John Marshall Bancorp, Inc. Reports Higher Net Interest Margin, Strong Loan Growth and Pristine Asset Quality

John Marshall Bancorp, Inc. (NASDAQ:JMSB) (the "Company"), parent company of John Marshall Bank (the "Bank"), reported its financial results for the three and twelve months ended December 31, 2023.

Selected Highlights

• Higher Net Interest Margin – Net interest margin was 2.12% for the three months ended December 31, 2023 compared to 2.08% for the three months ended September 30, 2023. During the third quarter, we repositioned the balance sheet by shedding $183.1 million of lower-yielding assets. During the fourth quarter, we continued to originate and reprice loans at generally higher yields and slow the rate of increase in our funding costs. As of December 31, 2023, the Company believes it is well-positioned for the lower interest rate environment implied by interest rate futures.
• Strong Loan Growth – Loans, net of unearned income, grew $39.8 million or 8.7% annualized from September 30, 2023 to December 31, 2023. Loans, net of unearned income, grew $90.2 million or 10.1% annualized from June 30, 2023 to December 31, 2023. The Company remains selective on credit and continues to pursue opportunities where we can obtain an appropriate risk-adjusted return. We continue to see new lending opportunities that meet our underwriting standards as some of our competitors have scaled back lending efforts.
• Pristine Asset Quality – For the seventeenth consecutive quarter, the Company had no nonperforming loans, no other real estate owned and no loans 30 days or more past due. There were no charge-offs during the quarter. The Company continues to adhere to strict underwriting standards and proactively manages the portfolio.
• Stable Profitability – Reported net income was $4.5 million for the three months ended December 31, 2023 and the three months ended June 30, 2023. Excluding the non-recurring loss on securities, net of tax and non-recurring taxes and penalties on the early surrender of Bank Owned Life Insurance policies (the "Restructuring"), previously disclosed in our July 21, 2023 earnings release, the Company's core net income (Non-GAAP) for each of the last three quarters was approximately $4.5 million during a challenging economic environment. The reported loss of $10.1 million for the three months ended September 30, 2023 resulted primarily from the Restructuring. The Company's balance sheet is well-positioned for falling rates.
• Competitive Shareholder Returns – From December 31, 2022 to December 31, 2023, the Company increased book value per share from $15.09 to $16.25. In addition to the $0.22 cash dividend paid in July 2023, total return to shareholders for 2023 was $1.38 or an increase of 9.2%.
• Well Capitalized – Each of the Bank's regulatory capital ratios is well in excess of the regulatory threshold to be considered well capitalized. The Bank's equity to assets and total risk-based capital ratios were 11.1% and 15.7%, respectively, as of December 31, 2023.
• Achieved SBA Preferred Lender Status – On December 4, 2023, the Company announced that it had been designated a preferred lender by the U.S. Small Business Administration ("SBA"). As an SBA preferred lender, the Company now has the authority and proven expertise to make loan decisions without direct approval from the SBA. This streamlined loan approval process will facilitate commercial loan and deposit growth. In addition, we expect to increase fee income through the sale of certain SBA loans.

Chris Bergstrom, President and Chief Executive Officer, commented, "2023 underscored the importance of consistency of purpose and a conservative balance sheet. If the current rate environment prevails through April 2024, this will be the longest inverted yield curve in the country's history. This has exerted significant pressures on community banks. John Marshall started and finished the year with a strong balance sheet as demonstrated by our robust capital position, spotless asset quality and ample liquidity. We continued cultivating clients and prospects, while some of our competitors chose to scale back or cease lending. Our underwriting remained steadfast and we booked loans where we could earn an appropriate return. We believe providing an unmatched customer experience, regardless of the economic cycle, differentiates us from our peers. While we were unable to produce a fifth consecutive year of record earnings, we de-risked the balance sheet with our July restructuring and increased our net interest margin and core earnings. We look forward to 2024 and having the balance sheet to capitalize on new opportunities and driving long-term shareholder value."

Balance Sheet, Liquidity and Credit Quality

Total assets were $2.24 billion at December 31, 2023, $2.30 billion at September 30, 2023 and $2.35 billion at December 31, 2022.

Total loans, net of unearned income, increased $70.5 million or 3.9% to $1.86 billion at December 31, 2023, compared to $1.79 billion at December 31, 2022 and increased $39.8 million during the quarter ended December 31, 2023 or 8.7% annualized from $1.82 billion at September 30, 2023. Detail on the loan growth can be seen in the attached tables.

The carrying value of the Company's fixed income securities portfolio was $265.5 million at December 31, 2023, $265.4 million at September 30, 2023 and $457.0 million at December 31, 2022. The reduction in the portfolio resulted primarily from the Restructuring. As of December 31, 2023, 96.1% of our bond portfolio was covered by the implied guarantee of the United States government or one of its agencies. At December 31, 2023, nearly 61.0% of the fixed income portfolio was invested in amortizing bonds, which provides the Company with a source of steady cash flow. At December 31, 2023, the fixed income portfolio had an estimated weighted average life of 4.3 years. The available-for-sale portfolio comprised approximately 64.0% of the fixed income securities portfolio and had a weighted average life of 3.0 years at December 31, 2023. The held-to-maturity portfolio comprised approximately 36.0% of the fixed income securities portfolio and had a weighted average life of 6.7 years at December 31, 2023. The Company did not purchase any fixed income securities during the three or twelve month periods ended December 31, 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 $638.9 million as of December 31, 2023 compared to $763.5 million as of December 31, 2022 and represented 28.5% and 32.5% of total assets, respectively. In addition to available secured borrowing capacity, the Bank had available federal funds lines of $100.0 million at December 31, 2023.

Total deposits were $1.91 billion at December 31, 2023, $1.98 billion at September 30, 2023 and $2.06 billion at December 31, 2022. Total deposits decreased $75.0 million or 3.8% when compared to September 30, 2023. Detail on the deposit activity can be seen in the attached tables. As of December 31, 2023, the Company had $634.1 million of deposits that were not insured or not collateralized by securities compared to $614.0 million at September 30, 2023. Deposits that were not insured or not collateralized by securities represented only 33.3% of total deposits at December 31, 2023 compared to 31.0% at September 30, 2023.

The Company obtained a $54.0 million advance from the Bank Term Funding Program ("BTFP") on May 15, 2023 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. Total borrowings as of December 31, 2023 consisted of subordinated debt totaling $24.7 million, the BTFP advance totaling $54.0 million, and federal funds purchased totaling $10 million. The Company did not have any Federal Home Loan Bank of Atlanta ("FHLB") advances outstanding as of December 31, 2023.

Shareholders' equity increased $17.1 million or 8.0% to $229.9 million at December 31, 2023 compared to $212.8 million at December 31, 2022. Book value per share was $16.25 as of December 31, 2023 compared to $15.09 as of December 31, 2022, an increase of 7.7%. The year-over-year change in book value per share was primarily due to the Company's earnings over the previous twelve months and decrease in accumulated other comprehensive loss, partially offset by increased share count from shareholder option exercises and restricted share award issuances and dividends paid. The decrease in accumulated other comprehensive loss was primarily attributable to the sale of certain available-for-sale investment securities in the July 2023 Restructuring and decreases in unrealized losses on our available-for-sale investment portfolio due to market value changes. Book value per share increased from $15.61 as of September 30, 2023 or 16.3% annualized.

The Bank's capital ratios at December 31, 2023 improved when compared to December 31, 2022 and remained well above regulatory thresholds for well-capitalized banks. As of December 31, 2023, the Bank's total risk-based capital ratio was 15.7%, compared to 15.6% at December 31, 2022 (GAAP). As outlined below, the Bank would continue to remain well above regulatory thresholds for well-capitalized banks at December 31, 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.

The Company recorded no charge-offs during the fourth quarter of 2023, the third quarter of 2023 or the fourth quarter of 2022. As of December 31, 2023, the Company had no non-accrual loans, no loans greater than 30 days past due and no other real estate owned assets.

At December 31, 2023, the allowance for loan credit losses was $19.5 million or 1.05% of outstanding loans, net of unearned income, compared to $20.0 million or 1.10% of outstanding loans, net of unearned income, at September 30, 2023. The decrease in the allowance as a percentage of outstanding loans, net of unearned income, was primarily a result of improved economic forecasts used in the quantitative portion of the model and an assessment of management's considerations of existing economic versus historical conditions combined with the continued strong credit performance of our loan portfolio segments.

At December 31, 2023, the allowance for credit losses on unfunded loan commitments was $0.6 million compared to $0.9 million at September 30, 2023. The decrease in the allowance for credit losses on unfunded loan commitments was primarily the result of the updated loss factors utilized on the funded loan portfolio and decreases in unfunded commitments during the quarter.

The Company did not have an allowance for credit losses on held-to-maturity securities as of December 31, 2023 or September 30, 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 as of December 31, 2023, demonstrating their strong debt-service-coverage and loan-to-value ratios.

Income Statement Review

Quarterly Results

The Company reported net income of $4.5 million for the fourth quarter of 2023, a decrease of $3.7 million when compared to $8.2 million for the fourth quarter of 2022.

Net interest income for the fourth quarter of 2023 decreased $5.5 million or 31.3% compared to the fourth quarter of 2022, driven primarily by the increase in costs of interest-bearing liabilities outpacing the increase in yield on interest-earning assets. The yield on interest earning assets was 4.68% for the fourth quarter of 2023 compared to 4.10% for the same period in 2022. The increase in yield on interest earning assets was primarily due to higher yields on the Company's loan portfolio and deposits in banks as a result of increases in interest rates subsequent to the fourth quarter of 2022. The cost of interest-bearing liabilities was 3.64% for the fourth quarter of 2023 compared to 1.53% for the same quarter in the prior year. The increase in the cost of interest-bearing liabilities was primarily due to a 2.11% increase in the cost of interest-bearing deposits as a result of the repricing of the Company's time deposits coupled with an increase in rates offered on money market, NOW and savings deposit accounts since the fourth quarter of 2022. The increase in the overall cost of interest-bearing liabilities in the fourth quarter of 2023 relative to the same period of the prior year is largely due to rate hikes totaling 5.25% by the Federal Reserve Bank since the beginning of 2022, which has increased cost of funds and compressed net interest margins across the banking industry. The annualized net interest margin for the fourth quarter of 2023 was 2.12% as compared to 3.05% for the same quarter of the prior year. The decrease in net interest margin was primarily due to the increase in cost of interest-bearing deposits, which was partially offset by an increase in yields on the Company's interest-earning assets. With a portion of the proceeds from the Restructuring being redeployed to higher yielding assets, the Company's net interest margin increased from the 2.08% reported in the third quarter 2023.

The Company recorded a $781 thousand release of provision for credit losses for the fourth quarter of 2023 compared to a provision of $175 thousand for the fourth quarter of 2022. The release of provision for credit losses during the fourth quarter of 2023 was primarily a result of improved economic forecasts used in the quantitative portion of the model and an assessment of management's considerations of existing economic versus historical conditions combined with the continued strong credit performance of our loan portfolio segments.

Non-interest income decreased $94 thousand during the fourth quarter of 2023 compared to the fourth quarter of 2022. The decrease in non-interest income was primarily due to a decrease in bank owned life insurance ("BOLI") income of $99 thousand due to the surrender of all BOLI policies as part of the Restructuring, decrease in swap fee income of $127 thousand and decreases in wire and other customer transaction based fees. These decreases were partially offset by increases in gains recorded on the sale of the guaranteed portion of SBA 7(a) loans totaling $81 thousand and a favorable variance of $61 thousand related to mark-to-market adjustments on investments related to the Company's nonqualified deferred compensation plan when compared to the fourth quarter of 2022.

Non-interest expense increased $105 thousand or 1.4% during the fourth quarter of 2023 compared to the fourth quarter of 2022 primarily due to increases in salaries and employee benefits, increases in FDIC insurance expense and increases in franchise tax expense. The increase in salaries and employee benefits was due to higher incentive compensation expense incurred by the Company. Incentive compensation accruals can fluctuate materially from quarter to quarter, based upon the Company's financial performance and conditions measured against, among other evaluation criteria, our strategic plan and budget. At the end of each year, the ultimate determination of the incentive compensation is approved by the Board of Directors. For the twelve months ended December 31, 2023, the percentage decrease in incentive compensation was commensurate with the percentage decrease in core income before taxes (Non-GAAP, see below for further detail). The increase in FDIC insurance expense resulted from the FDIC increasing the base assessment rate for all insured depository institutions. The increase in franchise tax expense was due to an increase in the Bank's equity as that is the basis the Commonwealth of Virginia uses to assess taxes on banking institutions. The decrease in furniture and equipment expense was due to lower software and equipment service expense due to contract renegotiation efforts. The decrease in occupancy expense of premises was due to a decrease in office rent as a result of the renegotiation of certain leases. The Company continues to analyze cost savings opportunities on existing leases and material contracts.

For the three months ended December 31, 2023, annualized non-interest expense to average assets was 1.31% compared to 1.27% for the three months ended December 31, 2022. The increase was primarily due to lower average assets when comparing the two periods.

For the three months ended December 31, 2023, the annualized efficiency ratio was 59.7% compared to 40.9% for the three months ended December 31, 2022. The increase was primarily due to a decrease in net interest income.

Year-to-Date Results

The Company reported net income of $5.2 million for the twelve months ended December 31, 2023, a decrease of $26.6 million when compared to the same period in 2022. This decrease was primarily attributable to the Restructuring, as previously discussed, that resulted in an after-tax loss of $14.6 million. Core net income (Non-GAAP) defined as reported net income excluding the non-recurring after-tax loss on securities sale and taxes paid in conjunction with the surrender of the Bank's BOLI policies resulting from the Restructuring, was $19.8 million, a decrease of $12.0 million when compared to the twelve months ended December 31, 2022. Reported (GAAP) and core (Non-GAAP) earnings per share, annualized return on average assets ("ROAA") and annualized return on average equity ("ROAE") were as follows:

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.

Net interest income for the twelve months ended December 31, 2023 decreased $19.9 million or 28.3% compared to the same period of 2022, driven primarily by the increase in costs of interest-bearing liabilities outpacing the increase in yield on interest-earning assets. The yield on interest earning assets was 4.41% for the twelve months ended December 31, 2023 compared to 3.77% for the same period in 2022. The increase in yield on interest earning assets was primarily due to higher yields on the Company's loan and investment portfolios and deposits in banks as a result of increases in interest rates subsequent to the third quarter of 2022. The cost of interest-bearing liabilities was 3.08% for the twelve months ended December 31, 2023 compared to 0.89% for the twelve months ended December 31, 2022. The increase in the cost of interest-bearing liabilities was primarily due to a 2.21% increase in the cost of interest-bearing deposits as a result of the repricing of the Company's time deposits coupled with an increase in rates offered on money market, NOW and savings deposit accounts since the fourth quarter of 2022. The annualized net interest margin for the twelve months ended December 31, 2023 was 2.22% as compared to 3.16% for the same period in the prior year. The decrease in net interest margin was primarily due to the increase in cost of interest-bearing deposits, which was partially offset by an increase in yields on the Company's interest-earning assets.

The Company recorded a $3.3 million release of provision for credit losses for the twelve months ended December 31, 2023 compared to $175 thousand provision for the twelve months ended December 31, 2022. The release of provision for credit losses during 2023 was primarily a result of changes in the Company's loss driver analysis, resulting from a periodic review of our assumptions and improved economic forecasts used in the quantitative portion of the model and assessment of management's considerations of existing economic versus historical conditions combined with the continued strong credit performance of our loan portfolio segments.

Non-interest income decreased $16.6 million during the twelve months ended December 31, 2023 compared to the same period in 2022. The decrease in non-interest income was primarily due to the Restructuring that resulted in a loss of $17.1 million. Core non-interest income (Non-GAAP) increased $483 thousand primarily due to favorable variances of $671 thousand as a result of mark-to-market adjustments on investments related to the Company's nonqualified deferred compensation plan. The Company also had an increase in other service charges and fee income of $182 thousand primarily as a result of penalty fee income recognized on the early withdrawal of certificates of deposit, and gains recorded on the sale of the guaranteed portion of SBA 7(a) loans totaling $131 thousand. These increases were partially offset by a decrease in BOLI income of $320 thousand due to the surrender of all BOLI policies as part of the Restructuring.

Non-interest expense decreased $1.1 million or 3.3% during the twelve months ended December 31, 2023 compared to the same period in 2022 primarily due to decreases in salaries and employee benefits expense. The decrease in salaries and employee benefits was primarily due to a reduction in incentive related compensation accruals year-over-year. The decrease in other expense was the result of a favorable verdict received by the Company on a multi-year legal matter that was resolved during the year and lower legal and consulting expenses, partially offset by increases in FDIC insurance expense, franchise tax expense and marketing expense. The increase in FDIC insurance expense resulted from the FDIC increasing the base assessment rate for all insured depository institutions. The increase in franchise tax expense was due to an increase in the Bank's equity as that is the basis the Commonwealth of Virginia uses to assess taxes on banking institutions. The increase in marketing expense was due to increased marketing and promotional activity. The decrease in occupancy expense of premises was due to a decrease in office rent as a result of the renegotiation of certain leases. The decrease in furniture and equipment expense was due to lower depreciation expense on fixed assets and lower software and equipment service expense due to contract renegotiation efforts.

For the twelve months ended December 31, 2023, annualized non-interest expense to average assets was 1.33% compared to 1.40% for the twelve months ended December 31, 2022. The decrease was primarily due to lower overhead costs as a result of continued cost consciousness.

For the twelve months ended December 31, 2023, the efficiency ratio was 86.7% primarily due to the non-recurring securities loss on sale recorded in connection with the Restructuring. Excluding the effects of the Restructuring, the core efficiency ratio (Non-GAAP) was 58.5% compared to 44.2% for the twelve months ended December 31, 2022. The increase was primarily due to a decrease in net interest income, which more than offset the increase in core non-interest income (Non-GAAP) and decrease in non-interest expense.

Explanation of Non-GAAP Financial Measures

This release contains financial information determined by methods other than in accordance with GAAP. Management believes that the supplemental non-GAAP information provides a better comparison of the impact of unrealized losses in the Company's bond portfolio on the Bank's regulatory capital ratios and period-to-period operating performance, respectively. Additionally, the Company believes this information is utilized by regulators and market analysts to evaluate a company's financial condition and therefore, such information is useful to investors. Non-GAAP measures used in this release consist of the following:

• The Adjusted Bank regulatory capital ratios in the hypothetical scenario where the entire bond portfolio was sold at fair market value and the losses realized.
• Core non-interest income, core income before taxes, core income tax expense, core net income, core earnings per share (basic and diluted), core return on average assets, core return on average equity, core non-interest income as a percentage of average assets and core efficiency ratio, which excludes the impact of losses recognized in the Restructuring.

These disclosures should not be viewed as a substitute for financial results in accordance with GAAP, nor are they necessarily comparable to non-GAAP performance measures which may be presented by other companies. Please refer to the Reconciliation of Certain Non-GAAP Financial Measures table for a reconciliation of these non-GAAP measures to the most directly comparable GAAP measure.

About John Marshall Bancorp, Inc.

John Marshall Bancorp, Inc. is the bank holding company for John Marshall Bank. The Bank is headquartered in Reston, Virginia with eight full-service branches located in Alexandria, Arlington, Loudoun, Prince William, Reston, and Tysons, Virginia, as well as Rockville, Maryland, and Washington, D.C. The Bank is dedicated to providing exceptional value, personalized service and convenience to local businesses and professionals in the Washington D.C. Metro area. The Bank offers a comprehensive line of sophisticated banking products and services that rival those of the largest banks along with experienced staff to help achieve customers' financial goals. Dedicated Relationship Managers serve as direct points-of-contact, providing subject matter expertise in a variety of niche industries including Charter and Private Schools, Government Contractors, Health Services, Nonprofits and Associations, Professional Services, Property Management Companies and Title Companies. Learn more at www.johnmarshallbank.com.

In addition to historical information, this press release contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 that 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. Our 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 the Bank include, but are not limited to, the following: the concentration of our business in the Washington, D.C. metropolitan area and the effect of changes in the economic, political and environmental conditions on this market; adequacy of our allowance for credit losses; deterioration of our asset quality; future performance of our loan portfolio with respect to recently originated loans; the level of prepayments on loans and mortgage-backed securities; liquidity, interest rate and operational risks associated with our business; changes in our financial condition or results of operations that reduce capital; our ability to maintain existing deposit relationships or attract new deposit relationships; changes in consumer spending, borrowing and savings habits; inflation and changes in interest rates that may reduce our margins or reduce the fair value of financial instruments; changes in the 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; additional risks related to new lines of business, products, product enhancements or services; increased competition with other financial institutions and fintech companies; adverse changes in the securities markets; changes in the financial condition or future prospects of issuers of securities that we own; our ability to maintain an effective risk management framework; changes in laws or government regulations or policies affecting financial institutions, including changes in regulatory structure and in regulatory fees and capital requirements; compliance with legislative or regulatory requirements; results of examination of us by our regulators, including the possibility that our regulators may require us to increase our allowance for credit losses or to write-down assets or take similar actions; potential claims, damages, and fines related to litigation or government actions; the effectiveness of our internal controls over financial reporting and our ability to remediate any future material weakness in our internal controls over financial reporting; geopolitical conditions, including acts or threats of terrorism and/or military conflicts, or actions taken by the U.S. or other governments in response to acts or threats of terrorism and/or military conflicts, negatively impacting business and economic conditions in the U.S. and abroad; the effects of weather-related or natural disasters, which may negatively affect our operations and/or our loan portfolio and increase our cost of conducting business; public health events (such as COVID-19), and of governmental and societal responses thereto; technological risks and developments, and cyber threats, attacks, or events; the additional requirements of being a public company; changes in accounting policies and practices; our ability to successfully capitalize on growth opportunities; our ability to retain key employees; deteriorating economic conditions, either nationally or in our market area, including higher unemployment and lower real estate values; implications of our status as a smaller reporting company and as an emerging growth company; and other factors discussed in the Company's reports (such as our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q and Current Reports on Form 8-K) filed with the Securities and Exchange Commission. 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.