Esquire Financial Holdings, Inc. — Q3 2018 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2018. The company is a bank holding company whose bank serves legal and small-business customers nationally, alongside commercial and retail customers in the New York metropolitan area. Amounts below are in millions of dollars unless stated otherwise.
Financial performance and position
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Interest income | $7.620 | $5.354 | $20.754 | $14.542 |
| Net interest income | $7.276 | $5.226 | $20.013 | $14.140 |
| Provision for loan losses | $0.450 | $0.275 | $0.975 | $0.725 |
| Noninterest income | $1.800 | $1.345 | $5.854 | $3.909 |
| Noninterest expense | $6.330 | $4.425 | $16.891 | $12.618 |
| Net income | $1.682 | $1.141 | $5.861 | $2.983 |
| Diluted EPS | $0.22 | $0.16 | $0.76 | $0.51 |
| Net interest margin | 4.75% | 4.53% | 4.69% | 4.37% |
- Q3 net income increased 47.4%; nine-month net income increased 96.5%. Growth reflected higher net interest income and noninterest income, partly offset by higher expenses and loan-loss provisions.
- Q3 merchant processing income was $1.300 million, up 63.1%; nine-month income was $3.532 million, up 43.2%. Management attributed the increase to higher processing volumes and more merchants. Nine-month customer fees and service charges rose 61.0%, to $2.322 million.
- Average loan yields and growth in earning assets supported higher interest income and margins. The company reported a nine-month average loan yield of 6.10%, versus 5.68% in 2017; its average rate paid on interest-bearing deposits rose to 0.31% from 0.21%.
- At September 30, total assets were $645.6 million, up 21.0% from year-end 2017. Loans were $437.9 million, up 25.5%; deposits were $552.2 million, up 23.1%. Core deposits were $522.0 million, or 94.5% of deposits.
- Cash and cash equivalents were $39.8 million. Nine-month cash from operations was $7.4 million; investing activities used $114.7 million, principally reflecting loan growth and securities purchases; financing activities provided $104.1 million, mainly from deposit growth. Cash declined $3.2 million from year-end.
- Secured borrowings were $0.272 million. No amounts were outstanding on available FHLB, Federal Reserve discount-window, or correspondent-bank credit lines. Reported borrowing capacity was $123.3 million at the FHLB, $16.6 million at the Federal Reserve, and $7.5 million through correspondent banks.
- Bank regulatory capital ratios were 13.40% Tier 1 leverage, 17.78% Tier 1 risk-based, 17.78% common equity Tier 1, and 18.92% total risk-based. The bank was classified as well capitalized.
Material changes and notable items
- Loans grew across commercial, multifamily, and commercial real estate portfolios. Attorney-related loans totaled $185.4 million, or 42.4% of loans. Commercial and multifamily loans together represented 70% of the loan portfolio.
- Noninterest expense rose 43.1% in Q3 and 33.9% for the nine-month period. Compensation expense included a one-time $1.2 million charge related to the recent passing of the Executive Chairman, as well as hiring and salary and incentive increases. Professional and consulting costs also increased year over year.
- The allowance for loan losses was $5.229 million, or 1.19% of loans, versus $4.264 million, or 1.22%, at December 31, 2017. The filing reported no delinquent or nonperforming loans at September 30; commercial loans included $9.098 million classified special mention and $0.195 million substandard.
- Available-for-sale securities had a fair value of $147.5 million and gross unrealized losses of $5.262 million at September 30. Nine-month other comprehensive loss was $2.431 million after tax, primarily reflecting securities valuation changes. Management attributed the declines to interest rates rather than credit quality and reported no impairment charges.
- In April 2018, the company invested $2.410 million for a 4.95% interest in private technology company Litify LLC. Its carrying amount remained at cost, with no impairment identified in the company’s qualitative assessment.
- Federal tax reform reduced the effective tax rate: 26.8% for both the three- and nine-month 2018 periods, versus 39.0% and 36.6%, respectively, in 2017.
Outlook, risks, and contingencies
- The filing provides no specific earnings, revenue, or growth guidance. Management described continued focus on core deposits and growth in commercial and consumer attorney-related lending within its risk profile.
- The bank reported that it is asset-sensitive: its model estimated higher 12-month net interest income under rising-rate scenarios and lower income under falling-rate scenarios. These are simulations, not forecasts, and depend on assumptions about rates, deposits, prepayments, and management actions.
- Key risks include loan and real-estate concentration in the company’s market, dependence on legal and litigation-related lending and deposits, credit losses, interest-rate and deposit-cost changes, merchant-services performance, competition, technology and cybersecurity, regulation, and ability to control costs.
- The company expected the new lease standard to increase balance-sheet assets and liabilities, without a material income-statement impact based on leases then outstanding. It planned to adopt the CECL credit-loss standard in the first quarter of 2020 and was preparing implementation.
- Management reported no pending legal proceeding believed likely to have a material adverse effect, no material change to previously disclosed risk factors, and effective disclosure controls. No material commitments affecting liquidity were reported beyond disclosed obligations and off-balance-sheet credit commitments.
Important facts for investors to verify
- Whether loan, deposit, and merchant-processing growth can continue without materially higher funding costs, credit provisions, or operating expenses.
- Trends in attorney-related and real-estate loan concentrations, including the special-mention and substandard commercial balances and the adequacy of the allowance.
- The duration and recovery prospects of securities unrealized losses, and the effect of interest-rate changes on net interest income and economic value.
- The nature and recurrence of the $1.2 million executive-chairman-related compensation charge, and the company’s ongoing staffing and public-company cost base.
- Progress and potential financial effects of the Litify investment, lease-standard adoption, and CECL implementation.