John Marshall Bancorp, Inc. — 2022 Third-Quarter 10-Q
Reporting period: Quarter and nine months ended September 30, 2022. The company is a Virginia bank holding company whose subsidiary, John Marshall Bank, primarily serves the Washington, D.C. metropolitan area. Amounts below are in millions unless noted; balance-sheet comparisons are to December 31, 2021 unless otherwise stated.
Key financial results
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Net interest income | $17.7 | $16.2 | $52.9 | $48.9 |
| Provision for loan losses | $0 | $0.3 | $0 | $2.8 |
| Non-interest income | $0.5 | $0.3 | $1.0 | $1.2 |
| Non-interest expense | $8.0 | $7.6 | $24.4 | $24.6 |
| Net income | $8.0 | $6.8 | $23.6 | $17.9 |
| Diluted EPS | $0.57 | $0.48 | $1.67 | $1.29 |
- Q3 net income rose 19.0%; nine-month net income rose 31.7%. Nine-month return on average assets was 1.40% versus 1.19%, and return on average equity was 15.03% versus 12.32%.
- Tax-equivalent net interest margin was 3.10% in Q3 versus 3.15% a year earlier, and 3.19% year to date versus 3.30%. The Q3 efficiency ratio improved to 43.9% from 46.2%; year-to-date it improved to 45.3% from 49.0%.
- At September 30, assets were $2,305.5, net loans $1,705.1, deposits $2,063.3, and shareholders’ equity $202.2. Assets grew 7.3% and deposits 9.7% from year-end; net loans increased $58.6.
- Cash and cash equivalents were $74.8, down $31.0 over the first nine months. Operating cash flow was $25.2; investing activities used $219.8, primarily for securities purchases and loan growth, while financing activities provided $163.6.
- The allowance for loan losses was $20.0, or 1.16% of gross loans net of unearned income, unchanged in dollars from year-end. No nonperforming or past-due loans were reported at September 30; net charge-offs were zero for the first nine months.
- The Bank’s regulatory ratios were 15.4% total risk-based capital, 14.3% common equity Tier 1, and 11.0% leverage. The Bank was classified as well capitalized.
Material changes and notable items
- Higher average loan and securities balances drove nine-month net interest income growth. Rising rates lifted securities and bank-deposit yields, but deposit repricing increased funding costs and compressed net interest margin.
- Non-interest income declined year to date, mainly due to $583 thousand of mark-to-market losses on investments held to economically hedge deferred-compensation obligations. Q3 income included a $153 thousand bank-owned life insurance benefit claim; management described this as nonrecurring.
- Shareholders’ equity fell $6.3 from year-end, primarily from a $30.5 after-tax other comprehensive loss on available-for-sale securities and $2.8 in declared dividends, partly offset by net income and option exercises. Available-for-sale securities had $39.5 of gross unrealized losses; held-to-maturity securities had $18.8 of unrealized losses. Management attributed the declines to interest rates, not credit deterioration, and reported no intent or likely need to sell before recovery.
- In June, the company issued $25.0 of 5.25% fixed-to-floating subordinated notes, then redeemed its $25.0 of 5.75% notes in July. The new notes mature in 2032, are callable beginning in 2027, and qualify as Tier 2 capital. The company had no FHLB advances outstanding at quarter-end.
- Deposits included $284.7 of brokered deposits and estimated uninsured deposits of $1.15 billion. Available borrowing capacity was approximately $374.6 from the FHLB, $105.0 from correspondent-bank lines, and $27.3 at the Federal Reserve discount window; none of the latter two sources was drawn.
- The company declared a $0.20-per-share dividend during the first quarter. Its repurchase authorization permits purchases of up to 700,000 shares through August 31, 2023; none had been repurchased by September 30.
Outlook, risks, and contingencies
- The filing provides no quantified earnings or financial guidance. Management expects net interest income and margin to fluctuate with interest rates and changes in asset and funding mix.
- CECL adoption was scheduled for January 1, 2023. Management expected an increase in the allowance for credit losses, but said the impact would depend on portfolio characteristics, economic conditions, and forecasts; it planned to elect a three-year regulatory-capital transition.
- Risks identified include inflation and interest-rate changes, deteriorating economic or real-estate conditions, geographic concentration in the Washington, D.C. area, asset quality and allowance estimates, liquidity and funding conditions, securities-market changes, and regulatory or competitive developments.
- Commitments to extend credit were $258.8 and standby letters of credit $14.9 at quarter-end. Management did not anticipate material losses from these arrangements. The company reported no material legal proceedings and no material changes to previously disclosed risk factors.
Investor verification points
- Assess deposit funding sensitivity: deposit interest expense rose to $3.1 in Q3 from $1.5, and brokered and uninsured deposits were significant.
- Evaluate the potential effects of further rate changes on net interest margin, securities fair values, and the large unrealized-loss position, including the held-to-maturity portfolio.
- Review the assumptions supporting the unchanged loan-loss allowance and the expected CECL transition adjustment, notwithstanding the reported absence of nonperforming and past-due loans.
- Track loan growth and concentration: commercial real-estate loans were 63.4% of gross loans at quarter-end.
- Confirm the CECL adoption impact, subsequent funding and liquidity trends, and any changes to the dividend or stock-repurchase plans in later filings.