Virginia community bank announces its exit from BaaS

A Fairfax, Virginia-based community bank has pulled the plug on its banking-as-a-service subsidiary after the four-year-old unit  fell short of its revenue and deposit targets.

The $2.2 billion-asset MainStreet Financial revealed the shuttering of its Avenu unit Monday in a press release announcing its first-quarter earnings. “The timeline for the expected return on invested capital extended beyond the Company’s plan, and we decided to devote our energy on the core bank,” CEO Jeff Dick said in the release.

By closing Avenu, MainStreet joins a lengthy list of banks that stumbled while pursuing an embedded banking strategy, though investors appeared to react positively to the news. MainStreet shares closed up more than 1% Monday at $16.64.

In September, for example, the $6.1 billion-asset Financial Institutions Inc. in Warsaw, New York, said that it planned to quit banking-as-a-service to focus on its core community banking franchise. Closer to home for MainStreet, the $2.9 billion-asset Blue Ridge Bancshares in Charlottesville, Virginia,  completed its exit from the market in December. 

Many of the institutions that encountered difficulties in the banking-as-a-service business ran afoul of their regulators. MainStreet avoided those pitfalls, building Avenu from the ground up, stressing compliance and linking fintech partners directly to its core banking system to guarantee the accuracy of the transaction ledger.

But even with that design, Avenu failed on the bottom line. The unit lost $3.6 million in 2024. Meanwhile, its $41 million in deposits on Dec. 31, were well below the $200 million MainStreet had expected after three full years of operations.

Monday’s announcement came about three months after MainStreet opted to impair the value of Avenu’s operating software — writing it down to current market value and recording a $19.7 million charge against the company’s fourth-quarter earnings, which led to a $10 million loss for the last three months of 2024.

MainStreet had also floated a plan to roll out an app aimed at cannabis retailers in an eleventh-hour bid to repair Avenu’s deteriorating financial situation.

“The upfront costs and lack of real progress proved to be too great to continue Avenu,” Janney Montgomery Scott Director of Research Chris Marinac wrote Monday in a research note.

Now, after eliminating the unit, MainStreet expects its near-term operating expenses to trend down. The bank projected a 13% drop in noninterest expenses to $12.5 million in the second quarter, with a further decline to $11.5 million projected for the final three months of 2025. Such a trend “should have a positive influence on earnings-per-share, returns, and tangible book value,” Marinac wrote.

MainStreet reported first-quarter net income totaling $2.5 million Monday, as it was able to tamp down its funding costs while holding lending steady. “We worked diligently to optimize pricing on our deposit stack,” Chief Accountant Alex Vari said in the press release.

Nonperforming loans totaled 1.18% of total loans. MainStreet expects that ratio to drop in the second quarter with the probable resolution of an $11.2 million commercial real estate loan, a result that Chief Credit Officer Chris Johnston called a “testament to the team’s diligent and creative efforts to work together with borrowers to find positive outcomes in a timely manner.”