Esquire Financial Holdings, Inc. — Q3 2017 Form 10-Q
Reporting period: Three and nine months ended September 30, 2017. Unaudited consolidated results include Esquire Bank, N.A. Unless otherwise noted, figures are in millions of dollars. The company is a bank holding company serving legal and small-business customers nationally, alongside commercial and retail customers in the New York metropolitan area.
Financial performance
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Interest income | $5.354 | $4.076 | $14.542 | $11.779 |
| Net interest income | $5.226 | $3.936 | $14.140 | $11.405 |
| Provision for loan losses | $0.275 | $0.180 | $0.725 | $0.455 |
| Noninterest income | $1.345 | $1.057 | $3.909 | $3.087 |
| Noninterest expense | $4.425 | $3.620 | $12.618 | $10.563 |
| Net income | $1.141 | $0.740 | $2.983 | $2.131 |
| Diluted EPS | $0.16 | $0.14 | $0.51 | $0.42 |
| Net interest margin | 4.53% | 4.15% | 4.37% | 4.26% |
Q3 net income rose 54.2%; nine-month net income rose 40.0%. Interest income growth primarily reflected higher average loan balances; Q3 loan yield also increased. Higher noninterest income was mainly from customer fees and service charges, including sweep fees, and merchant-processing activity. Expense growth reflected hiring and compensation, public-company costs, technology investment, and, for the nine-month period, office consolidation and related costs.
Financial position, funding and cash flow
- At September 30, total assets were $480.8 million, up 13.2% from December 31, 2016. Net loans were $324.6 million, up $49.4 million; available-for-sale securities were $107.8 million, up $15.2 million.
- Deposits totaled $394.9 million, up $24.1 million. Core deposits were $367.5 million, or 93.1% of deposits. Cash and cash equivalents were $31.4 million, down from $43.0 million at year-end 2016.
- Stockholders’ equity was $83.3 million, versus $52.2 million at year-end. The increase primarily reflected $26.3 million of net IPO proceeds; 2,154,580 newly issued shares were sold at $14.00 each. Preferred shares were exchanged for common shares in July; no preferred shares remained outstanding at September 30.
- Secured borrowings were $0.28 million. No amounts were outstanding on disclosed FHLB, Federal Reserve discount-window, Atlantic Community Bankers’ Bank, or Zions Bank lines. Available borrowing capacity included $83.0 million from FHLB, $20.2 million from the Federal Reserve, and lines of $3.5 million and $4.0 million from the two correspondent banks.
- For the first nine months, operating cash flow was $3.0 million, investing cash flow was negative $65.9 million, and financing cash flow was $51.3 million. Cash and cash equivalents declined $11.5 million. Investing outflows mainly reflected $50.6 million of loan growth and $31.4 million of securities purchases; financing included deposit growth and IPO proceeds.
- The Bank was classified as well capitalized. Reported September 30 capital ratios were 13.64% Tier 1 leverage, 18.22% Tier 1 risk-based, 18.22% total risk-based, and 19.41% Common Equity Tier 1. The filing also describes higher Bank-specific minimum ratios established by the OCC in 2012.
Material changes and credit quality
- Total loans were $327.5 million before deferred costs and allowance. Attorney-related loans reached $138.6 million, or 42.3% of the portfolio, compared with $99.7 million at year-end. Consumer loans grew to $30.0 million from $10.6 million, including substantial growth in post-settlement consumer loans.
- The allowance for loan losses was $4.1 million, or 1.24% of loans, compared with $3.4 million, or 1.23%, at year-end. Nine-month charge-offs were $54,000.
- Special-mention loans increased to $7.65 million from $287,000. Management attributed most of the increase to the downgrade of one commercial attorney-related relationship totaling $6.8 million, citing an anticipated temporary cash-flow shortfall. The loans were current and reported as well collateralized, with a 16.8% loan-to-net-fee value.
- The company reported no past-due or nonperforming loans, impaired loans, troubled-debt restructurings, or loans rated substandard or doubtful at September 30. Management cautioned that allowance estimates are subject to uncertainty and may change.
Outlook, risks and other notable items
- The filing provides no specific earnings or growth guidance. Management described continued loan growth and use of IPO proceeds to support lending and other growth initiatives; it noted that the larger equity base had adversely affected return on equity after the offering.
- Interest-rate modeling indicated asset sensitivity: a 100-basis-point increase was estimated to raise 12-month net interest income by $1.142 million; a 100-basis-point decrease was estimated to reduce it by $2.096 million. Management cautioned that actual outcomes may differ because of model assumptions, market conditions, rate timing and any management actions.
- Key stated risks include real-estate and legal/litigation-market loan concentrations, borrower credit quality, interest-rate changes, deposit competition and retention, merchant-services risks, technology and third-party-provider risks, regulation, and the ability to control costs.
- Management expected no significant operating or financial-condition impact from the forthcoming revenue-recognition standard (effective for the company January 1, 2018) or ASU 2016-01. Lease accounting was under evaluation; the company was preparing for the expected-credit-loss standard, effective for it in 2020.
- Available-for-sale securities had $1.021 million of gross unrealized losses at September 30, primarily attributed by management to interest rates rather than credit quality; no impairment charge was recorded. The filing reports no material pending legal proceedings and says disclosure controls were effective, with no material quarterly change in internal control over financial reporting.
Important facts for investors to verify
- How the $7.65 million special-mention balance and the $6.8 million attorney-related exposure have performed since quarter-end, and whether the temporary cash-flow shortfall resolved.
- Whether attorney-related and real-estate concentrations, rapid consumer-loan growth, and the allowance remain appropriate as the portfolio expands.
- Whether deposit growth and available borrowing capacity can fund loan growth while preserving liquidity and net interest margins.
- How post-IPO share dilution and the enlarged equity base affect per-share earnings and return on equity.
- The cover page marks “No” for filing all required reports during the preceding 12 months; confirm the context and reporting-history implications for this newly public issuer.