John Marshall Bancorp, Inc. (Nasdaq: JMSB) (the “Company”), parent company of John Marshall Bank (the “Bank”), reported its financial results for the three and six months ended June 30, 2023.
Selected Highlights
- Pristine Asset Quality – For the fifteenth consecutive quarter, the Company had no nonperforming loans, no other real estate owned and no loans 30 days or more past due. As of June 30, 2023, there were no loans greater than 10 days past due. There were no charge-offs during the quarter. The Company remains steadfast in adhering to our strict underwriting standards and the diligent management of the portfolio.
- Increasingly Well-Capitalized –The Bank’s capital ratios remain significantly above regulatory thresholds for well-capitalized banks. Our regulatory capital ratios have increased or remained the same as the prior quarter in each of the past four quarters.
- Significant Liquidity – The Company’s liquidity position, defined as the sum of cash, unencumbered securities and available secured borrowing capacity, totaled $839.4 million as of June 30, 2023, representing 35.5% of total assets. The Company’s liquidity position represented 120% of uninsured, non-collateralized deposits at June 30, 2023, up from 113% at March 31, 2023.
- Strength in CRE Loan Portfolio – The Company’s loan portfolio remains a source of strength. As of June 30, 2023, the Company’s commercial real estate (“CRE”) non-owner occupied and owner-occupied portfolios had a weighted average loan-to-values of 51.7% and 55.8%, respectively, and weighted average debt service coverage ratios of 2.3x and 3.3x, respectively.
- Initial SBA Loan Sale – During the quarter, the Company completed its first Small Business Administration (“SBA”) loan sale. The Company is accelerating activity in this business line and intends to become a preferred lender. We believe the preferred lender status will allow us to streamline the SBA borrowing process for our existing and potential customers and thereby increase loan and deposit balances and fee income.
- Profitability – Annualized return on average equity for the three months ended June 30, 2023 was 8.13%. The Company’s profitability has been impacted by the significant increase in short-term rates that affected funding costs. Long-term profitability will be positively impacted by the restructuring, as further discussed below, and anticipated loan growth.
On July 17, 2023, the Company sold $161.7 million in lower-yielding available-for-sale investment securities and redeemed $21.4 million of Bank Owned Life Insurance (“BOLI”) assets (the “restructuring”), resulting in a non-recurring, after-tax loss of $14.6 million. The sale of the available-for-sale securities will not impact book-value-per-share as the after-tax loss of $13.5 million was already reflected in accumulated other comprehensive loss as of June 30, 2023. The remaining $1.1 million after-tax loss stems from the taxation on the gain associated with the expected cash payout from the BOLI policies. The proceeds from the restructuring will be reinvested in higher yielding assets with an expected after-tax loss earn back of less than 3 years. The restructuring is expected to improve the Company’s earnings, while maintaining strong capital ratios on a generally accepted accounting principles (“GAAP”) basis and continuing to meaningfully exceed well-capitalized ratios on a regulatory basis. Upon completion of the sale, the Company’s available-for-sale and held-to-maturity fixed income securities portfolio has an estimated weighted average life of 4.6 years and the available-for-sale portfolio has an estimated weighted average life of 3.2 years. Nearly 65% of the remaining portfolio is invested in amortizing bonds and is expected to return, on average, $2.5 million in cash flows each month.
Chris Bergstrom, President and Chief Executive Officer, commented, “The Federal Reserve’s rapid increase in the federal funds rate from 0.25% to 5.25% over the past 15 months has resulted in a challenging environment. Short-term yields have exceeded long-term yields causing an inverted yield curve. Inverted yield curves drive up funding costs with comparatively less relief from increased loan yields and exert pressure on net interest margin. As demonstrated by our 15th consecutive quarter of zero non-performing assets, we remain laser focused on credit. Furthermore, we have organically increased both our capital and liquidity positions for the opportunities that we believe are ahead. Our loan pipeline, with credits that meet our stringent criteria, is building for very promising growth in the second half of this year. The restructuring that we executed in July provides additional funding to be redeployed in higher yielding assets. This will benefit our net interest margin and bottom line. In short, we are well-positioned to continue to develop and grow relationships with competitive financial products and services and access to the Bank’s decision makers. Recession or soft landing, we believe the strength of our balance sheet provides flexibility to pursue prudent and profitable growth.”
Balance Sheet, Liquidity and Credit Quality
Total assets were $2.36 billion at June 30, 2023, $2.35 billion at March 31, 2023 and $2.32 billion at June 30, 2022. Asset growth from June 30, 2022 to June 30, 2023 was $47.9 million or 2.1%.
Total loans, net of unearned income, increased $77.1 million or 4.6% to $1.77 billion at June 30, 2023, compared to $1.69 billion at June 30, 2022. The increase in loans was primarily attributable to growth in the residential mortgage and commercial investor real estate loan portfolios.
Total loans, net of unearned income, decreased $1.5 million during the quarter ended June 30, 2023 or 0.1% from $1.77 billion at March 31, 2023. The decrease in loans was primarily attributable to loan pay downs and payoffs exceeding originations in the investor real estate, multifamily, commercial business and commercial owner occupied real estate loan portfolios. The Company’s loan pipeline headed into the third quarter of 2023 is robust and gaining momentum. We are seeing increased lending opportunities that meet our underwriting standards and, in many cases, fewer competitors for those loans as some market participants have scaled back lending efforts.
The carrying value of the Company’s fixed income securities investment portfolio was $422.7 million at June 30, 2023, $438.7 million at March 31, 2023 and $467.4 million at June 30, 2022. Only $11.7 million or 2.8% of our bond portfolio is not covered by the implied guarantee of the United States government or one of its agencies and is largely comprised of high-quality Virginia and Maryland municipal bonds rated AA or better at June 30, 2023. At June 30, 2023, nearly 70% of the fixed income portfolio is invested in amortizing bonds, which provides the Company with a source of steady cash flow. At June 30, 2023, the fixed income portfolio had an estimated weighted average life of 4.4 years. The available-for-sale portfolio comprised approximately 79% of the fixed income securities portfolio and had a weighted average life of 3.6 years at June 30, 2023. The held-to-maturity portfolio comprised approximately 21% of the fixed income securities portfolio and had a weighted average life of 7.1 years at June 30, 2023. The Company did not purchase any fixed income securities during the three or six month periods ended June 30, 2023.
The Company’s balance sheet remains highly liquid. The Company’s liquidity position, defined as the sum of cash, unencumbered securities and available secured borrowing capacity, totaled $839.4 million as of June 30, 2023 compared to $852.6 million as of March 31, 2023 and represented 35.5% and 36.3% of total assets, respectively. The decrease in the Company’s liquidity position during the quarter resulted primarily from pledging securities to obtain the Bank Term Funding Program (“BTFP”) advance, as discussed below. Wholesale deposits, defined as brokered and QwickRate certificates of deposit, decreased $36.7 million or 9.3% from $395.8 million at March 31, 2023 to $359.1 million at June 30, 2023.
Liquidity Trends | |||||||||||||||||||||||||||||||||||
June 30, 2023 | March 31, 2023 | December 31, 2022 | September 30, 2022 | June 30, 2022 | |||||||||||||||||||||||||||||||
(Dollars in thousands) | Amount | % of
| Amount | % of
| Amount | % of
| Amount | % of
| Amount | % of
| |||||||||||||||||||||||||
Cash | $ | 129,551 | 5.5 | % | $ | 103,359 | 4.4 | % | $ | 61,599 | 2.6 | % | $ | 74,756 | 3.2 | % | $ | 120,887 | 5.2 | % | |||||||||||||||
Unencumbered Securities | 233,695 | 9.9 | % | 298,194 | 12.7 | % | 313,618 | 13.4 | % | 345,987 | 15.0 | % | 351,675 | 15.2 | % | ||||||||||||||||||||
Available Secured Borrowing Capacity | 476,144 | 20.1 | % | 451,008 | 19.2 | % | 388,257 | 16.5 | % | 401,828 | 17.4 | % | 402,840 | 17.4 | % | ||||||||||||||||||||
Total Liquidity | $ | 839,390 | 35.5 | % | $ | 852,561 | 36.3 | % | $ | 763,474 | 32.5 | % | $ | 822,571 | 35.6 | % | $ | 875,402 | 37.8 | % | |||||||||||||||
On May 15, 2023, the Company obtained a $54.0 million advance from the Federal Reserve Bank’s BTFP to secure lower funding costs relative to wholesale deposits. The BTFP advance has a term of one year and bears interest at a fixed rate of 4.80%.
If the Company were to avail itself of additional BTFP funding, we estimate an incremental increase in our liquidity position of approximately $29.1 million, increasing our potential liquidity to $868.5 million as of June 30, 2023. In addition to available secured borrowing capacity, the Bank had available federal funds lines of $110.0 million at June 30, 2023.
Total deposits were $2.05 billion at June 30, 2023, $2.09 billion at March 31, 2023 and $2.04 billion at June 30, 2022. Deposits increased $2.6 million or 0.1% when compared to June 30, 2022. The increase in deposits was primarily due to time deposit growth. Total deposits decreased $42.3 million or 2.0% when compared to March 31, 2023. The decrease was primarily due to a decrease in costlier wholesale deposits of $36.7 million or 9.3% from $395.8 million at March 31, 2023 to $359.1 million at June 30, 2023. NOW deposits increased $26.4 million to partially offset the decrease in wholesale deposits. As of June 30, 2023, the Company had $697.0 million of deposits that were not insured or not collateralized by securities compared to $756.0 million at March 31, 2023. Deposits that were not insured or not collateralized by securities represented only 34.1% of total deposits at June 30, 2023 compared to 36.2% at March 31, 2023.
Total borrowings as of June 30, 2023 consisted of subordinated debt totaling $24.6 million and a BTFP advance totaling $54.0 million. On May 15, 2023, the Company obtained a $54.0 million advance from the Federal Reserve Bank’s BTFP to secure lower funding costs relative to wholesale deposits. The BTFP advance has a term of one year, bears interest at a fixed rate of 4.80% and can be prepaid without penalty prior to maturity. The Company did not have any FHLB advances or federal funds purchased outstanding as of June 30, 2023.
Shareholders’ equity increased $11.4 million or 5.5% to $219.0 million at June 30, 2023 compared to $207.5 million at June 30, 2022. Book value per share was $15.50 as of June 30, 2023 compared to $14.80 as of June 30, 2022. The year-over-year change in book value per share was primarily due to the Company’s earnings over the previous twelve months, partially offset by an increase in accumulated other comprehensive loss, increased share count from shareholder option exercises and restricted share award issuances and dividends paid. The increase in accumulated other comprehensive loss was primarily attributable to increases in unrealized losses on our available-for-sale investment portfolio due to market value changes as a result of rising interest rates.
The Bank’s capital ratios at June 30, 2023 improved when compared to June 30, 2022. We remain well above regulatory thresholds for well-capitalized banks. As of June 30, 2023, the Bank’s total risk-based capital ratio was 16.1%, compared to 15.1% at June 30, 2022 (GAAP). As outlined below, the Bank would continue to remain well above regulatory thresholds for well-capitalized banks at June 30, 2023 in the hypothetical scenario where the entire bond portfolio was sold at fair market value and the losses realized (Non-GAAP). Refer to “Explanation of Non-GAAP Measures” and the “Reconciliation of Certain Non-GAAP Financial Measures” table for further details about financial measures used in this release that were determined by methods other than in accordance with GAAP.
Bank Regulatory Capital Ratios (As Reported) | ||||||||||||
Well-
| June 30, 2023 | December 31, 2022 | June 30, 2022 | |||||||||
Total risk-based capital ratio | 10.0 | % | 16.1 | % | 15.6 | % | 15.1 | % | ||||
Tier 1 risk-based capital ratio | 8.0 | % | 15.0 | % | 14.4 | % | 14.0 | % | ||||
Common equity tier 1 ratio | 6.5 | % | 15.0 | % | 14.4 | % | 14.0 | % | ||||
Leverage ratio | 5.0 | % | 11.6 | % | 11.3 | % | 11.0 | % | ||||
Bank Regulatory Capital Ratios (Hypothetical Scenario of Selling All Bonds at Fair Market Value - Non-GAAP) | ||||||||||||
Well-
| June 30, 2023 | December 31, 2022 | June 30, 2022 | |||||||||
Total risk-based capital ratio | 10.0 | % | 14.3 | % | 13.8 | % | 14.2 | % | ||||
Tier 1 risk-based capital ratio | 8.0 | % | 13.0 | % | 12.6 | % | 13.0 | % | ||||
Common equity tier 1 ratio | 6.5 | % | 13.0 | % | 12.6 | % | 13.0 | % | ||||
Leverage ratio | 5.0 | % | 12.0 | % | 11.8 | % | 12.1 | % | ||||
The Company recorded no charge-offs during the second quarter of 2023, during the first quarter of 2023 or during the second quarter of 2022. As of June 30, 2023, the Company had no non-accrual loans, no loans greater than 10 days past due and no other real estate owned assets.
At June 30, 2023, the allowance for loan credit losses was $20.6 million or 1.17% of outstanding loans, net of unearned income, compared to $21.6 million or 1.22% of outstanding loans, net of unearned income, at March 31, 2023. The decrease in the allowance as a percentage of outstanding loans, net of unearned income, was primarily a result of improvement in the forecasted housing price index used in the quantitative component of the CECL model and changes in qualitative factors.
At June 30, 2023, the allowance for credit losses on unfunded loan commitments was $1.1 million compared to $1.0 million at March 31, 2023. The increase in the allowance for credit losses on unfunded loan commitments was primarily the result of an increase in unfunded commitment balances during the quarter.
The Company did not have an allowance for credit losses on held-to-maturity securities as of June 30, 2023 or March 31, 2023.
The Company’s owner occupied and non-owner occupied CRE portfolios continue to be of sound credit quality. The following table provides a detailed breakout of the two aforementioned portfolios, demonstrating their strong debt-service-coverage and loan-to-value ratios.
Commercial Real Estate | ||||||||||||||||||
Owner Occupied | Non-owner Occupied | |||||||||||||||||
Asset Class | Weighted
| Weighted
| Number of
| Principal
| Weighted
| Weighted
| Number of
| Principal
| ||||||||||
Office | 61.0 | % | 3.9 | x | 129 | $ | 83,018 | 49.1 | % | 1.9 | x | 66 | $ | 124,532 | ||||
Retail | 60.9 | % | 2.7 | x | 43 | 59,903 | 51.9 | % | 2.0 | x | 141 | 381,009 | ||||||
Warehouse | 59.6 | % | 2.3 | x | 28 | 35,606 | 47.1 | % | 2.7 | x | 23 | 32,565 | ||||||
Church | 34.0 | % | 3.2 | x | 18 | 38,017 | - - | - - | - - | - - | ||||||||
Hotel/Motel | - - | - - | - - | - - | 61.0 | % | 1.9 | x | 7 | 39,590 | ||||||||
Industrial | 56.4 | % | 4.8 | x | 25 | 37,960 | 52.7 | % | 5.5 | x | 14 | 53,347 | ||||||
Other(4) | 55.3 | % | 3.2 | x | 51 | 106,355 | 50.4 | % | 1.8 | x | 15 | 23,580 | ||||||
Total | 294 | $ | 360,859 | 266 | $ | 654,623 | ||||||||||||
(1) | Loan-to-value is determined at origination date and is divided by principal balance as of June 30, 2023. | |
(2) | The debt service coverage ratio (“DSCR”) is calculated from the primary source of repayment for the loan. Owner occupied DSCR’s are derived from cash flows from the owner occupant’s business, property and their guarantors, while non-owner occupied DSCR’s are derived from the net operating income of the property. | |
(3) | Principal balance excludes deferred fees or costs. | |
(4) | Other asset class is primarily comprised of schools, daycares and country clubs. |
Income Statement Review
Quarterly Results
Net income for the second quarter of 2023 decreased $3.4 million or 43.0% to $4.5 million compared to $7.9 million for the second quarter of 2022. Earnings per diluted share for the three months ended June 30, 2023 were $0.32, a 42.9% decrease when compared to the $0.56 reported for the three months ended June 30, 2022. Annualized Return on Average Assets (“ROAA”) was 0.77% and annualized Return on Average Equity (“ROAE”) was 8.13% for the three months ended June 30, 2023.
Net interest income for the second quarter of 2023 decreased $5.3 million or 30.6% compared to the second quarter of 2022, driven primarily by the increase in costs of inter
