Esquire Financial Holdings, Inc. — Q1 2019 Form 10-Q
Reporting period: Three months ended March 31, 2019; balance sheet comparisons are to December 31, 2018. The filing is unaudited. Esquire is a bank holding company whose subsidiary serves the legal and small-business communities nationally, as well as commercial and retail customers in the New York metropolitan area.
Financial performance and position
- Income: Net income was $3.0 million, up 52.5% from $2.0 million in Q1 2018. Diluted EPS was $0.39 versus $0.26.
- Revenue and margins: Interest income rose 35.3% to $8.5 million; interest expense increased to $555,000 from $174,000. Net interest income grew 30.1% to $7.9 million. Net interest margin increased to 4.94% from 4.67%, and net interest spread to 4.63% from 4.55%. Noninterest income was nearly flat at $2.1 million.
- Costs and credit provision: Noninterest expense increased 3.9% to $5.5 million, including higher employee compensation. Provision for loan losses was $425,000 versus $225,000.
- Assets and lending: Total assets were $720.1 million, up 8.5% from year-end. Loans were $490.0 million, up 4.7%; commercial loans increased 10.8% to $212.6 million. Attorney-related loans were $209.6 million, or 42.8% of loans.
- Credit quality: The allowance for loan losses was $6.0 million, or 1.23% of loans, compared with $5.6 million, or 1.20%, at year-end. The company reported no delinquent or nonperforming loans at March 31. Commercial loans included $9.1 million rated special mention and $165,000 rated substandard.
- Funding, liquidity, and capital: Deposits grew 8.2% to $615.0 million; core deposits were 96.7% of deposits. Cash and cash equivalents were $49.9 million. The bank had no outstanding balances on disclosed FHLB, Federal Reserve discount-window, or correspondent-bank credit lines; stated available capacity was $122.0 million, $24.3 million, and $17.5 million, respectively. The bank reported all regulatory capital ratios above well-capitalized thresholds; its total risk-based capital ratio was 17.99%.
- Debt and obligations: Secured borrowings were $89,000. Operating lease liabilities were $3.5 million after adoption of the new lease standard. Disclosed operating lease obligations and time deposits totaled $24.1 million.
- Cash flow: Operating cash flow was $566,000, down from $2.6 million. Investing activities used $27.8 million, mainly reflecting loan growth and securities purchases; financing activities provided $46.6 million, principally from deposit growth. Cash increased $19.4 million.
Material changes versus Q1 2018
- Net interest income increased $1.8 million, driven mainly by higher average loan balances and yields. The filing attributes most of the increase in interest income to loan growth and a 27-basis-point increase in average loan yield; higher deposit rates increased funding costs.
- Merchant processing income rose 77.7% to $1.8 million, while customer-related fees and service charges fell 74.7% to $267,000, primarily reflecting lower administrative service payments on off-balance-sheet funds. Total noninterest income therefore changed little.
- Average monthly merchant processing volumes increased 96.8% to $796.2 million. Employee compensation and benefits rose 12.3%; total noninterest expense rose less, by 3.9%.
- Average interest-earning assets increased to $651.0 million from $529.0 million. Average interest-bearing deposit cost increased to 0.65% from 0.25%.
Outlook, risks, and unusual items
- The filing provides no specific earnings or financial guidance. Management describes a focus on prudent loan growth and expanding core deposit relationships; Q1 results are not necessarily indicative of full-year results.
- Management identifies interest-rate sensitivity, credit losses, real-estate and legal/litigation-market loan and deposit concentrations, merchant-services risks, competition, deposit retention, third-party providers, cybersecurity, regulation, and economic conditions as risks. The bank’s simulation showed higher modeled 12-month net interest income in rising-rate scenarios and lower income in falling-rate scenarios; management cautions actual results may differ because of assumptions and market changes.
- At March 31, securities had $2.0 million of gross unrealized losses. Management attributed these losses to interest-rate changes rather than credit deterioration and reported no other-than-temporary impairment charges.
- The company adopted ASC 842 leases on January 1, 2019, recognizing right-of-use assets and lease liabilities. It planned to adopt CECL on January 1, 2020 and was preparing with a vendor.
- Management reported no pending legal proceedings believed to have a material adverse effect, no material change in risk factors, and effective disclosure controls. No material changes to internal control over financial reporting were reported for the quarter.
Important facts for investors to verify
- Whether merchant-processing growth and volume are sustainable, and how merchant income evolves relative to lower administrative service income.
- Loan growth, commercial and attorney-related concentrations, classified-loan trends, and the adequacy of the allowance as the portfolio expands.
- Net interest margin and deposit pricing trends, particularly under changing interest rates and competition for deposits.
- The drivers of the sharp year-over-year decline in operating cash flow, including the increase in other assets reported in the cash-flow statement.
- CECL implementation assumptions and its eventual effect on the allowance, earnings, and capital.