MainStreet Bancshares, Inc.

Previous wording

The following discussion and analysis is intended as a review of significant factors affecting the Company’s consolidated financial condition and results of operations for the periods indicated. This discussion and analysis should be read in conjunction with the accompanying consolidated financial statements and the related notes and the Company’s Annual Report on Form 10-K, which contains audited consolidated financial statements of the Company as of and for the year ended December 31, 2023, previously filed with the SEC on March 20, 2024. Results for the three and nine months ended September 30, 2024 are not necessarily indicative of results for the year ending December 31, 2024 or any future period.

Current wording

The following discussion and analysis is intended as a review of significant factors affecting the Company’s consolidated financial condition and results of operations for the periods indicated. This discussion and analysis should be read in conjunction with the accompanying consolidated financial statements and the related notes and the Company’s Annual Report on Form 10-K, which contains audited consolidated financial statements of the Company as of and for the year ended December 31, 2024, previously filed with the SEC on March 14, 2025. Results for the three months ended March 31, 2025 are not necessarily indicative of results for the year ending December 31, 2025 or any future period.

Previous wording

MainStreet Bank is a community commercial bank incorporated in and chartered by the Commonwealth of Virginia. The Bank is a member of the Federal Reserve Bank of Richmond, and its deposits are insured by the FDIC. The Bank opened for business on May 26, 2004, and is headquartered in Fairfax, Virginia. We currently operate six Bank branches; located in Herndon, Fairfax, McLean, Clarendon, Leesburg in Virginia, and one in Washington D.C.

Current wording

MainStreet Bank is a community commercial bank incorporated in and chartered by the Commonwealth of Virginia. The Bank is a member of the Federal Reserve Bank of Richmond, and its deposits are insured by the FDIC. The Bank opened for business on May 26, 2004, and is headquartered in Fairfax, Virginia. We currently operate six Bank branches; located in Herndon, Fairfax, McLean, Clarendon, and Leesburg in Virginia, and one in Washington D.C.

Previous wording

The Company's business is conducted through two reportable segments; Core Banking and Financial Technology. Core Banking encompasses the community bank where we offer a full range of banking services to individuals, small to medium-sized businesses and professionals through both traditional and electronic delivery. The Financial Technology segment provides services to money service business, payment processors, and Banking as a Service ("BaaS") for fintechs, social media solutions, application developers, money movers and entrepreneurs who want to embed financials services into their solutions. We were the first community bank in the Washington, D.C. metropolitan area to offer a full online business banking solution, including remote check scanners on a business customer’s desktop. We offer mobile banking apps for iPhones, iPads and Android devices that provide for remote deposit of checks. In addition, we were the first bank headquartered in the Commonwealth of Virginia to offer CDARS, the Certificate of Deposit Account Registry Service. We offer our customers a suite of reciprocal deposit options through IntraFI, an innovative reciprocal deposit placement service that offers FDIC insurance on deposits up to $265 million. We believe that enhanced electronic delivery systems and technology increase profitability through greater productivity and cost control and allow us to offer new and better products and services.

Current wording

We were the first community bank in the Washington, D.C. metropolitan area to offer a full online business banking solution, including remote check scanners on a business customer’s desktop. We offer mobile banking apps for iPhones, iPads and Android devices that provide for remote deposit of checks. In addition, we were the first bank headquartered in the Commonwealth of Virginia to offer CDARS, the Certificate of Deposit Account Registry Service. We offer our customers a suite of reciprocal deposit options through IntraFI, an innovative reciprocal deposit placement service that offers FDIC insurance on deposits up to $265 million. We believe that enhanced electronic delivery systems and technology increase profitability through greater productivity and cost control and allow us to offer new and better products and services.

Previous wording

In August 2021, the Company created a community development entity (“CDE”) subsidiary, MainStreet Community Capital, LLC, a Virginia limited liability company, to apply for NMTC allocations from the U.S. Department of Treasury’s Community Development Financial Institutions Fund. To promote development in economically distressed areas, the NMTC program was established under the Community Renewal Tax Relief Act of 2000 to provide tax incentives for capital investment in disadvantaged market areas that have not experienced economic expansion. The program establishes a tax credit for investment in a CDE and ongoing compliance with the program is accomplished through a governing board and an advisory board which maintains accountability to residents and businesses in the aforementioned disadvantaged areas. This CDE will be an intermediary vehicle for the provision of loans and investments in Low-Income Communities (“LICs”).

Current wording

In September 2021, the Company created a community development entity (“CDE”) subsidiary, MainStreet Community Capital, LLC, a Virginia limited liability company, to apply for New Market Tax Credit (“NMTC”) allocations from the U.S. Department of Treasury’s Community Development Financial Institutions Fund. To promote development in economically distressed areas, the NMTC program was established under the Community Renewal Tax Relief Act of 2000 to provide tax incentives for capital investment in disadvantaged market areas that have not experienced economic expansion. The program establishes a tax credit for investment in a CDE and ongoing compliance with the program is accomplished through a governing board and an advisory board which maintains accountability to residents and businesses in the aforementioned disadvantaged areas. This CDE will be an intermediary vehicle for the provision of loans and investments in Low-Income Communities (“LICs”). In January 2022, the Community Development Financial Institutions Fund (“CDFI”) of the United States Department of the Treasury certified MainStreet Community Capital, LLC as a registered CDE. In December 2024, MainStreet Community Capital submitted an application to apply for the 2024 NMTC program allocation. Allocation awards are expected to be announced during the fourth quarter of 2025.

Previous wording

Total interest income increased $1.8 million, or 5.7%, to $33.7 million for the three months ended September 30, 2024 from $31.8 million for the three months ended September 30, 2023, on a tax equivalent basis. The increase was primarily the result of an increase in interest and fees on loans of $1.8 million. Total average interest-earning assets increased $146.7 million, to $2.0 billion for the three months ended September 30, 2024 from $1.86 billion for the same period in 2023 primarily because of an increase of $142.4 million in the average balance of loans and by an increase of $9.7 million in the average balance of federal funds sold. These increases were offset by a $5.4 million decrease in the average balance of investment securities. The average yield on our interest-earning assets decreased 14 basis points to 6.67% for the three months ended September 30, 2024 as compared to 6.81% for the three months ended September 30, 2023 primarily due to market conditions. For the three months ended September 30, 2024, the Company reversed $984,000 in accrued interest income in relation to loans placed on nonaccrual.

Current wording

Total interest income increased $0.5 million, or 1.5%, to$33 million for the three months ended March 31, 2025 from$32.5 million for the three months ended March 31, 2024, on a tax equivalent basis. The increase was primarily the result of an increase in interest and fees on loans of$0.5 million. Total average interest-earning assets increased$124.2 million, to$2.04 billion for the three months ended March 31, 2025 from$1.91 billion for the same period in 2024 primarily because of an increase of$109.6 million in the average balance of loans and by an increase of $20.5 million in the average balance of interest bearing deposits at other financial institutions. These increases were offset by a$5.1 million decrease in the average balance of investment securities. The average yield on our interest-earning assets decreased 25 basis points to 6.57% for the three months ended March 31, 2025 as compared to 6.82% for the three months ended March 31, 2024 primarily due to market conditions. For the three months ended March 31, 2025, the Company reversed $104,000 in accrued interest income in relation to loans placed on nonaccrual, as compared to $399,000 for the three months ended March 31, 2024.

Previous wording

Interest and fees on loans increased $1.8 million, to $31.6 million for the three months ended September 30, 2024 from $29.8 million for the same period in 2023. This was primarily due to an increase in the average loans outstanding increasing $142.4 million, which increased to $1.81 billion for the three months ended September 30, 2024 from $1.67 billion for the three months ended September 30, 2023. The average yield on loans decreased 16 basis points, or 2.3%, for the three months ended September 30, 2024 as compared to the three months ended September 30, 2023.

Current wording

Interest and fees on loans increased $0.5 million, to $31.1 million for the three months ended March 31, 2025 from $30.6 million for the same period in 2024. This was primarily due to an increase in the average loans outstanding increasing $109.6 million, which increased to $1.84 billion for the three months ended March 31, 2025 from $1.73 billion for the three months ended March 31, 2024. The average yield on loans decreased 24 basis points, or 3.3%, for the three months ended March 31, 2025 as compared to the three months ended March 31, 2024.

Previous wording

Interest income on federal funds sold and interest-earning deposits increased by $68,000 to $1.3 million for the three months ended September 30, 2024, from $1.2 million for the three months ended September 30, 2023. The increase was primarily due to the average balances increasing over the period despite having a slight reduction in yield of 21 basis points. The average balance of interest-earning deposits and federal funds sold increased $9.7 million to $104.5 million for the three months ended September 30, 2024 from $94.8 million for the same period in 2023. The average yield decreased to 4.88% for the three months ended September 30, 2024 from 5.09% for the same period in 2023.

Current wording

Interest income on federal funds sold and interest-earning deposits decreased by $13,000 to $1.17 million for the three months ended March 31, 2025, from $1.18 million for the three months ended March 31, 2024. The decrease was primarily due to the reduction in yield of 91 basis points. The average balance of interest-earning deposits and federal funds sold increased $19.7 million to $111.7 million for the three months ended March 31, 2025 from $92.0 million for the same period in 2024. The average yield decreased to 4.24% for the three months ended March 31, 2025 from 5.15% for the same period in 2024.

Previous wording

Interest on investment securities decreased by $29,000 to $769,000 for the three months ended September 30, 2024 from $798,000 for the three months ended September 30, 2023 on a fully tax-equivalent basis. Interest on investments in U.S. Treasury, U.S. Government Agencies, and U.S. Municipals increased in total $24,000, or 6.3%, to $401,000 for the three months ended September 30, 2024, from $377,000 for the three months ended September 30, 2023. Interest on mortgage-backed securities decreased by $23,000, or 21.3%, to $85,000 for the three months ended September 30, 2024, from $108,000 for the three months ended September 30, 2023. Subordinated debt interest income decreased by $34,000, or 25.1%, to $101,000 for the three months ended September 30, 2024, from $135,000 for the three months ended September 30, 2023. The average yield on taxable securities decreased 25 basis points, to 2.89% and the average yield on tax-exempt securities increased 55 basis points, to 4.11% on a tax equivalent basis for the three months ended September 30, 2024, from 3.14% and 3.56%, respectively, for the same period in 2023. Fluctuation in market rates resulted in investment income decreasing, as well as the average balance of investment securities decreasing by $5.4 million, to $90.4 million for the three months ended September 30, 2024, from $95.8 million for the three months ended September 30, 2023.

Current wording

Interest on investment securities decreased by $24,000 to $753,000 for the three months ended March 31, 2025 from $777,000 for the three months ended March 31, 2024 on a fully tax-equivalent basis. Interest on investments in U.S. Government Agencies and U.S. Municipals was $364,000 for the three months ended March 31, 2025 and March 31, 2024. Interest on mortgage-backed securities decreased by $16,000, or 15.7%, to $86,000 for the three months ended March 31, 2025, from $102,000 for the three months ended March 31, 2024. Subordinated debt interest income decreased by $4,000, or 2.9%, to $132,000 for the three months ended March 31, 2025, from $136,000 for the three months ended March 31, 2024. The average yield on taxable securities increased 9 basis points, to 3.21% and the average yield on tax-exempt securities increased 18 basis points, to 3.84% on a tax equivalent basis for the three months ended March 31, 2025, from 3.12% and 3.66%, respectively, for the same period in 2024. Despite the increase in average yield, interest on investment securities decreased given that the average balance of investment securities decreased by $5.1 million, to $88.3 million for the three months ended March 31, 2025, from $93.4 million for the three months ended March 31, 2024.

Previous wording

Total interest expense increased $5.3 million, to $18.2 million for the three months ended September 30, 2024 from $13.0 million for the three months ended September 30, 2023, primarily due to a $2.0 million increase in interest expense on time deposits and a $1.2 million increase in interest expense on money market deposits. The Company also saw an increase of interest expense on interest bearing demand deposits of $1.9 million in the three months ended September 30, 2024 over the three months ended September 30, 2023. These increases were offset by a decrease of interest expense of $186,000 on advances from the Federal Home Loan Bank in the three months ended September 30, 2024, compared to the three months ended September 30, 2023.

Current wording

Total interest expense decreased $391,000, to $16.5 million for the three months ended March 31, 2025 from $16.8 million for the three months ended March 31, 2024, primarily due to a $766,000 decrease in interest expense on interest bearing demand deposits and a $96,000 decrease in total interest expense paid on borrowings. These decreases were offset by a $223,000 increase in interest expense on time deposits and a $184,000 increase in interest expense on money market deposits.

Previous wording

Interest expense on deposits increased $5.2 million to $17.1 million for the three months ended September 30, 2024 from $11.9 million for the three months ended September 30, 2023 primarily as a result of an increase in average interest-bearing deposit yields and balances. The increase in average deposit balances was $200.5 million to $1.40 billion during the three months ended September 30, 2024 as compared to $1.24 billion for the three months ended September 30, 2023. The increase in the average balance of interest-bearing deposits was primarily a result of a $32.0 million increase in the average balance of money market deposit accounts and by a $96.9 million increase in the average balance of interest-bearing demand deposits. The average cost of interest-bearing deposits was 472 basis points for the three months ended September 30, 2024, compared to 382 basis points for the three months ended September 30, 2023. The average rate paid on money market deposits increased 80 basis points to 4.70% for the three months ended September 30, 2024 from 3.90% for the three months ended September 30, 2023. The average rate paid on interest-bearing demand deposits increased 372 basis points to 4.83% for the three months ended September 30, 2024 from 1.11% for the three months ended September 30, 2023 primarily due to market competition and the interest rate environment. The average cost of certificates of deposit increased by 73 basis points to 4.99% for the three months ended September 30, 2024 as compared to 4.26% for the three months ended September 30, 2023. The decrease in the average balance of non-interest bearing demand deposits for the three months ended September 30, 2024, primarily was the result of depositors looking for higher yielding products and market competition.

Current wording

Interest expense on deposits decreased $295,000 to $15.6 million for the three months ended March 31, 2025 from $15.9 million for the three months ended March 31, 2024 primarily as a result of a decrease in cost of funds. The increase in average balance of interest-bearing deposits was $180.9 million to $1.52 billion during the three months ended March 31, 2025 as compared to $1.33 billion for the three months ended March 31, 2024. The increase in the average balance of interest-bearing deposits was primarily a result of a $104.1 million increase in the average balance of money market deposit accounts and by a $88 million increase in the average balance of time deposits. The average cost of interest-bearing deposits was 417 basis points for the three months ended March 31, 2025, compared to 477 basis points for the three months ended March 31, 2024. The average rate paid on money market deposits decreased 73 basis points to 3.98% for the three months ended March 31, 2025 from 4.71% for the three months ended March 31, 2024. The average rate paid on interest-bearing demand deposits decreased 117 basis points to 3.81% for the three months ended March 31, 2025 from 4.98% for the three months ended March 31, 2024 primarily due to market competition and the interest rate environment. The average cost of certificates of deposit decreased by 39 basis points to 4.59% for the three months ended March 31, 2025 as compared to 4.98% for the three months ended March 31, 2024. The average balance of non-interest bearing demand deposits and other liabilities decreased $44.1 million to $353.7 million for the three months ended March 31, 2025, compared to $397.8 million for the three months ended March 31, 2024. The decrease was primarily the result of depositors looking for higher yielding products and market competition.

Previous wording

Net interest income decreased approximately $3.4 million, or 18.3%, to $15.4 million for the three months ended September 30, 2024 from $18.8 million for the three months ended September 30, 2023, on a tax equivalent basis, in connection with our net interest-earning assets decreasing $57.2 million to $470.6 million for the three months ended September 30, 2024 from $527.8 million for the three months ended September 30, 2023. The interest rate spread tightened by 99 basis points to 1.94% for the three months ended September 30, 2024 from 2.93% for the three months ended September 30, 2023, on a tax equivalent basis. The net interest margin compressed by 98 basis points from 4.03% for the three months ended September 30, 2023 to 3.05% for the three months ended September 30, 2024 on a tax equivalent basis. Refer to “Use of Certain Non-GAAP Financial Measures,” below, for a reconciliation of adjusted net interest margin.

Current wording

Net interest income increased approximately $0.9 million, or 5.6%, to $16.6 million for the three months ended March 31, 2025 from $15.7 million for the three months ended March 31, 2024, on a tax equivalent basis, despite our net interest-earning assets decreasing $51.8 million to $444.7 million for the three months ended March 31, 2025 from $496.6 million for the three months ended March 31, 2024. The interest rate spread increased by 33 basis points to 2.38% for the three months ended March 31, 2025 from 2.05% for the three months ended March 31, 2024, on a tax equivalent basis. The net interest margin increased slightly by 1 basis point from 3.29% for the three months ended March 31, 2024 to 3.30% for the three months ended March 31, 2025 on a tax equivalent basis. Refer to “Use of Certain Non-GAAP Financial Measures,” below, for a reconciliation of adjusted net interest margin.

Previous wording

Management believes that the provision recorded for the period ended September 30, 2024 reflects a balance sufficient to provide for each allowance segment, using objective data and information available to us at this time in evaluating our standard analysis of local/national economic data, changes in underwriting quality, portfolio concentrations, experience of lending team, credit quality and supportable forecasts. We will continuously review the credit portfolio to determine the depth and breadth of potential credit losses. As we obtain additional information and to more accurately assess the full nature and extent of elevated risk to the credit portfolio that may arise, additional provision expenses may be required.

Current wording

Management believes that the allowance for credit losses recorded for the period ended March 31, 2025 reflects a balance sufficient to provide for each allowance segment, using objective data and information available to us at this time in evaluating our standard analysis of local/national economic data, changes in underwriting quality, portfolio concentrations, experience of lending team, credit quality and supportable forecasts. We will continuously review the credit portfolio to determine the depth and breadth of potential credit losses. As we obtain additional information and to more accurately assess the full nature and extent of elevated risk to the credit portfolio that may arise, additional provision expenses may be required.

Previous wording

The provision for credit losses, which is an operating expense, is maintained to ensure that the allowance for credit losses is maintained at levels we consider necessary and appropriate to absorb expected credit losses at a balance sheet date. In determining the level of the allowance for credit losses on loans and off-balance sheet credit exposure, we consider past and current loss experience, evaluations of real estate collateral, current and future economic conditions, volume and type of lending, adverse situations that may affect a borrower’s ability to repay a loan and the levels of non-performing loans. The amount of the allowance is based on estimates, and actual losses may vary from such estimates as more information becomes available over time or economic conditions change. This evaluation is inherently subjective, as it requires estimates and assumptions that are susceptible to significant revision as circumstances change or as more information becomes available. The allowance for credit losses is assessed monthly and provisions are made for credit losses as required in order to maintain the overall allowance.

Current wording

The provision for credit losses, which is an operating expense, is maintained to ensure that the allowance for credit losses is maintained at levels we consider necessary and appropriate to absorb expected credit losses as of the balance sheet date. In determining the level of the allowance for credit losses on loans and off-balance sheet credit exposure, we consider past and current loss experience, evaluations of real estate collateral, current and future economic conditions, volume and type of lending, adverse situations that may affect a borrower’s ability to repay a loan and the levels of non-performing loans. The amount of the allowance is based on estimates, and actual losses may vary from such estimates as more information becomes available over time or economic conditions change. This evaluation is inherently subjective, as it requires estimates and assumptions that are susceptible to significant revision as circumstances change or as more information becomes available. The allowance for credit losses is assessed monthly and provisions are made for credit losses as required in order to maintain the overall allowance.

Previous wording

The provision for credit losses on loans was $3.1 million for the three months ended September 30, 2024 compared to a recovery of credit losses on loans of $98,000 for the three months ended September 30, 2023. The Company charged off $1.9 million in loans during the quarter which had to be replaced through provision expense. The Company also added $1 million to the allowance for credit loss reserves for loan growth and in conjunction with heightened risk factors. Loan originations, which totaled approximately $92.0 million for the three months ended September 30, 2023 decreased $32.0 million to $60.0 million for the three months ended September 30, 2024. The Company did see an uptick in non-performing loans at September 30, 2024, with a balance of $28.3 million. 42% of this balance is attributable to one relationship and the remaining 58% are confined to nine relationships that experienced liquidity constraints. The Company is proactive in identifying any potential issues and acts decisively when prudent. As of September 30, 2024, the Company had only 6.86% criticized and classified loans to total gross loans.

Current wording

The provision for credit losses on loans was $0 for the three months ended March 31, 2025 compared to a provision of credit losses on loans of $164,000 for the three months ended March 31, 2024. The Company had no charge offs during the quarter, which are normally replaced through provision expense. Loan growth for the quarter was not significant and therefore, did not impact the allowance for credit losses on loans significantly. Loan originations, which totaled approximately $34.0 million for the three months ended March 31, 2024 decreased $0.8 million to $33.2 million for the three months ended March 31, 2025. Non-performing loans at March 31, 2025 remained stable with a balance of $21.7 million compared to December 31, 2024 but increased $12.4 million from $9.3 million at March 31, 2024. 52% of this balance is attributable to one relationship and the remaining 48% are confined to eight relationships that experienced liquidity constraints. The Company is proactive in identifying any potential issues and acts decisively when prudent. Past due loans excluding non-performing loans, increased to $40.1 million as of March 31, 2025 compared to $62,000 as of December 31, 2024. The increase in past due loans was isolated to a limited number of borrowers and was due to timing of payments received rather than deteriorating credit, and therefore, did not significantly impact the allowance for credit losses on loans as of March 31, 2025.

Previous wording

The recovery of credit losses on off-balance sheet credit exposure was $212,000 for the three months ended September 30, 2024 compared to a provision for credit losses of $353,000 for the three months ended September 30, 2023. The decrease in off-balance sheet credit exposure was primarily related to the utilization of revolving lines of credit.

Current wording

The provision of credit losses on off-balance sheet credit exposure was $0 for the three months ended March 31, 2025 compared to a recovery of credit losses of $359,000 for the three months ended March 31, 2024. The stabilization of the provision for off-balance sheet credit exposure was primarily related to the utilization of revolving lines of credit.

Previous wording

Classified loans have increased by $67.2 million as of September 30, 2024 compared to the same period in 2023. Approximately 65% of the classified loan balances are related to a segment of loans that share similar characteristics. This segment was originated during 2021 and experienced swings in operating costs, permit delays, and liquidity tightening as a result of the sharp increase in interest rates. The Company routinely charges off potential exposure as identified, and identifies and executes the best course of action to minimize any further loss exposure. Approximately 35% of classified loans are made up of smaller credits that have been either placed on nonaccrual or the Company is monitoring closely to be able to assess repayment. As interest rates have risen significantly over the last two years, management believes in taking a proactive approach to risk management in the loan portfolio, particularly as credits are due to reprice in a new rate environment. During the three months ended September 30, 2024, there was $1.9 million in charge-offs incurred and recoveries of $11,000 were received.

Current wording

Criticized loans and classified loans have increased by$66.6 million and$38.1 million respectively as of March 31, 2025 compared to the same period in 2024. The majority of the criticized loan increases consist of two multi-family relationships impacted by rising interest rates and Washington D.C. government policies. Approximately 44% of the classified loan balances are related to a segment of loans that share similar characteristics. The majority of this segment that is rated classified originated during 2021 and experienced increases in operating costs, permit delays, and liquidity tightening as a result of the sharp increase in interest rates. Approximately 36% of classified loans are made up of smaller credits that have been either placed on nonaccrual or the Company is monitoring closely to be able to assess repayment. The remaining 20% is expected to be repaid at par upon successful court-approved resolution. As interest rates have risen significantly over the last two years, management believes in taking a proactive approach to risk management in the loan portfolio, particularly as credits are due to reprice in a new rate environment. The Company routinely charges off potential exposure as identified, and identifies and executes the best course of action to minimize any further loss exposure. During the three months ended March 31, 2025, there were $0 charge-offs incurred and recoveries of $10,000 were received.

Previous wording

Non-interest income decreased $5,000, or 0.6%, to $886,000 for the three months ended September 30, 2024 from $891,000 for the three months ended September 30, 2023. The decrease in non-interest income was primarily due to other fee income related to prepayment penalties that were recognized during 2023 that were not recurring in 2024. Offsetting other fee income were increases in deposit account service charges in the three months ended September 30, 2024 of $43,000 compared to the same period in 2023. The increase in account service charges was in addition to an increase of $30,000 in bank owned life insurance income for the three months ended September 30, 2024, as a result of the elevated interest rate environment compared to same period in the prior year. The Company continues to focus on increasing non-interest income as it continues to add services that strategically benefit our customers.

Current wording

Non-interest income increased $143,000, or 18%, to $939,000 for the three months ended March 31, 2025 from $796,000 for the three months ended March 31, 2024. The increase in non-interest income was primarily due to a $60,000 gain on retirement of subordinated debt. Additionally, deposit account service charges increased $61,000 in the three months ended March 31, 2025 compared to the same period in 2024. The increase in account service charges was in addition to an increase of $10,000 in bank owned life insurance income for the three months ended March 31, 2025. The Company continues to focus on increasing non-interest income as it continues to add services that strategically benefit our customers.

Previous wording

Non-interest expense increased $1.7 million, or 14.4%, to $13.2 million for the three months ended September 30, 2024, from $11.6 million for the three months ended September 30, 2023 primarily because of increases in salaries and employee benefits of $326,000. The Company added fifteen employees as the franchise continues to grow and build out its strategic initiatives. Outside services, which includes professional fees for attorneys, accountants and consultants, increased $148,000 to $845,000 for the three months ended September 30, 2024, from $697,000 for the three months ended September 30, 2023. This increase is driven by regulatory requirements in audits and routine legal assistance as the Company grows. Information security tools, a subset of furniture and equipment expenses, increased approximately $54,000 to $162,000 for the three months ended September 30, 2024, from $108,000 for the three months ended September 30, 2023. Franchise tax, a subset of other operating expenses, increased approximately $98,000 to $557,000 for the three months ended September 30, 2024, from $459,000 for the three months ended September 30, 2023 because of growth in the Company's capital as of September 30, 2024 compared to the capital levels as of September 30, 2023. Offsetting these increases was a decrease in administrative expenses of $62,000, or 22.4%, to $215,000 for the three months ended September 30, 2024 from $277,000 for the three months ended September 30, 2023 due to expense management. During the three months ended September 30, 2024 the Company incurred $594,000 in nonrecurring expenses related to loan sale and dispositions, which was allocated to other operating expenses.

Current wording

Non-interest expense increased $1.8 million, or 15%, to $14.3 million for the three months ended March 31, 2025, from $12.5 million for the three months ended March 31, 2024 primarily because of increases in salaries and employee benefits of $897,000. The Company incurred higher payroll costs for the three months ended March 31, 2025 compared to the same period in 2024 given a higher number of employees for most of the quarter and non-recurring severance costs incurred as reductions were made during the end of the quarter. Other operating expenses increased $434,000, or 45%, to $1.4 millionfor the three months ended March 31, 2025, from $954,000 for the three months ended March 31, 2024 primarily due to increases in loan workout expenses as the Company has resolved some of the non-performing loans. Outside services, which includes professional fees for attorneys, accountants, consultants, and cloud services, increased $399,000 to $1.2 million for the three months ended March 31, 2025, from $774,000 for the three months ended March 31, 2024. This increase is driven by regulatory requirements in audits, routine legal assistance as the Company grows, and from increased cloud services costs. Information security tools, a subset of furniture and equipment expenses, increased approximately $37,000 to $164,000 for the three months ended March 31, 2025, from $127,000 for the three months ended March 31, 2024. Data processing increased approximately $50,000 to $362,000 for the three months ended March 31, 2025, from $312,000 for the three months ended March 31, 2024. Offsetting these increases was a decrease in occupancy expenses of $39,000, or 9%, to $396,000 for the three months ended March 31, 2025 from $435,000 for the three months ended March 31, 2024 due to expense management.

Previous wording

Income tax expense decreased $4.2 million, or 82.4%, to a tax expense of $900,000 for the nine months ended September 30, 2024 from a tax expense of $5.1 million for the nine months ended September 30, 2023. The decrease in federal income tax expense for the nine months ended September 30, 2024 compared to the same period a year ago was driven by the decrease in income before income taxes of $19.5 million, to income before income tax of $7.1 million for the nine months ended September 30, 2024 compared to income before income tax expense of $26.6 million for the same period in the prior year. The Company accrues taxes based on an estimated tax rate basis using inputs and assumptions about pre-tax income. As the inputs and assumptions change, the estimated tax accruals will change throughout the year. The Company was able to apply and claim a research and development tax credit of approximately $245,000 for its associated work in developing a software platform. The Company also invests in projects that have tax credit benefits in order to help reduce its overall tax liability, timing of these tax credits are layered into our overall assessment. As a result of expanding its footprint, the Company has included assessments in income tax expense for potential state tax liabilities which totaled $185,000 for the nine months ended September 30, 2024. For the nine months ended September 30, 2024, the Company had an effective income tax expense rate of 12.7%, compared to an effective income tax expense rate of 19.3% for the nine months ended September 30, 2023.

Current wording

Income tax expense decreased $148,000, or 18%, to $682,000 for the three months ended March 31, 2025 from $830,000 for the three months ended March 31, 2024. The decrease in federal income tax expense for the three months ended March 31, 2025 compared to the same period a year ago was driven by the decrease in income before income taxes of $1 million, to income before income tax of $3.1 million for the three months ended March 31, 2025 compared to income before income tax expense of $4.1 million for the same period in the prior year. The Company accrues taxes based on an estimated tax rate basis using inputs and assumptions about pre-tax income. As the inputs and assumptions change, the estimated tax accruals will change throughout the year. The Company also invests in projects that have tax credit benefits in order to help reduce its overall tax liability, timing of these tax credits are layered into our overall assessment. As a result of expanding its footprint, the Company has included assessments in income tax expense for potential state tax liabilities which totaled $79,000 for the three months ended March 31, 2025. For the three months ended March 31, 2025, the Company had an effective income tax expense rate of 21.8%, compared to an effective income tax expense rate of 20.1% for the three months ended March 31, 2024.

Previous wording

Investment securities decreased $309,000, or 0.3%, from $101.6 million at December 31, 2023 to $101.2 million at September 30, 2024. The decrease was primarily due to normal paydown of available-for-sale securities and amortization of certain restricted stock securities, which was offset by new investments of restricted equities of $2.4 million. At September 30, 2024, our held-to-maturity portion of the securities portfolio, at amortized cost, was $16.0 million, and our available-for-sale portion of the securities portfolio, at fair value, was $58.5 million compared to our held-to-maturity portion of the securities portfolio of $17.3 million and our available-for-sale portion of the securities portfolio of $59.9 million at December 31, 2023.

Current wording

Investment securities increased $2.8 million, or 2.7%, from $102.4 million at December 31, 2024 to $105.2 million at March 31, 2025. The increase was primarily due to new investments of restricted equities of $3.5 million which was offset by paydowns on the available-for-sale investment securities and calls on the held-to-maturity securities as well as amortization of the restricted equities. At March 31, 2025, our held-to-maturity portion of the securities portfolio, at amortized cost, was $15.7 million, and our available-for-sale portion of the securities portfolio, at fair value, was $55.9 million compared to our held-to-maturity portion of the securities portfolio of $16.1 million and our available-for-sale portion of the securities portfolio of $55.7 million at December 31, 2024.

Previous wording

Net loans increased $70.4 million, or 4.1%, to $1.78 billion at September 30, 2024 from $1.71 billion at December 31, 2023. Residential real estate loans decreased $1.5 million, or 3.1%, to $446.1 million at September 30, 2024 from $474.6 million at December 31, 2023. Commercial real estate loans increased by $127.5 million from $743.8 million at December 31, 2023 to $871.3 million at September 30, 2024. Commercial and industrial loans increased by $30.8 million from $75.4 million at December 31, 2023 to $106.2 million at September 30, 2024. Construction and land development loans decreased $56.2 million to $373.5 million at September 30, 2024 from $429.6 million at December 31, 2023. Consumer loans decreased by $1.6 million from $3.6 million at December 31, 2023 to $2.0 million at September 30, 2024. The decrease in consumer loans is primarily a result of management’s decision to let the indirect lending portfolio amortize off the balance sheet.

Current wording

Net loans increased $1.2 million, or 0.1%, to $1.81 billion at March 31, 2025 from $1.81 billion at December 31, 2024. Residential real estate loans increased $11.8 million, or 2.7%, to $451.3 million at March 31, 2025 from $439.5 million at December 31, 2024. Commercial real estate loans increased by $35.1 million from $898.2 million at December 31, 2024 to $933.3 million at March 31, 2025. Commercial and industrial loans increased by $2.8 million from $102.4 million at December 31, 2024 to $105.2 million at March 31, 2025. Construction and land development loans decreased $48.6 million to $344.8 million at March 31, 2025 from $393.4 million at December 31, 2024. Consumer loans decreased by $242,000 from $1.6 million at December 31, 2024 to $1.3 million at March 31, 2025. The decrease in consumer loans is primarily a result of management’s decision to let the indirect lending portfolio amortize off the balance sheet.

Previous wording

The Company holds a concentration in commercial real estate loans. As of September 30, 2024, construction, land development and other land loans represented 118.2% of consolidated risk-based capital. Total commercial real estate loans as defined by the Agency guidance represented 360.3% of consolidated risk-based capital. During the prior 36 months, the Company has experienced an increase in its commercial real estate portfolio by 76%.

Current wording

The Company holds a concentration in commercial real estate loans. As of March 31, 2025, construction, land development and other land loans represented 115.6% of consolidated risk-based capital. Total commercial real estate loans as defined by the Agency guidance represented 388.2% of consolidated risk-based capital. During the prior 36 months, the Company has experienced an increase in its commercial real estate portfolio by 59%.

Previous wording

The total estimated stress test loss is deducted from capital and we recalculate the capital ratios. As shown in the tables below, as of September 30, 2024 and December 31, 2023, the post-stress capital ratios well exceed our Board target ratios as well as Agency minimums (with buffer). For Non-Owner-Occupied CRE & Multi-family the stress test is bifurcated with a low-end loss estimate and high-end estimate. The Low Estimate produces loss amounts for loans that are flagged for default (per the model) and floors the loss amount at zero. The High Estimate executes similar to the low estimate but floors the Loss-Given-Default rate at 10%, per Basel Committee on Banking Supervision rules. It also has a collective loss held on all loans regardless of if the loan is flagged for default.

Current wording

The total estimated stress test loss is deducted from capital and we recalculate the capital ratios. As shown in the tables below, as of March 31, 2025 and December 31, 2024, the post-stress capital ratios well exceed our Board target ratios as well as Agency minimums (with buffer). For Non-Owner Occupied CRE & Multifamily the stress test is bifurcated with a low-end loss estimate and high-end estimate. The Low Estimate produces loss amounts for loans that are flagged for default (per the model) and floors the loss amount at zero. The High Estimate executes similar to the low estimate but floors the Loss-Given-Default rate at 10%, per Basel Committee on Banking Supervision rules. It also has a collective loss held on all loans regardless of if the loan is flagged for default.

Previous wording

The Company uses wholesale deposits as a funding source in addition to customer deposits. Wholesale deposits provide a diversified and stable source of funding during times of market volatility. As of September 30, 2024, the Company had $422.6 million of total wholesale deposit balances, a decrease of $10.4 million compared to December 31, 2023, which totaled $433.0 million.

Current wording

The Company uses wholesale deposits as a funding source in addition to customer deposits. Wholesale deposits provide a diversified and stable source of funding during times of market volatility. As of March 31, 2025, the Company had $577.9 million of total wholesale deposit balances, an increase of $109.8 million compared to December 31, 2024, which totaled $468.1 million.

Previous wording

Given the interest rate environment and strategic initiatives, the Company replaced maturing lower yielding wholesale CDs with higher market rate CDs. The replacement CDs include call options at our discretion if economic conditions changed. The Company also utilized additional wholesale demand deposits to provide liquidity and more effectively balance our interest rate sensitivity. During the nine months ended September 30, 2024, total wholesale deposit funding accounted for approximately 32% of our interest expense.

Current wording

Given the interest rate environment and strategic initiatives in 2024, the Company replaced maturing lower yielding wholesale CDs with higher market rate CDs that included call options at our discretion if economic conditions changed. The Company began exercising these call options in order to lower funding costs as market conditions shifted. The Company also utilized additional wholesale demand deposits to provide liquidity and more effectively balance our interest rate sensitivity. During the three months ended March 31, 2025, total wholesale deposit funding accounted for approximately 36.8% of our interest expense.

Previous wording

Each quarter the Bank files a bank call report with the FDIC, which has a specific way it defines wholesale brokered deposits. As of September 30, 2024, the Company had $394.8 million of wholesale deposits outstanding, as defined by FDIC, a decrease of $3.7 million from December 31, 2023. In addition, pursuant to rule 12 CFR 337.6(e), well-capitalized and well-rated institutions are not required to treat reciprocal deposits as wholesale deposits up to the lesser of 20 percent of their total liabilities or $5 billion. Reciprocal core deposits exceeding this threshold must be reported additionally as wholesale deposits for call report purposes only. As of September 30, 2024, the Company additionally reported $293.1 million in reciprocal deposits considered wholesale for call report purposes only, bringing regulatory defined wholesale deposits to $687.9 million as of September 30, 2024. As of December 31, 2023, the Company additionally reported $176.3 million in reciprocal deposits considered wholesale for call report purposes only, bringing regulatory defined wholesale deposits to $609.3 million as of December 31, 2024. As of September 30, 2024 and December 31, 2023, all of the Company's reciprocal deposits were core deposits from customers who placed their deposits in the reciprocal network for additional FDIC insurance coverage.

Current wording

Each quarter the Bank files a bank call report with the FDIC, which has a specific way it defines wholesale brokered deposits. As of March 31, 2025, the Company had $553.4 million of wholesale deposits outstanding, as defined by FDIC, an increase of $110.5 million from December 31, 2024. In addition, pursuant to rule 12 CFR 337.6(e), well-capitalized and well-rated institutions are not required to treat reciprocal deposits as wholesale deposits up to the lesser of 20 percent of their total liabilities or $5 billion. Reciprocal core deposits exceeding this threshold must be reported additionally as wholesale deposits for call report purposes only. As of March 31, 2025, the Company additionally reported $87.8 million in reciprocal deposits considered wholesale for call report purposes only, bringing regulatory defined wholesale deposits to $641.1 million as of March 31, 2025. As of December 31, 2024, the Company additionally reported $259.9 million in reciprocal deposits considered wholesale for call report purposes only, bringing regulatory defined wholesale deposits to $702.8 million as of December 31, 2024. As of March 31, 2025 and December 31, 2024, all of the Company's reciprocal deposits were core deposits from customers who placed their deposits in the reciprocal network for additional FDIC insurance coverage.

Previous wording

Liquidity Management. Liquidity describes our ability to meet the financial obligations that arise in the ordinary course of business. Liquidity is primarily needed to meet the borrowing and deposit withdrawal requirements of our customers and to fund current and planned expenditures. Deposits are the primary source of funds for lending and investing activities. The Company uses wholesale deposits in addition to customer deposits, as funding sources. Scheduled payments, as well as prepayments, and maturities from portfolios of loans and investment securities also provide a stable source of funds. FHLB secured advances, other secured borrowings, federal funds purchased, and other short-term unsecured borrowed funds, as well as longer-term debt issued through the capital markets, all provide supplemental liquidity sources. Additional liquidity can be obtained through the Federal Reserve Bank discount window. The Company’s funding activities are monitored and governed through the Company’s asset/liability management process. MainStreet Bank had no federal funds purchased outstanding and an additional secured borrowing capacity of $521.3 million as of September 30, 2024. Additionally, at September 30, 2024, we had the ability to borrow up to $144.0 million from other financial institutions.

Current wording

Liquidity Management. Liquidity describes our ability to meet the financial obligations that arise in the ordinary course of business. Liquidity is primarily needed to meet the borrowing and deposit withdrawal requirements of our customers and to fund current and planned expenditures. Deposits are the primary source of funds for lending and investing activities. The Company uses wholesale deposits in addition to customer deposits, as funding sources. Scheduled payments, as well as prepayments, and maturities from portfolios of loans and investment securities also provide a stable source of funds. FHLB secured advances, other secured borrowings, federal funds purchased, and other short-term unsecured borrowed funds, as well as longer-term debt issued through the capital markets, all provide supplemental liquidity sources. Additional liquidity can be obtained through the Federal Reserve Bank discount window. The Company’s funding activities are monitored and governed through the Company’s asset/liability management process. MainStreet Bank had no federal funds purchased outstanding and an additional secured borrowing capacity of $554.8 million as of March 31, 2025. Additionally, at March 31, 2025, we had the ability to borrow up to $144.0 million from other financial institutions.

Previous wording

While maturities and scheduled amortization of loans and securities are predictable sources of funds, deposit flows and loan prepayments are greatly influenced by general interest rates, economic conditions, and competition. Our most liquid assets are cash and cash equivalents, which include federal funds sold and interest-earning deposits in other banks. The levels of these assets are dependent on our operating, financing, lending and investing activities during any given period. At September 30, 2024, cash and cash equivalents totaled $232.1 million. The Company has availability on secured and unsecured lines for an additional $665.3 million. Finally, securities classified as available-for-sale, which provide additional sources of liquidity, totaled $58.5 million at September 30, 2024.

Current wording

While maturities and scheduled amortization of loans and securities are predictable sources of funds, deposit flows and loan prepayments are greatly influenced by general interest rates, economic conditions, and competition. Our most liquid assets are cash and cash equivalents, which include federal funds sold, interest-earning deposits in other banks, and other cash due from banks. The levels of these assets are dependent on our operating, financing, lending and investing activities during any given period. At March 31, 2025, cash and cash equivalents totaled $202.6 million. Finally, securities classified as available-for-sale, which provide additional sources of liquidity, totaled $55.9 million at March 31, 2025.

Previous wording

Our cash flows are provided by and used in three primary activities: operating activities, investing activities, and financing activities. Net cash provided by operating activities was $9.3 million and $26.3 million for the nine months ended September 30, 2024 and September 30, 2023, respectively. There were no sales of securities in the nine months ended September 30, 2024 or for nine months ended September 30, 2023. Net cash used in investing activities, which consist primarily of disbursements for loan originations and the purchase of securities, offset by principal collections on loans and proceeds from maturing securities, was $79.6 million and $102.1 million for the nine months ended September 30, 2024 and September 30, 2023, respectively. Net cash provided by financing activities was $187.9 million and $66.4 for the nine months ended September 30, 2024 and 2023, respectively, which consisted primarily of increases in interest bearing deposits of $224.6 million for the nine months ended September 30, 2024, partially offset by repayments of federal funds purchased of $15.0 million and decreased non-interest bearing deposits of $17.0 million.

Current wording

Our cash flows are provided by and used in three primary activities: operating activities, investing activities, and financing activities. Net cash provided by operating activities was$1.5 million and$3.6 million for thethree months ended March 31, 2025 and March 31, 2024, respectively. There were no sales of securities in thethree months ended March 31, 2025 or forthree months ended March 31, 2024. Net cash used in investing activities, which consist primarily of disbursements for loan originations and the purchase of securities, offset by principal collections on loans and proceeds from maturing securities, was$4.4 million and$23.3 million for thethree months ended March 31, 2025 and March 31, 2024, respectively. Net cash used in financing activities was$2.2 million and provided by financing activities was$29.9 million for thethree months ended March 31, 2025 and 2024, respectively.

Previous wording

We are committed to maintaining a strong liquidity position. We monitor our liquidity position daily. We anticipate that we have sufficient funds to meet our current funding commitments. Certificates of deposit due within one year of September 30, 2024, totaled $564.0 million of total deposits. If these deposits do not remain with us, we will be required to seek other sources of funds, including other deposits, Federal Home Loan Bank advances and commitments from other financial institutions. Depending on market conditions, we may be required to pay higher rates on such deposits or borrowings than we currently pay. We believe, however, based on experience that a significant portion of such deposits will remain with us. We can attract and retain deposits by adjusting the interest rates offered.

Current wording

We are committed to maintaining a strong liquidity position. We monitor our liquidity position daily. We anticipate that we have sufficient funds to meet our current funding commitments. Certificates of deposit due within one year of March 31, 2025, totaled $645.7 million of total deposits. If these deposits do not remain with us, we will be required to seek other sources of funds, including other deposits, Federal Home Loan Bank advances and commitments from other financial institutions. Depending on market conditions, we may be required to pay higher rates on such deposits or borrowings than we currently pay. We believe, however, based on experience that a significant portion of such deposits will remain with us. We can attract and retain deposits by adjusting the interest rates offered.

Previous wording

Commitments. As a financial services provider, we routinely are a party to various financial instruments with off-balance-sheet risks, such as commitments to extend credit and unused lines of credit. While these contractual obligations represent our future cash requirements, a significant portion of commitments to extend credit may expire without being drawn upon. Such commitments are subject to the same credit policies and approval process accorded to loans we make. At September 30, 2024, we had outstanding loan commitments of $237.2 million and $311,000 in outstanding stand-by letters of credit. We anticipate that we will have sufficient funds available to meet our current lending commitments.

Current wording

Commitments. As a financial services provider, we routinely are a party to various financial instruments with off-balance-sheet risks, such as commitments to extend credit and unused lines of credit. While these contractual obligations represent our future cash requirements, a significant portion of commitments to extend credit may expire without being drawn upon. Such commitments are subject to the same credit policies and approval process accorded to loans we make. At March 31, 2025, we had outstanding loan commitments of $186.4 million and $241,500 in outstanding stand-by letters of credit. We anticipate that we will have sufficient funds available to meet our current lending commitments.

Previous wording

Management believes that the use of these non-GAAP measures provides meaningful information about operating performance by enhancing comparability with other financial periods and other financial institutions. The non-GAAP measures used by management enhance comparability by excluding the effects of items that do not reflect ongoing operating performance, including non-recurring gains or charges. These non-GAAP financial measures should not be considered an alternative to U.S. GAAP-basis financial statements, and other bank holding companies may define or calculate these or similar measures differently. A reconciliation of the non-GAAP financial measures used by the Company to evaluate and measure the Company’s performance to the most directly comparable U.S. GAAP financial measures is presented below.

Current wording

Management believes that the use of these non-GAAP measures provides meaningful information about operating performance by enhancing comparability with other financial periods and other financial institutions. The non-GAAP measures used by management enhance comparability by excluding the effects of items that do not reflect ongoing operating performance, including non-recurring gains or charges. These non-GAAP financial measures should not be considered an alternative to, or more important than, U.S. GAAP-basis financial measures, and other bank holding companies may define or calculate these or similar measures differently. A reconciliation of the non-GAAP financial measures used by the Company to evaluate and measure the Company’s performance to the most directly comparable U.S. GAAP financial measures is presented below.