Esquire Financial Holdings, Inc. — Q2 2019 Form 10-Q
Business and reporting period. The company is a bank holding company operating Esquire Bank, a commercial bank serving legal and small-business customers nationally and commercial and retail customers in the New York metropolitan area. This unaudited filing covers the quarter and six months ended June 30, 2019; comparative results are for 2018. Dollar amounts below are in millions unless stated otherwise.
Financial performance and position
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Interest income | $9.322 | $6.864 | $17.806 | $13.133 |
| Net interest income | $8.584 | $6.641 | $16.512 | $12.736 |
| Provision for loan losses | $0.400 | $0.300 | $0.825 | $0.525 |
| Noninterest income | $3.090 | $1.980 | $5.171 | $4.055 |
| Noninterest expense | $6.507 | $5.289 | $11.988 | $10.561 |
| Net income | $3.468 | $2.221 | $6.453 | $4.179 |
| Diluted EPS | $0.45 | $0.29 | $0.83 | $0.54 |
- Q2 net income increased 56.1%; six-month net income increased 54.4%. Q2 net interest margin was 4.89%, up 26 basis points year over year; the six-month margin was 4.92%, up 27 basis points. Net interest spread was 4.55% and 4.58%, respectively.
- At June 30, total assets were $732.5 million, up 10.3% from year-end 2018. Loans were $514.6 million, up 9.9%; deposits were $623.2 million, up 9.6%; and stockholders’ equity was $102.4 million, up 10.3%.
- Commercial loans grew $42.6 million, or 22.2%, to $234.4 million. Attorney-related loans totaled $231.3 million, 45.0% of the loan portfolio. Cash and cash equivalents were $40.2 million; available-for-sale securities were $147.7 million.
- The allowance for loan losses was $6.4 million, or 1.25% of loans, versus $5.6 million, or 1.20%, at year-end. The bank reported no nonperforming assets or troubled debt restructurings. At June 30, $4.6 million of loans were rated special mention and $0.15 million substandard.
- Six-month operating cash flow was $0.7 million, compared with $2.8 million in 2018. Investing activities used $45.9 million, primarily reflecting $46.7 million of net loan growth; financing provided $54.8 million, including a $54.7 million increase in deposits. Cash rose $9.6 million to $40.2 million.
- Deposits were the principal funding source; core deposits were $603.3 million, or 96.8% of deposits. Secured borrowings were just $0.1 million. No amounts were drawn on available FHLB borrowing capacity of $117.6 million, Federal Reserve discount-window capacity of $24.2 million, or correspondent-bank lines totaling $17.5 million.
- Esquire Bank was reported as well capitalized. Its total risk-based capital ratio was 17.78%, Tier 1 risk-based and common equity Tier 1 ratios were each 16.62%, and Tier 1 leverage was 12.85%.
Changes versus the prior comparable period
- Growth in average loans and higher loan yields drove most of the increase in interest income: loan interest income rose 41.8% in Q2 and 39.0% year to date. Average loan balances increased 36.3% in Q2 and 33.3% year to date.
- Deposit costs rose: average rates paid on interest-bearing deposits increased to 0.77% in Q2 from 0.29%, and to 0.71% year to date from 0.27%. The company said higher asset yields more than offset increased funding costs, lifting net interest margin.
- Merchant-processing income increased 139.1% in Q2 and 111.0% year to date. Average monthly processing volume rose 63.4% in Q2 and 76.6% year to date. Customer-related fees fell 74.6% in Q2 and 74.7% year to date, primarily reflecting lower administrative-service payments on off-balance-sheet funds.
- Noninterest expense grew 23.0% in Q2 and 13.5% year to date. Management cited staffing and salary increases, higher merchant-platform processing and system-implementation costs, and Q2 increases in IT consulting and targeted marketing.
- Unrealized securities losses narrowed: accumulated other comprehensive loss was $0.08 million at June 30, compared with $2.6 million at December 31, 2018. The filing attributed unrealized losses to interest rates rather than credit quality and reported no impairment charges.
Outlook, risks and notable items
- The filing gives no quantified earnings, growth, or margin guidance. Management notes that reported interim results are not necessarily indicative of full-year results.
- Principal disclosed risks include interest-rate and funding-cost changes; credit losses and allowance-estimation judgments; real-estate and local-market loan concentration; dependence on the legal/litigation market; merchant-services and third-party risks; competition; cybersecurity and technology; and regulatory, compliance, and economic changes. Management described interest-rate risk as the company’s primary market risk.
- Interest-rate simulations estimate higher 12-month net interest income under rising-rate scenarios and lower income under falling rates: a 200-basis-point decline modeled a $5.4 million reduction from the baseline. The filing cautions that actual results may differ due to model assumptions, market conditions, and management actions.
- Adoption of lease accounting on January 1, 2019 resulted in recognition of right-of-use assets and lease liabilities. At June 30, these were $2.9 million and $3.5 million, respectively; six-month operating lease cost was $0.24 million.
- The company planned to adopt the expected-credit-loss standard (CECL) on January 1, 2020 under the then-current effective date. A July 2019 proposal could delay adoption for smaller reporting companies to January 1, 2023; the proposal was not yet final in the filing.
- Management said disclosure controls were effective and reported no material change in internal control over financial reporting during the quarter. The company reported no pending legal proceeding expected to have a material adverse effect and no material changes to its previously disclosed risk factors.
Important facts for investors to verify
- Whether merchant-processing growth and its economics are sustainable, and how much future results depend on ISOs, merchants, and third-party providers.
- Whether falling administrative-service income persists, given its sensitivity to off-balance-sheet fund balances, duration, and short-term rates.
- Loan mix, growth, criticized commercial loans, allowance adequacy, and credit performance as the portfolio expands—especially attorney-related and real-estate lending.
- Deposit pricing and funding trends, and whether margin growth can continue as deposit costs adjust to market rates.
- The final CECL adoption date and estimated effect on the allowance, earnings, and capital once implementation estimates are available.
- The assumptions behind interest-rate sensitivity estimates and the availability of contingent borrowing capacity if liquidity needs change.