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Item 7.Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion and analysis of the consolidated financial condition and results of operations of the Company and its subsidiary should be read in conjunction with the consolidated financial statements and related notes presented in Item 8, Financial Statements and Supplementary Data, of this Annual Report on Form 10-K. Historical results of operations and the percentage relationships among any amounts included, and any trends that may appear, may not be indicative of results of operations or trends in operations for any future periods.

Overview

We are a bank holding company headquartered in Reston, Virginia primarily serving the Washington, D.C. metropolitan area. The material business operations of our organization are performed through the Bank. As a result, the discussion and analysis within this section primarily relate to activities conducted at the Bank.

As with most community banks, the Bank derives a significant portion of its income from interest received on loans and investments. The Bank’s primary source of funding is deposits, both interest-bearing and non-interest-bearing. To account for credit risk inherent in all loans, the Bank maintains an allowance for loan losses to absorb probable losses on existing

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loans that may become uncollectible. The Bank establishes and maintains this allowance by recording a provision for loan losses against earnings. In addition to net interest income, the Bank also generates income through service charges on deposits, insurance commission income, income from bank owned life insurance, and merchant services fee income. In order to maintain its operations, the Bank incurs various operating expenses which are further described within the “Results of Operations” later in this section.

As of December 31, 2022, the Company had total consolidated assets of $2.35 billion, total loans net of unearned income of $1.79 billion, total deposits of $2.07 billion and total shareholders’ equity of $212.8 million.

Critical Accounting Policies and Estimates

The Company’s accounting and reporting policies conform to GAAP, as well as general practices within the banking industry. Application of these principles requires management to make estimates, assumptions, and judgments that affect the amounts reported in the financial statements and accompanying notes. These estimates, assumptions, and judgments are based on information available as of the date of the financial statements; accordingly, as this information changes, the financial statements may reflect different estimates, assumptions, and judgments. Certain policies inherently rely more extensively on the use of estimates, assumptions, and judgments and as such may have a greater possibility of producing results that could be materially different than originally reported.

The following is a discussion of the critical accounting policy and significant estimate that require us to make complex and subjective judgments. Additional information about this policy can be found in Note 1 of our consolidated financial statements included in Item 8 of this Form 10-K.

Allowance for Loan Losses

The allowance for loan losses is established as losses are estimated to have occurred through a provision for loan losses charged to earnings. Loan losses are charged off when management believes the collectability of a loan balance is unlikely, which reduces the allowance. Loans are generally written down to the estimated net realizable value of the underlying collateral when the loan is 180 days past due. Subsequent recoveries, if any, are credited to the allowance.

The allowance for loan losses is evaluated on a regular basis by management and is based upon management’s periodic review of the collectability of the loans by segment in light of historical experience, the nature and volume of the loan portfolio, adverse situations that may affect the borrower’s ability to repay, estimated value of any underlying collateral and prevailing economic conditions. This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available.

The allowance consists of specific, general and unallocated components. The specific component relates to loans that are classified as impaired. For such loans that are classified as impaired, an allowance is established when the discounted cash flows (or collateral value or observable market price) of the impaired loan is lower than the carrying value of that loan. The general component covers nonimpaired loans and is based on historical loss experience adjusted for qualitative factors. Qualitative factors used for each segment include an analysis of the levels of and trends in delinquencies, nonaccrual loans, and watch list loans; trends in concentrations, volume and term of loans; effects of any changes in lending policies and practices; experience, ability, and depth of management; national and local economic trends and conditions; and any other factor, as deemed appropriate. An unallocated component is maintained to cover uncertainties that could affect management’s estimate of probable losses. The unallocated component of the allowance reflects the margin of imprecision inherent in the underlying assumptions used in the methodologies for estimating specific and general losses in the portfolio.

A loan is considered impaired when, based on current information and events, it is probable that the Company will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Factors considered by management in determining impairment include payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record, and the amount of the shortfall in relation to the principal and interest owed. Impairment is measured on

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a loan-by-loan basis for commercial, construction, and commercial mortgage loans by either the present value of expected future cash flows discounted at the loan’s effective interest rate, the loan’s obtainable market price, or the fair value of the collateral if the loan is collateral dependent.

Large groups of smaller balance homogeneous loans are collectively evaluated for impairment. Accordingly, the Company does not separately identify individual consumer loans for impairment disclosures unless the loan has been modified in a troubled debt restructuring.

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Selected Financial Data

The following table contains selected historical consolidated financial data as of the dates and for the periods shown. The selected balance sheet data as of December 31, 2022 and 2021 and the selected income statement data for the years ended December 31, 2022 and 2021 have been derived from our audited consolidated financial statements included elsewhere in this Form 10-K and should be read in conjunction with the other information contained in this Form 10-K, including the information contained within this “Item 7 – Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Item 8 – Financial Statements and Supplementary Data.”

Balance Sheet Data:

Asset Quality Data:

Allowance for loan losses to nonperforming loans NM NM

Non-performing assets to total assets 0.00 % 0.00 %

Non-performing loans to total loans 0.00 % 0.00 %

Capital Ratios (Bank level):

Total risk-based capital ratio 15.6 % 15.3 %

Tier 1 risk-based capital ratio 14.4 % 14.0 %

Common equity tier 1 ratio 14.4 % 14.0 %

Equity-to-total assets ratio 10.0 % 10.8 %

Income Statement Data:

Interest and dividend income $ 84,066 $ 74,119

Provision for loan losses 175 3,105

Shares Outstanding and Per Share Data:

Earnings per share, basic $ 2.27 $ 1.87

Earnings per share, diluted $ 2.25 $ 1.83

Performance Ratios:

Return on average assets ("ROAA") 1.40 % 1.25 %

Return on average equity ("ROAE") 15.18 % 12.90 %

Net interest margin(2) 3.16 % 3.29 %

Efficiency ratio 44.2 % 47.7 %

Non-interest expense to average assets 1.40 % 1.58 %

NM – Not meaningful

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Financial Overview

General

The following is a summary of the Company’s financial highlights for the year ended December 31, 2022.

Results of Operations – Years Ended December 31, 2022 and December 31, 2021

Overview

The Company reported record net income of $31.8 million for the year ended December 31, 2022, a $6.3 million or 24.9% increase over the $25.5 million reported for the same period of 2021.

Earnings per diluted share for the year ended December 31, 2022 were $2.25, a 22.9% increase over the $1.83 reported for the same period of 2021.

Net interest income increased $4.5 million to $70.4 million for the year ended December 31, 2022, compared to $65.9 million for the year ended December 31, 2021. Growth in our loan and investment portfolios resulted in an increase in net interest income of 6.8% for the year ended December 31, 2022 when compared to the year ended December 31, 2021.

The Company recorded a $175 thousand provision for loan losses for the year ended December 31, 2022, compared to a $3.1 million provision for the year ended December 31, 2021. The decrease in the provision for loan losses as compared to the same period in 2021 primarily reflects changes in the Company’s evaluation of environmental factors impacting the Company’s loan portfolio during 2022. During 2021, the environmental or qualitative factor allocations within the allowance for loan losses were adjusted to account for the risks to certain industry subgroups and portfolio segments within our portfolio as a result of the continuing COVID-19 pandemic. The decrease in the provision for loan losses primarily reflects an estimated decrease in uncertainty as it relates to the estimated impact of the COVID-19 pandemic on the Company’s loan portfolio and the broader economy. Additional discussion of the provision for loan losses is included below under the heading Provision Expense.

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Non-interest income decreased $28 thousand or 1.6% during the year ended December 31, 2022 compared to the year ended December 31, 2021. The decrease in non-interest income was primarily due to mark-to-market adjustments of $(548) thousand resulting from a reduction in value of investments related to the Company’s nonqualified deferred compensation plan. The decrease in non-interest income was partially offset by a non-recurring BOLI related benefit claim realized and interest rate swap fee income recognized, as well as increases in insurance commissions and interchange and other fee income due to higher production and increased customer activity, respectively. During the year ended December 31, 2021, the Company also realized a $10 thousand gain on a called security. Excluding the impacts of the gain on the called security, mark-to-market adjustments, and BOLI related benefit claim, non-interest income increased $373 thousand or 24.6%.

Non-interest expense decreased $388 thousand or 1.2% during the year ended December 31, 2022 compared to the year ended December 31, 2021. The decrease in non-interest expense was primarily due to non-recurring legal and professional fees incurred in 2021, as well as decreases in marketing expense, FDIC insurance fees, and salaries and benefits expense. The decrease in marketing expense was primarily due to lower marketing vendor related expenses. The decrease in FDIC insurance fees was primarily due to lower insurance premiums. The decrease in salaries and benefits expense was primarily due to lower accruals related to deferred compensation and employer health insurance fees. The decrease in non-interest expense was partially offset by increases in state franchise taxes as a result of an increase in the Bank’s equity year-over-year and data processing fees due to new investments in technology solutions to support our operations.

The ROAA for the years ended December 31, 2022 and 2021 was 1.40% and 1.25%, respectively. The ROAE for the years ended December 31, 2022 and 2021 was 15.18% and 12.90%, respectively.

Net Interest Income and Net Interest Margin

Net interest income is the excess of interest earned on loans and investments over the interest paid on deposits and borrowings, and is the Company’s primary revenue source. Net interest income is affected by overall balance sheet growth, changes in interest rates and changes in the mix of investments, loans, deposits and borrowings. The Company’s interest-earning assets include loans, investment securities and interest-bearing deposits in other banks, while our interest-bearing liabilities include interest-bearing deposits and borrowings. Net interest margin represents the difference between interest received and interest paid as a percentage of average total interest-earning assets. Management seeks to maximize net interest income without exposing the Company to an excessive level of interest rate risk through management’s asset and liability management policies. Interest rate risk is managed by monitoring the pricing, maturity, and repricing options of all classes of interest-bearing assets and liabilities. Management expects net interest income and net interest margin to fluctuate based on changes in interest rates and changes in the amount and composition of the Company’s interest-earning assets and interest-bearing liabilities.

The following table presents the annual average balance for each principal balance sheet category, and the amount of interest income or expense associated with that category, as well as corresponding average yields earned and rates paid for the years ended December 31, 2022 and 2021.

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Average Balance Sheets and Interest Rates on Interest-Earning Assets and Interest-Bearing Liabilities

Interest Income / Average Interest Income / Average

Assets:

Securities:

Loans, net of unearned income(2):

Total non-interest earning assets 36,624 31,132

Liabilities & Shareholders’ Equity:

Interest-bearing deposits

Federal funds purchased 386 15 3.89 % — — —

Total liabilities and shareholders’ equity $ 2,275,767 $ 2,043,619

Net interest spread 2.88 % 3.10 %

Net interest margin as presented above is calculated by dividing tax-equivalent net interest income by total average earning assets. Net interest income, on a tax equivalent basis, is a financial measure that the Company believes provides a more accurate picture of the interest margin for comparative purposes. Tax-equivalent net interest income is calculated by adding the tax benefit on certain securities and loans, whose interest is tax-exempt, to total interest income then subtracting total interest expense. The following table, “Tax-Equivalent Net Interest Income,” reconciles net interest income to tax-equivalent net interest income, which is a non-GAAP measure.

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Tax-Equivalent Net Interest Income

Year Ended

GAAP Financial Measurements:

Interest Income - Securities and Other Interest-Earning Assets 9,785 4,704

Interest Expense - Borrowings 1,867 1,612

Non-GAAP Financial Measurements:

Add: Tax Benefit on Tax-Exempt Interest Income - Loans 209 194

Add: Tax Benefit on Tax-Exempt Interest Income - Securities 32 32

Total Tax Benefit on Tax-Exempt Interest Income (1) $ 241 $ 226

Tax-Equivalent Net Interest Income $ 70,662 $ 66,134

(1) Tax benefit was calculated using the federal statutory tax rate of 21%.

Net interest income increased $4.5 million or 6.8% to $70.7 million on a fully tax-equivalent basis for the year ended December 31, 2022. The increase in net interest income was driven by an increase in the average balance of interest-earning assets, and to a lesser extent, an increase in yield on interest-earning assets as a result of rising interest rates during 2022.

On a fully tax-equivalent basis, the net interest margin was 3.16% for the year ended December 31, 2022, compared to 3.29% for the year ended December 31, 2021. The decrease in net interest margin was primarily due to an increase in the cost of interest-bearing liabilities, which more than offset the increase in yield on loans, investments, and interest-bearing deposits in other banks. The cost of interest-bearing liabilities was 0.89% for the year ended December 31, 2022 compared to 0.59% for the same period of the prior year. The increase in the cost of interest-bearing liabilities was primarily due to higher interest expense on deposits and our subordinated debt. The increase in interest expense on subordinated debt was primarily the result of carrying the $25.0 million fixed-to-floating 5.75% subordinated notes that were issued on July 6, 2017 (“2017 notes”) and the $25.0 fixed-to-floating 5.25% subordinated note issued on June 15, 2022 (the “2022 note”) from June 15, 2022 until July 15, 2022, when the 2017 notes were redeemed, coupled with the accelerated amortization of $272 thousand in deferred issuance costs associated with our 2017 notes. The 2022 note currently bears interest at a fixed rate of 5.25% compared to the fixed rate of 5.75% paid on the 2017 notes that were redeemed on July 15, 2022. Increases in rates offered on NOW and money market deposit accounts and the repricing of our time deposits during the year ended December 31, 2022 also contributed to the increase in the cost of interest-bearing liabilities.

The loan portfolio’s yield for the year ended December 31, 2022 was 4.44% compared to 4.36% for the year ended December 31, 2021. The increase in yield on the Company’s loan portfolio was primarily due to an increase in interest rates during 2022.

The investment securities portfolio’s yield for the year ended December 31, 2022 was 1.87% compared to 1.63% for the year ended December 31, 2021. The increase of 0.24% was primarily due to higher yields on investment securities purchased during 2022.

The yield on interest-bearing deposits due from banks for the year ended December 31, 2022 was 1.28% compared to 0.13% for the year ended December 31, 2021. The increase of 1.15% was primarily due to an increase in the federal funds rate during the year ended December 31, 2022 when compared to the federal funds rate during the year ended December 31, 2021.

The following table presents the effects of changing rates and volumes on net interest income for the periods indicated. The rate column shows the effects attributable to changes in rate (changes in rate multiplied by prior volume). The volume column shows the effects attributable to changes in volume (changes in volume multiplied by prior rate). The net column

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represents the sum of the prior columns. For purposes of this table, changes attributable to both rate and volume, which cannot be segregated, have been allocated to volume.

Rate/Volume Analysis

For the Year Ended December 31,

Increase

(Decrease) Due to

(Dollars in thousands) Volume Rate Total Increase (Decrease)

Interest-earning Assets:

Securities:

Tax-exempt(1) — — —

Loans, net of unearned income:

Total loans, net of unearned income(2) $ 3,551 $ 1,330 $ 4,881

Interest-bearing deposits in other banks $ (229) $ 1,536 $ 1,307

Interest-bearing Liabilities:

Interest-bearing deposits:

Total interest-bearing deposits $ 946 $ 4,233 $ 5,179

Federal funds purchased 15 — 15

Other borrowed funds (83) — (83)

Total interest-bearing liabilities $ 1,017 $ 4,417 $ 5,434

Change in net interest income $ 5,348 $ (820) $ 4,528

(2)The Company did not have any loans on non-accrual as of December 31, 2022 or December 31, 2021.

Interest Income

Interest income increased by $10.0 million or 13.4% to $84.3 million on a fully tax-equivalent basis for the year ended December 31, 2022 compared to $74.3 million for the year ended December 31, 2021, driven by both an increase in volume and rates on interest-earning assets. The increase in volume of average interest-earning assets was primarily attributable to the Company’s loan and investment portfolios. The increase in rate on interest-earning assets was primarily attributable to interest-bearing deposits due from banks, the loan portfolio, and to a lesser extent, the investment portfolio.

Fully tax-equivalent interest income on loans increased by approximately $4.9 million as a result of volume growth and an increase in rate. Average loans increased approximately $80.1 million between the years ended December 31, 2022 and December 31, 2021, which was primarily attributable to growth in the investor real estate and residential mortgage portfolios.

Fully tax-equivalent interest income on investment securities increased by approximately $3.8 million as a result of volume growth and rate increases. Average investment securities increased approximately $165.8 million between the years ended December 31, 2022 and December 31, 2021. The increase in investment securities was funded primarily by PPP loan payoffs and deposit growth.

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The increase in rates on loans, investment securities, and interest-bearing deposits in other banks was primarily attributable to an increase in benchmark interest rates throughout 2022.

Interest Expense

Interest expense increased by $5.4 million or 66.2% to $13.6 million for the year ended December 31, 2022 compared to $8.2 million for the year ended December 31, 2021, primarily due to an increase in rates and, to a lesser extent, volume of deposits. The increase in rates was primarily a result of the repricing of the Company’s time deposits coupled with an increase in rates offered on NOW and money market deposit accounts during the year ended December 31, 2022. Our overall cost of funds benefited from an increase in average non-interest bearing deposits to total average deposits, which increased from 25.1% for the year ended December 31, 2021 to 25.7% for the year ended December 31, 2022.

Provision Expense

The Company maintains an allowance for loan losses that represents management’s best estimate of probable losses inherent in the loan portfolio as of each balance sheet date. Both the amount of the provision, which is charged to earnings, and the level of the allowance for loan losses are impacted by many factors, including general, industry-specific, and geographic-specific economic conditions, current and historical credit losses, conditions specific to individual borrowers, the value of collateral underlying secured loans, among other factors.

The Company recorded a $175 thousand provision for loan losses for the year ended December 31, 2022, compared to a $3.1 million provision for the year ended December 31, 2021. The decrease in the provision for loan losses as compared to the same period in 2021 primarily reflects changes in the Company’s evaluation of environmental factors impacting the Company’s loan portfolio during 2022. During 2021, the environmental or qualitative factor allocations within the allowance for loan losses were adjusted to account for the risks to certain industry subgroups and portfolio segments within our portfolio as a result of the continuing COVID-19 pandemic. The decrease in the provision for loan losses primarily reflects a decrease in uncertainty as it relates to the estimated impact of the COVID-19 pandemic on the Company’s loan portfolio and the broader economy.

See “Asset Quality” section below for additional information on the credit quality of the loan portfolio.

Non-interest Income

The Company’s recurring sources of non-interest income consist primarily of interchange income, bank owned life insurance income, service charges on deposit accounts and insurance commissions. Generally speaking, loan fees are included in interest income on the loan portfolio and not reported as non-interest income.

The following table summarizes non-interest income for the years ended December 31, 2022 and December 31, 2021.

Service charges on deposit accounts

Overdrawn account fees $ 88 $ 76

Account service fees 236 186

Other service charges and fees

Other charges and fees 247 98

Bank owned life insurance 544 411

Gains on securities — 10

Net gains on premises and equipment — 29

Insurance commissions 382 284

Other operating income (loss) (215) 246

Total non-interest income $ 1,691 $ 1,719

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$(548) thousand resulting from a reduction in value of investments related to the Company’s nonqualified deferred compensation plan. The decrease in non-interest income was partially offset by a non-recurring BOLI related benefit claim realized and interest rate swap fee income recognized, as well as increases in insurance commissions and interchange and other fee income due to higher production and increased customer activity, respectively. During the year ended December 31, 2021, the Company also realized a $10 thousand gain on a called security. Excluding the impacts of the gain on the called security, mark-to-market adjustments, and BOLI related benefit claim, non-interest income increased $373 thousand or 24.6%.

Non-interest Expense

Generally, non-interest expense is composed of all employee expenses and costs associated with operating our facilities, obtaining and retaining customer relationships and providing banking services. The largest component of non-interest expense is salaries and employee benefits. Non-interest expense also includes operational expenses, such as occupancy and equipment expenses, data processing expenses, professional fees, advertising expenses and other general and administrative expenses, including FDIC assessments, and Virginia state franchise taxes.

The following table summarizes non-interest expense for the years ended December 31, 2022 and December 31, 2021.

Salaries and employee benefits expense $ 20,190 $ 20,411

Occupancy expense of premises 1,893 1,985

Furniture and equipment expenses 1,325 1,436

Advertising expense 193 395

Supplies, printing, and postage 133 181

Other operating expenses 664 682

Income Taxes

Income tax expense increased $1.5 million or 21.5% to $8.3 million for the year ended December 31, 2022 compared to $6.8 million for the year ended December 31, 2021. Our effective tax rate for the year ended December 31, 2022 was 20.6%, compared to 21.1% for the same period ended December 31, 2021. The decrease in our effective tax rate was primarily due to tax benefits realized in connection with the exercise of certain nonqualified stock options during the year ended December 31, 2022.

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Discussion and Analysis of Financial Condition – Years Ended December 31, 2022 and December 31, 2021

Assets, Liabilities, and Shareholders’ Equity

The Company’s total assets increased $198.9 million or 9.3% to $2.35 billion at December 31, 2022 compared to $2.15 billion at December 31, 2021. The increase in total assets is primarily attributable to an increase in loans net of unearned income of $123.0 million and an increase in the carrying value of the Company’s investment portfolio of $111.9 million. The increase was partially offset due to a decrease in interest-bearing deposits in banks of $47.9 million.

The Company’s total liabilities increased $194.6 million or 10.0% to $2.14 billion at December 31, 2022 compared to $1.94 billion at December 31, 2021. The increase in total liabilities was primarily attributable to an increase in total deposits of $186.2 million.

The Company’s total shareholders’ equity increased $4.3 million or 2.1% to $212.8 million at December 31, 2022 compared to $208.5 million at December 31, 2021. The increase was primarily due to increases in retained earnings and additional paid-in capital, which were partially offset by the increase in the unrealized loss on our available-for-sale investment portfolio and the one-time special cash dividend declared during the first quarter of 2022. Total common shares outstanding increased from 13,745,598, including 75,826 shares relating to unvested stock awards, at December 31, 2021, to 14,098,986, including 55,185 shares relating to unvested stock awards, at December 31, 2022. The year-over-year increase in shares outstanding was the result of exercises of stock options and additional grants of restricted stock awards. Excluding accumulated other comprehensive loss, which primarily includes the impact of unrealized losses on the Company’s available-for-sale investment portfolio, total shareholders’ equity increased $32.6 million or 15.6% from December 31, 2021 to December 31, 2022.

Investment Securities

The Company maintains a primarily fixed income investment securities portfolio that had a total carrying value of $457.0 million at December 31, 2022 and $344.8 million at December 31, 2021. The investment portfolio is used as a source of liquidity, interest income, and credit risk diversification, as well as to manage rate sensitivity and provide collateral for secured public funds. Investment securities are classified as available-for-sale or held-to-maturity based on management’s investment strategy and management’s assessment of the intent and ability to hold the securities until maturity. Investment securities that we may sell prior to maturity in response to changes in management’s investment strategy, liquidity needs, interest rate risk profile or for other reasons are classified as available-for-sale. The Company also had restricted stock and equity securities within its investment securities portfolio with total carrying values of $4.4 million and $2.1 million, respectively, as of December 31, 2022 and $5.0 million and $1.9 million, respectively, as of December 31, 2021. Restricted stock is comprised of investments in Federal Home Loan Bank stock, Federal Reserve Bank stock, and Community Bankers’ Bank stock. The Company’s equity securities consist of mutual funds held in a trust and were obtained for the purpose of economically hedging changes in the Company’s nonqualified deferred compensation liability.

The Company purchased $207.9 million of investment securities during 2022, which were comprised of $151.1 million of mortgage-backed securities, $32.3 million of U.S. Treasuries, $12.9 million of collateralized mortgage obligation securities, $9.6 million of U.S. government and federal agency securities, and $2.0 million of corporate bonds. The Company had $59.9 million in maturities, calls and principal repayments on securities during 2022, which is comprised of $41.1 million of mortgage-backed securities, $12.0 million of collateralized mortgage obligation securities, $5.8 million of U.S. government and federal agency securities and $1.0 million in municipal securities.

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The following table summarizes the amortized cost and fair value of the Company’s primarily fixed income investment portfolio as of December 31, 2022 and December 31, 2021, respectively.

Amortized Fair Amortized Fair

(Dollars in thousands) Cost Value Cost Value

Held-to-maturity

Available-for-sale

In the prevailing rate environments as of both December 31, 2022 and December 31, 2021, the Company’s investment portfolio had an estimated weighted average remaining life of approximately 4.5 years. The Company’s available-for-sale investment portfolio had an estimated weighted average remaining life of approximately 3.8 years and 4.1 years in the prevailing rate environments as of December 31, 2022 and December 31, 2021, respectively.

The following table summarizes the maturity composition of our investment securities as of December 31, 2022, including the weighted average yield of each maturity band. Maturities are based on the final contractual payment date, and do not reflect the effect of scheduled principal repayments, prepayments, or early redemptions that may occur. The weighted-average yield below represents the effective yield for the investment securities and is calculated based on the amortized cost of each security.

Amortized Fair Weighted-Average

(Dollars in thousands) Cost Value Yield

Held-to-maturity

Due in one year or less $ — $ — —

Due after one year through five years 5,208 4,474 0.94 %

Available-for-sale

Loan Portfolio

Gross loans net of unearned income increased $123.0 million or 7.4% to $1.79 billion as of December 31, 2022 compared to $1.67 billion as of December 31, 2021. Excluding PPP loans, gross loans held for investment net of unearned income

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increased $190.6 million or 11.9% from December 31, 2021 to December 31, 2022. PPP loans held for investment net of unearned income totaled $132 thousand at December 31, 2022, a decrease from $67.7 million at December 31, 2021.

The following table presents the Company’s composition of loans held for investment, net of deferred fees and costs, in dollar amounts and as a percentage of total gross loans as of December 31, 2022 and December 31, 2021.

(Dollars in thousands) Amount Percent Amount Percent

Real Estate Loans:

Commercial - Non Real Estate:

Consumer - Non-Real Estate:

Allowance for loan losses (20,208) (20,032)

Net deferred loan costs 4,060 915

The following table summarizes the contractual maturities of the loans as of December 31, 2022 by loan type. Maturities are based on the final contractual payment date, and do not reflect the effect of scheduled principal repayments, prepayments, or early redemptions that may occur. The table also summarizes the fixed and floating rate composition of loans held for investment for contractual maturities greater than one year.

After 1 After 5

Year years Maturing

Within 1 Within 5 Within 15 After 15

(Dollars in thousands) Year Years Years Years Total

Real Estate Loans:

Commercial - Non-Real Estate:

Consumer - Non-Real Estate:

For Maturities Over One Year:

Asset Quality

The Company maintains policies and procedures to promote sound underwriting and mitigate credit risk. The Chief Credit Officer is responsible for establishing credit risk policies and procedures, including underwriting and hold guidelines and credit approval authority, and monitoring credit exposure and performance of the Company’s lending-related transactions.

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The Company’s asset quality remained strong during the year ended December 31, 2022. The Company did not have any nonperforming assets, which includes nonperforming loans and OREO, as of December 31, 2022 or December 31, 2021. As a result, the Company did not have any nonperforming loans, which consists of loans that are 90 days or more past due or loans placed on nonaccrual as of December 31, 2022 or December 31, 2021.

The Company did not have any nonaccrual loans as of December 31, 2022 or December 31, 2021 nor were there any loans placed on nonaccrual during those periods. A loan is placed on nonaccrual status when (i) the Company is advised by the borrower that scheduled principal or interest payments cannot be met, (ii) when management’s best judgment indicates that payment in full of principal and interest can no longer be expected, or (iii) when any such loan or obligation becomes delinquent for 90 days, unless it is both well-secured and in the process of collection. As a result, the Company did not have any interest income that would have been recognized on nonaccrual loans for the years ended December 31, 2022 or December 31, 2021.

The Company may, for economic or legal reasons related to a borrower’s financial condition, grant a concession to the borrower that it would not otherwise consider, which results in the related loan being classified as a TDR. All modifications are evaluated by management on a loan-by-loan basis to determine whether the loan modification constitutes a TDR. Total TDRs were $418 thousand and $549 thousand as of December 31, 2022 and December 31, 2021, respectively, and were performing in accordance with their modified terms as of those dates.

The following table summarizes the Company’s asset quality as of December 31, 2022 and December 31, 2021.

Nonaccrual loans $ — $ —

Loans past due 90 days and accruing interest — —

Other real estate owned and repossessed assets — —

Total nonperforming assets $ — $ —

Allowance for loan losses to nonperforming assets NM NM

Nonaccrual loans to gross loans 0.00 % 0.00 %

Nonperforming assets to period end loans and OREO 0.00 % 0.00 %

NM – Not meaningful

Allowance for Loan Losses

Refer to the discussion in the “Critical Accounting Policies and Estimates” section above for management’s approach to estimating the allowance for loan losses.

Gross charged-off loans were $1 thousand and $91 thousand for the years ended December 31, 2022 and December 31, 2021, respectively. The charge-off in 2021 related to a loan that the Company sold as part of a portfolio management strategy. Gross recoveries totaled $2 thousand and $1 thousand for the years ended December 31, 2022 and December 31, 2021, respectively. The allowance for loan loss as a percentage of gross loans, net of unearned income was 1.13% and 1.20% as of December 31, 2022 and December 31, 2021, respectively. Excluding PPP loan balances, the allowance for loan losses as a percentage of gross loans, net of unearned income was 1.13% and 1.25% at December 31, 2022 and December 31, 2021, respectively. The Company does not have a reserve on PPP loan balances, as they are 100% guaranteed by the SBA. The decrease in the allowance as a percentage of outstanding loans, net of unearned income, was primarily due to changes in the loan portfolio’s composition as well as net changes in qualitative adjustments.

The following table summarizes the Company’s loan loss experience by loan portfolio for the years ended December 31, 2022 and December 31, 2021.

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Net Net Net Net

(charge-offs) (charge-off) (charge-offs) (charge-off)

(Dollars in thousands) recoveries recovery rate (1) recoveries recovery rate (1)

Real estate loans:

Construction and land development — — — —

Residential — — — —

Commercial loans 2 0.00 % — —

Consumer loans — — — —

Total $ 1 $ (90)

Average loans outstanding during the period $ 1,677,151 $ 1,597,049

Allowance coverage ratio (2) 1.13 % 1.20 %

Total net (charge-off) recovery rate (1) 0.00 % (0.01) %

Allowance to nonaccrual loans ratio(3) NM NM

NM – Not meaningful

The following table summarizes the allowance for loan losses by portfolio with a comparison of the percentage composition in relation to total allowance for loan losses and total loans as of December 31, 2022 and December 31, 2021.

Allowance Percent of Allowance Percent of Loans in

for Loan in Each Category to Each Category to Total

(Dollars in thousands) Losses Total Allocated Allowance Loans

Real Estate Loans:

Commercial - Non-Real Estate:

Consumer - Non-Real Estate:

Unallocated 638 — —

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Allowance Percent of Allowance Percent of Loans in

for Loan in Each Category to Each Category to Total

(Dollars in thousands) Losses Total Allocated Allowance Loans

Real Estate Loans:

Commercial - Non-Real Estate:

Consumer - Non-Real Estate:

Unallocated 632 — —

Management believes that the allowance for loan losses is adequate to absorb credit losses inherent in the portfolio as of December 31, 2022. There can be no assurance, however, that adjustments to the provision for loan losses will not be required in the future. Changes in the economic assumptions underlying management’s estimates and judgments; adverse developments in the economy, on a national basis or in the Company’s market area; or changes in the circumstances of particular borrowers are criteria that could change and make adjustments to the provision for loan losses necessary.

Deposits

Total deposits increased $186.2 million or 9.9% to $2.07 billion as of December 31, 2022 compared to $1.88 billion as of December 31, 2021.

Non-interest bearing demand deposits decreased $12.1 million or 2.5% to $476.7 million as of December 31, 2022 compared to $488.8 million at December 31, 2021. Non-interest bearing demand deposits represented 23.1% and 26.0% of total deposits at December 31, 2022 and December 31, 2021, respectively.

Interest-bearing deposits, which include NOW accounts, regular savings accounts, money market accounts, and time deposits, increased $198.3 million or 14.2% to $1.59 billion as of December 31, 2022 compared to $1.39 billion as of December 31, 2021. Interest-bearing demand deposits represented 76.9% and 74.0% of total deposits at December 31, 2022 and December 31, 2021, respectively.

The Company focuses on funding asset growth with deposit accounts, with an emphasis on core deposit growth, as its primary source of deposits. Core deposits consist of checking accounts, NOW accounts, money market accounts, regular savings accounts, time deposits, reciprocal IntraFi Demand® deposits, IntraFi Money Market® deposits and IntraFi CD® deposits. Core deposits totaled $1.69 billion or 81.9% of total deposits and $1.64 billion or 87.1% of total deposits at December 31, 2022 and December 31, 2021, respectively.

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The following table sets forth the average balances of deposits and the average interest rates paid for the years ended December 31, 2022 and 2021.

Average Average

(Dollars in thousands) Amount Rate Amount Rate

Interest bearing:

The following table sets forth the maturity ranges of certificates of deposit with balances of $250,000 or more as of December 31, 2022.

(Dollars in thousands) Total Uninsured

The total amount of our uninsured deposits (deposits in excess of $250,000, as calculated in accordance with FDIC regulations) was estimated at $963.9 million at December 31, 2022 and $862.8 million at December 31, 2021. Included in these amounts were $161.2 million and $118.1 million of public fund deposits that are collateralized by securities as of December 31, 2022 and December 31, 2021, respectively. Uninsured deposits and deposits not otherwise collateralized by securities represented 39% and 40% of total deposits, respectively, as of December 31, 2022 and December 31, 2021.

Capital Resources

The Company is a bank holding company with less than $3 billion in assets and does not (i) have significant off balance sheet exposure, (ii) engage in significant non-banking activities, or (iii) have a material amount of securities registered under the Exchange Act. As a result, the Company qualifies as a small bank holding company under the Federal Reserve’s Small Bank Holding Company Policy Statement and is currently not subject to consolidated regulatory requirements.

The Bank is subject to capital adequacy standards adopted by the Federal Reserve, including the capital rules that implemented the Basel III regulatory capital reforms developed by the Basel Committee on Banking Supervision.

Note 16 to the Consolidated Financial Statements, included in Item 8 of this Form 10-K, contains additional discussion and analysis regarding the Company and Bank’s regulatory capital requirements.

Shareholders’ equity increased $4.3 million or 2.1% to $212.8 million at December 31, 2022 compared to $208.5 million at December 31, 2021. The increase was primarily due to increases in retained earnings and additional paid-in capital, which were partially offset by the increase in the unrealized loss on our available-for-sale investment portfolio and the one-time special dividend declared during the first quarter of 2022. Excluding accumulated other comprehensive loss, which primarily includes the impact of unrealized losses on the Company’s available-for-sale investment portfolio, total shareholders’ equity increased $32.6 million or 15.6% from December 31, 2021 to December 31, 2022.

In August of 2022, the Company’s Board of Directors authorized the extension of the Company’s stock repurchase program that was originally adopted in August of 2021. Under the stock repurchase program, the Company may repurchase up to 700,000 shares of its outstanding common stock, or 5.0% of outstanding shares as of December 31, 2022. The stock

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repurchase program will expire on August 31, 2023 or earlier if all the authorized shares have been repurchased. The Company has not repurchased any of its outstanding common stock under the program as of December 31, 2022.

Liquidity

Liquidity reflects a financial institution’s ability to fund assets and meet current and future financial obligations. Liquidity is essential in all banks to meet customer withdrawals, compensate for balance sheet fluctuations, and provide funds for growth. Monitoring and managing both liquidity measurements is critical in developing prudent and effective balance sheet management. Management conducts liquidity stress testing on a quarterly basis to prepare for unexpected adverse scenarios and contemporaneously develops mitigating strategies to reduce losses in the event of an economic downturn.

The Company’s principal source of liquidity and funding is its deposit base. The level of deposits necessary to support the Company’s lending and investment activities is determined through monitoring loan demand. Liquidity needs are also met with cash and cash equivalents and unencumbered securities. Liquid assets totaled $397.5 million as of December 31, 2022 compared to $371.2 million at December 31, 2021. These amounts represented 16.9% and 17.3% of total assets as of December 31, 2022 and December 31, 2021, respectively.

In addition to the liquidity provided by balance sheet cash flows, the Company supplements its liquidity with additional sources such as credit lines with the FHLB, the Reserve Bank and other correspondent banks. Specifically, the Company has pledged a portion of its commercial real estate and residential real estate loan portfolios to the FHLB and a portion of its commercial and industrial portfolio to the Reserve Bank. Additional borrowing capacity at the FHLB was approximately $363.4 million as of December 31, 2022. Additional borrowing capacity with the Reserve Bank was approximately $24.9 million as of December 31, 2022. Undrawn lines of credit with other correspondent banks totaled $79.5 million at December 31, 2022. On March 12, 2023, the Federal Reserve announced the creation of the Bank Term Funding Program (“BTFP”), whereby eligible depository institutions can obtain advances up to one year in length upon pledging eligible collateral. BTFP advances, if requested, provide an additional source of liquidity to the Company. As of March 12, 2023, the Company had eligible collateral totaling $349.4 million available for pledging to the BTFP.

Liquidity is a core pillar of the Company’s operations. Conditions may arise in the future that could negatively impact the Company’s future liquidity position resulting in funding mismatches. These include market constraints on the ability to convert assets into cash or accessing sources of funds (i.e., market liquidity) and contingent liquidity events. Changes in economic conditions or exposure to credit, market, operational, legal, and reputation risks also can affect a bank’s liquidity. Management maintains that the Company has a strong liquidity position, but any of the factors referenced above could materially impact that in the future.

Off-Balance Sheet Arrangements

The Company enters into certain off-balance sheet arrangements in the normal course of business to meet the financing needs of its customers. These off-balance sheet arrangements include commitments to extend credit, standby letters of credit and financial guarantees which would impact the Company’s liquidity and capital resources to the extent customers accept and or use these commitments. These instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the balance sheet. With the exception of these off-balance sheet arrangements, the Company has no off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on the Company’s financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures, or capital resources, that is material to investors. For further information, see Note 11 to the Consolidated Financial Statements, included in Item 8 of this Form 10-K, for further discussion of the nature, business purpose and elements of risk involved with these off-balance sheet arrangements.

Item 7A.Quantitative and Qualitative Disclosures About Market Risk

Not required for small reporting companies.

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Item 8.Financial Statements and Supplementary Data

John Marshall Bancorp, Inc. Audited Consolidated Financial Statements:

Page

Report of Independent Registered Public Accounting Firm 65

Consolidated Balance Sheets as of December 31, 2022 and December 31, 2021 66

Notes to the Consolidated Financial Statements 71

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Report of Independent Registered Public Accounting Firm

To the Shareholders and the Board of Directors

John Marshall Bancorp, Inc.

Reston, Virginia

Opinion on the Financial Statements

We have audited the accompanying consolidated balance sheets of John Marshall Bancorp, Inc. and its subsidiary (the Company) as of December 31, 2022 and 2021, the related consolidated statements of income, comprehensive income, changes in shareholders’ equity and cash flows for the years then ended, and the related notes to the consolidated financial statements (collectively, the financial statements). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2022 and 2021, and the results of its operations and its cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America.

Basis for Opinion

These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.

Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.

/s/ Yount, Hyde & Barbour, P.C.

We have served as the Company's auditor since 2008.

Winchester, Virginia

March 23, 2023

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John Marshall Bancorp, Inc. and Subsidiary

Consolidated Balance Sheets

December 31, 2022 and 2021

(In thousands, except share data)

Assets

Cash and due from banks $ 6,583 $ 2,920

Securities available-for-sale, at fair value 357,576 239,300

Restricted securities, at cost 4,425 4,951

Equity securities, at fair value 2,115 1,869

Bank premises and equipment, net 1,219 1,620

Accrued interest receivable 5,531 4,943

Liabilities and Shareholders’ Equity

Liabilities

Deposits:

Federal funds purchased 25,500 —

Federal Home Loan Bank advances — 18,000

Accrued interest payable 1,035 843

Commitments and contingencies

Shareholders’ Equity

Accumulated other comprehensive loss (28,697) (400)

See Notes to Consolidated Financial Statements.

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John Marshall Bancorp, Inc. and Subsidiary

Consolidated Statements of Income

Years Ended December 31, 2022 and 2021

(In thousands, except per share data)

Interest and Dividend Income

Interest on investment securities, taxable 7,934 4,146

Interest on investment securities, tax-exempt 120 120

Interest on deposits in banks 1,482 175

Total interest and dividend income $ 84,066 $ 74,119

Interest Expense

Federal funds purchased 15 —

Federal Home Loan Bank advances 42 125

Provision for loan losses 175 3,105

Net interest income after provision for loan losses $ 70,246 $ 62,803

Non-interest Income

Service charges on deposit accounts $ 324 $ 262

Bank owned life insurance 544 411

Other service charges and fees 656 477

Gains on securities — 10

Insurance commissions 382 284

Other operating income (loss) (215) 275

Total non-interest income $ 1,691 $ 1,719

Non-interest Expenses

Salaries and employee benefits $ 20,190 $ 20,411

Occupancy expense of premises 1,893 1,985

Furniture and equipment expenses 1,325 1,436

Earnings per share, basic $ 2.27 $ 1.87

Earnings per share, diluted $ 2.25 $ 1.83

See Notes to Consolidated Financial Statements.

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John Marshall Bancorp, Inc. and Subsidiary

Consolidated Statements of Comprehensive Income

Years Ended December 31, 2022 and 2021

(In thousands)

Other comprehensive loss:

Total other comprehensive loss $ (28,297) $ (4,186)

Total comprehensive income $ 3,506 $ 21,275

See Notes to Consolidated Financial Statements.

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John Marshall Bancorp, Inc. and Subsidiary

Consolidated Statements of Changes in Shareholders’ Equity

Years Ended December 31, 2022 and December 31, 2021

(In thousands, except share data)

Accumulated

Other Total

Additional Paid- In Retained Comprehensive Shareholders’

Shares Common Stock Capital Earnings Income (Loss) Equity

Other comprehensive loss — — — — (4,186) (4,186)

Share-based compensation — — 560 — — 560

Other comprehensive loss — — — — (28,297) (28,297)

Share-based compensation — — 573 — — 573

See Notes to Consolidated Financial Statements.

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John Marshall Bancorp, Inc. and Subsidiary

Consolidated Statements of Cash Flows

Years Ended December 31, 2022 and 2021

(In thousands)

Cash Flows from Operating Activities

Right of use asset amortization 1,360 1,416

Provision for loan losses 175 3,105

Share-based compensation expense 573 560

Net amortization of securities (25) 488

Fair value adjustment on equity securities 354 (194)

Amortization of debt issuance costs 317 49

Net gains on premises and equipment — (29)

Gains on sales and calls of available-for-sale securities — (10)

Deferred tax expense (benefit) 594 (678)

Bank owned life insurance income (544) (411)

Changes in assets and liabilities:

(Increase) decrease in accrued interest receivable (588) 365

(Increase) decrease in other assets (1,376) 861

Increase (decrease) in accrued interest payable 192 (34)

(Decrease) Increase in other liabilities (237) 591

Net cash provided by operating activities $ 33,155 $ 32,354

Cash Flows from Investing Activities

Purchase of available-for-sale securities (206,890) (231,353)

Purchase of held-to-maturity securities (1,003) (11,025)

Net redemption of restricted securities 526 725

Net purchases of equity securities (600) (708)

Life insurance proceeds 371 —

Insurance casualty proceeds — 22

Proceeds from sale of premises and equipment — 35

Purchases of bank premises and equipment (156) (353)

Net cash (used in) investing activities $ (270,872) $ (302,999)

Cash Flows from Financing Activities

Net repayment of Federal Home Loan Bank advances (18,000) (4,000)

Increase in federal funds purchased 25,500 —

Issuance of subordinated debt 24,579 —

Repayment of subordinated debt (25,000) —

Cash dividends paid (2,799) —

Issuance of common stock for share options exercised 3,058 716

Net cash provided by financing activities $ 193,517 $ 237,987

Net decrease in cash and cash equivalents $ (44,200) $ (32,658)

Cash and cash equivalents, beginning of period 105,799 138,457

Cash and cash equivalents, end of period $ 61,599 $ 105,799

Supplemental Disclosures of Cash Flow Information

Cash payments for:

Supplemental Disclosures of Noncash Transactions

Unrealized loss on securities available-for-sale $ (35,637) $ (5,197)

See Notes to Consolidated Financial Statements.

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Note 1— Nature of Business and Summary of Significant Accounting Policy

Nature of Banking Activities

John Marshall Bancorp, Inc. (the “Company”), headquartered in Reston, Virginia, became the registered bank holding company under the Bank Holding Company Act of 1956 for its wholly-owned subsidiary, John Marshall Bank (the “Bank”), on March 1, 2017. This reorganization was completed through a one-for-one share exchange in which the Bank’s shareholders received one share of voting common stock of the Company in exchange for each share of the Bank’s voting common stock.

The Company was formed on April 21, 2016 under the laws of the Commonwealth Virginia. The Bank formed on April 5, 2005 under the laws of the Commonwealth of Virginia and was chartered as a bank on February 9, 2006, by the Virginia Bureau of Financial Institutions. The Bank is a member of the Federal Reserve System and is subject to the rules and regulations of the Virginia Bureau of Financial Institutions, the Board of Governors of the Federal Reserve System (the “Federal Reserve”) and the Federal Deposit Insurance Corporation (“FDIC”). The Bank opened for business on April 17, 2006 and provides banking services to its customers primarily in the Washington, D.C. metropolitan area.

The accounting and reporting policies of John Marshall Bancorp, Inc. conform to generally accepted accounting principles in the United States of America and reflect practices of the banking industry. The significant accounting policies are summarized below.

Principles of Consolidation

The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiary. All significant intercompany accounts and transactions between the Company and the Bank have been eliminated.

Restriction on Dividends

The Bank is subject to certain restrictions on the amount of dividends that it may pay to the Company without prior regulatory approval. At December 31, 2022, the Bank had $77.5 million available to distribute in the form of dividends to the Company.

Significant Accounting Policies

Use of Estimates

In preparing financial statements in conformity with accounting principles generally accepted in the United States of America (“GAAP”), management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the balance sheet and reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Material estimates that are particularly susceptible to significant change in the near term relate to the determination of the allowance for loan losses.

Reclassifications

Certain items in the prior year financial statements were reclassified to conform to the current presentation. Reclassifications had no effect on prior year net income or shareholders’ equity.

Concentration of Credit Risk

Most of the Company’s activities are with customers located in the Washington, D.C. metropolitan area. Real estate loans, including commercial, construction and land development, and residential loans, represented 97% of the total loan portfolio at December 31, 2022 and 93% of the total loan portfolio at December 31, 2021. The Company does not have any significant concentrations to any one industry or customer.

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Cash and Cash Equivalents

For the purposes of the statements of cash flows, cash and cash equivalents include cash and balances due from banks and interest-bearing deposits in banks (items with an original maturity of three months or less).

Securities

Certain debt securities that management has the positive intent and ability to hold-to-maturity are classified as “held-to-maturity” and recorded at amortized cost. Debt securities not classified as held-to-maturity or trading, are classified as “available-for-sale” and recorded at fair value, with unrealized gains and losses excluded from earnings and reported net of deferred tax in accumulated other comprehensive income (loss) within shareholders’ equity. Purchase premiums and discounts on debt securities are recognized in interest income using the interest method over the terms of the securities.

Transfers of debt securities into the held-to-maturity classification from the available-for-sale classification are made at fair value on the date of transfer. The unrealized holding gain or loss on the date of the transfer is reported in accumulated other comprehensive income (loss) and in the carrying value of the held-to-maturity securities. Such amounts are amortized over the remaining contractual lives of the securities.

Impairment of securities occurs when the fair value of a security is less than its amortized cost. For debt securities, impairment is considered other-than-temporary and recognized in its entirety in net income if either (a) the intent is to sell the security or (b) it is more likely than not that it will be necessary to sell the security prior to recovery of its amortized cost basis. If, however, the Company’s intent is not to sell the security and it is not more than likely that the Company will be required to sell the security before recovery, the Company must determine what portion of the impairment is attributable to a credit loss, which occurs when the amortized cost of the security exceeds the present value of the cash flows expected to be collected from the security. If there is no credit loss, there is no other-than-temporary impairment. If there is a credit loss, other-than-temporary impairment exists and the credit loss must be recognized in net income and the remaining portion of impairment must be recognized in other comprehensive income.

The Company regularly reviews each debt security for other-than-temporary impairment based on criteria that include the extent to which cost exceeds market price, the duration of that market decline, the financial health of and specific prospects for the issuer, the security’s ratings, the Company’s best estimate of the present value of cash flows expected to be collected from debt securities, the intention with regards to holding the security to maturity and the likelihood that the Company would be required to sell the security before recovery.

Equity securities with readily determinable fair values are carried at fair value, with changes in fair value reported in net income. Any equity securities without readily determinable fair values are carried at cost, minus impairment, if any, plus or minus changes resulting from observable price changes in orderly transactions for identical or similar investments. Restricted equity securities are carried at cost and are periodically evaluated for impairment based on the ultimate recovery of par value. The entirety of any impairment on the equity securities is recognized in earnings.

Gains and losses on sales of securities are recorded on the trade date and determined using the specific identification method.

Loans

The Company grants real estate, commercial and consumer loans to customers (representing the Company’s loan segments). A substantial portion of the loan portfolio is represented by commercial real estate loans in the Washington, D.C. metropolitan area. Within the real estate segment, the Company has also identified the residential, commercial and construction classes. The ability of the Company’s debtors to honor their real estate loan contracts is dependent upon the real estate market and general economic conditions in this area, among other factors.

Underwriting and risk characteristics of each loan class are summarized as follows:

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Loans that management has the intent and ability to hold for the foreseeable future or until maturity or pay-off generally are reported at their outstanding unpaid principal balances adjusted for the allowance for loan losses and any deferred fees or costs on originated loans. Interest income is accrued on the unpaid principal balance. Loan origination fees, net of certain direct origination costs, are deferred and recognized as an adjustment of the related loan yield using the interest method.

The accrual of interest on mortgage and commercial loans is discontinued at the time the loan is 90 days past due unless the credit is well secured and in the process of collection. Other personal loans are typically charged off no later than 180 days past due. In all cases, loans are placed on nonaccrual or charged off at an earlier date if collection of principal or interest is considered doubtful. The determination of days past due or delinquency status uses the first contractual payment date that has not been paid-in-full by the borrower.

All interest accrued but not collected for loans that are placed on nonaccrual or charged off is reversed against interest income. The interest on these loans is accounted for on the cash-basis or cost-recovery method, until qualifying for return to accrual. Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured.

Allowance for Loan Losses

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practices; experience, ability, and depth of management; national and local economic trends and conditions; and any other factor, as deemed appropriate. Our qualitative factors during the periods covered by these financial statements have also included specific considerations of inflation and other economic metrics, as well as the direct and indirect impacts of the pandemic. An unallocated component is maintained to cover uncertainties that could affect management’s estimate of probable losses. The unallocated component of the allowance reflects the margin of imprecision inherent in the underlying assumptions used in the methodologies for estimating specific and general losses in the portfolio.

Troubled Debt Restructurings (“TDR”)

The Company may, for economic or legal reasons related to a borrower’s financial condition, grant a concession to the borrower that it would not otherwise consider, which results in the related loan being classified as a TDR. The Company strives to identify borrowers in financial difficulty early and work with them to modify their loan before their loan reaches nonaccrual status. The modified terms for a TDR may include rate reductions, principal forgiveness, payment forbearance and other actions intended to minimize the economic loss and to avoid foreclosure or repossession of the collateral. All restructured loans are considered impaired loans and may either be in accruing status or nonaccruing status. Nonaccruing restructured loans may return to accruing status provided doubt has been removed concerning the collectability of principal and interest as evidenced by a sufficient period of payment performance in accordance with the restructured terms. Loans may be removed from the restructured category in the year subsequent to the restructuring if their revised loan terms are considered to be consistent with terms that can be obtained in the credit market for loans with comparable risk and if they meet certain performance criteria.

Bank Premises and Equipment

Bank premises and equipment are stated at cost less accumulated depreciation and amortization. Depreciation of property and equipment is computed on the straight-line method over the useful lives of the assets, ranging from three to fifteen years, or the expected term of leases, if shorter. Expected terms include lease option periods to the extent that the exercise of such options is reasonably certain. Maintenance and repairs of property and equipment are expensed as incurred, while major improvements are capitalized and amortized over their respective useful life.

Bank Owned Life Insurance

The Company has purchased life insurance on certain key executives and officers. Bank owned life insurance is recorded at the amount that can be realized under the insurance contract at the balance sheet date, which is the cash surrender value adjusted for other charges or amounts due that are probable at settlement. Changes in cash surrender value are reflected in non-interest income in the Consolidated Statements of Income.

Other Real Estate Owned

Assets acquired through or instead of loan foreclosure are initially recorded at fair value less costs to sell when acquired, establishing a new cost basis. These assets are subsequently accounted for at lower of cost or fair value less estimated costs

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to sell. Operating costs after acquisition are expensed as incurred. The Company had no other real estate owned as of December 31, 2022 and 2021. At December 31, 2022 and 2021, there were no consumer mortgage loans secured by residential real estate for which formal foreclosure proceedings were in progress.

Transfers of Financial Assets

Transfers of financial assets are accounted for as sales, when control over the assets has been surrendered. Control over transferred assets is deemed to be surrendered when (a) the assets have been isolated from the Company – put presumptively beyond the reach of the transferor and its creditors, even in the event of bankruptcy or other receivership, (b) the transferee obtains the right (free of conditions that constrain it from taking advantage of that right) to pledge or exchange the transferred assets, and (c) the Company does not maintain effective control over the transferred assets through an agreement to repurchase them before their maturity or the ability to unilaterally cause the holder to return specific assets.

Income Taxes

Deferred taxes are provided on a liability method whereby deferred tax assets are recognized for deductible temporary differences, operating loss carryforwards, and tax credit carryforwards. Deferred tax liabilities are recognized for taxable temporary differences. Temporary differences are differences between the reported amounts of assets and liabilities and their tax bases. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized. Deferred tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date of enactment.

When tax returns are filed, it is highly certain that some positions taken would be sustained upon examination by the taxing authorities, while others are subject to uncertainty about the merits of the position taken or the amount of the position that would be ultimately sustained. The benefit of a tax position is recognized in the financial statements in the period during which, based on all available evidence, management believes it is more likely than not that the position will be sustained upon examination, including the resolution of appeals or litigation processes, if any. Tax positions taken are not offset or aggregated with other positions. Tax positions that meet the more-likely-than-not recognition threshold are measured as the largest amount of tax benefit that is more than 50% likely of being realized upon settlement with the applicable taxing authority. The portion of the benefits associated with tax positions taken that exceeds the amount measured as described above is reflected as a liability for unrecognized tax benefits in the accompanying balance sheet along with any associated interest and penalties that would be payable to the taxing authorities upon examination. The Company recorded no liability for unrecognized tax benefits at December 31, 2022 or 2021.

Earnings Per Common Share

Earnings per common share is calculated in accordance with Accounting Standard Codification (“ASC”) 260 - Earnings Per Share, which provides that unvested share-based payment awards that contain non-forfeitable rights to dividends or dividend equivalents (whether paid or unpaid) are participating securities and shall be included in the computation of earnings per share pursuant to the two-class method.

Under the two-class method, basic earnings per common share is computed by dividing net earnings allocated to common stock by the weighted-average number of common shares outstanding during the applicable period, excluding outstanding participating securities. Diluted earnings per common share is computed using the weighted-average number of shares determined for the basic earnings per common share computation plus the dilutive effect of stock compensation using the treasury stock method. Earnings per share are restated for all stock splits and dividends through the date the financial statements are issued.

Advertising Costs

The Company follows the policy of charging the production costs of advertising to expense as incurred. Advertising expense was $193 thousand and $395 thousand for the years ended December 31, 2022 and 2021, respectively.

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Share-Based Compensation

The Company recognizes the compensation cost relating to share-based payment transactions based on the grant date fair value of the equity instruments issued. The share compensation accounting guidance requires that compensation cost for all share-based awards be calculated and recognized over the vesting period. A Black-Scholes model is used to estimate the fair value of stock options. Restricted stock awards are valued using the closing stock price on the date of grant. The Company’s accounting policy is to recognized forfeitures as they occur.

Comprehensive Income (Loss)

Comprehensive income consists of net income and other comprehensive income (loss). Other comprehensive income (loss) includes unrealized gains (losses) on securities available-for-sale and the amortization of unrealized losses or accretion of unrealized gains on securities transferred from available-for-sale to held-to-maturity, which are also recognized as a separate component of equity. Items reclassified out of accumulated other comprehensive income (loss) to net income relate solely to realized gains (losses) on sales of securities available-for-sale and appear under the caption “Gains on securities” in the Company’s Consolidated Statements of Income.

Derivatives

The Company enters into interest rate swaps (“swaps”) with commercial loan customers to provide a facility to mitigate the fluctuations in the variable rate on the respective loans. These swaps are matched in exact offsetting terms to swaps that the Company enters into with an outside third party. The swaps are reported at fair value in other assets or other liabilities in the Consolidated Balance Sheets. The Company's swaps qualify as derivatives, but are not designated as hedging instruments. As such, any net gain or loss resulting from changes in the fair value is recognized in other operating (loss) income in the Consolidated Statements of Income. Refer to Note 5 for further discussion regarding the Company’s swaps.

Fair Value of Financial Instruments

Fair values of various assets and liabilities are estimated using relevant market information, valuation techniques and other assumptions, as more fully disclosed in Note 12. Fair value estimates involve uncertainties and matters of significant judgment. Changes in assumptions or in market conditions could significantly affect the estimates.

Recent Accounting Pronouncements

In June 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2016-13, “Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments.” The amendments in this ASU, among other things, require the measurement of all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. Financial institutions and other organizations will now use forward-looking information to better inform their credit loss estimates. Many of the loss estimation techniques applied today will still be permitted, although the inputs to those techniques will change to reflect the full amount of expected credit losses. In addition, the ASU amends the accounting for credit losses on available-for-sale debt securities and purchased financial assets with credit deterioration. The FASB has issued multiple updates to ASU 2016-13 as codified in Topic 326, including ASUs 2019-04, 2019-05, 2019-10, 2019-11, 2020-02, and 2020-03. These ASUs have provided for various minor technical corrections and improvements to the codification as well as other transition matters. Smaller reporting companies who file with the Securities and Exchange Commission (“SEC”) and all other entities who do not file with the SEC are required to apply the guidance for fiscal years, and interim periods within those years, beginning after December 15, 2022. The Company adopted ASU 2016-13 as of January 1, 2023 in accordance with the required implementation date. At adoption, the after tax impact to retained earnings was an approximate reduction of $(2.3) million based on our evaluation as of that date. This adjustment consisted of increases to the allowance for credit losses on loans, as well as the Company's reserve for unfunded loan commitments. Subsequent to adoption, the Company will record adjustments to its allowance for credit losses and reserves for unfunded commitments through the provision for credit losses in the Consolidated Statements of Income. For regulatory capital purposes, the Company and its subsidiary bank, have elected to utilize the optional three-year transition period for the adverse effects of implementing the standard.

Table of Contents

The Company is utilizing a discounted cash flow model to tabulate its estimate of current expected credit losses. For the purposes of calculating its quantitative reserves, the Company has segmented its loan portfolio based on loans which share similar risk characteristics. Within the quantitative portion of the calculation, the Company utilizes at least one or a combination of loss drivers, which may include unemployment rates, home price indices, and/or GDP, to adjust its loss rates over a reasonable and supportable forecast period of one year. A straight-line reversion technique is used for the following four quarters, at which time the Company reverts to historical averages. To further adjust the allowance for credit losses for expected losses not already included within the quantitative component of the calculation, the Company may consider several qualitative factors, including but not limited to: variability in the economic forecast, concentration of the loan portfolio, idiosyncratic risks not embedded in the data used in the model, as well as other factors deemed necessary and appropriate to support the estimate of expected credit losses. The Company's CECL implementation process included an assessment of: data availability and gap analysis, benchmarking data, data collection, consideration and analysis of multiple loss estimation methodologies, an assessment of relevant qualitative factors and correlation analysis of multiple potential loss drivers and their impact on the Company's historical loss experience. The Company also used the services of a third party advisor to validate the conceptual soundness of the methodology framework and of the CECL model.

John Marshall Bancorp, Inc. JMSB US Equity

JMSB · 10-K · period ended 2022-12-31

Item 7.Management’s Discussion and Analysis of Financial Condition and Results of Operations

Item 7A.Quantitative and Qualitative Disclosures About Market Risk

Item 8.Financial Statements and Supplementary Data

John Marshall Bancorp, Inc. JMSB US Equity☆

JMSB · 10-K · period ended 2022-12-31

Item 7.Management’s Discussion and Analysis of Financial Condition and Results of Operations

Item 7A.Quantitative and Qualitative Disclosures About Market Risk

Item 8.Financial Statements and Supplementary Data

John Marshall Bancorp, Inc. JMSB US Equity