Esquire Financial Holdings, Inc. — Q2 2021 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2021. The company is a bank holding company whose subsidiary serves the litigation industry, small businesses, and commercial and retail customers. Dollar amounts below are in millions unless stated otherwise.
Financial performance
| Metric | Q2 2021 | Q2 2020 | Six months 2021 | Six months 2020 |
|---|---|---|---|---|
| Net interest income | $10.7 | $9.2 | $20.7 | $18.4 |
| Provision for loan losses | $0.85 | $1.9 | $2.65 | $3.8 |
| Noninterest income | $5.5 | $3.0 | $10.9 | $6.1 |
| Noninterest expense | $9.1 | $6.8 | $17.3 | $13.6 |
| Net income | $4.5 | $2.5 | $8.7 | $5.1 |
| Diluted EPS | $0.57 | $0.33 | $1.10 | $0.67 |
| Net interest margin | 4.49% | 4.47% | 4.50% | 4.59% |
- Q2 net income rose 77.7%; first-half net income rose 69.1%. Payment processing fees were the main noninterest-income driver, increasing 91.6% in Q2 and 88.6% for the first half.
- Management attributed payment-processing growth to expanded ISO sales channels, more merchants and transaction volume, fee arrangements, and economic reopening. Processing volume was $6.2 billion in Q2 and $11.2 billion for the first half.
- Expense growth reflected staffing (26% higher), digital-platform investment, marketing, technology implementation, and processing volume. First-half net interest margin declined 9 basis points, as lower asset yields more than offset reduced funding costs.
Financial position, cash flow and liquidity
- At June 30, 2021, total assets were $1.058 billion, up 13.0% from year-end 2020. Cash and equivalents were $145.7 million; net loans were $693.4 million; available-for-sale securities were $126.3 million.
- Total loans were $708.5 million, up 5.3% from year-end; growth was concentrated in multifamily loans, up 18.5% to $201.2 million, and commercial loans, up 4.3% to $373.9 million. Litigation-related loans totaled $353.7 million, 49.9% of the loan portfolio.
- Deposits increased 13.8% to $914.7 million. Core deposits were $903.4 million, or 98.8% of deposits. Stockholders’ equity was $134.7 million, up 6.8% from year-end.
- First-half operating cash flow was $16.3 million, versus $13.8 million in 2020. Investing activities used $46.4 million, largely reflecting loan growth and securities purchases; financing provided $110.6 million, primarily from deposit growth. Cash increased $80.6 million to $145.7 million.
- The filing reports no outstanding FHLB or Federal Reserve advances and no drawn amounts on disclosed credit lines. Available borrowing capacity included $116.9 million from the FHLB, $28.9 million at the Federal Reserve discount window, and $67.5 million in unsecured correspondent-bank lines. The fair-value note lists $49,000 of secured borrowings.
- The bank reported regulatory capital ratios of 17.86% total risk-based, 16.60% Tier 1 risk-based, 16.60% common equity Tier 1, and 12.29% Tier 1 leverage; it was considered well capitalized.
Asset quality, changes and notable items
- The allowance for loan losses was $14.0 million, or 1.98% of loans, versus $11.4 million, or 1.70%, at December 31, 2020. The first-half provision was lower than in 2020, but the reserve increased with loan growth and identified portfolio risks.
- Nonperforming assets were $2.3 million, consisting of nonaccrual consumer loans; they represented 0.32% of loans and 0.21% of assets. The allowance coverage ratio was 617%. Special-mention and substandard loans were $28.8 million and $9.4 million, respectively.
- The legacy NFL post-settlement consumer portfolio was $24.6 million, with a weighted-average remaining maturity of less than one year. The company had ceased new originations in December 2017 and had charged off 6% of NFL loans to date. Claims-process changes, physician qualification rules, pandemic-related delays, and revisions addressing “race-norming” may extend repayment timelines and increase credit losses.
- No borrowers remained in the COVID-19 payment-deferral program at June 30, 2021. Management said the pandemic’s future effects remain uncertain; potential effects include higher credit losses, impaired asset values, and weaker demand.
- Available-for-sale securities increased to $126.3 million. Unrealized losses were attributed to interest-rate changes rather than credit quality; management recorded no impairment charge.
- No material pending legal proceedings were reported. Management stated that disclosure controls were effective and reported no material change in internal controls during the quarter.
Outlook and risks
The filing provides no specific earnings, revenue, or loan-growth guidance. Management expressed an intention to prudently grow litigation-related lending and core deposit relationships, while investing in digital platforms and sales capacity. Key stated risks include loan and deposit concentration in litigation-related markets, real-estate and credit exposure, interest-rate sensitivity, competition, merchant/ISO losses and operational or technology risks. COVID-19 and NFL claims-administration developments could affect payment timing, asset quality, provisioning, liquidity, and results.
The bank expects to adopt the CECL credit-loss standard on or before January 1, 2023; the filing does not quantify the expected adoption impact.
Important facts for investors to verify
- Whether payment-processing growth and transaction volumes are sustainable, and how merchant/ISO concentration and fee arrangements affect earnings.
- Developments in the $24.6 million NFL loan portfolio, including claim-processing timelines, borrower classifications, recoveries, delinquencies, and potential charge-offs.
- Whether reserve levels remain adequate as loans grow, particularly given the increase in the allowance to 1.98% of loans and the classified-loan balances.
- How lower asset yields, interest-rate changes, deposit pricing, and excess liquidity affect net interest margin and profitability.
- Whether operating expenses and technology investments produce returns commensurate with their growth, and the eventual impact of CECL adoption.