Esquire Financial Holdings, Inc. — 2018 Form 10-K
Reporting period: Fiscal year ended December 31, 2018. The company is a bank holding company operating through Esquire Bank, serving legal and small-business customers nationally, alongside commercial and retail customers in the New York metropolitan area. Its model combines attorney-focused lending, low-cost deposits and merchant processing.
Financial performance and condition
| Metric | 2018 | 2017 |
|---|---|---|
| Net interest income | $27.7 million | $19.9 million |
| Noninterest income | $7.9 million | $5.5 million |
| Total revenue (net interest income plus noninterest income) | $35.6 million | $25.4 million |
| Net income | $8.7 million | $3.6 million |
| Diluted earnings per share | $1.13 | $0.58 |
| Net interest margin | 4.73% | 4.43% |
| Efficiency ratio | 59.34% | 68.71% |
| Return on average assets / common equity | 1.45% / 10.12% | 0.80% / 5.38% |
- Net income rose 139.7%. Net interest income increased 39.7%, reflecting loan growth and a higher net interest margin; noninterest income rose 42.4%, led by merchant processing.
- Noninterest expense increased 27.9% to $22.3 million. It included a $1.173 million one-time compensation charge related to the August 2018 death of Executive Chairman Dennis Shields.
- Provision for loan losses was $1.4 million, versus $0.9 million. The allowance was $5.6 million, or 1.20% of loans, compared with $4.3 million, or 1.22%, a year earlier. Net charge-offs were approximately zero.
- Total assets were $663.9 million, up 24.4%; gross loans were $468.1 million, up 34.1%; deposits were $568.4 million, up 26.7%; and stockholders’ equity was $92.8 million, up 11.3%.
- Cash and cash equivalents ended at $30.6 million, down from $43.1 million. Operating cash flow was $9.4 million; investing cash outflow was $142.1 million, principally reflecting loan growth and securities purchases; financing cash inflow was $120.1 million, mainly deposit growth.
- Core deposits were $548.0 million, 96.4% of deposits; the reported cost of deposits was 0.23%. The company reported $89,000 of secured borrowings and no outstanding balances on its FHLB, Federal Reserve discount-window or other available credit lines. Available capacity included $115.0 million at the FHLB, $24.2 million at the Federal Reserve and $7.5 million through other institutions.
- Esquire Bank’s capital ratios were strong: total risk-based capital 18.70%, Tier 1 risk-based capital 17.54% and Tier 1 leverage 13.26%. The Bank was classified as well capitalized.
Material changes, outlook and risks
- Attorney-related loans reached $211.4 million, or 45.2% of the loan portfolio. Real estate loans were $231.6 million, or 49.6%. Loans were concentrated geographically: 67.5% in New York and 55.0% in New York City.
- Merchant processing income was $5.0 million. The platform served approximately 28,000 merchants through 25 active ISOs and processed $7.2 billion in card volume. Management stated its intention to continue expanding merchant processing and attorney-focused lending; the filing provides no specific earnings or growth guidance.
- Credit quality was reported as sound, with no nonperforming loans or assets at year-end. However, $9.2 million of loans were rated special mention and one $180,000 commercial loan was performing but substandard. The portfolio’s rapid growth and limited seasoning remain risks.
- NFL concussion-settlement consumer lending is a notable concentration. The company stopped originating these loans in December 2017. A court-appointed special investigator began reviewing the settlement program in December 2018; management warned that additional administration could extend asset duration and increase credit risk. The filing gives inconsistent NFL exposure figures: $27.9 million for loans related to the case in one section and approximately $23.0 million of total NFL consumer exposure in another.
- Other key risks include dependence on the legal and litigation market, real estate and New York-area concentrations, interest-rate sensitivity, deposit concentration, and merchant/ISO, processor, cybersecurity and regulatory risks. The ten largest depositors represented 23.5% of total deposits.
- Management described the Bank as asset-sensitive: its modeled 12-month net interest income rose under higher-rate scenarios and declined under lower-rate scenarios. These are model estimates, not forecasts, and depend on assumptions.
- The company did not expect to pay common dividends in the foreseeable future. A January 2019 repurchase program authorized up to 300,000 shares; none had been repurchased by February 28, 2019. The company also reported a $2.41 million investment for a 4.95% interest in Litify LLC.
- Expected accounting changes included approximately $3.1 million of additional lease liabilities and corresponding right-of-use assets upon adoption of the lease standard in 2019. Management planned to adopt CECL in the first quarter of 2020; the standard may increase the allowance for credit losses.
- The independent auditor issued an unqualified opinion on the financial statements. Management concluded disclosure controls and internal control over financial reporting were effective; the auditor did not provide an internal-control attestation because the company qualified as an emerging growth company. No pending legal proceeding was identified as likely to have a material adverse effect.
Important facts for investors to verify
- Reconcile the conflicting NFL loan exposure disclosures and monitor the special investigator’s review, settlement-processing timelines and repayments.
- Review loan concentration, underwriting and subsequent credit performance, particularly attorney-related, multifamily/CRE and New York-area exposures; track special-mention and substandard credits.
- Assess deposit stability and concentration, including litigation-related funding and the ten largest depositors, alongside the company’s very low reported deposit cost.
- Evaluate whether merchant volume and fee growth can continue while managing ISO, merchant, processor and card-network risks.
- Track net interest margin and funding costs as rates change, and compare actual results with the filing’s interest-rate sensitivity scenarios.
- Monitor the impact of the one-time chairman-related charge, ongoing expense growth, lease-standard adoption and CECL implementation on future earnings and capital.
- Confirm whether the authorized share repurchase was subsequently used and whether regulatory, capital or liquidity constraints affect shareholder returns.