Esquire Financial Holdings, Inc. — Q3 2020 Form 10-Q
Reporting period: Three and nine months ended September 30, 2020; balance-sheet comparisons are with December 31, 2019. Amounts below are in millions except per-share data and ratios. The company is a commercial bank focused on the litigation industry, small businesses, merchant processing, and local commercial and retail banking.
Key financial results
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Net interest income | $9.2 | $8.7 | $27.6 | $25.3 |
| Provision for loan losses | $0.9 | $0.4 | $4.7 | $1.3 |
| Noninterest income | $3.9 | $3.5 | $10.0 | $8.6 |
| Noninterest expense | $7.3 | $6.6 | $20.9 | $18.6 |
| Net income | $3.6 | $3.8 | $8.7 | $10.3 |
| Diluted EPS | $0.48 | $0.49 | $1.14 | $1.32 |
| Net interest margin | 4.23% | 4.82% | 4.46% | 4.88% |
- Q3 net income declined 5.5%; nine-month net income declined 14.9%. Higher loan-loss provisioning and operating costs outweighed growth in net interest income and merchant-processing revenue.
- Merchant-processing income rose 13.3% in Q3 to $3.7 million and 19.2% year to date to $9.5 million. Processing volume increased 32.3% in Q3 to $4.2 billion and 20.7% year to date to $10.4 billion.
- Net interest income increased, but margins narrowed as asset yields fell in the low-rate environment. Lower deposit costs partly offset reduced loan, securities, and cash yields.
Financial position, liquidity and credit
- Total assets were $880.9 million, up 10.4% from year-end 2019. Loans were $635.7 million, up 12.4%; commercial loans grew 24.4% to $321.0 million.
- Attorney-related loans totaled $291.1 million, or 45.8% of loans. This includes lending to law firms and consumer lending to claimants and attorneys.
- Deposits rose 9.5% to $745.5 million; core deposits were $741.2 million, or 99.4% of deposits. Cash and cash equivalents were $110.6 million and available-for-sale securities were $110.4 million.
- Borrowings were minimal: secured borrowings were $84,000, with no outstanding FHLB, Federal Reserve discount-window, or correspondent-bank line borrowings. Available stated capacity included $111.3 million at the FHLB, $20.6 million at the Federal Reserve, and $67.5 million in unsecured correspondent lines.
- Stockholders’ equity was $121.9 million. Esquire Bank reported a 16.93% total risk-based capital ratio, 15.67% Tier 1 risk-based and common equity Tier 1 ratios, and a 12.21% Tier 1 leverage ratio; management said the bank exceeded applicable requirements and was well capitalized.
- For the first nine months, operating cash flow was $16.9 million, investing cash flow was negative $32.7 million, and financing cash flow was positive $64.6 million. Cash increased $48.8 million to $110.6 million.
- The allowance for loan losses increased to $11.6 million, or 1.82% of loans, from $7.0 million, or 1.24%, at year-end. The increase reflected loan growth and COVID-19-related qualitative risk factors.
- Nonperforming loans were $7.6 million (1.20% of loans): one $5.8 million multifamily loan past maturity but still accruing and $1.8 million of nonaccrual consumer loans. The multifamily loan was extended after quarter-end and reported current and performing.
Changes, outlook and risks
- COVID-19 payment deferrals had declined to 13 borrowers and $11.5 million as of November 6, from $90.1 million at June 30. The company reported no deferral borrowers placed on nonperforming status or receiving modifications classified as troubled debt restructurings.
- The company had funded $21.9 million of PPP loans by September 30 and expected that portfolio to decline as loans were forgiven. Management reported no identified specific COVID-related impairment in loan or securities portfolios, but said the pandemic’s ultimate effects remained uncertain.
- Management attributed expense growth to staffing, technology and digital-platform investment, higher processing volumes, and office and software costs. It said the technology and personnel investments were intended to support growth in 2021 and beyond; the filing provides no quantified earnings or revenue guidance.
- Key risks include pandemic-driven borrower stress and collateral declines, interest-rate and margin pressure, concentrations in attorney/litigation-related lending and deposits, merchant-processing and ISO risks, and the timing and collection of NFL concussion-settlement claimant loans. NFL consumer loan exposure was $27.9 million, with a weighted-average remaining maturity of about 1.1 years; COVID-related delays could extend repayment timing. The company had ceased originating these loans in December 2017.
- Management identified potential PPP-related litigation, regulatory, reputational, and SBA-guarantee risks, as well as remote-work cybersecurity exposure. It reported no pending legal proceeding believed likely to have a material adverse effect and no material changes to other previously disclosed risk factors beyond the added NFL-loan risk.
Important facts for investors to verify
- Whether higher provisions and the 1.82% allowance remain adequate as pandemic conditions, deferrals, and borrower performance evolve.
- Current status and repayment prospects for the $5.8 million multifamily loan, nonaccrual consumer loans, and the $27.9 million NFL claimant-loan portfolio.
- Ongoing margin trends, deposit costs and mix, and the effect of low rates on loan and securities yields.
- Whether merchant-processing growth and technology investments translate into sustainable earnings while expenses rise.
- PPP forgiveness and SBA-guarantee performance, and any material developments in merchant chargebacks, litigation, or regulatory matters.
- The filing reports no quantified forward earnings guidance; results for the interim periods are not necessarily indicative of full-year results.