John Marshall Bancorp, Inc. — Q2 2022 Form 10-Q
Business context and reporting period
John Marshall Bancorp is a Virginia bank holding company whose subsidiary, John Marshall Bank, primarily serves the Washington, D.C. metropolitan area. This unaudited filing covers the quarter and six months ended June 30, 2022; operating results are compared with the corresponding 2021 periods, and balance-sheet changes are generally compared with December 31, 2021. Amounts below are in U.S. dollars; financial statement amounts are in millions unless otherwise stated.
Financial performance and position
- Q2 earnings: Net income was $7.9 million, up 29.7% from $6.1 million; diluted EPS was $0.56 versus $0.44. Net interest income was $17.3 million, up 5.0%; there was no loan-loss provision, compared with $0.09 million in Q2 2021. Non-interest income was $0.1 million versus $0.4 million, while non-interest expense fell 15.3% to $7.7 million.
- First-half earnings: Net income was $15.6 million, up 39.5%; diluted EPS was $1.10 versus $0.80. Net interest income increased 7.5% to $35.2 million. The company recorded no provision for loan losses, compared with $2.5 million in the first half of 2021. Non-interest income declined 40.6% to $0.5 million; non-interest expense declined 2.9% to $16.5 million.
- Margins and returns: Tax-equivalent net interest margin was 3.16% for Q2 and 3.25% for the first half, versus 3.32% and 3.38%, respectively, in 2021. First-half return on average assets was 1.41% versus 1.13%; return on average equity was 15.02% versus 11.78%. The first-half efficiency ratio improved to 46.1% from 50.4%.
- Balance sheet: Total assets were $2.32 billion, up 7.8% from year-end 2021. Deposits rose 8.6% to $2.04 billion; net loans were $1.67 billion, up $26.2 million. Shareholders’ equity was $207.5 million, down $0.9 million, as earnings and option exercises were more than offset by unrealized securities losses and dividends.
- Cash flow: For the six months, operating cash flow was $16.6 million, investing cash outflow was $170.0 million, and financing cash inflow was $168.5 million. Cash and cash equivalents increased $15.1 million to $120.9 million. The filing provides cash-flow data for the six-month period, not Q2 alone.
- Debt and capital: Subordinated debt was $49.6 million at quarter-end, including a $25 million fixed-to-floating note issued June 15 at 5.25% through June 2027, then three-month SOFR plus 245 basis points; it qualifies as Tier 2 capital. The $25 million 2017 notes were redeemed on July 15, 2022. No FHLB advances were outstanding at quarter-end. The Bank was categorized as well capitalized, with total risk-based capital of 15.1%, Tier 1 risk-based capital of 14.0%, and leverage ratio of 11.0%.
- Liquidity and funding: Liquid assets were $422.5 million, or 18.2% of total assets. Additional stated borrowing capacity included $373.9 million at the FHLB, $28.9 million at the Federal Reserve discount window, and $105 million in correspondent-bank lines; none of the latter lines had been drawn. Estimated uninsured deposits were $1.07 billion. Brokered deposits were $266.1 million.
Material changes and asset quality
- Loan growth excluding PPP loans was 5.9% from year-end, while PPP loans fell from $67.7 million to $0.2 million as the program wound down. Commercial real estate loans increased, while construction and land development and non-real-estate commercial loans declined.
- Management attributed stronger first-half net interest income to balance-sheet growth, improved funding composition, and lower funding costs. The margin nevertheless declined, primarily because of lower yields on loans and fixed-rate investments.
- The allowance for loan losses was $20.0 million, or 1.18% of gross loans net of unearned income, versus 1.20% at year-end. Management cited improved risk ratings and reduced uncertainty about pandemic effects, partly offset by consideration of inflation. There were no nonaccrual, 90-days-past-due, or nonperforming assets; $6.9 million of loans were rated special mention and $0.1 million substandard.
- Available-for-sale securities had $21.97 million of gross unrealized losses at June 30, versus $2.99 million at year-end; held-to-maturity securities had $13.40 million of gross unrealized losses versus $2.25 million. Management attributed the declines primarily to rising interest rates and stated it did not intend, and was not more likely than not required, to sell affected securities before recovery. The available-for-sale mark contributed to a $16.5 million first-half other comprehensive loss.
Outlook, commentary, and risks
- The filing gives no specific earnings or growth guidance. Management cautions that interim results are not necessarily indicative of full-year results.
- The company was preparing to adopt CECL on January 1, 2023. Management expected an increase in the allowance for credit losses, but the amount was not clear; it intended to elect the regulatory capital transition provision.
- Management identified exposure to inflation, interest-rate changes, securities-market movements, economic and real-estate conditions, credit quality, deposit funding and liquidity, and concentration in the Washington, D.C. market. It also noted competition, regulatory and operational risks, and uncertainty in future loan performance.
- Q2 non-interest income was affected by a $0.3 million fair-value loss on investments held to economically hedge nonqualified deferred-compensation obligations. First-half non-interest income included a $0.5 million year-over-year adverse swing in these mark-to-market adjustments. Lower Q2 compensation expense reflected reduced incentive accruals and changes in employee-benefit and deferred-compensation costs; incentive accruals may vary between quarters.
- Off-balance-sheet commitments included $263.7 million to extend credit and $17.3 million of standby letters of credit. Management did not anticipate material losses. The company reported no material legal proceedings and no material changes to previously disclosed risk factors.
Important facts for investors to verify
- How rising rates, deposit repricing, and competition for deposits affect net interest margin and funding costs.
- The size and composition of the securities portfolio’s unrealized losses, and the company’s ability to hold securities until recovery without liquidity pressure.
- CECL adoption assumptions, the resulting allowance increase, and any effects on regulatory capital.
- Credit trends in commercial real estate and construction lending, including changes to watch-list ratings and the adequacy of the allowance.
- The sustainability of earnings growth given the absence of a loan-loss provision, volatile deferred-compensation mark-to-market results, and variable incentive compensation.