John Marshall Bancorp, Inc. Reports Record Earnings and Growth Asset Quality, Capital and Liquidity Positions Remain Strong

RESTON, Va.--(BUSINESS WIRE)-- John Marshall Bancorp, Inc. (OTCQB: JMSB) (the “Company”), parent company of John Marshall Bank (the “Bank”) reported its financial results for the three and six months ended June 30, 2020.

Selected Highlights

• Seventh Consecutive Quarter of Record Earnings - The Company reported net income of $4.6 million for the three months ended June 30, 2020 compared to $3.8 million for the three months ended June 30, 2019, an increase of 19.7%. The Company reported net income of $9.1 million for the six months ended June 30, 2020, compared to $7.4 million for the six months ended June 30, 2019, an increase of 22.1%. Earnings per diluted share was $0.33 for the three months ended June 30, 2020, an increase of 17.9% from $0.28 per diluted share for the three months ended June 30, 2019. Earnings per diluted share was $0.66 for the six months ended June 30, 2020, an increase of 22.2% from $0.54 per for the six months ended June 30, 2019.

• Company Best Growth in Assets, Loans and Deposits – Growth in assets, loans and deposits in the second quarter of 2020 represented records for the Company. Total assets exceeded $1.80 billion at June 30, 2020, an increase of $308.3 million or 20.6% when compared to the same period in 2019. Gross loans net of unearned income increased $275.5 million, or 22.2% from June 30, 2019 to June 30, 2020. Total deposits grew $298.2 million, or 23.6% from June 30, 2019 to June 30, 2020.

• Outstanding Asset Quality – The second quarter of 2020 marked the third consecutive quarter of no non-performing assets, no loans 30 days or more past due and no real estate owned. There have been no charge-offs during the first six months of 2020. The Company reported $42 thousand in net loan recoveries during the first six months of 2020, compared to $146 thousand in net loan charge-offs during the first six months of 2019.

• Strong Capital and Liquidity - While the Company is exempt from the regulatory capital rules at the holding company level, both the Company and the Bank materially exceed the regulatory thresholds defining well-capitalized. Cash and unencumbered securities equaled $207 million, or 11.5% of total assets as of June 30, 2020. Exclusive of the available PPP Lending Facility, the Company had $293 million of secured borrowing capacity available at June 30, 2020. The Company had significant unsecured (correspondent borrowing lines and brokered deposits) funding capacity available as of June 30, 2020.

• Improved Funding Composition - Non-interest bearing deposits grew $125.2 million or 45.8% during the first six months of 2020 and represented 25.5% of total deposits at June 30, 2020. Core customer funding grew $237.1 million or 20.9% since June 30, 2019 and represented 84.9% of funding sources as of June 30, 2020. Non-maturing deposits constituted 61.4% of total deposits as of June 30, 2020, 55.9% as of December 31, 2019 and 56.3% as of June 30, 2019. Wholesale funding represented 13.6% of total funding sources at June 30, 2020, down from 15.4% at December 31, 2019. Balance sheet growth and the downward repricing of our funding base enabled the Company to report record net interest income per day of $153 thousand during the second quarter of 2020, a 14.7% increase from the $133 thousand per day during the same period in 2019.

• Operating Leverage Continues to Improve with Growing Revenues - Revenues were $14.5 million, or 16.4% greater in the second quarter of 2020 relative to $12.5 million for the second quarter of 2019. Noninterest expense for the second quarter of 2020 was $7.4 million, or 1.5% greater than the $7.3 million for the second quarter of 2019. This positive operating leverage enabled the efficiency ratio to decrease from 58.2% for the second quarter of 2019 to 50.8% for the second quarter of 2020. Noninterest expense to average assets declined from 2.03% for the three months ended June 30, 2019 to 1.70% for the three months ended June 30, 2020.

• Highest Pre-Tax, Pre-Provision Income in Company History –The Company reported record pre-tax, pre-provision (“PTPP”) income of $7.1 million for the three months ended June 30, 2020, a 37.2% increase from the same period a year ago. PTPP income increased 30.0% from $10.1 million for the six months ended June 30, 2019, to $13.1 million for the six months ended June 30, 2020. While the Company’s asset quality remains strong, management believes that PTPP is a useful financial measure because it enables users to assess the Company’s ability to generate capital to cover potential credit losses.

Chris Bergstrom, President and Chief Executive Officer, commented “As we continue to tackle the challenges of the ongoing pandemic, John Marshall Bank has been focused on the needs of our customers, staff and surrounding communities we serve. We have been able to provide our customers enhanced products and services using our digital platform. We have leveraged our technology investment to enable most employees to work from home and invested in safeguards for those working onsite. We delivered record earnings and balance sheet growth. We continue to improve our funding composition. Despite these challenging times, our asset quality remains strong as our underwriting remains rigorous. We believe we are well positioned for continued profitable growth with a well-capitalized, liquid balance sheet.”

Balance Sheet Review

Assets

Total assets were $1.80 billion at June 30, 2020, $1.58 billion at December 31, 2019 and $1.49 billion at June 30, 2019. During the second quarter of 2020, assets increased $179.5 million, or 11.1%. Asset growth was $308.3 million, or 20.6%, from June 30, 2019 to June 30, 2020.

Loans

Gross loans at June 30, 2020 included $148.2 million in Paycheck Protection Program Loans (“PPP loans”). PPP loans are guaranteed by the U.S. Small Business Administration (“SBA”). As part of the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”), PPP loans were designed by the United States Treasury and the SBA to provide an incentive for small businesses to keep their workers on the payroll. The Paycheck Protection Program (“PPP”) provides for forgiveness of up to the full principal amount of qualifying loans provided that all employee retention criteria are met and the funds are used for eligible expenses within a time period of either eight or twenty-four weeks. PPP loans have an interest rate of 1%. The majority of the PPP loans were issued prior to June 5, 2020 and have a maturity of 2 years. Two loans, totaling $302 thousand, were funded after June 5, 2020 and have a maturity of 5 years.

The Company fielded PPP applications from small businesses, submitted those applications to the SBA and disbursed approved loan funds to their respective applicants. As compensation for originating and ongoing administration of these PPP loans, the Company received fees of $4.0 million which are net of loan origination costs of $1.2 million. These net fees were deferred at origination and are being recognized in interest income over the remaining lives of the loans. Income recognition will be accelerated upon forgiveness or repayment of PPP loans.

Excluding PPP loans, gross loans net of unearned income grew $32.7 million or 2.4% during the second quarter of 2020 and increased $127.4 million or 10.3% from June 30, 2019 to June 30, 2020. Non-PPP loan growth during the first six months of 2020 was restrained by payoffs and paydowns totaling $165.4 million.

Investment Securities

The Company’s portfolio of investments in debt securities was $127.7 million at June 30, 2020, $122.7 million at December 31, 2019 and $106.7 million at June 30, 2019. Year-over-year bond growth, from June 30, 2019 to June 30, 2020, was $21.1 million, or 19.7%. During the second quarter of 2020, the Company sold $10.8 million of fixed income securities, resulting in a pre-tax gain of $297 thousand. The Company also had restricted securities totaling $5.8 million at June 30, 2020, $7.2 million at December 31, 2019 and $6.3 million at June 30, 2019. The reduction in restricted securities stems from decreased Federal Home Loan Bank of Atlanta (“FHLB”) advances.

Interest Bearing Deposits in Banks

Interest-bearing deposits in banks were $109.9 million at June 30, 2020, $87.0 million at December 31, 2019 and $93.8 million at June 30, 2019. The higher cash balances at June 30, 2020 are a result of continued deposit growth and management’s strategic decision to operate with a higher level of liquidity in the current economic environment.

Deposits

Total deposits were $1.56 billion at June 30, 2020, $1.31 billion at December 31, 2019 and $1.26 billion at June 30, 2019. During the second quarter of 2020, deposits grew $182.1 million or 13.2%. During the first six months of 2020, deposits grew $252.9 million, or 19.3%. Year-over-year deposit growth, from June 30, 2019 to June 30, 2020, was $298.2 million, or 23.6%.

Non-interest bearing demand deposits were $398.7 million at June 30, 2020, $273.5 million at December 31, 2019 and $267.5 million at June 30, 2019. During the second quarter of 2020, non-interest bearing demand deposits grew $123.8 million or 45.0%. During the first six months of 2020, non-interest bearing demand deposits grew $125.2 million, or 45.8%. Year-over-year non-interest bearing demand deposit growth, from June 30, 2019 to June 30, 2020, was $131.2 million, or 49.0%.

Core customer funding was $1.37 billion at June 30, 2020, $1.17 billion at December 31, 2019 and $1.13 billion at June 30, 2019. Year-over-year core customer funding sources increased by $237.1 million, or 20.9%, from June 30, 2019 to June 30, 2020. Core customer funding was 84.9% of all funding sources as of June 30, 2020, as compared to 82.8% at December 31, 2019 and 85.2% as of June 30, 2019. Transaction accounts constituted 61.4% of total deposits as of June 30, 2020, 55.9% as of December 31, 2019 and 56.3% as of June 30, 2019.

Insured Cash Sweep (“ICS”) deposits were $228.3 million at June 30, 2020, $187.4 million at December 31, 2019 and $172.2 million at June 30, 2019. Year-over-year, ICS deposits increased $56.1 million from June 30, 2019 to June 30, 2020. Certificate of Deposit Account Registry Service (“CDARS”) deposits were $37.3 million at June 30, 2020, $50.9 million at December 31, 2019 and $79.5 million at June 30, 2019. Reciprocal deposit growth fluctuates with customers’ preferences to receive fixed (CDARS) or floating (ICS) yields.

Certificates of deposits were $372.4 million at June 30, 2020, $383.5 million at December 31, 2019 and $341.0 million at June 30, 2019. QwickRate certificates of deposit were $31.8 million at June 30, 2020, $18.0 million at December 31, 2019 and $19.8 million at June 30, 2019. Year-over-year QwickRate certificates of deposit increased $12.0 million from June 30, 2019 to June 30, 2020. Brokered deposits were $160.6 million at June 30, 2020, $125.1 million at December 31, 2019 and $111.5 million at June 30, 2019. Brokered deposits increased $49.1 million from June 30, 2019 to June 30, 2020. The increase in brokered deposits is mostly related to a migration of borrowings from FHLB and Federal funds purchased to brokered deposits.

Borrowings

Total borrowings, consisting of FHLB advances and Federal funds purchased, were $26.0 million at June 30, 2020, $74.0 million at December 31, 2019 and $40.5 million at June 30, 2019. Total borrowings decreased $14.5 million, or 35.8%, from June 30, 2019 to June 30, 2020 and decreased $48.0 million, or 64.9% from December 31, 2019 to June 30, 2020. Management has chosen to retire FHLB advances as they mature so as to increase contingent funding sources. As of June 30, 2020, the Bank had over $240 million remaining in borrowing capacity with the FHLB.

The Company had subordinated notes with a balance of $24.7 million at June 30, 2020 and $24.6 million at December 31, 2019 and June 30, 2019. The notes qualify as Tier 2 capital for the Company for regulatory purposes.

Shareholders’ Equity and Capital Levels

Total shareholders’ equity was $176.3 million at June 30, 2020, $162.0 million at December 31, 2019 and $152.7 million at June 30, 2019. Year-over-year shareholders’ equity increased by $23.6 million, or 15.5%. Total common shares outstanding increased from 13,077,090, including 50,889 shares relating to unvested stock awards, at June 30, 2019, to 13,573,601, including 47,403 shares relating to unvested stock awards, at June 30, 2020. The year-over-year increase in shares outstanding was primarily from the exercise of stock options.

The Company’s capital ratios remain well above regulatory minimums for well capitalized banks. As of June 30, 2020, the Company’s total risk-based capital ratio was 14.4%, compared to 13.6% at June 30, 2019.

Income Statement Review

Net Interest Income

Net interest income, the Company’s primary source of revenue, was $13.9 million for the three months ended June 30, 2020, up 14.7% from $12.1 million for the three months ended June 30, 2019. The net interest margin was 3.27% for the three months ended June 30, 2020 as compared to 3.49% for the three months ended June 30, 2019. Average net loans increased $266.7 million compared to the three months ended June 30, 2019, with a 59 basis point decline in yield. Average securities increased $26.9 million, compared to the three months ended June 30, 2019, with a 28 basis point decline in yield. The average yield on interest-bearing assets decreased 68 basis points from 4.93% for the three months ended June 30, 2019, to 4.25% for the three months ended June 30, 2020. Average interest-bearing deposits in other banks increased $25.8 million compared to the three months ended June 30, 2019, with a 228 basis point decline in yield. The average cost of interest-bearing liabilities decreased 54 basis points when comparing the quarter ended June 30, 2019 to the quarter ended June 30, 2020.

For the six months ended June 30, 2020, net interest income was $26.7 million, up 12.8% from $23.7 million for the six months ended June 30, 2019. The net interest margin was 3.30% during the first six months of 2020, compared to 3.46% during the first six months of 2019. In March of 2020, the Federal Reserve cut rates 150 basis points, which adversely impacted the earning asset yield for both the three and six months ended June 30, 2020. Despite the rate cuts, net interest income increased by 12.8% during the first six months of 2020, compared to the first six months of 2020, resulting primarily from a $249.9 million, or 18.1%, increase in average earning assets during the first six months of 2020, compared to the first six months of 2019.

On a linked quarterly basis, net interest margin decreased 6 basis points to 3.27% for the three months ended June 30, 2020, with the yield on earning assets declining from 4.62% for the three months ended March 31, 2020, to 4.25% for the three months ended June 30, 2020. The average cost of interest-bearing liabilities declined 34 basis points from 1.77% for the three months ended March 31, 2020, compared to 1.43% for the three months ended June 30, 2020.

Provision for Loan Losses

The Company had a $1.5 million provision for loan losses for the three months ended June 30, 2020, compared to $384 thousand for the same period in 2019. The Company had $42 thousand in net loan recoveries during the second quarter of 2020, compared to net $23 thousand in net loan recoveries in the second quarter of 2019.

During the six months ended June 30, 2020, the Company recognized a provision for loan losses of $1.9 million, compared to a provision of $605 during the first six months of 2019. The Company reported $42 thousand in net loan recoveries during the first six months of 2020, compared to $146 thousand in net loan charge-offs during the first six months of 2019.

The increase in the Company’s provision for loan losses during 2020 as compared to the corresponding periods in the prior year was primarily related to our consideration of COVID-19 and its impact on the qualitative factors included in the allowance estimate. The provision increased the allowance for loan losses as a percentage of total loans from 0.81% at December 31, 2019 to 0.84% at June 30, 2020. Excluding PPP loan balances, the provision increased the allowance for loan losses as a percentage of total loans from 0.84% at March 31, 2020 to 0.93% at June 30, 2020. PPP loan balances are 100% guaranteed by the SBA and carry no reserve. The Company continues to evaluate the adequacy of its allowance for loan losses with regards to the pandemic and will update its estimate as changes within the Company's portfolio become known and more economic data becomes available.

Noninterest Income

The Company’s recurring sources of noninterest income consist primarily of bank owned life insurance income and service charges on deposit accounts. The majority of loan fees are included in interest income on the loan portfolio and not reported as noninterest income.

For the three months ended June 30, 2020, the Company reported total noninterest income of $638 thousand, compared to $369 thousand during the three months ended June 30, 2019. Service charges on deposit accounts declined $51 thousand for the three months ended June 30, 2020 when compared to the same period in 2019. Other operating income for the three months ended June 30, 2020 included a $21 thousand increase in insurance commissions as compared to the three months ended June 30, 2019.

For the six months ended June 30, 2020, the Company reported total noninterest income of $882 thousand, compared to $676 thousand during the first six months of 2019, an increase of $206 thousand, or 30.5%. Service charges on deposit accounts declined $53 thousand for the six months ended June 30, 2020 when compared to the same period in 2019. Other operating income for the six months ended June 30, 2020 declined $20 thousand when compared to the same period in 2019. The decline in other operating income for the six months ended June 30, 2020 was related to mark-to-market adjustments recorded on the Company’s equity securities.

The increase in noninterest income for both the three months and six months ended June 30, 2020 was primarily attributed to gains on sales of securities totaling $297 thousand and $309 thousand, respectively. Excluding the securities gains, the year-over-year decline for both the three and six months periods ended June 30, 2020 for service charges were attributable to lower ATM fees and lower overdraft fees.

Noninterest Expense

For the three months ended June 30, 2020, noninterest expense increased 1.5%, to $7.4 million, compared to $7.3 million for the same period in 2019. Salary and employee benefit expense was $4.4 million during the three months ended June 30, 2020, down $148 thousand, or 3.2% when compared to $4.6 million for the three months ended June 30, 2019. Occupancy expense decreased 13.6%, or $77 thousand and furniture and equipment increased 60.1% or $209 thousand when comparing the three months ended June 30, 2020 to the same period in 2019. Other operating expense increased by 6.9%, or $122 thousand when comparing the three months ended June 30, 2020 to the same period in 2019.

For the six months ended June 30, 2020, noninterest expense increased 1.5% to $14.5 million, compared to $14.3 million for the same period in 2019. For the six months ended June 30, 2020, salaries and employee benefits expense decreased 3.0%, or $272 thousand, compared to the six months ended June 30, 2019. Occupancy expense decreased 11.8%, or $130 thousand and furniture and equipment increased 35.6%, or $243 thousand when comparing the six months ended June 30, 2020 to the same period in 2019. Other operating expense increased by 11.3%, or $372 thousand, during the six months ended June 30, 2020, compared to the same period in 2019.

For both the three and six months ended June 30, 2020, occupancy expense declined due to the renegotiation of leases at the end of 2019. Furniture and equipment expense increased due to additional software costs and additional supplies associated with the pandemic and the majority of the increase in operating expense is related to higher FDIC insurance expense and franchise taxes.

Asset Quality

For the third consecutive quarter, the Company had no non-accrual loans, no loans 30 days or more past due and no other real estate owned as of June 30, 2020. As of June 30, 2019, non-accrual loans totaled $1.4 million. Non-performing assets were 0.09% at June 30, 2019. The Company had no other real estate owned as of June 30, 2020 and 2019.

Troubled debt restructurings were $633 thousand at June 30, 2020, a decline of $1.7 million, compared to $2.3 million at June 30, 2019. All troubled debt restructurings were performing in accordance with their modified terms as of June 30, 2020. There were $922 thousand of the troubled debt restructurings that were performing in accordance with their modified terms as of June 30, 2019.

In 2020, the federal banking agencies issued regulatory guidance to work with borrowers as outlined in Section 4013 of the CARES Act. The guidance interprets current accounting standards and indicates that a Company can conclude that a borrower is not experiencing financial difficulty if short-term modifications are made in response to COVID-19, such as payment deferrals, fee waivers, extensions of repayment terms, or other delays in payment that are insignificant related to the loans in which the borrower is less than 30 days past due on its contractual payments at the time a modification program is implemented. As of June 30, 2020, the Bank had modified 172 loans with outstanding balances of $250.2 million, representing 16.5% of total loans. Of the total 172 COVID modifications, 43 loans totaling $113.6 million or 7.5% of total loans were secured by retail oriented commercial real estate collateral. The weighted average loan-to-value of these loans was 60.8% and the weighted average debt service coverage ratio was 1.7 times. There were 7 loans totaling $34.6 million or 2.3% of total loans that were secured by hotels. The hotel loans with COVID modifications had a weighted average loan-to-value of 65.8% and the weighted average debt service coverage ratio was 1.7 times. There were 21 loans totaling $25.6 million or 1.7% of total loans that were secured by office oriented commercial real estate. The office loans with COVID modifications had a weighted average loan-to-value of 64.3% and the weighted average debt service coverage ratio was 1.8 times. For the commercial real estate loan COVID modifications, the weighted average loan-to-value ratios were based on the most recent appraisals in each individual credit file and the debt service coverage ratios were based on the most recent tax returns received as of June 30, 2020. The single family mortgage loans with COVID modifications represent less than 1% of total loans. Of the 172 COVID loan modifications, 94% of the loans are located within the Washington metropolitan statistical area and 99% of the loans are located within Virginia, Maryland and the District of Columbia.

About John Marshall Bancorp, Inc.

John Marshall Bancorp, Inc. is the bank holding company for John Marshall Bank. John Marshall Bank is headquartered in Reston, Virginia with eight full-service branches located in Alexandria, Arlington, Loudoun, Prince William, Reston, Rockville, Tysons, and Washington, D.C. and one loan production office in Arlington, Virginia. The Company is dedicated to providing an exceptional customer experience and value to local businesses, business owners and consumers in the Washington D.C. Metro area. The Bank offers a comprehensive line of sophisticated banking products, services and a digital platform that rival those of the largest banks. Dedicated relationship managers serving as direct point-of-contact along with an experienced staff help achieve customer’s financial goals. Learn more at www.johnmarshallbank.com.

In addition to historical information, this press release contains certain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 which are based on certain assumptions and describe future plans, strategies and expectations of the Company. These forward-looking statements are generally identified by use of the words “believe,” “expect,” “intend,” “anticipate,” “estimate,” “project,” “will,” “should,” “may,” “view,” “opportunity,” “potential,” or similar expressions or expressions of confidence. The Company’s ability to predict results or the actual effect of future plans or strategies is inherently uncertain. Factors which could have a material adverse effect on the operations of the Company and its subsidiary include, but are not limited to the following: changes in interest rates, general economic conditions, public health crises (such as the governmental, social and economic effects of the novel coronavirus), levels of unemployment in the Bank’s lending area, real estate market values in the Bank’s lending area, future natural disasters, the level of prepayments on loans and mortgage-backed securities, legislative/regulatory changes, monetary and fiscal policies of the U.S. Government including policies of the U.S. Treasury and the Board of Governors of the Federal Reserve System, the quality or composition of the loan or investment portfolios, demand for loan products, deposit flows, competition, demand for financial services in the Company’s market area, accounting principles and guidelines, and other conditions which by their nature are not susceptible to accurate forecast, and are subject to significant uncertainty. These risks and uncertainties should be considered in evaluating forward-looking statements and undue reliance should not be placed on such statements. The Company does not undertake, and specifically disclaims any obligation, to publicly release the result of any revisions which may be made to any forward-looking statements to reflect events or circumstances after the date of such statements or to reflect the occurrence of anticipated or unanticipated events. Annualized, pro forma, projected and estimated numbers are used for illustrative purpose only, are not forecasts and may not reflect actual results.

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Chris Bergstrom (703) 584-0840

Source: John Marshall Bancorp, Inc.