MainStreet Bancshares Inc

NASDAQ:MNSB

Q4-2024 Earnings Call

[Jeff Dick, executive]

Well, good afternoon, and thank you for joining our virtual earnings webcast. My name is Jeff Dick, I'm the Chairman and CEO of MainStreet Bancshares Inc. and MainStreet Bank. I'm joined here today with our Chief Lending Officer, Tom Floyd; our Chief Accountant, Alex Vari; and of course, our CFO, Tom Chmelik.

If you'd like, you can submit written questions throughout the presentation using the viewing portal. We will address your questions at the end of this presentation. If you miss -- if we miss your question during the discussion, please reach out after the webcast. Chris Marinac will not be joining us on the call today. He did submit questions in advance, and we will address them after the session. Also Matt Breese from Stephens, Inc. no longer provides coverage for our company.

We'd be remiss if we didn't point you to our safe harbor page that describes the content forward-looking statements. We use certain non-GAAP measures, which are identified as such within the presentation materials.

The D.C. market is still a great place to do business. We always talk about the strength of our market because we are in a region that hosts the Federal Government. But we do also have world-class universities, hospital systems, airports, tourism, data centers and at least 16 Fortune 500 companies. As such, we also have low unemployment and high median household income for our workforce.

Slide 4 reminds you of our growth story over the past 20 years. I think there's an interesting correlation to be made from our early years to the present time. We started with a technology strategy of putting our bank in our customers' office. You may recall back in 2004 that the Check 21 act became law shortly after we opened, which allows -- allowed for the remote deposit of a digital image of a [ check ]. Acquiring customers with the consent of scanning and remotely depositing checks using our online banking solution wasn't easy, it was new. When we first met with a possible customer, we would give them the presentation and they would typically reply with, well, that's interesting. Let me know when you have a branch nearby. We persevered. It took a while to get customers comfortable with our solution. Once they had it, they couldn't do without it.

Growth was slow in the beginning, but it quickly picked up all these years later. We are still the largest provider of remote deposit of any bank serviced by our core processor, Jack Henry. Today, we're in a similar situation. We have a great solution. We need to get it in front of the right customers in order to grow. We're working harder than ever to make that happen. We are a Virginia community bank serving the Washington, D.C. Metropolitan area, and we have a great organic growth story using a branch-like strategy. We've always been a tech forward bank with strong online and mobile banking technology.

We are trading on the NASDAQ Capital Market Exchange. As of year-end 2024, we had a market cap of $138 million or slightly more than 7.6 million shares outstanding. Our tangible book value was $23.77. Slide 7 provides an overview of the intangible impairment determination that the Board and management recently [ decisioned ]. We determined that the implementation delays impacted our expectations for the Avenu Software-as-a Service solution. After the accounting team put together its impairment analysis, the Board and management agreed with their conclusions to fully impair the capitalized intangible assets.

Alex will talk you through this process in just a few minutes. Before I turn things over to Alex, you'll see the 3 key issues we'll be addressing in today's presentation are focused on the improvement of our intangible capitalized assets, the good progress that we made in working through our small number of [indiscernible] and the outlook for Avenu.

At this point, I will turn the presentation over to Alex Vari. Alex is our Chief Accountant. He works closely with Thomas Chmelik, to ensure the accuracy of all of our books of records. Alex is going to talk you through the impairment process as well as financial performance. Alex?

[Richard Vari, executive]

Thank you, Jeff. On Slide 8, we summarize our financial performance over the past 4 quarters as well as for the fiscal year 2024. For the year, we are reporting a loss of [ earnings ] per share $1.60, a return on average assets of negative 0.47% and a return on average equity of negative 4.44% and a net interest margin of 3.13%. Our performance ratios were impacted by an impairment of our intangible assets that were recognized during the fourth quarter.

As you will see later in the slide deck, we provide core performance ratios after the nonrecurring adjustment. As we discussed in our quarterly calls earlier this year, our ratios were also directly impacted by taking action on a handful of problem loans. We have made significant progress finding solutions to nonperforming loans, and we remain strongly capitalized and look forward to the opportunities we have in 2025.

During 2024, we reversed $1.9 million of interest income and we had net charge-offs of $4.5 million, an additional $2.9 million in provision expense was added to ensure that the allowance for credit loss remains directionally consistent for portfolio growth and a recent history. As you can see, the nonrecurring credit issues impacted our earnings per common share by $0.67. Our return on average assets by 24 basis points. Our return on average equity by 224 basis points And our net interest margin by 8 basis points.

As we will discuss later in the presentation, our credit metrics will drive improvement in our key performance ratios and will be reflected in our overall allowance for credit losses as it returns to our historical average. During the fourth quarter, as the Board and management balanced Avenu's 2025 growth plan and expense run rate, we made the tough decisions about paring back development personnel and focusing on revenue generation. Those conversations triggered a discussion about whether our change has constituted the need for an impairment analysis to be performed in accordance with Generally Accepted Accounting Principles or GAAP.

In agreement with that [indiscernible] analysis, we wrote the intangible assets to 0 effective at the end of the fiscal year, and this negatively impacted several performance ratios. You see the total amount of nonrecurring impairment adjustments for the fiscal year after accounting for taxes negatively impacted our earnings per share by $2.14, our return on average assets by 76 basis points and our return on average equity of 724 basis points. As these adjustments are nonrecurring, we expect to see improved and normalized performance metrics through 2025.

Turning to Slide 10, you will see how the impact of the impairment actually had a positive effect on tangible book value of $0.48 per common share. As tangible book value already excludes the full value of any intangible assets, recognizing a decrease in intangible assets, net of the tax [indiscernible] actually improves this metric.

Moving to Slide 11. The interest rate environment and [ cost of funding ] have been challenging in 2024. It is impacting banks earnings across the spectrum. Anecdotally, I saw an article recently that surveyed Community Bank CEO, and 54% of the deposit cost as their #1 challenge in 2025.

Here, you will see we ended the year with a healthy net interest margin of 3.13%. Our deposit market remains very competitive as we often compete with super regional and multinational banks and requiring deep relationship building in our communities. In the fourth quarter, we continue to build new deposit relationships that would fortify and grow our financial [indiscernible] year. We used excess liquidity to exercise the call options on $60 million in high CDs. We did incur some deposit carrying costs while we executed these options. That added 9 basis points of additional compression on our net interest margin for this quarter only, but we are positioning our balance sheet for a strong 2025.

Without the additional carrying costs, our net interest margin would remain the same as the prior quarter. We will continue exercising our callable CDs throughout the first quarter as we are laser-focused on [indiscernible] our funding expense.

We are continuing to fund new quality loans that are underwritten, stress tested in the current rate environment. Net new loan fundings were $36 million over the last quarter and $108 million for the fiscal year, which points to continued interest income growth, further enhancing our future and interest margin expectations. For the fiscal year 2025, we expect low single-digit loan growth.

On Slide 12, you will see our noninterest-bearing deposits represent 23% of our core deposit base and 17% of all deposits. We have an additional $122 million in callable CDs. That will be -- just one second. There's a message. Is there an issue with the audio? It could be just the one, but if anybody else is having any issue, please let me know. And I apologize. Okay. It's just the audio was bad. Okay. You're fading out. So I would just ask -- we'll speak a little bit more and try to get this resolved.

We'll start on Slide 12. On Slide 12, you will see our noninterest-bearing deposits represent 23% of our core deposits base and 17% of all deposits. We have an additional $122 million in callable CDs that will be accretive to our net interest margin as they are called. We continue to grow core deposits in a meaningful way, adding $187 million during 2024.

Our noncore deposit balances increased strategically, capitalized market conditions that will reduce funding costs and shorten the duration of our term deposits. As the FOMC react to market conditions, they have begun to lower our expectations of continued rate cuts in 2025, making it even more important that banks and competitive markets find niche markets to accumulate low-cost deposits.

Now turning to 2025, Our projected run rate is what we are expecting going into the year. Adjusting for the nonrecurring transactions, noninterest expenses increased a nominal 6 basis points quarter-over-quarter. Management has taken action to reduce expenses and increase expense control and efficiency. At this point in 2025, we are projecting a run rate of 83 basis points per month through the first quarter. Of course, we will continue to update you as the year progresses.

At this point, I'll turn the presentation over to Tom Floyd, our Chief Lending Officer, to discuss our loan portfolio and loan performance.

[Tom Floyd, executive]

Thank you, Alex. 2024 was a challenging year, but a year that I'm very proud of and looking forward to reviewing with you. Over the next few minutes, I'm excited to share details about our loan portfolio composition, trends in credit quality our annual growth and a measure of our stability going forward.

You will see that over the fourth quarter, we issued positive movement in terms of total nonperforming asset levels and positive trends in total past due levels coupled with our commitment to serving our vibrant client base, we remain optimistic about the future.

Our loan portfolio is well positioned for stable or falling rates. 61% of our portfolio has rate resets beyond 6 months, with the remaining 39% with rate resets within 6 months. Of those, 55% have weighted average floor rate of 6.34%. And as we move forward into 2025, we anticipate this will help our net interest margin as rates are expected to remain stable or decreased.

Our legal lending limit remained at $47 million, and our average new loan size was $1.9 million. As we mentioned last quarter, this highlights that as we've grown in our capacity, we continue to serve the smaller sized capital formation needs in our market. We're very comfortable in our [indiscernible] .

Slide 16 highlights that our loan portfolio is diversified with healthy metrics The nonowner-occupied loans comprised 30% of the portfolio and include hospitality, industrial, mixed-use, retail and a small amount of office. The weighted average yield is 6.47%, and the weighted average loan to value is 60%. Construction loans comprised 21% of the total book and are comprised of mixed-use, multifamily, residential, retail and self- storage. Our weighted average yield is 7.8%, and the weighted average loan to value is 61%. Owner-occupied accounts for 90% of the portfolio and is comprised of end users across roughly a thousand industries. This is a highly competitive asset class and the weighted average yield is 5.95%, with a weighted average loan to value of 68%.

Multifamily loans account for 13% of the portfolio and have a weighted average yield of 6.45% and a weighted average loan to value of 73%. Slide 17 highlights that our CRE concentration is managed well. At the end of the fourth quarter, pre-impairment, our CRE concentration was 375% capital, which is at the limit set by our Board. As you can see, we consistently managed the levels set by our Board and through proactive management, we'll add that number back within the policy limit over the next few months. Through normal business activities, we can accomplish this with a negligible impact to our existing clients.

It's worth highlighting that in our [ CRE portfolio ], we only have $13 million in exposure to pure office space, where the primary source of repayment is dependent on the market rate office rent. Slide 18 shows the trend in stress test over the past 8 quarters and the resulting impact to capital. The Q4 stress test for all earning assets reflects the worst case stress loss has committed at $45.1 million. In all quarters and even after year-end impairment, we remain strongly capitalized. The stress test includes loan level testing for all construction and investor commercial real estate. For other loan categories, we use the balance in each call report category multiplied by our worst ever loss for that call report category. For investments, we use the market price. And finally, for bank-owned life insurance with the terminal liquidation value.

Slide 19 highlights the vigorous management of our nonperforming loans over the course of 2024. Overall, we were able to reduce nonperforming assets by 62% over the course of the year for an ending balance of $21.7 million. Our aggressive action resulted in the overall [indiscernible] with a total principal loss coming to just 10% in terms of the loans that we resolved in 2024.

Slide 20 shows a decrease in our classified loan levels. Over the quarter, we decreased classified loans from 4.31% of total gross loans to 2.94% of total gross loans. We continue to rigorously and aggressively work our nonperforming loans and expect positive outcomes, which we'll highlight later in the presentation.

The next slide shows the positive trend in terms of past due loans. As you can see, over the last 3 quarters, we are trending downward with total loans and 30 days past due at the end of the quarter at virtually 0. Slide 22 highlights our prudent balance sheet management and our allowance for credit losses is directionally consistent with recent performance. As discussed in the stress testing slide, we remain strongly capitalized.

Based on positive trends in our past dues and our rigorous management of our nonperforming assets, we anticipate this trend will normalize in 2025. Slide 23, is a brief snapshot of our remaining classified and nonaccrual loans. As you can see, the common thread is that there is a high probability of a successful outcome.

The next slide highlights the recent change being made in D.C. to help strengthen our local community. This creative approach to modernizing obsolete offices, along with recent developments on federal workers returning to the office are welcome changes to our local landscape. Rising tides raise [ all ships, ] but all in all, the recent changes are positive and reasons to be optimistic.

Slide 25 highlights our consistent loan growth. Even through the various economic conditions and economic backdrops, our team has demonstrated a consistent ability to grow.

In summary, we've grown the loan portfolio by 6% in 2024. At the same time, our portfolio has broadly seen a decrease from problem [indiscernible] just as we told you that we expected last quarter. Our lending team has done an excellent job of serving our clients in our market that has resulted in a superior yield on earning assets and at more times than not, a demonstrated ability to exit relationships with minimal losses to principal values. We remain well capitalized and are working vigorously with our borrowers where there remain positive potential outcomes. We're passionate about serving our community. We love seeing it thrive and we're optimistic about the future.

That wraps it up for our loan presentation. Back to you, Jeff.

[Jeff Dick, executive]

Thank you, Tom. Our Banking-as-a-Service balance sheet for 2024 now reflects the $62,000 in other assets and $41 million in low or no cost deposits. The income statement reflects the net loss of $3.6 million from normal operations.

Looking at the pipeline, there's 5 fintechs client contracts. The first is fully live, but proceeding slowly at this point. Avenu will go into beta as soon as the due diligence has finished for client number 1 and should go quick -- go live quickly from that point. We're thinking beta will be about 2 weeks, maybe 3 weeks at the most.

As an aside from that, the API integration team is actually able to accommodate a timeline for a fintech move through the process in 60 to 90 days. The 3 clients that are in the queue behind Avenu are currently moving at a slower pace at their choices. Avenu is moving fast and has a lot of potential. In my mind, the client with the next most potential is the one waiting for their California money [indiscernible] to license. Once that fintech onboards with us, we should see some very good momentum.

Venu, again, is our cannabis payment solution. We control the app, the network, the virtual terminal for checkout and the merchant services solution. Each aspect of the solution is very simple and very elegant. The cannabis retail itself in the industry, I'm sorry, is large and driven, and we see a tremendous opportunity.

Slide 30 shows data from March 2024 forecast, estimating the U.S. legal cannabis retail market at $35.2 billion for 2025. Slide 31 tells us that there are 12,452 cannabis licenses in the United States. The slide also shows us the retail volume of sales in 21 of the 38 states where cannabis retail sales are legal. The weighted average sales per store in 2024 for those 21 states was $3.5 million per year.

Slide 32 shows the Venu opportunity. Again, the total addressable market is the 12,452 stores, collectively doing over $1 billion in monthly sales. 70% of that is in cash. We've been a conservative approach to our projections. We assume we could convert 1/3 of those weighted average sales per store into digital payments. We then assume we'd add about 100 stores to the network this year. Candidly, once our sales channels are in place, we think we should be able to do much better than that.

The power of the Venu solution is at the point we start to see some saturation with just 20% of the total retail stores and less than 1/3 of the sales from each of those stores, we could end up earning transaction fees of $90 million or more. This is a captive network at this point. In order to get there quickly, we are actively negotiating a few different sales channels to take Venu forward. We're working with a very few credible independent sales organizations, ISO, that have big sales teams. They are excited that the opportunity as the competition is virtually nonexistent for what we offer. We'll also be working with our banking associations as well as cannabis associations in our efforts to gain market share.

For 2025, we've estimated the average outstanding deposits for Avenu for the year to be $135 million, and emphasis on average. Properly executing this strategy alongside the fee income and expense reductions that we've taken will put Avenu to a profitable point in 2025. The Board and management know that its strategic execution is pivotal to the company's success and future. The core bank is strong and well positioned. The Avenu and Venu teams are relentless in their endeavor to execute and the market that they can deliver.

At this point, we're going to start questions with -- that we received from Chris Marinac, who is a Director of Research at Janney Montgomery Scott. After that, we'll address questions that were submitted earlier in the day and through the portal.

So I'm going to start by reading a few of Chris's questions. The first one is an Alex question or Tom Chmelik question. The asset impairment makes sense. Will the other measures that you also put in place be meaningful as you take Avenu forward?

[Richard Vari, executive]

Yes, it's a great question, and they are. We took action to decrease our expenses and focus on revenue. I mentioned those actions were reducing some personnel costs. We renegotiated contracts, very focused on reducing the expense, the efficiency and trying to be as lean as possible and really focused on revenue. And I think that's going to be meaningful to the bottom line.

[Jeff Dick, executive]

Tom, anything to add?

[Thomas Chmelik, executive]

Yes. As I said it was sort of being thoughtful of the expenses that we went through to decrease for this year and we'll constantly continue to look for other expenses to continue to work through as time goes on.

[Jeff Dick, executive]

Good. Thank you. As the next question is still on Avenu. Does the Avenu solution that we have in place today fully support our cannabis opportunity? What does that look like? And how long that takes to see meaningful [indiscernible]?

And yes, the version one of Avenu that went into place in October 1, 2024, has everything that the Venu solution needs in order to be successful. The small remaining team that focused on Avenu will continue to harden the software solution to make it, so it's more efficient, works faster and more scalable, but it's working and all of the alpha testing for Avenu -- for Venu, I'm sorry, has been very successful.

We are working to get the ISO reseller relationships in place as quickly as we can and get everything moving so that we can start to really focus on onboarding the cannabis retailers. This is a bit a of a chicken and egg kind of a situation. We onboard the cannabis retailers, we do in-store marketing, we do other types of marketing to get to the consumers. They download the app from App Store and we're sort of off to the races, but it really is hitting as many cannabis retailers on board as quickly as we can that will drive, I think, the ultimate adoption. So we're excited and we're looking forward on that.

The next question is the pre-ROAA of 53 basis points achievable in 2025? And is there room to improve upon it? Alex or Tom, yes.

[Richard Vari, executive]

Yes. Yes, happy to address that. The short answer is yes, absolutely. We have a number of things that are impacting that. So when we're looking at our 2024 performance, we had some credit issues and some nonrecurring transactions. Those are behind us. And so we won't be having those going into 2025. A couple of other things I'm thinking about, certainly a trend in the last quarter, our net interest income by dollars is increasing.

We had an increase in net interest income by about 4.5% over the quarter, which is a nice trend to see. And as I mentioned earlier, we, in the fourth quarter, we exercised $60 million worth of callable CDs that were accretive to our net interest margin. We have another 120 sort of in the chamber, if you will, right, that will be accretive to our funding as we continue to follow those. And just we are seeing continued deposit opportunities in our market as well as new loan growth. So we have a lot of opportunities to be excited about in 2025.

[Thomas Chmelik, executive]

Yes. And the other thing is the decrease in the nonperforming assets will help the margin also. And hopefully, with some of the things that we're working through on former NPAs are not assets of recovery of interest that we believe we will see in the coming year.

[Jeff Dick, executive]

Excellent. This is a Tom Floyd question. Do you think the loan growth opportunity exists in our market to support our planned loan growth?

[Tom Floyd, executive]

I absolutely do. And as I mentioned, we love our market. It's a large market. We have less than 1% market share in our markets. So for us to get low single-digit loan growth, there's an abundance of opportunities for the type of lending we are trying to do, which is owner-occupied, owner -- end-user businesses, those opportunities give us the opportunity to get full banking relationships. They're very much in the community Our SBA lending and other types of owner-occupied C&I. So we' absolutely think they're within our market.

[Jeff Dick, executive]

This is a follow-on question and you've answered some of this, but the types of specific lending that we're looking at trying to focus on for 2025, and maybe as you look -- think about that, I think a natural follow-up would be what the type of loans if there's any, that you intend to stay away from?

[Tom Floyd, executive]

So absolutely, the onwer-occupied is something that we're going to look to do a lot of this year. In terms of loans that we'll be approaching with caution would be acquisition financing in the government contracting space, where your payments focuses on build receivables. Things of that nature, we're going to be very confident with. We certainly have a good customer base, the government contractors. We're going to continue to support their asset-based needs. We will be more cautious with acquisition financing going forward.

[Jeff Dick, executive]

Tom Chmelik, you are a veteran in D.C., a native. Does the new administration and congress present any barriers with what we're trying to achieve?

[Thomas Chmelik, executive]

I mean one thing that we've always done is whatever the administration is, whether the Republic or Democrat and as they come in, it moves slowly. So there will be some changes, but albeit it will be slow. We still have the federal government here, it's not leaving any time tomorrow. He's not taking it out of town. But I think it's going to be interesting to see what does happen. I think it's just not here, it's all across the countries. As I said, we still have a vibrant economy. Without the federal government, there's a lot of things that go on here as Jeff alluded to in the beginning of the slide presentation.

[Jeff Dick, executive]

Yes. And it's interesting, the mandate for federal workers returning back to work, I think, is going to be significant. When COVID hit in Washington, D.C., like -- not unlike, I'm sure, many of the major cities, all of the very small, what we would call, mon-and-pop shops, the shoe repair, the breakfasts, the coffees, the Starbucks coffee shops, so just all of those little businesses dried up because there was no traffic, no foot traffic in the city for years, and it's still not what it was. So there is even opportunities as those spots are still empty. I think for businesses to come back once the federal workers come back and need those services again. So those are wonderful SBA opportunity because of the right size for that.

[Tom Floyd, executive]

That's a great point. And we've added to the talent of our team with very experienced SBA staff. So we are excited to look at that here going forward.

[Jeff Dick, executive]

Good. Again, accounting question. For the first quarter of 2025, you indicated a 3 basis point monthly increase in the run rate. Where does that number start from? Is that from the end of the just the Q4 or is that from 2024?

[Richard Vari, executive]

Right. Yes. And so that's starting with the year-to-date 2024 normalized net interest expenses. So when you take out the nonrecurring noninterest expenses, it gets you to about $51.9 million. So we're using that as our point to say 83 basis points per month from there. And I'd like to just point out that with -- due to the cost cutting things and the focus on reducing expenses, that's actually about a 40% reduction in run rate from where we were in 2024. So we're really excited about the things we've done and what we're looking for in 2025.

[Jeff Dick, executive]

Yes. I mean that is a significant 40%. And that's one of the things that we're really focused on to try to improve the performance metrics for the coming year. We'll sort of bounce back and forth. Again, a loan question. Refers to a credit losses question more specifically. And the question is, if I added about 10 basis points of the losses projected for 2025, would that be about right? I'll let you start, Tom.

[Tom Floyd, executive]

Yes. I think if you wanted to be conservative, and solve it candidly, we've seen a lot of improvements in our credit quality metrics over the last quarter. And so we're optimistic about our direction. And we believe that what we have into our ACL should cover what we need to clean up. So yes.

[Jeff Dick, executive]

Yes, there's always an absolute unknown. But having said that, I know the lenders, the credit administration team loan review, everything else has really scoured the portfolio, and it's in a very good shape at this point.

So those are Chris's questions. There's a couple more here, some in my mobile phone that I will try to read. There's one here that says, if we spend a little bit more time discussing just the net, the core results of the bank. And I think if you went back to the slide that shows our thinking about that, let's focus just a bit on those core results sort of next credit ex-impairment. How does that help the bank? How will that go into 2025? We've talked about it a little bit, but I think it's more [indiscernible].

[Richard Vari, executive]

Yes, happy to touch on that. So on Slide 9, we really laid out what the key performance ratios, kind of would have been the core had you taken out the capital impairment. And frankly, 2024 was a challenging year. We had deposit costs are challenging. And so those are things that the bank is continuing with. But I think the things that we're focused on are the things that I kind of mentioned before that we have a lot of levers that we can pull as far as reducing funding costs, the things that we're doing with our deposits.

We have -- I know we're talking less about Avenu, but Avenu 1 version 1 is behind us. So those expenses are being paired back and we're being very [indiscernible]. The bank had a very healthy interest margin at 3.13% for the year. We're proud of that. We believe that we are primed to continue expanding that. As I mentioned, we're adding new loans. Net interest income is growing. And we still have, as I called earlier, sort of [ powder in the keg ] to continue lowering the funding cost being some of the things that we did with the balance sheet. We're managing that.

[Thomas Chmelik, executive]

Tom, I'll also, the loan yields, we are still getting loan yields that we've always gotten. I mean we provide service, and that's what we've always said to everybody. That's what we do and we get paid for what we do here. So that will continue. We see that to be an issue going forward with the type of loans that we're doing.

[Richard Vari, executive]

And with improving credit metrics and we're going to continue to see increased profitability metrics on the back of that and certainly just looking at the bank.

[Jeff Dick, executive]

I've had a couple of questions that have come in. It says what does we've significantly pared down future work at this point mean? I'll own that. That was poorly written. It's in reference to the changes that we've made with the future software development. When we look at Avenu version 1 is in production. As I said previously, we need a core small team that will continue to work too hard and make the solution more efficient to take care of any of the small things that go from day to day when other solutions update their systems and that type of thing.

And there are actually 2 services that were well underway to developments. One is the ability to add debit card functions to the solutions that a fintech could offer a white label to the clients that actually help a lot in bringing in larger balances. And so that's one that was put in.

The other one that's underway is we're developing what we need to do for an [indiscernible], which is sorry, ACH terminology, but it allows the fintech -- allows the customer of the fintech to direct deposits, number all of their paycheck right into that account. So again, both of those are really focused on going after clients or fintechs that would use that feature functionality, which would then translate into higher balances being maintained for those accounts.

Pretty much anything beyond that has been put on hold. And the reductions that enforce those have been taken. That was questioned by somebody, when would that happen. That has been taken. Everything has been streamlined with immediate effect and very serious about what we're trying to do because to achieve what we've stated here today, we had to act on that.

The good news is as we are able to present Avenu as successful and Venu as successful, we will look to look at whatever -- what other features and functionality down the road when we can support and justify it might be necessary in order to continue to gain purchase in the space. So we talked about the run rate expense level being decreased by 40%.

Let's see. How do current expectations compared to what was presented in the third quarter revenue projection -- presentation from the consultant? So again, I shared that average number of $135 million, that's probably in line with the deposit gathering side of things. It's just an average number as opposed to the primary number to get to at some point in the future. It's probably -- it's just more realistic, I think, to look at the average balance outstanding. From an expense standpoint, we've actually pared down those expenses fairly significantly that were shown in that. Those are our numbers that we had with them, but those actions, as I said, have been taken. So it is -- it should produce a better outcome.

So this one with the impairment. How should we make sense of the intangible asset being written down to 0 versus some other percentage?

[Richard Vari, executive]

Yes. It's interesting on the accounting guidance there, it is -- it gives you a guide and tells you, here are the criteria and here's how do you look at it. I think in our [indiscernible], we used the income approach and with the new product that has yet to really generate cash flow, it's a little bit more difficult to tie down to a specific number. So if you're using projections and looking at it from that perspective, so it's difficult to assess in terms of absolute as the accounting guidance gives it. We took the fact that we had [indiscernible] in the best possible way and finished out our analysis.

[Jeff Dick, executive]

Tom, anything to add?

[Thomas Chmelik, executive]

No, that's spot on.

[Jeff Dick, executive]

All right. There's another Avenu question. Were the delays in Avenu primarily driven by inefficient market demand, technological development challenges or heightened competitive pressures?

So I think we've been actually very clear on it. We saw the [ '21 consent ] orders that were put in place in 2023, 2024. We looked at those, and we really addressed the contents, and it was a matter of not wanting to have to do it [indiscernible], but to have all that technicality properly integrated.

Now there were some technological issues, again, that we could have work around, but we decided to just fix, those were third parties and so you say it's 100% on one thing and not the other way around. But ultimately, it was impacted by our desire from a compliance, regulatory and otherwise perspective in order to do it right, get it right in the first time. That was very important.

So we wouldn't have that solution between the market until October 1. And when we brought it to market, we've been aggressive since then, working with clients to get into the space and we're dealing with them at their speed. We are, again, also out in the market, looking at a lot of different opportunities to continue to grow with other fintech providers that have more potential. Are there any questions from...

[Unknown Executive]

Yes. Questions about Avenu. And I'll paraphrase some of these. How many customers does Avenu have [indiscernible]?

[Jeff Dick, executive]

And so the only -- generally, the only fully live is [indiscernible]. We talked about that earlier and that's been slow to take up. They went live December 31. And they're going at their pace. They all downloaded on their customer -- they have a customer base and it's been -- and that's one of the things that sort of influence the apparent decision as well.

[Unknown Executive]

Can you provide additional detail about the status of the deposits expected in 2024 or 2025?

[Jeff Dick, executive]

For 2025, I mean, yes. So that's really a function of the opportunities that we have, and we think that some of that's going to come from the Venu opportunity. We didn't really focus much on the cannabis retailers' operating income. That's an opportunity that we're exploring.

There's also -- again, they're not under contract yet, but there's some very good potentials out there. And we're trying to bring in pretty quickly. So I apologize. I can't share names, I can't share our options, but they're working very hard to bring these in, and it's going to change.

I think one of the key things to recognize is what happens if that materializes. And that's really what drives the future of Avenu. We'll get it from the positive standpoint if it materializes. We do everything that is meant to do, move on and grow. We have to be realistic about the alternatives, and the Board and management have discussed that, too. And we'll take action when actions [indiscernible].

[Unknown Executive]

What is the expected expenses in 2025?

[Jeff Dick, executive]

So they've been pared down. There's opportunity for fixed and variable costs. The variable is a function of the [indiscernible] solution is.

But I think it's meaningless to focus on [indiscernible] as lean as possible. We had [indiscernible] the team is able to operate the functionality that we have now, but we're very much keeping those operating expenses as lean as possible and we are revisiting certain contracts that are in place to try to lower the cost on those.

But as I stated before, if we achieve the income that we have in the slide deck, that will be a positive result and will cover all of the expenses with the cushion.

[Unknown Executive]

And then again, 40% reduction for expenses. What was the 40% comprised of?

[Richard Vari, executive]

Yes, I'll clarify that. So that's not Avenu specific. We were talking about a reduction in the run rate for the company. And it wasn't -- I apologize, if I was not -- it's not a 40% reduction in expense. When you're looking at the run rate that we had in 2024 compared with the run rate that we're projecting in 2025, it's a 40% production in run rates. We're anticipating 83 basis points per month, which is a reduction of the rate that we had in 2024. And that was done from the cost cutting production and expense things that we were discussed previously here. Sounds like that's the last question.

[Jeff Dick, executive]

Okay. So I'm sorry, there's one more on the call here. Need to find it so I can read it properly. Again, with regard to Avenu, please elaborate on what are the operational changes versus the revaluation.

To be honest, I'm not 100% sure what that means. I'm going to reach out to the author of that and address it offline. We have talked about the operational change, I think, through that. So perhaps I answered the question already, the efficiencies that we've gained, but that was the -- that is definitely, of course, significant of the two. There was more savings built into pairing things down. As I said, renegotiating with the agreements that we've already been able to renegotiate and reset expectations.

The Board, I think, I guess I didn't say this, but the Board just met for 2.5 days here at our headquarters. We went through some very good strategic plan and a very comprehensive market evaluations, the accounting team and all of the leadership of the bank really anticipated in what can we do from an efficiency standpoint to get things to operate as lean as we can for this coming year. None of us were happy with the 2024 overall performance.

Having said that, I think we -- as a group, we worked as hard as we ever have in order to get it there. But when I look at 2024, it really [indiscernible] a lot of work to get things into the right place, to get things very focused so that now we're in a position to really take off and get some extremely strong positive momentum. So we're excited for that. There's challenges before us that we'll be able to prove to the market.

And we thank you for your continued investment in MainStreet Bank. And if you do have questions, by all means, please reach it out. We will be at an investor conference, starting Wednesday morning through Thursday, but we will try to get back to you. We can get together and talk through any questions that you have after this.

Thank you again for taking the time to be with us today. We very much appreciate it. I hope you have a good rest of the day. Thank you.