Q2 2023 MainStreet Bancshares Inc Earnings Call
Speaker 1: 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.
Speaker 1: So far, for 2023, 63% of the $115 million that we've originated in floating rate loans have floors with an average rate of 7.68%.
Speaker 1: We've also booked $102 million in fixed rate loans this year.
Speaker 1: 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.
Speaker 1: The commercial real estate loans that we booked in the second quarter are in good sectors for our market.
Speaker 1: with good rates and terms. We booked one office loan for $199,000 to a good customer with a strong loan to value.
Speaker 1: 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.
Speaker 1: which gives us an opportunity to work through the issues before they become concerns.
Speaker 1: We've managed to reduce our investor CRE exposure down slightly to 363% of capital, which is intentional given the current economy.
Speaker 1: Loans to invest or office space has been a hot topic this year.
Speaker 1: Candidly, I didn't do a very good job explaining our exposure to the investor office space in our first quarter discussion.
Speaker 1: I think this slide does a much better job showing our very low $13 million exposure to peer office space.
Speaker 1: Our construction portfolio is nicely diversified. In the office category for construction, the entire 9.4M will be owner occupied. After your conversion week, you will be successful at Whoever runs and
Speaker 1: 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.
Speaker 1: Loans outside of our market are generally to customers who reside within our market.
Speaker 1: Our June 30th stress test shows results that are consistent with previous quarters. The stress test includes all earning assets.
Speaker 1: When we deduct the current worst case estimate of $32.5 million from our capital, we remain very well capitalized.
Speaker 1: As we go forward, we are assuming that our monthly expense rate will increase between 2.5 and 3 percent per month for the remainder of the year. This includes amortizing our software solution.
Speaker 1: We continue to learn about cryptocurrencies, but we aren't engaged in any activity. We've converted all of our loans from LIBOR to Sulfur, and we're always happy to talk about M&A opportunities.
Speaker 1: Shifting gears to our Avenue Software as a Service solution, I'm very pleased to report that Avenue is live.
Speaker 1: Our first client has passed all phases of sandbox testing and have been given the production key.
Speaker 1: 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.
Speaker 1: We've been judicious on our overall development spend, which is currently at 12.4 million.
Speaker 1: The team is now fully staffed and in complete control of the solution.
Speaker 1: Legacy Avenue 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 non-capitalized expenses.
Speaker 1: As we go live with our first client, we have four more clients that have signed agreements and are ready to go.
Speaker 1: There are another four who have their agreements and are completing their due diligence.
Speaker 1: There's six 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 client is an understatement.
Speaker 1: Our success is tied to each client's success.
Speaker 1: A client with an excellent solution is an assured success.
Speaker 1: What we do know is that the opportunities for the banking as a service industry are significant and continually growing.
Speaker 1: We also know that some of the middleware players have already exited the market prior to even launching their solution due to funding constraints.
Speaker 1: With that said, the team is working very hard and will do their level best to achieve the projections that we provided.
Speaker 1: We project a range of new DVA balances between 5 million and 25 million for 2023, and between 50 and 125 million for 2024.
Speaker 1: We project that this year's fee income will be less than $100,000 and next year's fees will be between $400 and $1.25 million.
Speaker 1: 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.
Speaker 1: At this point, we'll open the line to our analysts for questions. Afterwards, we'll address the questions you submitted through the portal.
Speaker 1: I think today we are starting with Chris Maranak. Chris, if you're ready for us, do you have any questions or comments?
Speaker 2: Hey, Jeff, good afternoon. Thank you for hosting the call. Can you talk about the timing of sort of ongoing deposit rate changes and then maybe some of the kind of loan re-pricing and how the catch-up of loan yields will play out?
Speaker 1: So, deposit pricing, you know, is going to be obviously an industry problem for the short term.
Speaker 1: 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,
Speaker 1: we feel that they're pretty happy with where we're at.
Speaker 1: We may need to...
Speaker 1: increase a little bit if rates go up 25 basis points. Clearly if they got more than that, we'll have to adjust.
Speaker 1: On the loan side, I think we're...
Speaker 1: with this next 25 basis points, we'll see a little jump in all of our variable rate funding but
Speaker 1: So, you know, that's why we tried to project this time. We tried to project the net interest margin through year end. In our simulation model, we do. It is, it is.
Speaker 1: you know, taking into account any changes that we have dialed into the balance sheet.
Speaker 1: I think that's going to be a good indication of where we're at.
Alright 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.
Yeah, it's a growth rate from the previous quarter. However, the large amount has to do with, as was put into the deck, the increase in the non-capitalized expenses, which were $275,000 in there, and also the $120,000, which is going to be amortized.
The twelve point four million dollars will start in September
Sounds good. Thank you both.
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. We had talked about our intention to pay dividends, and we had talked about our intention to pay dividends.
And before I turn over to Matt, one of the things that had come up as a question earlier was in the in the in the big slide deck, we had talked about our intention to pay dividends. But at the time we were in budget lunches we had, because that was the tenfold billion
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 clear 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.
I'm curious, just a level set, what are your expectations by the end of the year? So 4-2-23, quarterly expenses. Does some of this level of growth provided in the presentation, do we expect that to carry into 2024? And then third part of this is cash.
By then, by the end of this year, what are the expected annualized and ongoing expenses just for Avenue?
Well, let me answer the first question on the expenses. I think that 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 the guidance 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 we any once again as we've always said we will try to control expenses as best we can With everything that we have going on You know our efficiency ratio, you know 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? 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 Avenue?
the ongoing annual kind of expense run rate just for Avenue.
I think I don't have that broken out. Yeah, we didn't have that. That is something that we could include in the next quarter's deck. sea
Okay, maybe go into page 15 of the presentation. I just wanted to be clear what we're looking at here is a, you know, it says it's a trailing 12 month. And so by the fourth quarter 23, we should be thinking about, you know, that the quarterly name is something lower than the 4, 23, 4, 24, because it includes.
you know, the trailing four quarters. Is that the right read? Yes.
Okay, so the fourth quarter name should, you know, by this match, we'd actually be closer to like 395 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 clarification after the call.
I didn't see that number. I just asked for this. And so I think that's something we could probably provide clarification after the call. Okay.
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
The limits that the board put in place for down 1, 2, 3, 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 hurtful.
you know, representation. You know, I indicated that we put, you know, we started putting floors. 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,
curious how meaningfully that down 17.65% has changed.
Yeah, well, yeah, so we'll look at that and...
maybe have some, you know, off, you know, just discussions on how meaningful it will be to put that in, because now 100 might be relevant.
have some, you know, off, you know, just discussions on on how meaningful it will be to to put that in because now 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 the deposit growth through the end of the year. Thank you.
I mean, right now, we're still on 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 long growth, yeah. And I would say, if anything, it'd be in the lower single digits, and then 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 Avenue to to assist in getting that up right-sized.
That's all I had. Thank you. Okay. There's a few questions this time. First question, could you provide additional color on Avenue staffing? I thought about putting in an org chart, and I definitely will next time. Okay. Thank you.
you know, we're staffed from the, you know, the production, the engineering to the, you know, development. I think I showed in there we've got our cybersecurity staff is I think five strong and and yeah, so we've got the QA. It's a full complement. It's a fully developed staff that's
that's taken over the project at this point in time. Definitely we'll put it 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 tests for loan losses? We did a little bit more of that last time. I can tell you on our construction legislation and his
testing, as I said, the safest places are before the project starts and when it's absolutely finished.
In between that, we know that a dollar in doesn't equate to a dollar of an increased value. In fact, we do exponential discounting throughout the process in order to, I think, fairly represent, you know, the project's value. Of course, when it's getting close to the market, we know that a dollar in doesn't equate to a dollar of an increased value.
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.
I'm drawing a blank right now.
on the ratios that we use for the stress.
Do you recall Andrew?
thereno.
Well, it's on the income approach, the interest level, we stress 2%.
immediate and sustained vacancies vacancy is 5% and the cap rate is 2% yeah 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 boldly and that type of a thing.
Okay.
We have...
Does the margin projection through year end assume a similar migration rate of dollars from non interest bearing deposits or lower cost interest bearing deposits into higher cost money? Yes, we use
An independent third party is 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 non-interest 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 it leveling off at this point in time. Yeah. 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. Yeah. So unless there's some more on it.
down 20% Link 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. Yeah, I would agree with that, Jeff. Most of that accounts, what you see now, the operating accounts, the day-to-day operations of these businesses.
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 Avenue a success?
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 371 average in the slide deck? I actually published CD rates are lower than that. I think what you're seeing there is, you know, we have done some wholesale funding and that's obviously at the margin.
So that's that's blended in with the CDs that we've raised that is correct. Yeah. Yeah, 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. OK. You guys have them sit back? No.
All right. Have we missed any questions here?
Let's see.
should have the
Obviously updating Avenue performance on a quarterly basis
I'm not sure if some of it got cut off for me, but I'll follow up with you after the call. Yeah, we'll be giving updates on a quarter on quarter basis.
You want to address Eric's last question there because
I didn't see it.
I'm not sure. Yeah, it's regarding large wire fraud that took place at 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 not, knock on wood, not lost any money from any of these attempts on us. Yeah, it's interesting. One of the main sources of wire fraud is still email instruction interruption.
you know, when that first started happening, they would have to change something in the two 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.
email 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... So, it may cause a Sweet Bear and we can come back again pretty soon after I Um.
email and, you know, we saw on each one. So we're doing everything that we can. We have, you know, our team, the fraud team now is a few people. You know, I'm happy to say that we just caught a pretty significant kite where, you know, we ended up not losing any money. And...
So, you know, knock on wood, that's... It's a... The team is just very, very dedicated and very thorough, but you've identified, Eric, you know, a key problem that we're experiencing right now.
They keep getting better and better at what they do.
Again, if we didn't answer your question, 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 that will go up on our website as well. As this presentation and hopefully will continue to give you enough information to
help you to make those critical decisions. But we feel very confident, very pleased with the performance, you know, to date, year to date. We think, you know, we're not seeing any trends internally that would lead us to believe that, you know, anything will happen for the rest of the year otherwise.
you know, barring any significant economic changes. So as always, we appreciate all of you who have invested in Main Street Bank shares, 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.