MainStreet Bancshares, Inc.: Form 10-Q for the period ended Jun 30, 2025

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 and six months ended June 30, 2025 are not necessarily indicative of results for the year ending December 31, 2025 or any future period.

Forward-Looking Statements

This Quarterly Report on Form 10-Q contains certain forward-looking statements and information relating to the Company within the meaning of the Private Securities Litigation Reform Act of 1995 that are based on the beliefs of management as well as assumptions made by and information currently available to management. Forward-looking statements can be identified by the fact that they do not relate strictly to historical or current facts. They often include words like “believe,” “expect,” “anticipate,” “estimate,” and “intend” or future or conditional verbs such as “will,” “should,” “could,” or “may” and similar expressions or the negative thereof. Important factors that could cause actual results to differ materially from those in the forward–looking statements included herein include, but are not limited to:

• general economic conditions, either nationally or in our market area, that are worse than expected;
• competition among depository and other financial institutions, particularly intensified competition for deposits;
• inflation and an interest rate environment that may reduce our margins or reduce the fair value of certain of our financial instruments;
• adverse changes in the securities markets;
• changes in laws or government regulations or policies affecting financial institutions, including changes in regulatory structure and in regulatory fees and capital requirements;
• the impact of significant changes in accounting procedures or requirements on our financial condition or results of operations;
• our ability to enter new markets successfully and capitalize on growth opportunities;
• our ability to successfully integrate acquired and newly organized entities;
• changes in consumer spending, borrowing and savings habits;
• changes in accounting policies and practices;
• changes in our organization, compensation and benefit plans;
• our ability to attract and retain key employees;
• changes in our financial condition or results of operations that reduce capital;
• changes in the financial condition or future prospects of issuers of securities that we own;
• the concentration of our business in the Northern Virginia as well as the greater Washington, DC metropolitan area and the effect of changes in the economic, political and environmental conditions on those markets;
• adequacy of or increases in the allowance for credit losses;
• cyber threats, attacks or other data security events;
• fraud or misconduct by internal or external parties;
• reliance on third parties for key services;
• deterioration of our asset quality, including an increase in loan delinquencies, problem assets and foreclosures;
• future performance of our loan portfolio with respect to recently originated loans;
• additional risks related to new lines of business, products, product enhancements or services;
• results of examination of us by our regulators, including the possibility that our regulators may require us to increase our allowance for credit losses or to write-down assets or take other supervisory action;
• the effectiveness of our internal controls over financial reporting and our ability to remediate any future material weakness in our internal controls over financial reporting;
• liquidity, interest rate and operational risks associated with our business;
• implications of our status as a smaller reporting company;
• a work stoppage, forced quarantine, or other interruption or the unavailability of key employees;
• volatility in the financial institution industry, including failures and/or rumors of possible failures of other financial institutions and actions by regulatory authorities in response thereto;
• litigation or governmental actions;
• impairment of a material asset;
• federal layoffs and potential government contract terminations or non-renewals;
• possible income tax and accounting effects of recently enacted legislation; and
• "Risk Factors" and other information included in our Annual Report on Form 10-K for the year ended December 31, 2024 and this Quarterly Report on Form 10-Q.

Should one or more of these risks or uncertainties materialize or should underlying assumptions prove incorrect, actual results may vary materially from those described herein. We caution readers not to place undue reliance on forward-looking statements. The Company disclaims any obligation to revise or update any forward-looking statements contained in this Form 10-Q to reflect future events or developments.

Economic Impact of Federal Spending Reductions and New Legislation

The Company recognizes that the impact of federal spending reductions, hiring freezes, and layoffs, including dismissals of employees and termination or non-renewal of government contracts in the Company’s primary market areas, may have an adverse economic effect, particularly after severance payments to permanently terminated federal employees expire later in 2025. In addition, consumer confidence and the strength of the US dollar may be negatively affected by uncertainty associated with proposed tariffs on many imports. We cannot assure you that the economic impacts of these actions would not be material and adverse to our business, financial condition, results of operations, or prospects.

On July 4, 2025, President Trump signed into law the legislation formally titled “An Act to Provide for Reconciliation Pursuant to Title II of H. Con. Res. 14” and commonly referred to as the One Big Beautiful Bill (the "Act”). The Company is currently evaluating income tax and accounting implications of the Act. The Company currently does not expect the Act to have a material impact on the Company's business, financial condition, results of operations, or prospects.

Overview

As used herein, the “Company,” “we,” “our,” and “us” refer to MainStreet Bancshares, Inc. and its subsidiaries, and the “Bank” refers to MainStreet Bank.

MainStreet Bancshares, Inc.

MainStreet Bancshares, Inc. is a financial holding company that owns 100% of MainStreet Bank and MainStreet Community Capital, LLC.

The Company and its subsidiaries are incorporated in and chartered by the Commonwealth of Virginia. The Company’s executive offices are located at 10089 Fairfax Boulevard, Fairfax, Virginia. Our telephone number is (703) 481-4567, and our internet address is www.mstreetbank.com (http://www.mstreetbank.com). The information contained on our website shall not be considered part of this Quarterly Report on Form 10-Q, and the reference to our website does not constitute incorporation by reference of the information contained on the website.

MainStreet Bank

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.

We emphasize providing responsive and personalized services to our clients. Due to the consolidation of financial institutions in our primary market area, we believe there is a significant opportunity for a local bank to provide a full range of financial services. By offering highly professional, personalized banking products and service delivery methods and employing advanced banking technologies, we seek to distinguish ourselves from larger, regional banks operating in our market area and believe we are able to compete effectively with other community banks.

We believe we have a solid franchise that meets the financial needs of our clients and communities by providing an array of personalized products and services delivered by seasoned banking professionals with decisions made at the local level. We believe a significant customer base in our market prefers to do business with a local institution that has a local management team, a local Board of Directors and local founders and that this customer base may not be satisfied with the responsiveness of larger regional banks. By providing quality services, coupled with the opportunities provided by the economies in our market area, we have generated and expect to continue to generate organic growth.

We service Northern Virginia as well as the greater Washington, D.C. metropolitan area. Our goal is to deliver a customized and targeted mix of products and services that meets or exceeds customer expectations. To accomplish this goal, we have deployed a premium operating system that gives customers access to up-to-date banking technology. These systems and our highly skilled staff have allowed us to compete with larger financial institutions. The combination of sophisticated technology and personal service sets us apart from our competition. We strive to be the leading community bank in our market.

The Company's business is focused core banking where we offer a full range of banking services to individuals, small to medium-sized businesses and professionals through both traditional and electronic delivery. During the quarter ended March 31, 2025, the Company pivoted away from certain operating BaaS services. Activities resulting from this business line for the quarters ended June 30, 2025 and June 30, 2024 are reported in Note 9 in the Notes to the Consolidated Financial Statements.

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.

Our products and services include: business and consumer checking, premium interest-bearing checking, business account analysis, savings, certificates of deposit and other depository services, as well as a broad array of commercial, real estate and consumer loans. Internet account access is available for all personal and business accounts, internet bill payment services are available on most accounts, and a robust online cash management system is available for business customers.

MainStreet Community Capital, LLC

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. The One Big Beautiful Bill signed into law on July 4, 2025, permanently extended the new market tax credit program.

Critical Accounting Policies

The accounting and financial reporting policies of the Company conform to accounting principles generally accepted in the United States of America and to general practices within the banking industry. Accordingly, the financial statements require certain estimates, judgments, and assumptions, which are believed to be reasonable, based upon the information available. These estimates and assumptions affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of income and expenses during the periods presented. Critical accounting policies comprise those that management believes are the most critical to aid in fully understanding and evaluating our reported financial results. These policies require numerous estimates or economic assumptions that may prove inaccurate or may be subject to variations which may significantly affect our reported results and financial condition for the current period or in future periods.

Our critical accounting policies involving significant judgments and assumptions used in the preparation of the consolidated financial statements as of June 30, 2025, have remained unchanged since our Annual Report on Form 10-K for the year ended December 31, 2024 was filed, unless noted herein. Any changes are discussed under "Recently Adopted Accounting Developments" in Note 1 of the Notes to Consolidated Financial Statements.

Comparison of Statements of Income for the Three Months Ended June 30, 2025 and 2024

General

Total interest income increased $850,000 for the three months ended June 30, 2025 from the same period in 2024. The increase was primarily the result of an increase in interest and fees on loans of $788,000 due to collection of accrued interest on a fully repaid nonaccrual loan. Total interest expense decreased $2.4 million for the three months ended June 30, 2025 from the same period in 2024 due to fluctuations in deposit interest expense described below. Net interest income increased $3.2 million for the three months ended June 30, 2025 from the same period in 2024. The recovery of credit losses was $543,000 for the three months ended June 30, 2025 compared to a provision for credit losses of $638,000 for the three months ended June 30, 2024. Non-interest income increased $302,000 for the three months ended June 30, 2025 from the same period in 2024. The increase in non-interest income was primarily due to a $68,000 gain on retirement of subordinated debt and a $103,000 gain on equity securities during the three months ended June 30, 2025. Non-interest expense increased by $1.9 million for the three months ended June 30, 2025 compared to the same period in 2024, primarily due to increases in salaries and employee benefits, outside services, and FDIC insurance. Of these expenses, $1.8 million were not incurred in the comparable quarter and were primarily related to the Company's decision to pivot away from certain operating BaaS services. Excluding these expenses, non-interest expense was $12.96 million for the three months ended June 30, 2025, an increase of $127,000 from $12.8 million for the three months ended June 30, 2024. Net income increased $2.0 million to $4.6 million for the three months ended June 30, 2025 from $2.6 million for the three months ended June 30, 2024. The increase in net income was primarily driven by the decrease in total interest expense.

Interest Income

Total interest income increased $850,000, or 2.5%, to $34.4 million for the three months ended June 30, 2025 from $33.5 million for the three months ended June 30, 2024, on a tax equivalent basis. The increase was primarily the result of an increase in interest and fees on loans of $788,000. Total average interest-earning assets increased $57.1 million, to $2.02 billion for the three months ended June 30, 2025 from $1.96 billion for the same period in 2024 primarily because of an increase of $37.2 million in the average balance of loans and by an increase of $23.6 million in the average balance of federal funds sold and interest bearing deposits at other financial institutions. These increases were offset by a $3.7 million decrease in the average balance of investment securities. The average yield on our interest-earning assets decreased 2 basis points to 6.84% for the three months ended June 30, 2025 as compared to 6.86% for the three months ended June 30, 2024 primarily due to market conditions. For the three months ended June 30, 2025, the Company reversed $128,000 in accrued interest income in relation to loans placed on nonaccrual, as compared to $659,000 for the three months ended June 30, 2024.

Interest and fees on loans increased $788,000, to $32.4 million for the three months ended June 30, 2025 from $31.7 million for the same period in 2024. This was primarily due to the collection of accrued interest on a fully repaid nonaccrual loan and due to an increase in the average loans outstanding of $37.2 million, which was $1.82 billion for the three months ended June 30, 2025 compared to $1.78 billion for the three months ended June 30, 2024. The average yield on loans increased 3 basis points, or 0.4%, for the three months ended June 30, 2025 as compared to the three months ended June 30, 2024.

Interest income on federal funds sold and interest-earning deposits increased by $62,000 to $1.15 million for the three months ended June 30, 2025, from $1.08 million for the three months ended June 30, 2024. The average balance of interest-earning deposits and federal funds sold increased $23.6 million to $108.3 million for the three months ended June 30, 2025 from $84.7 million for the same period in 2024. The average yield decreased to 4.24% for the three months ended June 30, 2025 from 5.13% for the same period in 2024.

Interest on investment securities was $769,000 for the three months ended June 30, 2025 and June 30, 2024 on a fully tax-equivalent basis. Interest on investments in U.S. Government Agencies and U.S. Municipals was $365,000 for the three months ended June 30, 2025 and $369,000 for the three months ended June 30, 2024. Interest on mortgage-backed securities was $94,000 for the three months ended June 30, 2025 and June 30, 2024. Subordinated debt interest income increased by $6,000, or 4.7%, to $134,000 for the three months ended June 30, 2025, from $128,000 for the three months ended June 30, 2024. The average yield on taxable securities increased 15 basis points, to 3.27% and the average yield on tax-exempt securities increased 12 basis points, to 3.83% on a tax equivalent basis for the three months ended June 30, 2025, from 3.12% and 3.71%, 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 $3.7 million, to $88.3 million for the three months ended June 30, 2025, from $92.0 million for the three months ended June 30, 2024.

Interest Expense

Total interest expense decreased $2.4 million to $15.5 million for the three months ended June 30, 2025 from $17.9 million for the three months ended June 30, 2024, primarily due to a $2.2 million decrease in interest expense on interest bearing deposits and a $212,000 decrease in total interest expense paid on borrowings.

Interest expense on deposits decreased $2.2 million to $14.7 million for the three months ended June 30, 2025 from $16.9 million for the three months ended June 30, 2024 primarily as a result of a decrease in cost of funds. The increase in average balance of interest-bearing deposits was $96.4 million to $1.50 billion during the three months ended June 30, 2025 as compared to $1.40 billion for the three months ended June 30, 2024. The increase in the average balance of interest-bearing deposits was primarily a result of a $15.6 million increase in the average balance of money market deposit accounts, by a $69.0 million increase in the average balance of time deposits, and by a $71.4 million increase in the average balance of savings and NOW deposits. These increases were partially offset by a $59.6 million decrease in interest bearing demand deposits during the three months ended June 30, 2025 as compared to the three months ended June 30, 2024. The average cost of interest-bearing deposits was 3.94% for the three months ended June 30, 2025, compared to 4.83% for the three months ended June 30, 2024. The average rate paid on money market deposits decreased 85 basis points to 3.94% for the three months ended June 30, 2025 from 4.79% for the three months ended June 30, 2024. The average rate paid on interest-bearing demand deposits decreased 135 basis points to 3.58% for the three months ended June 30, 2025 from 4.93% for the three months ended June 30, 2024 primarily due to the interest rate environment and our ability to reprice these deposits. The average rate paid on savings and NOW deposits decreased 28 basis points to 1.32% for the three months ended June 30, 2025 from 1.60% for the three months ended June 30, 2024. The average cost of certificates of deposit decreased by 66 basis points to 4.39% for the three months ended June 30, 2025 as compared to 5.05% for the three months ended June 30, 2024. The average balance of non-interest bearing demand deposits and other liabilities decreased $27.2 million to $354.6 million for the three months ended June 30, 2025, compared to $381.8 million for the three months ended June 30, 2024. The decrease was primarily the result of depositors looking for higher yielding products and market competition.

Net Interest Income

Net interest income increased approximately $3.2 million, or 20.6%, to $18.9 million for the three months ended June 30, 2025 from $15.6 million for the three months ended June 30, 2024, on a tax equivalent basis, despite our net interest-earning assets decreasing $24.4 million to $449.0 million for the three months ended June 30, 2025 from $473.4 million for the three months ended June 30, 2024. The interest rate spread increased by 84 basis points to 2.87% for the three months ended June 30, 2025 from 2.03% for the three months ended June 30, 2024, on a tax equivalent basis. The net interest margin increased by 55 basis point from 3.20% for the three months ended June 30, 2024 to 3.75% for the three months ended June 30, 2025 on a tax equivalent basis. Refer to “Use of Certain Non-GAAP Financial Measures,” below, for a reconciliation of adjusted net interest margin.

Average Balances, Net Interest Income, Yields Earned and Rates Paid

The following table shows for the periods indicated the total dollar amount of interest from average interest-earning assets and the resulting yields, as well as the interest expense on average interest-bearing liabilities, expressed both in dollars and rates, and the net interest margin. All average balances are based on daily balances.

(Dollars in thousands)

(1) Includes loans classified as non-accrual.

(2) Interest rate spread represents the difference between the average yield on average interest–earning assets and the average cost of average interest-bearing liabilities.

(3) Net interest earning assets represent total average interest–earning assets less average interest–bearing liabilities.

(4) Net interest margin represents net interest income divided by total average interest-earning assets.

(5) Annualized.

(6) Income and yields for all periods presented are reported on a fully tax-equivalent basis using the federal statutory tax rate of 21%. Refer to “Use of Certain Non-GAAP Financial Measures.”

Rate/ Volume Analysis

The following table presents the effects of changing rates and volumes on net interest income for the periods indicated. The rate column shows the effects attributable to changes in rate (changes in rate multiplied by prior average volume). The volume column shows the effects attributable to changes in volume (changes in average volume multiplied by prior rate). Changes attributable to both rate and volume, which cannot be segregated, have been allocated proportionately. The Total Increase (Decrease) column represents the sum of the prior columns.

(Dollars in thousands)

Provision for Credit Losses

Management believes that the allowance for credit losses recorded for the period ended June 30, 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.

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.

The recovery of credit losses on loans was $528,000 for the three months ended June 30, 2025 compared to a provision for credit losses on loans of $931,000 for the three months ended June 30, 2024. This is primarily due to a decrease in total gross loans of $43.9 million from $1.83 billion as of December 31, 2024 to $1.79 billion as of June 30, 2025 due to loan paydowns in the normal course of business and management of concentrations. Loan originations, which totaled approximately $44.5 million for the three months ended June 30, 2024 increased $6.4 million to $50.9 million for the three months ended June 30, 2025. Non-performing loans were $7.2 million at June 30, 2025. 52% of this balance is attributable to one relationship and the remaining 48% are confined to five 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 $37.8 million as of June 30, 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 June 30, 2025.

The recovery of credit losses on off-balance sheet credit exposure was $15,000 for the three months ended June 30, 2025 compared to a recovery of credit losses of $293,000 for the three months ended June 30, 2024. The stabilization of the provision for off-balance sheet credit exposure was primarily related to the utilization of revolving lines of credit.

As of June 30, 2025, criticized loans increased $3.6 million and classified loans decreased $18.1 million when compared to December 31, 2024, to a balance of $88.9 million and $39.3 million, respectively. Approximately $7.7 million of classified loans were sold at par during the three months ended June 30, 2025. The sale of these loans did not have a significant impact on the allowance for credit losses on loans. Additionally, as interest rates have risen significantly since March 2022, 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 June 30, 2025, there were $622,000 charge-offs incurred and recoveries of $747,000 were received. During the three months ended June 30, 2024, there were $370,000 charge-offs incurred and recoveries of $6,000 were received.

Non-Interest Income

Non-interest income increased $302,000, or 39.5%, to $1.1 million for the three months ended June 30, 2025 from $764,000 for the three months ended June 30, 2024. The increase in non-interest income was primarily due to a $68,000 gain on retirement of subordinated debt and a $103,000 gain on equity securities during the three months ended June 30, 2025. The Company continues to focus on increasing non-interest income as it continues to add services that strategically benefit our customers.

Non-Interest Expense

Non-interest expense increased $1.9 million, or 14.9%, to $14.7 million for the three months ended June 30, 2025, from $12.8 million for the three months ended June 30, 2024 primarily because of an increase in salaries and employee benefits of $795,000. The Company had an increase in salaries due to one time severance costs as we reduced headcount, as well as realigning certain incentive accruals. FDIC insurance expense increased $520,000 to $850,000 for the three months ended June 30, 2025, from $330,000 for the three months ended June 30, 2024. This increase was due to the significant deposit growth the Company experienced at the beginning of the year. Outside services, which includes professional fees for attorneys, accountants, consultants, and cloud services, increased $451,000 to $1.3 million for the three months ended June 30, 2025, from $839,000 for the three months ended June 30, 2024. This increase is driven by the acceleration of costs related to contract cancelation from the Company's decision to pivot away from certain operating BaaS services and from consulting costs to execute our strategic plan. Furniture and equipment expenses increased approximately $201,000 to $1.1 million for the three months ended June 30, 2025, from $940,000 for the three months ended June 30, 2024. Data processing increased approximately $43,000 to $357,000 for the three months ended June 30, 2025, from $314,000 for the three months ended June 30, 2024. Offsetting these increases was a decrease in occupancy expenses of $97,000, or 23.4%, to $318,000 for the three months ended June 30, 2025 from $415,000 for the three months ended June 30, 2024 due to expense management. Of these expenses, $1.8 million were not incurred in the comparable quarter and were primarily related to the Company's decision to pivot away from certain operating BaaS services. Excluding these expenses, non-interest expense was $12.96 million for the three months ended June 30, 2025, an increase of $127,000 from $12.8 million for the three months ended June 30, 2024.

Income Tax Expense

Income tax expense increased $826,000, or 347.1%, to $1.1 million for the three months ended June 30, 2025 from $238,000 for the three months ended June 30, 2024. The increase in federal income tax expense for the three months ended June 30, 2025 compared to the same period a year ago was driven by the increase in income before income taxes of $2.8 million, to income before income tax of $5.7 million for the three months ended June 30, 2025 compared to income before income tax expense of $2.9 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 $145,000 for the three months ended June 30, 2025 and $76,000 for the three months ended June 30, 2024. For the three months ended June 30, 2025, the Company had an effective income tax expense rate of 18.82%, compared to an effective income tax expense rate of 8.33% for the three months ended June 30, 2024. The effective tax rate for the three months ended June 30, 2024 was largely impacted by a tax credit investment during the quarter with immediate credit claim components.

Comparison of Statements of Income for the Six Months Ended June 30, 2025 and 2024

General

Total interest income increased $1.3 million for the six months ended June 30, 2025 from the same period in 2024. The increase was primarily the result of an increase in interest and fees on loans of $1.3 million due to collection of accrued interest on a fully repaid nonaccrual loan. Total interest expense decreased $2.8 million for the six months ended June 30, 2025 from the same period in 2024 due to fluctuations in deposit interest expense described below. Net interest income increased $4.1 million for the six months ended June 30, 2025 from the same period in 2024. The recovery of credit losses was $543,000 for the six months ended June 30, 2025 compared to a provision for credit losses of $443,000 for the six months ended June 30, 2024. Non-interest income increased $445,000 for the six months ended June 30, 2025 from the same period in 2024. The increase in non-interest income was primarily due to a $128,000 gain on retirement of subordinated debt, a $109,000 increase in deposit account service charges, and a $103,000 gain on equity securities. Non-interest expense increased by $3.7 million for the six months ended June 30, 2025 compared to the same period in 2024, primarily due to expenses related to employee downsizing in 2025. Net income increased $1.1 million to $7.0 million for the six months ended June 30, 2025 from $5.9 million for the six months ended June 30, 2024. The increase in net income was primarily impacted by the decrease in total interest expense.

Interest Income

Total interest income increased $1.4 million, or 2.1%, to $67.4 million for the six months ended June 30, 2025 from $66.0 million for the six months ended June 30, 2024, on a tax equivalent basis. The increase was primarily the result of an increase in interest and fees on loans of $1.3 million. Total average interest-earning assets increased $96.1 million, to $2.03 billion for the six months ended June 30, 2025 from $1.94 billion for the same period in 2024 primarily because of an increase of $78.9 million in the average balance of loans and by an increase of $21.7 million in the average balance of federal funds sold and interest bearing deposits at other financial institutions. These increases were offset by a $4.4 million decrease in the average balance of investment securities. The average yield on our interest-earning assets decreased 15 basis points to 6.69% for the six months ended June 30, 2025 as compared to 6.84% for the six months ended June 30, 2024 primarily due to market conditions. For the six months ended June 30, 2025, the Company reversed $232,000 in accrued interest income in relation to loans placed on nonaccrual, as compared to $1.1 million for the six months ended June 30, 2024.

Interest and fees on loans increased $1.3 million, to $63.6 million for the six months ended June 30, 2025 from $62.2 million for the same period in 2024. This was primarily due to the collection of accrued interest on a fully repaid nonaccrual loan and due to an increase in the average loans outstanding of $78.9 million, which increased to $1.83 billion for the six months ended June 30, 2025 from $1.76 billion for the six months ended June 30, 2024. The average yield on loans decreased 12 basis points, or 1.7%, for the six months ended June 30, 2025 as compared to the six months ended June 30, 2024.

Interest income on federal funds sold and interest-earning deposits increased by $50,000 to $2.31 million for the six months ended June 30, 2025, from $2.26 million for the six months ended June 30, 2024. The average balance of interest-earning deposits and federal funds sold increased $21.7 million to $110.0 million for the six months ended June 30, 2025 from $88.3 million for the same period in 2024. The average yield decreased to 4.24% for the six months ended June 30, 2025 from 5.14% for the same period in 2024.

Interest on investment securities decreased by $30,000 to $1.52 million for the six months ended June 30, 2025 from $1.55 million for the six months ended June 30, 2024 on a fully tax-equivalent basis. Interest on investments in U.S. Government Agencies and U.S. Municipals was $729,000 for the six months ended June 30, 2025 and $733,000 for the six months ended June 30, 2024. Interest on mortgage-backed securities decreased by $16,000 or 8.2%, to $180,000 for the six months ended June 30, 2025, from $196,000 for the six months ended June 30, 2024. Subordinated debt interest income increased by $2,000, or 0.8%, to $266,000 for the six months ended June 30, 2025, from $264,000 for the six months ended June 30, 2024. The average yield on taxable securities increased 12 basis points, to 3.23% and the average yield on tax-exempt securities increased 15 basis points, to 3.83% on a tax equivalent basis for the six months ended June 30, 2025, from 3.11% and 3.68%, 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 $4.4 million, to $88.4 million for the six months ended June 30, 2025, from $92.8 million for the six months ended June 30, 2024.

Interest Expense

Total interest expense decreased $2.8 million, to $31.9 million for the six months ended June 30, 2025 from $34.7 million for the six months ended June 30, 2024, primarily due to a $2.4 million decrease in interest expense on interest bearing deposits and a $308,000 decrease in total interest expense paid on borrowings.

Interest expense on deposits decreased $2.4 million to $30.3 million for the six months ended June 30, 2025 from $32.7 million for the six months ended June 30, 2024 primarily as a result of a decrease in cost of funds. The average balance of interest-bearing deposits increased $138.6 million to $1.51 billion during the six months ended June 30, 2025 as compared to $1.37 billion for the six months ended June 30, 2024. The increase in the average balance of interest-bearing deposits was primarily a result of a $59.7 million increase in the average balance of money market deposit accounts, a $78.5 million increase in the average balance of time deposits, and a $47.7 million increase in the average balance of savings and NOW deposits. These increases were partially offset by a $47.2 million decrease in interest bearing demand deposits during the six months ended June 30, 2025 as compared to the six months ended June 30, 2024.The average cost of interest-bearing deposits was 4.06% for the six months ended June 30, 2025, compared to 4.80% for the six months ended June 30, 2024. The average rate paid on money market deposits decreased 79 basis points to 3.96% for the six months ended June 30, 2025 from 4.75% for the six months ended June 30, 2024. The average rate paid on interest-bearing demand deposits decreased 126 basis points to 3.69% for the six months ended June 30, 2025 from 4.95% for the six months ended June 30, 2024 primarily due to the interest rate environment. The average cost of certificates of deposit decreased by 52 basis points to 4.49% for the six months ended June 30, 2025 as compared to 5.01% for the six months ended June 30, 2024. The average balance of non-interest bearing demand deposits and other liabilities decreased $35.7 million to $354.1 million for the six months ended June 30, 2025, compared to $389.8 million for the six months ended June 30, 2024. The decrease was primarily the result of depositors looking for higher yielding products and market competition.

Net Interest Income

Net interest income increased approximately $4.1 million, or 13.1%, to $35.4 million for the six months ended June 30, 2025 from $31.3 million for the six months ended June 30, 2024, on a tax equivalent basis, despite a decrease in our net interest-earning assets of $32.6 million to $452.4 million for the six months ended June 30, 2025 from $485.0 million for the six months ended June 30, 2024. The interest rate spread increased by 57 basis points to 2.61% for the six months ended June 30, 2025 from 2.04% for the six months ended June 30, 2024, on a tax equivalent basis. The net interest margin increased by 28 basis point from 3.24% for the six months ended June 30, 2024 to 3.52% for the six months ended June 30, 2025 on a tax equivalent basis. Refer to “Use of Certain Non-GAAP Financial Measures,” below, for a reconciliation of adjusted net interest margin.

Average Balances, Net Interest Income, Yields Earned and Rates Paid

The following table shows for the periods indicated the total dollar amount of interest from average interest-earning assets and the resulting yields, as well as the interest expense on average interest-bearing liabilities, expressed both in dollars and rates, and the net interest margin. All average balances are based on daily balances.

(Dollars in thousands)

(1) Includes loans classified as non-accrual.

(2) Interest rate spread represents the difference between the average yield on average interest–earning assets and the average cost of average interest-bearing liabilities.

(3) Net interest earning assets represent total average interest–earning assets less average interest–bearing liabilities.

(4) Net interest margin represents net interest income divided by total average interest-earning assets.

(5) Annualized.

(6) Income and yields for all periods presented are reported on a fully tax-equivalent basis using the federal statutory tax rate of 21%. Refer to “Use of Certain Non-GAAP Financial Measures.”

Rate/ Volume Analysis

The following table presents the effects of changing rates and volumes on net interest income for the periods indicated. The rate column shows the effects attributable to changes in rate (changes in rate multiplied by prior average volume). The volume column shows the effects attributable to changes in volume (changes in average volume multiplied by prior rate). Changes attributable to both rate and volume, which cannot be segregated, have been allocated proportionately. The Total Increase (Decrease) column represents the sum of the prior columns.

(In thousands)

Provision for Credit Losses

Management believes that the allowance for credit losses recorded for the period ended June 30, 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.

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.

The recovery of credit losses on loans was $528,000 for the six months ended June 30, 2025 compared to a provision for credit losses on loans of $1.1 million for the six months ended June 30, 2024. This is primarily due to a decrease in total gross loans of $43.9 million from $1.83 billion as of December 31, 2024 to $1.79 billion as of June 30, 2025 due to loan paydowns in the normal course of business. Loan originations, which totaled approximately $80.5 million for the six months ended June 30, 2024 increased $16.3 million to $96.8 million for the six months ended June 30, 2025.

The recovery of credit losses on off-balance sheet credit exposure was $15,000 for the six months ended June 30, 2025 compared to a recovery of credit losses of $652,000 for the six months ended June 30, 2024. The stabilization of the provision for off-balance sheet credit exposure was primarily related to the utilization of revolving lines of credit.

As of June 30, 2025, criticized loans increased $3.6 million and classified loans decreased $18.1 million when compared to December 31, 2024, to a balance of $88.9 million and $39.3 million, respectively.

Criticized loans and classified loans have increased by $73.0 million and $5.9 million respectively as of June 30, 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 63% 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 2022 and experienced increases in operating costs, permit delays, and liquidity tightening as a result of the sharp increase in interest rates. Approximately 37% 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 increase in criticized and classified loans since June 30, 2024 was considered in the determination of the allowance for credit losses as of June 30, 2025. As interest rates have risen significantly since March 2022, 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 six months ended June 30, 2025, there were $622,000 charge-offs incurred and recoveries of $757,000 were received. During the six months ended June 30, 2024, there were $511,000 charge-offs incurred and recoveries of $8,000 were received.

Non-Interest Income

Non-interest income increased $445,000, or 28.5%, to $2.0 million for the six months ended June 30, 2025 from $1.6 million for the six months ended June 30, 2024. The increase in non-interest income was primarily due to a $128,000 gain on retirement of subordinated debt, a $109,000 increase in deposit account service charges, and a $103,000 gain on equity securities. The Company continues to focus on increasing non-interest income as it continues to add services that strategically benefit our customers.

Non-Interest Expense

Non-interest expense increased $3.7 million, or 14.8%, to $29.1 million for the six months ended June 30, 2025, from $25.3 million for the six months ended June 30, 2024 primarily because of an increase in salaries and employee benefits of $1.7 million. Non-recurring severance costs were incurred as reductions were made during the six months ended June 30, 2025 related to the Company's decision to pivot away from certain operating BaaS services, causing salaries and benefits to increase. FDIC insurance expense increased $550,000 to $1.2 million for the six months ended June 30, 2025, from $660,000 for the six months ended June 30, 2024 due to significant deposit growth earlier in the year. Other operating expenses increased $458,000, or 21.7%, to $2.6 million for the six months ended June 30, 2025, from $2.1 million for the six months ended June 30, 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 $849,000 to $2.5 million for the six months ended June 30, 2025, from $1.6 million for the six months ended June 30, 2024. This increase is driven by the acceleration of costs related to contract cancelation from the Company's decision to pivot away from certain operating BaaS services. Furniture and equipment expenses increased approximately $282,000 to $2.2 million for the six months ended June 30, 2025, from $1.9 million for the six months ended June 30, 2024. Data processing increased approximately $92,000 to $719,000 for the six months ended June 30, 2025, from $627,000 for the six months ended June 30, 2024. Offsetting these increases was a decrease in occupancy expenses of $135,000, or 15.9%, to $714,000 for the six months ended June 30, 2025 from $849,000 for the six months ended June 30, 2024 due to expense management. Of these expenses, $1.8 million were not incurred in the comparable six month period and were primarily related to the Company's decision to pivot away from certain operating BaaS services. Excluding these expenses, non-interest expense was $27.3 million for the six months ended June 30, 2025, an increase of $2 million from $25.3 million for the six months ended June 30, 2024.

Income Tax Expense

Income tax expense increased $678,000 or 63.5%, to $1.7 million for the six months ended June 30, 2025 from $1.1 million for the six months ended June 30, 2024. The increase in federal income tax expense for the six months ended June 30, 2025 compared to the same period a year ago was driven by the increase in income before income taxes of $1.8 million, to income before income tax of $8.8 million for the six months ended June 30, 2025 compared to income before income tax expense of $7.0 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 $224,000 for the six months ended June 30, 2025 and $181,000 for the six months ended June 30, 2024. For the six months ended June 30, 2025, the Company had an effective income tax expense rate of 19.87%, compared to an effective income tax expense rate of 15.28% for the six months ended June 30, 2024.

Comparison of Statements of Financial Condition at June 30, 2025 and December 31, 2024

Total Assets

Total assets decreased $113.3 million, or 5.1%, to $2.11 billion at June 30, 2025 from $2.23 billion at December 31, 2024. The decrease was primarily the result of a decrease in cash and cash equivalents of $74.4 million as of June 30, 2025, a decrease in net loans of $43.1 million as of June 30, 2025, and a decrease of $2.6 million in other assets, due to a decline in the fair value of the interest rate loan swaps discussed in Note 4 of the Notes to Consolidated Financial Statements. These decreases were offset by an increase of $3.7 million in other receivables and an increase of $3.2 million property held for sale as discussed in Note 8.

Investment Securities

Investment securities decreased $841,000, or 1.2%, from $71.8 million at December 31, 2024 to $71.0 million at June 30, 2025. The decrease was primarily due to calls and maturities of the held-to-maturity securities. At June 30, 2025, our held-to-maturity portion of the securities portfolio, at amortized cost, was $14.8 million, and our available-for-sale portion of the securities portfolio, at fair value, was $56.1 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.

Net Loans

Net loans decreased $43.1 million, or 2.4%, to $1.77 billion at June 30, 2025 from $1.81 billion at December 31, 2024. Residential real estate loans increased $13.0 million, or 3.0%, to $452.5 million at June 30, 2025 from $439.5 million at December 31, 2024. Commercial real estate loans increased by $13.2 million from $898.2 million at December 31, 2024 to $911.4 million at June 30, 2025. Commercial and industrial loans decreased by $4.7 million from $102.4 million at December 31, 2024 to $97.7 million at June 30, 2025. Construction and land development loans decreased $64.9 million to $328.5 million at June 30, 2025 from $393.4 million at December 31, 2024. Consumer loans decreased by $500,000 from $1.6 million at December 31, 2024 to $1.1 million at June 30, 2025. The decrease in consumer loans is believed to be primarily a result of management’s decision to let the indirect lending portfolio amortize off the balance sheet.

A significant portion of the loan portfolio consists of commercial, construction and commercial real estate loans, primarily made in the Washington, D.C. metropolitan area and secured by real estate or other collateral in that market. Although these loans are made to a diversified pool of unrelated borrowers across numerous businesses, adverse developments in the Washington, D.C. metropolitan real estate market could have an adverse impact on this portfolio of loans and the Company’s income and financial position. While our basic market area is the Washington, D.C. metropolitan area, the Bank has made loans outside that market area where the applicant is an existing customer, and the nature and quality of such loans was consistent with the Company's lending policies.

The federal banking Agencies issued guidance in 2006 which addresses institutions with increased concentrations of commercial real estate (CRE) loans. The guidance does not establish specific CRE lending limits; rather, it promotes sound risk management practices and appropriate levels of capital that will enable institutions to continue to pursue CRE lending in a safe and sound manner. In developing this guidance, the Agencies recognized that different types of CRE lending present different levels of risk, and that consideration should be given to the lower risk profiles and historically superior performance of certain types of CRE, such as well-structured multifamily housing finance, when compared to others, such as speculative office space construction. As discussed under “CRE Concentration Assessments,” institutions are encouraged to segment their CRE portfolios to acknowledge these distinctions for risk management purposes. The guidance focuses on those CRE loans for which the cash flow from the real estate is the primary source of repayment rather than loans to a borrower for which real estate collateral is taken as a secondary source of repayment or through an abundance of caution. Thus, for the purposes of the guidance, CRE loans include those loans with risk profiles sensitive to the condition of the general CRE market (for example, market demand, changes in capitalization rates, vacancy rates, or rents). CRE loans are land development and construction loans (including 1- to 4-family residential and commercial construction loans) and other land loans. CRE loans also include loans secured by multifamily property, and nonfarm nonresidential property where the primary source of repayment is derived from rental income associated with the property (that is, loans for which 50 percent or more of the source of repayment comes from third party, nonaffiliated, rental income) or the proceeds of the sale, refinancing, or permanent financing of the property. Excluded from the scope of this Guidance are loans secured by nonfarm nonresidential properties where the primary source of repayment is the cash flow from the ongoing operations and activities conducted by the party, or affiliate of the party, who owns the property.

As part of their ongoing supervisory monitoring processes, the Agencies use certain criteria to identify institutions that are potentially exposed to significant CRE concentration risk. An institution that has experienced rapid growth in CRE lending, has notable exposure to a specific type of CRE, or is approaching or exceeds the following supervisory criteria may be identified for further supervisory analysis of the level and nature of its CRE concentration risk:

1. Total reported loans for construction, land development, and other land represent 100 percent or more of the institution’s total risk-based capital; or

2. Total commercial real estate loans as defined in this guidance represent 300 percent or more of the institution’s total risk-based capital, and the outstanding balance of the institution’s commercial real estate loan portfolio has increased by 50 percent or more during the prior 36 months.

The Agencies use the criteria as a preliminary step to identify institutions that may have CRE concentration risk. Because regulatory reports capture a broad range of CRE loans with varying risk characteristics, the supervisory monitoring criteria do not constitute limits on an institution’s lending activity but rather serve as high-level indicators to identify institutions potentially exposed to CRE concentration risk.

The Company holds a concentration in commercial real estate loans. As of June 30, 2025, construction, land development and other land loans represented 108.8% of consolidated risk-based capital. Total commercial real estate loans as defined by the Agency guidance represented 365.9% of consolidated risk-based capital. During the prior 36 months, the Company has experienced an increase in its commercial real estate portfolio by 52.0%.

The management team has extensive experience in underwriting commercial real estate loans and has implemented and continues to maintain heightened risk management procedures and strong underwriting criteria with respect to its commercial real estate portfolio. The Board of Directors has established internal maximum limits on CRE to better manage and control the exposure to property classes during periods of changing economic conditions. The Board of Directors also has minimum targets for regulatory capital ratios that are in excess of well capitalized ratios.

Our risk management process begins with a robust underwriting program. The underwriting and risk rating of all loans is completed by an underwriting team that is independent of the originating lender(s). The underwriting analysis of commercial real estate loans includes pre-origination stress testing utilizing the portfolio stress testing methods to fully understand the potential exposure before we originate the credit. Once originated, each loan receives ongoing quarterly stress tests to evaluate the risk profile over the life of the credit.

We stress test earning assets on a quarterly basis and measure the results against the Bank's risk-based capital. For commercial loans, residential real estate loans, owner-occupied commercial real estate loans and consumer installment loans, we multiply the total outstanding amount for each loan category by our highest quarter historical loss for that category as a surrogate in order to calculate a stressed loss.

For our non-owner occupied commercial real estate loans, we use three separate methodologies in our stress test. If a property fails more than one of the three tests, we extend the test with the highest exposure value and add an additional 10% for selling costs.

• An immediate and sustained 3.0% increase in interest rates,
• An immediate and sustained 5.0% increase in vacancy rates, and
• An immediate and sustained 2.0% change in the capitalization rate, or “cap rate.”

We stress test the construction lending portfolio by applying exponential discounting (using a "k factor" of 2) to each project based upon its percentage of completion. The project is stressed using the as-is and as-complete appraised values and assumes 10% selling costs.

For all other loans, we utilize the Bank's historic loss rates or if not available, the average loss rates of FFIEC Uniform Bank Performance Report Group 4 banks, for bank owned life insurance we utilize default rates from S&P Global ratings, and for securities we obtain an independent fair market value and if it is less than the book value, we subtract the fair market value from the book value to determine the stress loss. The following table shows the Company's earning assets and the results of the stress test performed for the periods indicated.

(Dollars in thousands)

(1) Net tax effective loss at the statutory rate of 21%

(2) Non-Owner Occupied CRE includes call codes 1E2 and 1D

(Dollars in thousands)

(1) Net tax effective loss at the statutory rate of 21%

(2) Non-Owner Occupied CRE includes call codes 1E2 and 1D

41

The total estimated stress test loss is deducted from capital and we recalculate the capital ratios. As shown in the tables below, as of June 30, 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.

June 30, 2025 Bank Capital Adequacy Ratios Pre- and Post-Stress (Tax-Effective)

December 31, 2024 Bank Capital Adequacy Ratios Pre- and Post-Stress (Tax-Effective)

The following two tables break down the June 30, 2025 and December 31, 2024 non-owner occupied CRE portfolio balances by showing the current balance in each sub-category and location. The tables also display very favorable weighted average interest rates and weighted average loan-to-values for both periods. The weighted average occupancy percentages are also broadly favorable for both periods.

June 30, 2025

(Dollars in thousands)

(1) Loan-to-value is based on maximum potential outstanding at time of origination

(2) Non-Owner Occupied CRE includes call codes 1E2 and 1D

(3) Hospitality relies upon individual STR data

(4) The underlying properties for office to residential conversion loans generally are not occupied during the conversion period

42

December 31, 2024

(Dollars in thousands)

(1) Loan-to-value is based on maximum potential outstanding at time of origination

(2) Non-Owner Occupied CRE includes call codes 1E2 and 1D

(3) Hospitality relies upon individual STR data

(4) The underlying properties for office to residential conversion loans generally are not occupied during the conversion period

The Company also underwrites and originates owner-occupied commercial real estate loans. These loans are typically term loans made to support properties that rely upon the operations of the business occupying the property for repayment. The Agencies specifically excluded owner-occupied commercial real estate from their concentration guidance, as the primary source of repayment is the cash flow from the ongoing operations and activities conducted by the party, or affiliate of the party, who owns the property.

The following two tables depict a well-diversified portfolio of owner-occupied commercial real estate as of June 30, 2025 and December 31, 2024. The properties are distributed nicely among the Company's footprint. This loan segment continues to perform very well and is supported by strong loan-to-values (LTVs). The following table sets forth our owner-occupied CRE portfolio by the business industry groups that occupy the properties for the periods indicated.

June 30, 2025

(Dollars in thousands)

(1) Loan-to-value is based on maximum potential outstanding at time of origination

December 31, 2024

(Dollars in thousands)

(1) Loan-to-value is based on maximum potential outstanding at time of origination

Allowance for Credit Losses - Loans

The allowance for credit losses on loans represents an amount that, in our judgment, will be adequate to absorb current and expected losses in the loan portfolio. The provision for credit losses on loans increases the allowance, and loans charged off, net of recoveries, reduce the allowance. The table below summarizes the allowance activity for the periods indicated:

(Dollars in thousands)

44

Nonperforming Assets

The following table presents information regarding nonperforming assets at the dates indicated:

(Dollars in thousands)

Deposits

Deposits decreased $109.2 million, or 5.7% to $1.80 billion at June 30, 2025 from $1.91 billion at December 31, 2024. Our core deposits decreased $109.9 million, or 7.6%, to $1.33 billion at June 30, 2025 from $1.44 billion at December 31, 2024. Non-interest bearing demand deposits increased $5.7 million, or 1.8%, to $330.0 million at June 30, 2025 from $324.3 million at December 31, 2024. Interest-bearing demand deposits decreased $15.7 million, or 11.2%, to $124.1 million at June 30, 2025 from $139.8 million at December 31, 2024. Time deposits decreased $54.9 million, or 6.7%, to $764.4 million at June 30, 2025 from $819.3 million at December 31, 2024. Money market demand deposits decreased $96.2 million, or 17.2%, to $463.9 million at June 30, 2025 from $560.1 million at December 31, 2024. Savings and NOW deposits increased $51.7 million or 80.4% from $64.3 million at December 31, 2024 to $116.1 million at June 30, 2025.

The following table presents the Company’s deposits segregated by major category as of June 30, 2025 and December 31, 2024:

(Dollars in thousands)

45

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 June 30, 2025, the Company had $468.7 million of total wholesale deposit balances, an increase of $605,000 compared to December 31, 2024, which totaled $468.1 million.

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 exercised 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 six months ended June 30, 2025 and 2024, total wholesale deposit funding accounted for approximately 36.3% and 31% of our interest expense.

The following table presents the Company's total wholesale deposit composition, concentrations, current rate and remaining duration, if applicable as of June 30, 2025.

(Dollars in thousands)

(1) Listing service CDs are excluded from being classified as wholesale deposits, per FDIC call report instructions

Regulatory Defined Wholesale Deposits

Each quarter the Bank files a bank call report with the FDIC, which has a specific way it defines wholesale brokered deposits. As of June 30, 2025, the Company had $449.8 million of wholesale deposits outstanding, as defined by FDIC, an increase of $6.9 million from $442.9 at 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 June 30, 2025, the Company additionally reported $151.3 million in reciprocal deposits considered wholesale for call report purposes only, bringing regulatory defined wholesale deposits to $601.1 million as of June 30, 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 June 30, 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.

Liquidity and Capital Resources

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 $551.5 million as of June 30, 2025. Additionally, at June 30, 2025, we had the ability to borrow up to $144.0 million from other financial institutions.

The Board of Directors, management, and the Asset Liability Committee (ALCO) are responsible for establishing and monitoring our liquidity targets and strategies in order to ensure that sufficient liquidity exists for meeting the borrowing needs and deposit withdrawals of our customers as well as unanticipated contingencies. We believe that we have enough sources of liquidity to satisfy our short and long-term liquidity needs as of June 30, 2025.

We monitor and adjust our investments in liquid assets based upon our assessment of expected loan demand; expected deposit flows; yields available on interest-earning deposits and securities; and the objectives of our asset/liability management program. Excess liquid assets are invested generally in interest-earning deposits and short-and intermediate-term securities.

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 June 30, 2025, cash and cash equivalents totaled $133.3 million. Finally, securities classified as available-for-sale, which provide additional sources of liquidity, totaled $56.1 million at June 30, 2025.

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 $2.6 million and $4.8 million for the six months ended June 30, 2025 and June 30, 2024, respectively. There were no sales of securities in the six months ended June 30, 2025 or for six months ended June 30, 2024. Net cash provided by investing activities was $37.1 million and used in investing activities was $78.8 million for the six months ended June 30, 2025 and June 30, 2024, respectively. Net cash used in financing activities was $114.2 million and provided by financing activities was $50.9 million for the six months ended June 30, 2025 and 2024, respectively.

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 June 30, 2025, totaled $622.4 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.

Regulatory Capital

Under the Basel III Capital Rules and the related framework for prompt corrective action, the Bank must meet specific capital guidelines that involve quantitative measures of the Bank’s assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices. The Bank’s capital amounts and classifications are also subject to qualitative judgments by regulators about components, risk- weightings and other factors.

Under the Basel III Capital Rules, a comprehensive capital framework for U.S. banking organizations, the Bank must hold a capital conservation buffer above the adequately capitalized risk-based capital ratios. The capital conservation buffer for 2025 and 2024 is 2.50%. Quantitative measures established by regulation to ensure capital adequacy require the Bank to maintain minimum amounts and ratios of Total capital, Common Equity Tier 1 capital, and Tier 1 capital (as defined in the regulations) to risk weighted assets (as defined), and of Tier 1 capital (as defined) to average assets (as defined). Management believes, as of June 30, 2025, the Bank meet all capital adequacy requirements to which it is subject.

The Bank’s actual capital amounts and ratios are presented in the table (dollars in thousands):

(Dollars in thousands)

Off-Balance Sheet Arrangements and Contractual Obligations

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 June 30, 2025, we had outstanding loan commitments of $233.5 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.

Use of Certain Non-GAAP Financial Measures

The accounting and reporting policies of the Company conform to U.S. GAAP and prevailing practices in the banking industry. However, certain non-GAAP measures are used by management to supplement the evaluation of the Company’s performance. These measures include adjusted net interest income and net interest margin.

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.

(Dollars in thousands, except for per share data)

49

Market Risk Management

The effective management of market risk is essential to achieving the Company’s strategic financial objectives. As a financial institution, the Company’s most significant market risk exposure is interest rate risk in its balance sheet; however, market risk also includes product liquidity risk, price risk and volatility risk in the Company’s lines of business. The primary objectives of market risk management are to minimize any adverse effect that changes in market risk factors may have on net interest income, and to offset the risk of price changes for certain assets recorded at fair value.

Interest Rate Market Risk

The Company’s net interest income and the fair value of its financial instruments are influenced by changes in the level of interest rates. The Company manages its exposure to fluctuations in interest rates through policies established by its Asset/Liability Committee. The Asset/Liability Committee meets regularly and has responsibility for approving asset/liability management policies, formulating strategies to improve balance sheet positioning and/or earnings and reviewing the interest rate sensitivity of the Company.

We estimate what our net interest income would be for a 12-month period. We then calculate what the net interest income would be for the same period under different interest rate assumptions. These estimates require certain assumptions to be made, including loan and mortgage-related investment prepayment speeds, reinvestment rates, and deposit maturity and decay rates. These assumptions are inherently uncertain. As a result, no simulation model can precisely predict the impact of changes in interest rates on our net interest income.

The table below sets forth, as of June 30, 2025, the calculation of the estimated changes in our net interest income that would result from changes in market interest rates over one year if we take no action from our current plan.

(Dollars in thousands)

(1) Interest rate changes are immediate and sustained for the entire 12-month period

(2) Simulation model assumptions are locked for the entire 12-month period.

Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 (the “Exchange Act”)) as of June 30, 2025. Based on their evaluation of the Company’s disclosure controls and procedures, the Company’s Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures designed to ensure that information required to be disclosed by the Company in reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission rules and regulations are designed and operating in an effective manner.

No change in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15(d)-15(f) under the Exchange Act) occurred during the second fiscal quarter of 2025 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting. There has been no significant effect or impact on internal controls over financial reporting as the Company implemented the current expected credit loss accounting standard.

Not required for smaller reporting companies. Reference is made to “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2024, filed with the SEC on March 14, 2025. For a discussion of certain risk factors affecting the Company, see our disclosure under “Forward-Looking Statements” in Part I, Item 2 in this Form 10-Q.