John Marshall Bancorp, Inc. quarterly report, Q2 FY2023

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John Marshall Bancorp, Inc. — Q2 2023 Form 10-Q

Business context and reporting period. The Virginia bank holding company, operating through John Marshall Bank in the Washington, D.C. metropolitan area, reported unaudited results for the three and six months ended June 30, 2023. Comparative income results are against the same periods of 2022; balance-sheet changes are generally against December 31, 2022. Amounts below are in U.S. dollars.

Financial results and position

  • Q2 earnings: Net income was $4.5 million, down 43.0% year over year; diluted EPS was $0.32 versus $0.56. For the first half, net income was $10.8 million, down 30.6%, and diluted EPS was $0.76 versus $1.10.
  • Interest income and margins: Q2 interest and dividend income increased to $24.5 million from $19.6 million, but interest expense rose to $12.4 million from $2.2 million. Net interest income fell 30.6% to $12.0 million. Tax-equivalent net interest margin was 2.10%, down from 3.16%. For the first half, net interest income declined 24.8% to $26.5 million and tax-equivalent margin fell to 2.33% from 3.25%.
  • Other income and expenses: Q2 non-interest income was $685,000 versus $109,000; first-half non-interest income was $1.25 million versus $523,000, helped by deferred-compensation investment mark-to-market gains and fees. Q2 non-interest expense increased 2.0% to $7.8 million; first-half expense decreased 5.3% to $15.6 million.
  • Credit costs and asset quality: The company recorded an $868,000 Q2 recovery of credit-loss provision and a $1.64 million recovery for the first half, primarily reflecting CECL model assumptions and lower loan balances; this included provision expense for unfunded commitments. The allowance for loan credit losses was $20.6 million, or 1.17% of gross loans. The company reported no past-due, nonaccrual, or nonperforming loans and no charge-offs in the first half.
  • Balance sheet: Total assets were $2.36 billion, up 0.7% from year-end. Gross loans were $1.77 billion, down 1.1%; deposits were $2.05 billion, down 1.0%; shareholders’ equity was $219.0 million, up 2.9%. Book value per share was $15.50.
  • Cash flow: In the first half, operating activities provided $10.5 million and investing activities provided $53.2 million, while financing activities provided $4.3 million. Cash and cash equivalents increased $68.0 million to $129.6 million.
  • Debt and liquidity: The company had $54.0 million in Federal Reserve Bank Term Funding Program (BTFP) borrowings at 4.80% and $24.7 million of subordinated debt. It reported $839.4 million of total liquidity, equal to 120% of uninsured, non-collateralized deposits; available capacity included $451.1 million from the FHLB, $25.1 million at the Federal Reserve discount window, and $110.0 million in correspondent-bank federal funds lines.
  • Capital: The Bank was categorized as well capitalized. At June 30, its total risk-based capital ratio was 16.1%, common equity Tier 1 ratio 15.0%, and leverage ratio 11.6%.

Material changes versus comparable periods

  • Deposit and borrowing costs rose much faster than asset yields: first-half cost of interest-bearing liabilities increased to 2.63% from 0.55%, while total interest-earning asset yield rose to 4.21% from 3.62%. Management attributed margin pressure to higher market rates and repricing of time deposits.
  • First-half average loans increased approximately $139 million year over year, supporting higher loan interest income, while period-end loans declined from December 2022.
  • Non-interest income rose year over year, mainly reflecting deferred-compensation investment fair-value changes, early certificate-of-deposit withdrawal fees, and customer swap fees. First-half securities sales generated a $202,000 pretax loss.
  • Deposits shifted toward interest-bearing accounts: non-interest-bearing demand deposits fell to 21.2% of deposits from 23.1% at year-end. Time deposits increased to $891.7 million from $803.9 million.
  • Accumulated other comprehensive loss was $28.6 million at June 30. Available-for-sale securities had $36.4 million of gross unrealized losses; management attributed these primarily to market interest-rate changes and reported no credit-loss allowance for the portfolio.

Outlook, commentary, risks, and unusual items

  • Post-quarter restructuring: On July 17, 2023, the company sold lower-yielding available-for-sale securities with $161.2 million par value and surrendered $21.4 million of bank-owned life insurance contracts. It reported a non-recurring $14.6 million after-tax loss: $13.5 million related to securities losses already reflected in June 30 accumulated other comprehensive loss, and $1.1 million from tax on the expected BOLI cash payout. Management expects reinvestment in higher-yielding assets to improve long-term profitability, with an expected after-tax loss earn-back period of less than three years. This was a subsequent event, not a Q2 operating expense.
  • Management described the loan pipeline entering Q3 as robust and gaining momentum, while stating that underwriting standards remain disciplined. It also said it continues to evaluate cost-saving opportunities. No specific earnings or margin guidance was provided.
  • Key disclosed risks include deposit retention and funding costs, liquidity and interest-rate risk, credit quality and allowance adequacy, real estate and local-market conditions, securities valuation, and operational, cyber, regulatory, and other risks. Uninsured deposits were estimated at $869.1 million; deposits neither insured nor collateralized by securities represented 34% of total deposits.
  • The company adopted CECL on January 1, 2023, reducing retained earnings by $2.3 million after tax at adoption. Management said the allowance was adequate but noted that economic assumptions, borrower circumstances, or adverse economic developments could require future adjustments.
  • Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter. It reported no material legal proceedings and no material changes to previously disclosed risk factors.

Investor verification priorities

  1. Review the July 17 securities and BOLI restructuring, including realized cash proceeds, reinvestment yields, actual earnings benefit, and progress against the less-than-three-year earn-back estimate.
  2. Track deposit pricing, time-deposit maturities, uninsured and non-collateralized deposit levels, and reliance on BTFP or other wholesale funding as interest costs evolve.
  3. Verify whether net interest margin stabilizes or continues to contract, given the substantial year-over-year increase in funding costs.
  4. Monitor loan growth and concentrations—particularly commercial real estate—and changes in criticized loans, delinquencies, and CECL allowances as forecasts and economic conditions change.
  5. Assess available liquidity and collateral capacity alongside the $54.0 million BTFP borrowing and the securities pledged to support funding.