, and remains a 'smaller reporting company'[17] - ASU 2023-07, 'Segment Reporting,' was adopted on December 31, 2024, leading to updated interim disclosures in Note 9[25] Note 2. Investment Securities This note details the company's investment securities portfolio, showing a slight decrease in total investment securities and significant unrealized losses on available-for-sale securities due to interest rate changes Total Investment Securities (Fair Value for AFS, Amortized Cost for HTM): | Date | Amount (in thousands) | | :--- | :--- | | June 30, 2025 | $71,000 | | December 31, 2024 | $71,825 | | Change | -$825 (-1.1%) | Investment Securities Held-to-Maturity (HTM) Amortized Cost: | Date | Amount (in thousands) | | :--- | :--- | | June 30, 2025 | $14,846 | | December 31, 2024 | $16,078 | | Change | -$1,232 (-7.7%) | - Unrealized losses on available-for-sale securities at June 30, 2025, totaled $9.7 million, primarily due to changes in interest rates rather than credit deterioration[35][40] Note 3. Loans Receivable This note provides details on the company's loan portfolio, indicating a decrease in net loans and a significant reduction in nonaccrual loans Net Loans: | Date | Amount (in thousands) | | :--- | :--- | | June 30, 2025 | $1,767,432 | | December 31, 2024 | $1,810,556 | | Change | -$43,124 (-2.4%) | Nonaccrual Loans: | Date | Amount (in thousands) | | :--- | :--- | | June 30, 2025 | $7,169 | | December 31, 2024 | $21,650 | | Change | -$14,481 (-66.9%) | - Loan modifications for borrowers experiencing financial difficulty during the six months ended June 30, 2025, totaled $20.4 million in amortized cost basis, primarily involving extended terms on interest-only payments or interest rate decreases[61] Note 3.1 Unfunded Commitments This note outlines the company's off-balance sheet credit exposure, showing a slight decrease in the allowance for credit losses and a reduced recovery of credit losses Allowance for Credit Losses on Off-Balance Sheet Credit Exposure: | Date | Amount (in thousands) | | :--- | :--- | | June 30, 2025 | $272 | | December 31, 2024 | $287 | | Change | -$15 (-5.2%) | - The recovery of credit losses on off-balance sheet credit exposure for the six months ended June 30, 2025, was $(15) thousand, compared to $(652) thousand in 2024, indicating a reduced recovery[73] Note 4. Derivatives and Risk Management Activities This note describes the company's derivative instruments and risk management, specifically detailing a decrease in the notional amount of matched interest rate swaps Notional Amount of Matched Interest Rate Swaps: | Date | Amount (in thousands) | | :--- | :--- | | June 30, 2025 | $210,394 | | December 31, 2024 | $230,417 | | Change | -$20,023 (-8.7%) | - The Company did not record any interest rate swap fee income for the three and six months ended June 30, 2025 or 2024[77] Note 5. Fair Value Presentation This note presents assets and liabilities measured at fair value, detailing the valuation levels for investment securities, derivatives, property held for sale, and loans Assets Measured at Fair Value on a Recurring Basis (June 30, 2025): | Asset Type | Level 1 (in thousands) | Level 2 (in thousands) | Level 3 (in thousands) | Total (in thousands) | | :--- | :--- | :--- | :--- | :--- | | Investment securities AFS | $0 | $68,408 | $1,210 | $69,618 | | Derivative asset | $0 | $14,677 | $0 | $14,677 | | Total | $0 | $83,085 | $1,210 | $84,295 | - Property held for sale, valued at $3.2 million at June 30, 2025, is measured at fair value on a nonrecurring basis using Level 3 inputs (transaction price and estimated selling costs)[90] - Loans, net, had an estimated fair value of $1.78 billion at June 30, 2025, with significant unobservable (Level 3) inputs[94] Note 6. Earnings Per Common Share This note calculates earnings per common share, showing a significant increase in net income available to common shareholders and basic and diluted EPS for the three months ended June 30, 2025 Net Income Available to Common Shareholders (Three Months Ended June 30): | Period | Amount (in thousands) | | :--- | :--- | | 2025 | $4,051 | | 2024 | $2,079 | | Change | +$1,972 (+94.8%) | Basic and Diluted EPS (Three Months Ended June 30): | Period | EPS | | :--- | :--- | | 2025 | $0.53 | | 2024 | $0.27 | | Change | +$0.26 (+96.3%) | Note 7. Accumulated Other Comprehensive Loss This note details the components of accumulated other comprehensive loss, indicating a reduction in the total loss and a decrease in unrealized losses on available-for-sale investment securities Total Accumulated Other Comprehensive Loss: | Date | Amount (in thousands) | | :--- | :--- | | June 30, 2025 | $(7,464) | | December 31, 2024 | $(7,711) | | Change | +$247 (+3.2% reduction in loss) | Unrealized loss on investment securities available-for-sale: | Date | Amount (in thousands) | | :--- | :--- | | June 30, 2025 | $(9,693) | | December 31, 2024 | $(10,014) | | Change | +$321 (Reduction in loss) | Note 8. Property Held For Sale This note describes property designated as held for sale, including a recently acquired building complex with two buildings expected to be sold by year-end 2025 - The Company acquired a building complex during the three months ended June 30, 2025, designating two buildings as held for sale with a carrying amount of $3.2 million[99] - The sale of these two buildings is currently expected to close before the end of 2025[99] Note 9. Segment Reporting This note provides financial information by business segment, highlighting increased profit in Core Banking and a larger loss in Financial Technology due to strategic shifts and nonrecurring costs Segment Profit (Loss) (Six Months Ended June 30): | Segment | 2025 (in thousands) | 2024 (in thousands) | Change (in thousands) | | :--- | :--- | :--- | :--- | | Core Banking | $12,984 | $8,123 | +$4,861 (+59.8%) | | Financial Technology | $(4,195) | $(1,132) | -$3,063 (-270.6%) | | Consolidated | $8,789 | $6,991 | +$1,798 (+25.7%) | - The Financial Technology segment's increased loss was due to expensing software-related costs after Avenu deployment and nonrecurring costs (contract termination, severance) from pivoting away from certain BaaS services[102] Item 2 – Management's Discussion and Analysis of Financial Condition and Results of Operations This section provides management's perspective on the Company's financial performance and condition, covering forward-looking statements, economic impacts, an overview of the Company's operations, critical accounting policies, and detailed comparisons of income statements and financial condition for the three and six months ended June 30, 2025, versus prior periods, with key themes including improved net income driven by lower interest expense, a shift to credit loss recoveries, and strategic adjustments in the Financial Technology segment, alongside a decrease in total assets and deposits Forward-Looking Statements This chapter discusses potential future events and factors that could materially affect the company's actual results, emphasizing that these statements are subject to risks and uncertainties - Important factors that could cause actual results to differ materially include general economic conditions, competition, inflation, interest rate environment, regulatory changes, cyber threats, and asset quality deterioration[104] - The Company disclaims any obligation to revise or update any forward-looking statements[106] Economic Impact of Federal Spending Reductions and New Legislation This chapter analyzes the potential adverse economic effects of federal spending reductions and new legislation on the company's primary market areas - Federal spending reductions, hiring freezes, and layoffs in the Company's primary market areas may have adverse economic effects, particularly after severance payments expire in late 2025[107] - The 'One Big Beautiful Bill' signed on July 4, 2025, permanently extended the new market tax credit program and is not expected to have a material impact on the Company's financial condition[108][122] Overview This chapter provides a general description of the company's business, including its community banking focus, strategic pivot in BaaS services, and Community Development Entity activities - MainStreet Bank is a community commercial bank in the Washington, D.C. metropolitan area, focusing on personalized services and advanced banking technology[112][117] - The Company pivoted away from certain operating BaaS (Banking-as-a-Service) services during the quarter ended March 31, 2025[119] - MainStreet Community Capital, LLC is a certified Community Development Entity (CDE) focused on New Market Tax Credit allocations for Low-Income Communities[122] Critical Accounting Policies This chapter outlines the company's significant accounting policies that require complex judgments and estimates, noting their consistency with prior periods except for recently adopted pronouncements - The Company's accounting policies conform to US GAAP and banking industry practices, requiring significant estimates and assumptions[123] - Critical accounting policies have remained unchanged since the 2024 Form 10-K, except for those noted under 'Recently Adopted Accounting Developments' in Note 1[124] Comparison of Statements of Income for the Three Months Ended June 30, 2025 and 2024 This chapter compares the company's income statement performance for the three-month periods, highlighting increased net income driven by higher net interest income and a shift to credit loss recovery - Net income increased by $2.0 million to $4.6 million, driven by a $3.2 million increase in net interest income and a shift from a provision for credit losses to a recovery[125][126] - Total interest income increased by $850 thousand (2.5%) to $34.4 million, primarily due to a $788 thousand increase in interest and fees on loans[127][128] - Total interest expense decreased by $2.4 million (13.3%) to $15.5 million, mainly due to a $2.2 million decrease in interest expense on interest-bearing deposits[131][132] - Net interest income increased by $3.2 million (20.6%) to $18.9 million, with the net interest margin rising 55 basis points to 3.75% on a tax-equivalent basis[133] - Non-interest expense increased by $1.9 million (14.9%) to $14.7 million, including $1.8 million in non-recurring costs related to pivoting from BaaS services[148] Comparison of Statements of Income for the Six Months Ended June 30, 2025 and 2024 This chapter compares the company's income statement performance for the six-month periods, showing increased net income due to higher net interest income and lower interest expense - Net income increased by $1.1 million to $7.0 million, driven by a $4.1 million increase in net interest income and a $2.8 million decrease in total interest expense[150] - Total interest income increased by $1.4 million (2.1%) to $67.4 million, primarily due to a $1.3 million increase in interest and fees on loans[151][152] - Total interest expense decreased by $2.8 million (8.1%) to $31.9 million, mainly due to a $2.4 million decrease in interest expense on interest-bearing deposits[155][156] - Net interest income increased by $4.1 million (13.1%) to $35.4 million, with the net interest margin rising 28 basis points to 3.52% on a tax-equivalent basis[157][158] - Non-interest expense increased by $3.7 million (14.8%) to $29.1 million, primarily due to increases in salaries and employee benefits (including severance costs) and outside services related to the BaaS pivot[173] Comparison of Statements of Financial Condition at June 30, 2025 and December 31, 2024 This chapter compares the company's financial position, detailing decreases in total assets, net loans, and total deposits, alongside a significant reduction in non-performing assets and strong capital adequacy - Total assets decreased by $113.3 million (5.1%) to $2.11 billion, primarily due to decreases in cash and cash equivalents ($74.4 million) and net loans ($43.1 million)[175] - Net loans decreased by $43.1 million (2.4%) to $1.77 billion, driven by significant decreases in construction and land development loans and commercial & industrial loans[177] - Total non-performing assets decreased significantly by $14.48 million (66.9%) to $7.17 million[202] - Total deposits decreased by $109.2 million (5.7%) to $1.80 billion, mainly due to decreases in money market and time deposits, partially offset by a significant increase in savings and NOW deposits[203] - All capital adequacy ratios exceed 'well capitalized' and internal minimum targets, both pre- and post-stress[192][218] Use of Certain Non-GAAP Financial Measures This chapter explains the company's use of non-GAAP financial measures to supplement GAAP performance evaluation and enhance comparability, with provided reconciliations - The Company uses non-GAAP financial measures, such as adjusted net interest income and net interest margin (fully-taxable equivalent), to supplement GAAP performance evaluation and enhance comparability[220][221] - Reconciliations of these non-GAAP measures to the most directly comparable U.S. GAAP financial measures are provided[221][222] Item 3 – Quantitative and Qualitative Disclosures about Market Risk This section addresses the Company's market risk exposure, primarily focusing on interest rate risk, managed by the Asset/Liability Committee (ALCO) using simulation models to estimate the impact of interest rate changes on net interest income, indicating a positive impact from both significant increases and decreases in rates over a 12-month period Market Risk Management This chapter describes the company's approach to managing market risk, primarily focusing on interest rate risk and the role of the Asset/Liability Committee - The Company's most significant market risk exposure is interest rate risk in its balance sheet[223] - The Asset/Liability Committee (ALCO) is responsible for establishing and monitoring policies and strategies to manage interest rate risk[224] Interest Rate Market Risk This chapter analyzes the company's exposure to interest rate fluctuations, using simulation models to project the impact of rate changes on net interest income Net Interest Income Stress Simulation (June 30, 2025): | Basis Point Change in Interest Rates | Year 1 Change From Level | | :--- | :--- | | +400 | 3.03% | | +300 | 3.36% | | +200 | 2.83% | | +100 | 1.84% | | Level | — | | -100 | (1.48)% | | -200 | (1.42)% | | -300 | 3.29% | | -400 | 8.57% | - Simulation models are used to estimate the impact of immediate and sustained changes in interest rates on net interest income over a 12-month period[225][229] Item 4 – Controls and Procedures Management, including the CEO and CFO, concluded that the Company's disclosure controls and procedures were effective as of June 30, 2025, with no material changes to internal control over financial reporting during the second fiscal quarter of 2025 - The Company's disclosure controls and procedures were evaluated as effectively designed and operating as of June 30, 2025[230] - No material changes in internal control over financial reporting occurred during the second fiscal quarter of 2025[231] PART II – OTHER INFORMATION Item 1 – Legal Proceedings As of June 30, 2025, the Company was not involved in any material legal proceedings beyond routine business operations, and no material proceedings are pending or threatened by governmental authorities - The Company was not involved in any material legal proceedings as of June 30, 2025[232] Item 1A – Risk Factors This section refers readers to the 'Risk Factors' in the Company's Annual Report on Form 10-K for December 31, 2024, and the 'Forward-Looking Statements' in Part I, Item 2 of this 10-Q for a discussion of certain risk factors - For a discussion of risk factors, reference is made to the Annual Report on Form 10-K for the year ended December 31, 2024, and 'Forward-Looking Statements' in Part I, Item 2 of this Form 10-Q[233] Item 2 – Unregistered Sales of Equity Securities and Use of Proceeds The Company did not repurchase any common shares during the three months ended June 30, 2025, and the maximum approximate dollar value of shares that may yet be purchased under existing plans or programs remains at $3.093 million - No common shares were repurchased during the three months ended June 30, 2025[235] - The maximum approximate dollar value of shares that may yet be purchased under existing plans or programs is $3.1 million[235] Item 5 – Other Information During the fiscal quarter ended June 30, 2025, no directors or executive officers informed the Company of the adoption, modification, or termination of any Rule 10b5-1 trading arrangements - No directors or executive officers adopted, modified, or terminated any Rule 10b5-1 trading arrangements during the fiscal quarter ended June 30, 2025[236] Item 6 – Exhibits This section lists the exhibits filed with the Form 10-Q, including various certifications (Rule 13a-14(a) for CEO and CFO, Section 1350) and Inline XBRL documents for the financial statements - Exhibits include Rule 13a-14(a) Certifications of the Chief Executive Officer and Chief Financial Officer, and Section 1350 Certification[237] - Inline XBRL documents for the consolidated financial statements are filed herewith[237] SIGNATURES The Quarterly Report on Form 10-Q was signed on August 8, 2025, by Jeff W. Dick, Chairman & Chief Executive Officer, and Thomas J. Chmelik, Senior Executive Vice President and Chief Financial Officer - The report was signed by Jeff W. Dick (Chairman & Chief Executive Officer) and Thomas J. Chmelik (Senior Executive Vice President and Chief Financial Officer) on August 8, 2025[241]