Esquire Financial Holdings, Inc. — Q3 2023 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2023. Esquire is a branchless commercial bank focused on litigation-related lending, payment processing, and commercial and retail banking. Unless otherwise noted, amounts are in U.S. dollars.
Financial results and position
- Q3 earnings: Net income was $9.8 million, up 27.6% from $7.7 million a year earlier. Diluted EPS was $1.17 versus $0.94.
- Nine-month earnings: Net income was $31.1 million, up 60.4% from $19.4 million. Diluted EPS was $3.74 versus $2.37.
- Q3 revenue and margin: Net interest income was $21.7 million, up 39.7%; net interest margin was 6.19%, compared with 5.18%. Noninterest income was $6.5 million, up 1.5%. Total interest and noninterest income was $30.4 million, up about 35.9%.
- Nine-month results: Net interest income was $61.1 million, up 49.0%; net interest margin was 6.08%, compared with 4.69%. Noninterest income was $23.5 million, up 29.4%, including a $4.0 million net gain on equity investments.
- Expenses and credit costs: Q3 noninterest expense rose 27.0% to $13.8 million; nine-month expense rose 28.1% to $39.2 million. Provision for credit losses was $1.2 million in Q3 and $3.0 million for nine months. The filing does not report a consolidated expense ratio in the financial statements; management cites a Q3 efficiency ratio of 48.7%.
- Balance sheet at September 30: Assets were $1.482 billion, up 6.2% from year-end 2022. Loans held for investment were $1.114 billion gross and $1.098 billion net, up 17.5% net from year-end. Deposits were $1.283 billion, up 4.4%; stockholders’ equity was $185.6 million, up from $158.2 million.
- Funding, debt and liquidity: Cash and cash equivalents were $120.6 million. The bank reported no outstanding FHLB or Federal Reserve borrowings; interest expense on borrowings was negligible. Management reported $782.4 million of overall liquidity, or 61% of deposits, including borrowing capacity and available reciprocal sweep balances. Core deposits were 99.4% of deposits.
- Cash flow, nine months: Operating activities provided $25.9 million, versus $30.3 million a year earlier; investing activities used $120.8 million, versus $155.1 million; financing activities provided $51.4 million, versus $157.8 million. Cash and cash equivalents declined $43.5 million to $120.6 million.
- Capital and credit quality: The bank was “well capitalized”; its total risk-based capital ratio was 15.59% and Tier 1 leverage ratio was 11.98%. There were no nonperforming assets. The allowance for credit losses was $15.3 million, or 1.38% of loans, versus $12.2 million, or 1.29%, at year-end 2022.
Material changes versus comparable periods
- Profit growth was driven principally by higher loan interest income from commercial loan growth and higher rates. Average Q3 loans rose 27.6% year over year, and the loan yield increased to 7.79% from 6.53%.
- Higher interest rates and growth in interest-bearing deposits increased Q3 interest expense to $2.2 million from $0.4 million. The average cost of interest-bearing deposits rose to 1.16% from 0.28%.
- Gross loans grew mainly in commercial lending and multifamily real estate. Commercial loans reached $662.3 million and multifamily loans $327.7 million at September 30.
- Noninterest expense increased, particularly compensation, professional services, and data processing, as the company added staff and invested in growth, technology, compliance, and risk management.
- Cash declined as management deployed liquidity into higher-yielding commercial loans; reverse repurchase agreements fell from $49.6 million at year-end to zero.
Outlook, commentary and risks
- The filing gives no quantified earnings or financial guidance. Management describes continued growth in litigation lending and payment processing, supported by technology and relationship banking, as priorities.
- Management characterizes the balance sheet as asset-sensitive: its model estimates that a 100-basis-point rate increase would add $5.1 million to 12-month net interest income, while a 100-basis-point decrease would reduce it by $4.8 million. These are model estimates, not guidance, and depend on assumptions.
- Litigation-related loans were $573.8 million, or 51.5% of total loans; litigation and payment-processing customers accounted for about 85% of deposits. Management identifies concentration in the litigation market and real estate, including the New York metro area, as risks.
- Uninsured deposits were $373.1 million, or 29% of deposits, excluding affiliate deposits. Management states that most uninsured deposits are tied to broader client relationships; available liquidity also includes sweep balances, some of which may be returned to the bank.
- Available-for-sale securities had $24.0 million of gross unrealized losses at quarter-end; held-to-maturity securities had $11.0 million of unrecognized losses. Management attributed the declines to interest rates rather than credit quality and reported no related credit-loss allowance. Accumulated other comprehensive loss was $17.4 million.
- Unusual items include the $5.3 million 2023 gain from the Litify investment transaction and a $1.3 million equity-method loss on the NFL consumer post-settlement loan fund. The fund’s expected weighted-average asset life was extended by about one year; its carrying amount was $10.7 million at quarter-end.
- The company adopted CECL on January 1, 2023, reducing retained earnings by $568,000 after tax and establishing a $500,000 reserve for unfunded commitments. Management says no pending legal proceeding is expected to have a material adverse effect; risk factors were unchanged from prior filings.
Important facts for investors to verify
- Whether loan growth, especially litigation-related and multifamily lending, remains prudent and whether criticized loans and the allowance develop as expected.
- How deposit pricing, uninsured deposit levels, escrow and sweep balances, and customer concentration affect funding stability and margins.
- Whether the reported interest-rate sensitivity and strong liquidity remain valid as rates, deposit behavior, and market conditions change.
- The sustainability of earnings excluding the Litify gain, alongside rising compensation, compliance, technology, and other operating costs.
- How unrealized securities losses, securities pledging, and the company’s ability to avoid selling securities affect liquidity and capital under stress.