Esquire Financial Holdings, Inc. — Q1 2018 Form 10-Q
Reporting period: Three months ended March 31, 2018; unaudited consolidated results for Esquire Financial Holdings and its wholly owned bank subsidiary. Unless otherwise noted, dollar amounts below are in millions. The company is a commercial bank serving legal and small-business clients nationally and commercial and retail customers in the New York metropolitan area.
Financial performance and condition
- Earnings: Net income was $1.958 million, up 140.2% from $0.815 million a year earlier. Diluted EPS was $0.26 versus $0.16; basic EPS was $0.27 versus $0.16.
- Interest income and margin: Interest income rose 41.5% to $6.270 million; interest expense increased 27.0% to $0.174 million. Net interest income increased 41.9% to $6.096 million. Net interest margin improved to 4.67% from 4.23%, and net interest spread to 4.55% from 4.14%.
- Other income and expenses: Noninterest income rose 72.3% to $2.075 million, including customer fees and service charges of $1.054 million and merchant processing income of $1.021 million. Noninterest expense increased 31.0% to $5.273 million, driven principally by compensation, professional services and data processing. Provision for loan losses was $0.225 million versus $0.150 million. Income before taxes was $2.673 million; tax expense was $0.715 million, an effective rate of 26.8% versus 38.5%.
- Loans and credit quality: Loans were $367.654 million gross and $363.165 million net, versus $348.978 million and $344.714 million, respectively, at year-end. The allowance was $4.489 million, or 1.22% of loans. There were no nonperforming, past-due, impaired or troubled-restructured loans reported. Special-mention loans rose to $10.269 million from $9.835 million.
- Assets, funding and capital: Total assets were $569.096 million, up 6.7% from December 31, 2017. Deposits increased to $481.732 million from $448.494 million; core deposits were $445.3 million, or 92.4% of deposits. Stockholders’ equity was $84.664 million. Secured borrowings were $0.276 million. The bank reported regulatory capital ratios of 13.00% Tier 1 leverage, 17.66% Tier 1 risk-based, 17.66% total risk-based and 18.81% common equity Tier 1, and was classified as well capitalized.
- Liquidity and cash flow: Cash and cash equivalents were $42.542 million; available-for-sale securities were $144.859 million. Q1 operating cash flow was $2.564 million, investing cash flow was negative $36.713 million and financing cash flow was positive $33.614 million, leaving cash down $0.535 million for the quarter. No amounts were drawn on disclosed FHLB, Federal Reserve or other bank credit lines; stated available capacity was $119.6 million, $18.3 million and $7.5 million, respectively.
Material changes versus comparable periods
- Net income grew as higher net interest income and noninterest income more than offset increased operating expenses. Management attributed loan-income growth to higher average loan balances and yields; it linked fee growth to increased sweep balances and rates, and merchant income growth to more ISOs and higher average monthly volumes.
- Average interest-earning assets increased to $529.0 million from $411.5 million. Average loan yield rose to 6.04% from 5.58%; average yield on total interest-earning assets rose to 4.81% from 4.37%.
- Quarter-end loans increased $18.7 million and securities increased $16.1 million from year-end. Attorney-related loans were $164.1 million, 44.7% of total loans, compared with $154.8 million at year-end.
- Unrealized losses on available-for-sale securities increased: fair value was $144.859 million against amortized cost of $148.501 million, with $3.837 million of gross unrealized losses. The resulting after-tax quarterly other comprehensive loss was $1.255 million. Management attributed the declines to interest rates rather than credit quality and reported no impairment charge.
Outlook, commentary and risks
- The filing provides no specific numerical earnings or growth guidance. Management said quarterly results are not necessarily indicative of full-year results and described investment in staff and technology to support growth.
- Management’s interest-rate model characterizes the bank as asset-sensitive: a +100 basis-point shock estimated a $1.505 million increase in 12-month net interest income, while a −100 basis-point shock estimated a $2.326 million decrease. The filing cautions that actual outcomes may differ because of model assumptions and management actions.
- Key disclosed risks include exposure to legal/litigation-related lending and deposits, commercial and real-estate credit concentrations, interest-rate changes, deposit competition and retention, merchant-services and third-party risks, technology and cybersecurity, regulatory changes and the ability to control costs. Management noted that allowance estimates could change materially, although the amount cannot be estimated.
- Contractual obligations included $4.664 million of operating lease obligations and $36.432 million of time deposits. The company also has ordinary-course commitments to extend credit; the supplied filing text does not provide their aggregate amount in this section.
- Management reported no pending legal proceedings believed to have a material adverse effect, no material loss contingencies, effective disclosure controls, and no material change in internal control over financial reporting during the quarter. Adoption of ASC 606 had no material effect; the company was assessing lease-accounting implementation and preparing for CECL.
Important facts for investors to verify
- Whether earnings growth and the higher net interest margin continue as funding costs and market rates change.
- Credit performance and allowance adequacy as the loan book grows, particularly commercial and attorney-related exposures; monitor special-mention loans and concentration levels.
- Whether merchant-processing and sweep-fee growth is sustainable, and how expense growth compares with revenue growth.
- Interest-rate and securities valuation sensitivity, including the unrealized-loss position and the assumptions behind management’s simulation models.
- Current regulatory capital and liquidity headroom, the amount of outstanding off-balance-sheet credit commitments, and progress on CECL and lease-accounting implementation.