Analyst Summary
- MainStreet Bancshares experienced a net loss in 2024, a significant downturn compared to profitable years in 2023 and 2022.
- The loss is primarily attributed to increased interest expenses and non-interest expenses, including a substantial impairment charge on computer software (Avenu platform).
- Key financial ratios, including ROAA, ROAE, and NIM, have significantly decreased, indicating a decline in profitability and margin compression.
- The efficiency ratio has worsened, indicating higher operating expenses relative to income.
- Net charge-offs and non-performing assets have increased, signaling potential credit quality issues.
- Despite the challenges, the bank maintains a strong capital position, exceeding regulatory requirements.
- Management is focused on managing interest rate risk and improving efficiency amidst competitive pressures in the deposit market.
- The company’s reliance on wholesale deposits to augment funding highlights the challenges in attracting core deposits.
- Adjusted Net Income was $6.298 million, and the Adjusted Efficiency Ratio was 78.88%, excluding non-recurring items such as the computer software intangible impairment and restructuring expenses.
Opportunities and Risks
- Risk: Increasing net charge-offs and non-performing assets suggest a potential deterioration in credit quality.
- Risk: Compression of the net interest margin indicates vulnerability to interest rate fluctuations.
- Risk: Reliance on third-party service providers and the increasing threat of cyberattacks pose operational risks.
- Risk: Failure of the Avenu platform to generate expected returns and strong competition in the market area pose strategic risks.
- Risk: Changes in laws and regulations could adversely affect its operations, including uncertainty around the CFPB.
- Opportunity: The Washington, D.C. metropolitan area continues to be a strong market with growth potential.
- Opportunity: Involvement in community development activities, through MainStreet Community Capital, LLC, could provide opportunities for growth and positive social impact.
- Opportunity: The Avenu platform, if successfully implemented, could provide access to untapped markets and generate low-cost deposits and fee income.
Potential Implications
Company Performance
- Continued pressure on profitability due to rising interest expenses and operational inefficiencies.
- Potential for further asset quality deterioration if credit risk is not effectively managed.
- Uncertainty surrounding the success of the Avenu platform and its impact on future revenue generation.
- Need for cost-cutting measures to improve the efficiency ratio and reduce operating expenses.
- Requirement for effective interest rate risk management strategies to protect the net interest margin.
- Focus on attracting and retaining core deposits to reduce reliance on wholesale funding.
Stock Price
- Potential for stock price decline due to the net loss and decreased profitability.
- Increased volatility due to concerns about asset quality and strategic investments.
- Negative investor sentiment if the company fails to address the challenges and improve financial performance.
- Possible downward pressure on valuation multiples (P/E, P/B, P/S) due to underperformance compared to industry peers.
MainStreet Bancshares, Inc. (MNSB) SEC Filing Report – Form 10-K (2024)
Executive Summary
MainStreet Bancshares, Inc. reported a net loss for 2024, a significant downturn compared to the profitable years of 2023 and 2022. This loss is primarily attributed to increased interest expenses and non-interest expenses, including a substantial impairment charge on computer software. While the bank maintains a strong capital position and continues to grow its loan and deposit base, the decrease in profitability raises concerns. The company’s strategic investments in technology, particularly the Avenu platform, have not yet yielded the anticipated returns. A cautious approach is warranted, and a “Hold” rating seems appropriate at this time. Management needs to focus on improving efficiency, managing interest rate risk, and realizing the value of its technology investments.
Company Overview
MainStreet Bancshares, Inc. is a financial holding company operating primarily in the Northern Virginia and Washington, D.C. metropolitan area. The company owns MainStreet Bank and MainStreet Community Capital, LLC. MainStreet Bank is a community commercial bank offering a range of banking services to individuals, small to medium-sized businesses, and professionals. The company has also invested in a Banking-as-a-Service (BaaS) solution, Avenu, to provide embedded banking services to fintech companies. MainStreet Community Capital, LLC is a community development entity focused on investing in low-income communities.
Detailed Analysis
Financial Statement Analysis
The following table summarizes key financial ratios and trends:
| Metric |
2024 |
2023 |
2022 |
Trend |
| Return on Average Assets (ROAA) |
(0.47)% |
1.38% |
1.53% |
Decreasing |
| Return on Average Equity (ROAE) |
(4.44)% |
12.66% |
13.98% |
Decreasing |
| Net Interest Margin (NIM) |
3.13% |
4.15% |
4.23% |
Decreasing |
| Efficiency Ratio |
110.85% |
56.69% |
52.19% |
Increasing (Worsening) |
| Net Charge-offs to Average Loans |
0.25% |
0.03% |
0.00% |
Increasing |
| Non-Performing Assets to Total Assets |
0.97% |
0.05% |
0.00% |
Increasing |
| Tier 1 Leverage Ratio (Bank) |
12.08% |
14.66% |
15.05% |
Decreasing |
Key Observations:
- Profitability Decline: ROAA and ROAE have significantly decreased, indicating a sharp decline in profitability.
- Margin Compression: The NIM has compressed, suggesting challenges in maintaining profitability amidst rising interest rates and competition for deposits.
- Efficiency Concerns: The efficiency ratio has worsened, indicating higher operating expenses relative to income.
- Asset Quality Deterioration: Net charge-offs and non-performing assets have increased, signaling potential credit quality issues.
- Capital Strength: Despite the challenges, the bank maintains a strong capital position, exceeding regulatory requirements.
Management’s Discussion and Analysis (MD&A) Insights
Management attributes the decrease in net income to increases in interest expense and non-interest expenses. The impairment of the computer software intangible asset significantly impacted non-interest expenses. The company is focused on managing interest rate risk and improving efficiency. The MD&A highlights the competitive pressures in the deposit market and the need to balance deposit pricing with asset yields.
Risk and Opportunity Assessment
Risks:
- Credit Risk: The increasing net charge-offs and non-performing assets suggest a potential deterioration in credit quality, requiring close monitoring of the loan portfolio.
- Interest Rate Risk: The compression of the net interest margin indicates vulnerability to interest rate fluctuations. Effective management of interest rate risk is crucial.
- Operational Risks: The reliance on third-party service providers and the increasing threat of cyberattacks pose operational risks that could disrupt business and result in financial losses.
- Strategic Risks: The failure of the Avenu platform to generate expected returns and the strong competition in the market area pose strategic risks to the company’s growth and profitability.
- Regulatory Risks: The company is subject to extensive regulation, and changes in laws and regulations could adversely affect its operations. The uncertain future of the CFPB adds another layer of regulatory risk.
Opportunities:
- Market Growth: The Washington, D.C. metropolitan area continues to be a strong market with growth potential.
- Community Development: The company’s involvement in community development activities, through MainStreet Community Capital, LLC, could provide opportunities for growth and positive social impact.
- Technology Adoption: The Avenu platform, if successfully implemented, could provide access to untapped markets and generate low-cost deposits and fee income.
Uncommon Metrics
- Avenu Intangible Impairment: The full impairment of the Avenu platform’s capitalized intangible software value suggests that the initial investment has not met expectations.
- Wholesale Deposit Strategy: The company’s reliance on wholesale deposits to augment funding highlights the challenges in attracting core deposits.
- CRE Concentration: The bank’s concentration in commercial real estate lending, exceeding regulatory guidelines, requires careful risk management.
Conclusion & Actionable Insights
MainStreet Bancshares faces significant challenges in the current economic environment, as evidenced by the net loss in 2024. While the company maintains a strong capital position and continues to grow its loan and deposit base, the decrease in profitability and the impairment of the Avenu platform raise concerns. Management needs to focus on improving efficiency, managing interest rate risk, and realizing the value of its technology investments. A cautious approach is warranted, and a “Hold” rating seems appropriate at this time.
Recommendations:
- Cost Management: Implement cost-cutting measures to improve the efficiency ratio and reduce operating expenses.
- Interest Rate Risk Management: Develop and execute strategies to mitigate interest rate risk and protect the net interest margin.
- Avenu Strategy Review: Conduct a thorough review of the Avenu platform’s strategy and explore alternative approaches to generate returns on the investment.
- Credit Quality Monitoring: Closely monitor the loan portfolio and take proactive measures to address potential credit quality issues.
- Deposit Growth: Focus on attracting and retaining core deposits to reduce reliance on wholesale funding.
Financial Analysis of MainStreet Bancshares, Inc. (MNSB)
1. Commentary
MainStreet Bancshares experienced a challenging year in 2024, marked by a net loss of $9.98 million compared to a net income of $26.59 million in 2023. This decline was primarily driven by a significant increase in non-interest expenses, including a $19.7 million computer software intangible impairment, and a substantial rise in the provision for credit losses. While interest income increased, it was offset by a larger increase in interest expense, leading to a decrease in net interest income. Despite the net loss, the bank maintains strong capital ratios, exceeding regulatory requirements, and continues to focus on managing asset quality and navigating a dynamic economic environment.
2. Financial Ratio and Metric Analysis
Profitability
Gross Profit Margin
Metric: Not applicable for banks as they do not have a cost of goods sold.
Operating Profit Margin
Metric: Calculated as (Net Interest Income + Total Non-Interest Income – Total Non-Interest Expenses) / Total Revenue = ($62,574 + $3,252 – $72,967) / ($134,615 + $3,252) = -4.93%
Trend: The operating profit margin decreased significantly from 2023. In 2023, the operating profit margin was ($76,742 + $3,340 – $45,616) / ($124,421 + $3,340) = 27.34%. The percentage change is -118.02%.
Industry: The industry average operating profit margin for banks varies but typically ranges from 20% to 40%. MNSB’s negative operating profit margin indicates significant underperformance compared to its peers.
Net Profit Margin
Metric: Net Income / Total Revenue = (-$9,980) / ($134,615 + $3,252) = -7.24%
Trend: The net profit margin decreased significantly from 2023. In 2023, the net profit margin was $26,585 / ($124,421 + $3,340) = 20.70%. The percentage change is -134.78%.
Industry: The industry average net profit margin for banks typically ranges from 15% to 30%. MNSB’s negative net profit margin indicates significant underperformance compared to its peers.
Return on Assets (ROA)
Metric: (Net Income) / Average Assets = (-$9,980) / $2,136,586 = -0.47%
Trend: ROA decreased from 1.38% in 2023. The percentage change is -134.06%.
Industry: The industry average ROA for banks typically ranges from 0.8% to 1.5%. MNSB’s negative ROA indicates significant underperformance compared to its peers.
Return on Equity (ROE)
Metric: (Net Income) / Average Equity = (-$9,980) / $224,631 = -4.44%
Trend: ROE decreased from 12.66% in 2023. The percentage change is -135.07%.
Industry: The industry average ROE for banks typically ranges from 10% to 15%. MNSB’s negative ROE indicates significant underperformance compared to its peers.
Earnings Per Share (EPS) – Basic and Diluted
Metric: Basic and Diluted EPS = (-$12,136) / 7,606,391 = -$1.60
Trend: EPS decreased from $3.25 in 2023. The percentage change is -149.23%.
Industry: EPS varies widely based on the size and profitability of the bank. A negative EPS indicates the company is not generating profit for its shareholders.
Liquidity
Current Ratio
Metric: Current Assets / Current Liabilities. Assuming that cash and cash equivalents, investment securities available-for-sale, investment securities held-to-maturity, restricted securities, and loans are current assets, and non-interest bearing deposits, interest bearing demand deposits, savings and NOW deposits, money market deposits, and time deposits are current liabilities, then the current ratio is ($207,708 + $55,747 + $16,078 + $30,623 + $1,810,556) / $1,907,794 = 1.11
Trend: To determine the trend, we would need the Current Ratio from the previous comparable period, which is not provided in the filing.
Industry: A current ratio of 1 or greater is generally considered acceptable for banks, indicating sufficient liquidity to meet short-term obligations.
Quick Ratio (Acid-Test Ratio)
Metric: (Current Assets – Loans) / Current Liabilities = ($207,708 + $55,747 + $16,078 + $30,623) / $1,907,794 = 0.16
Trend: To determine the trend, we would need the Quick Ratio from the previous comparable period, which is not provided in the filing.
Industry: A quick ratio of 0.2 or greater is generally considered acceptable for banks, indicating sufficient liquidity to meet short-term obligations.
Cash Ratio
Metric: Cash and Cash Equivalents / Current Liabilities = $207,708 / $1,907,794 = 0.11
Trend: To determine the trend, we would need the Cash Ratio from the previous comparable period, which is not provided in the filing.
Industry: The cash ratio for banks is typically low, as they rely on other liquid assets and access to funding. A cash ratio of 0.10 or greater is generally considered acceptable.
Solvency/Leverage
Debt-to-Equity Ratio
Metric: Total Liabilities / Total Stockholders’ Equity = $2,020,107 / $207,991 = 9.71
Trend: The debt-to-equity ratio increased from 8.19 in 2023 ($1,813,915 / $221,517). The percentage change is 18.56%.
Industry: The industry average debt-to-equity ratio for banks typically ranges from 7 to 11. MNSB’s debt-to-equity ratio is within the typical range.
Debt-to-Assets Ratio
Metric: Total Liabilities / Total Assets = $2,020,107 / $2,228,098 = 0.91
Trend: The debt-to-assets ratio increased from 0.89 in 2023 ($1,813,915 / $2,035,432). The percentage change is 2.25%.
Industry: The industry average debt-to-assets ratio for banks typically ranges from 0.8 to 0.9. MNSB’s debt-to-assets ratio is within the typical range.
Interest Coverage Ratio (Times Interest Earned)
Metric: Earnings Before Interest and Taxes (EBIT) / Interest Expense = (-$13,904 + $72,041) / $72,041 = 0.81
Trend: The interest coverage ratio decreased significantly from 1.69 in 2023 ($32,824 + $47,679) / $47,679. The percentage change is -52.07%.
Industry: An interest coverage ratio of 1.5 or greater is generally considered acceptable for banks, indicating the ability to cover interest expenses. MNSB’s interest coverage ratio is below the acceptable range.
Activity/Efficiency
Inventory Turnover
Metric: Not applicable for banks as they do not typically hold inventory.
Days Sales Outstanding (DSO)
Metric: Not directly applicable for banks. Instead, consider loan portfolio turnover.
Days Payable Outstanding (DPO)
Metric: Not directly applicable for banks. Instead, consider deposit turnover.
Asset Turnover
Metric: Total Revenue / Average Assets = ($134,615 + $3,252) / $2,136,586 = 0.064 or 6.4%
Trend: The asset turnover decreased from 6.53% in 2023 ($124,421 + $3,340) / $1,955,187. The percentage change is -1.99%.
Industry: The industry average asset turnover for banks typically ranges from 5% to 10%. MNSB’s asset turnover is within the typical range.
Valuation
Price-to-Earnings Ratio (P/E)
Metric: Stock Price / EPS = $17.12 / (-$1.60) = -10.70
Trend: The P/E ratio is negative due to the net loss in 2024. In 2023, the P/E ratio was $24.81 / $3.25 = 7.63.
Industry: P/E ratios vary widely based on the size and profitability of the bank. A negative P/E ratio indicates the company is not generating profit for its shareholders.
Price-to-Book Ratio (P/B)
Metric: Stock Price / Book Value per Share = $17.12 / $23.77 = 0.72
Trend: The P/B ratio increased from 0.96 in 2023 ($24.81 / $25.81). The percentage change is -25%.
Industry: The industry average P/B ratio for banks typically ranges from 0.8 to 1.2. MNSB’s P/B ratio is below the typical range.
Price-to-Sales Ratio (P/S)
Metric: Market Cap / Total Revenue. Market Cap = Shares Outstanding * Stock Price = 7,603,765 * $17.12 = $130,176,471.80 or $130.18 million. P/S = $130.18 / ($134,615 + $3,252) = 0.94
Trend: To determine the trend, we would need the P/S Ratio from the previous comparable period, which is not provided in the filing.
Industry: The industry average P/S ratio for banks typically ranges from 1 to 3. MNSB’s P/S ratio is below the typical range.
Enterprise Value to EBITDA (EV/EBITDA)
Metric: EV = Market Cap + Total Debt – Cash and Cash Equivalents = $130.18 + $73.039 – $207.708 = -$4.49 million. EBITDA = Net Income + Interest Expense + Taxes + Depreciation and Amortization = -$9.98 + $72.041 + (-$3.924) + $3.683 = $61.82 million. EV/EBITDA = -$4.49 / $61.82 = -0.07
Trend: The EV/EBITDA ratio is negative due to the negative enterprise value. In 2023, the EV/EBITDA ratio was 5.45.
Industry: EV/EBITDA ratios vary widely based on the size and profitability of the bank. A negative EV/EBITDA ratio indicates the company is not generating profit for its shareholders.
Growth Rates
Revenue Growth
Metric: (Current Year Revenue – Previous Year Revenue) / Previous Year Revenue = ($134,615 + $3,252 – $124,421 – $3,340) / ($124,421 + $3,340) = 8.19%
Trend: Revenue growth decreased from 48.09% in 2023. The percentage change is -82.97%.
Industry: Revenue growth varies widely based on the size and profitability of the bank. MNSB’s revenue growth is within the typical range.
Net Income Growth
Metric: (Current Year Net Income – Previous Year Net Income) / Previous Year Net Income = (-$9,980 – $26,585) / $26,585 = -137.54%
Trend: Net income growth decreased significantly from -0.33% in 2023. The percentage change is 41578.79%.
Industry: Net income growth varies widely based on the size and profitability of the bank. MNSB’s net income growth is below the typical range.
EPS Growth
Metric: (Current Year EPS – Previous Year EPS) / Previous Year EPS = (-$1.60 – $3.25) / $3.25 = -149.23%
Trend: EPS growth decreased significantly from -0.31% in 2023. The percentage change is 48045.16%.
Industry: EPS growth varies widely based on the size and profitability of the bank. MNSB’s EPS growth is below the typical range.
Other Relevant Metrics
Non-GAAP Measures: Adjusted Net Income and Efficiency Ratio
The company presents adjusted net income and efficiency ratio, excluding non-recurring items such as the computer software intangible impairment and restructuring expenses. This provides a view of the company’s performance from ongoing operations.
- Adjusted Net Income: $6.298 million (compared to a reported net loss of $9.980 million). This adjustment significantly improves the profitability picture.
- Adjusted Efficiency Ratio: 78.88% (compared to a reported 110.85%). This adjustment shows a more efficient operation when excluding the non-recurring impairment.
Analysis: While these non-GAAP measures provide a more favorable view of the company’s underlying performance, it’s important to consider the nature and magnitude of the excluded items. The intangible impairment is a significant expense, and while non-recurring, it reflects a real economic loss. Investors should carefully evaluate whether these adjustments are reasonable and provide a truly representative picture of the company’s ongoing profitability.
⚠️ This is an experimental project and this report is for informational purposes only and should not be considered investment advice. Conduct your own thorough research and consult with a qualified financial advisor before making any investment decisions. ⚠️