Esquire Financial Holdings, Inc. — 2019 Form 10-K
Reporting period: Fiscal year ended December 31, 2019. This is an annual filing; it does not provide standalone fourth-quarter results.
Business context
Esquire Financial is a bank holding company operating through Esquire Bank, N.A. It focuses on lending and deposit services for the legal industry nationwide, merchant services for small businesses, and traditional banking in the New York metropolitan area. The business relies substantially on legal-sector relationships for lending and low-cost deposits, and on merchant processing for fee income.
Financial performance and condition
| Metric | 2019 | Prior comparable period |
|---|---|---|
| Net income | $14.1 million | $8.7 million in 2018; up 61.9% |
| Diluted earnings per share | $1.82 | $1.13 in 2018 |
| Net interest income | $34.1 million | $27.7 million in 2018; up 23.0% |
| Net interest margin | 4.86% | 4.73% in 2018 |
| Noninterest income | $11.8 million | $7.9 million in 2018; up 50.4% |
| Noninterest expense | $24.9 million | $22.3 million in 2018; up 11.8% |
| Total assets | $798.0 million | $663.9 million at year-end 2018 |
| Total loans | $565.4 million | $468.1 million at year-end 2018; up 20.8% |
| Total deposits | $680.6 million | $568.4 million at year-end 2018; up 19.7% |
| Stockholders’ equity | $111.1 million | $92.8 million at year-end 2018 |
- Merchant processing income rose 121.2% to $11.0 million and accounted for most noninterest income. Customer-related fees and service charges fell 71.1% to $0.8 million, primarily reflecting lower administrative service income on off-balance-sheet funds.
- The provision for loan losses increased to $1.85 million from $1.38 million. The allowance was $7.0 million, or 1.24% of loans, versus $5.6 million, or 1.20%, in 2018.
- Cash and cash equivalents were $61.8 million, compared with $30.6 million a year earlier. Cash flow from operations was $14.9 million; investing activities used $95.9 million and financing activities provided $112.2 million.
- Borrowings were not a significant funding source: no amounts were drawn on the disclosed FHLB, Federal Reserve discount-window, or correspondent-bank lines at year-end. Balance-sheet secured borrowings were $86,000.
- The Bank reported a 17.83% total risk-based capital ratio and a 13.50% Tier 1 leverage ratio, and was classified as well capitalized.
Material changes and notable items
- Loan growth included commercial loans rising 34.5% to $258.0 million and commercial real estate loans rising 58.3% to $52.5 million. Attorney-related loans totaled $253.8 million, or 44.9% of the loan portfolio.
- Merchant processing expanded to approximately 40,000 merchants; the Bank processed $11.9 billion of card volume in 2019. Average monthly processing volume increased 16.4% year over year.
- Nonperforming loans were $1.5 million at year-end, versus none in 2018. Net charge-offs were $490,000, including a $324,000 charge-off on an NFL-related post-settlement consumer loan.
- Net unrealized gains on available-for-sale securities lifted accumulated other comprehensive income to $386,000 from a $2.6 million loss at year-end 2018. No securities impairment charges were recorded.
- The Company adopted lease accounting guidance in 2019 and recognized lease assets and liabilities. It reported $4.4 million of operating lease obligations.
Outlook, risks, and contingencies
- The filing gives no specific earnings, revenue, or margin guidance. Management describes plans to continue growing attorney-related lending and merchant services while maintaining deposit growth and prudent underwriting.
- Management did not expect to pay cash dividends for the foreseeable future, intending to retain earnings for operations and growth. A 300,000-share repurchase authorization was approved in January 2019; 8,506 shares had been repurchased after year-end through March 11, 2020.
- Credit risks include the growing commercial and real-estate loan exposures, geographic concentration in New York, and the unseasoned portfolio. Multifamily and commercial real estate loans represented 36.3% of loans.
- NFL-related post-settlement loans totaled $30.1 million, or 5.3% of loans, and represented 90% of post-settlement consumer loans. The Company had stopped originating this product in December 2017. Management cited claim-processing delays, revised physician requirements, and potential fraud as risks; the portfolio’s weighted-average remaining maturity was approximately two years.
- Funding concentration is a risk: the ten largest depositors represented 32.2% of deposits, while legal-sector customers accounted for more than 60% of the deposit base. Core deposits were 97.1% of deposits and the reported total cost of deposits was 0.41%.
- Interest-rate simulations indicate the Bank is asset-sensitive: modeled net interest income rises under rate increases and declines under rate decreases. Actual outcomes may differ from model estimates.
- Other material risk areas include merchant/ISO losses and fraud, dependence on third-party processors and technology, cybersecurity, regulatory and compliance costs, and sensitivity to economic and litigation-market conditions. The filing identifies pandemics among potential disruption risks but does not give a pandemic-specific forecast.
- Management reported no pending legal proceedings expected to have a material adverse effect. The filing disclosed $22.7 million of credit-related commitments, primarily variable-rate unused lines, and stated that commitments may expire unfunded.
Important facts for investors to verify
- Whether credit performance, provision expense, and NFL-related loan repayment trends have changed since year-end 2019, especially given the disclosed claims-processing and fraud risks.
- Whether merchant-services growth and revenue remain sustainable, and the resulting exposure to ISOs, processors, chargebacks, and card-network rules.
- Whether deposit concentration and the low-cost funding profile have remained stable, including the ten-largest-depositor concentration.
- How subsequent interest-rate changes affect net interest margin, deposit pricing, and securities valuations relative to management’s modeled sensitivities.
- How the 2020 repurchase authorization, dividend policy, and capital position evolved after the filing date; the filing states no cash dividends were expected in the foreseeable future.