Esquire Financial Holdings, Inc. — Q3 2019 Form 10-Q
Reporting period: Three and nine months ended September 30, 2019. Financial statements are unaudited. Dollar amounts below are in millions unless otherwise stated. The company operates Esquire Bank, serving legal and small-business customers nationally and commercial and retail customers in the New York metropolitan area.
Financial performance
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Interest income | $9.50 | $7.62 | $27.30 | $20.75 |
| Net interest income | $8.75 | $7.28 | $25.26 | $20.01 |
| Provision for loan losses | $0.43 | $0.45 | $1.25 | $0.98 |
| Noninterest income | $3.48 | $1.80 | $8.65 | $5.85 |
| Noninterest expense | $6.60 | $6.33 | $18.59 | $16.89 |
| Net income | $3.82 | $1.68 | $10.27 | $5.86 |
| Diluted earnings per share | $0.49 | $0.22 | $1.32 | $0.76 |
| Net interest margin | 4.82% | 4.75% | 4.88% | 4.69% |
- Growth drivers and comparisons: Q3 net income rose 126.9%; nine-month net income rose 75.2%. The increases reflected higher net interest income and merchant-processing income. Merchant-processing income increased 152.6% in Q3 and 126.3% year to date; transaction volume grew 58.9% and 69.6%, respectively.
- Customer-related fees and service charges fell 61.8% in Q3 and 71.9% year to date, primarily reflecting lower administrative-service-payment income tied to off-balance-sheet funds, their duration, and short-term rates.
- Deposit interest expense increased as deposit pricing rose. Average cost of interest-bearing deposits was 0.74% in Q3 versus 0.38% a year earlier, and 0.72% year to date versus 0.31%. Q3 net interest spread narrowed to 4.49% from 4.58%, while net interest margin improved; year-to-date spread was 4.55% versus 4.54%.
- Reported noninterest expense rose 4.3% in Q3 and 10.1% year to date. Comparisons are affected by a $1.2 million one-time compensation charge in Q3 2018 relating to the death of the former chairman. Excluding that charge, management said expense increased about $1.4 million in Q3 and $2.9 million year to date, citing staffing, technology processing, IT assessments, and pre-development costs.
Financial condition, cash flow, and capital
- At September 30, 2019, total assets were $759.7 million, up 14.4% from year-end 2018. Loans were $533.9 million, up 14.1%; deposits were $644.5 million, up 13.4%; and stockholders’ equity was $106.9 million, up 15.2%.
- Loans were 82.8% of deposits. Commercial loans increased to $247.9 million from $191.8 million at year-end. Attorney-related loans totaled $246.2 million, or 46.2% of the loan portfolio. Core deposits were $624.6 million, 96.9% of deposits.
- Cash and cash equivalents were $61.7 million, compared with $30.6 million at December 31, 2018. For the first nine months, operating cash flow was positive $11.6 million, investing cash flow was negative $56.6 million, and financing cash flow was positive $76.1 million; deposits supplied most of the financing inflow.
- Available-for-sale securities were $139.2 million. Unrealized losses were attributed by management to interest rates rather than credit quality; no other-than-temporary impairment charges were recorded.
- Debt was limited: secured borrowings were $87,000 at quarter-end, with no outstanding FHLB or Federal Reserve borrowings. Available borrowing capacity included $109.7 million at FHLB, $23.6 million at the Federal Reserve discount window, and $17.5 million in correspondent-bank lines; none was drawn.
- The bank reported regulatory capital ratios of 18.08% total risk-based, 16.90% Tier 1 risk-based, 16.90% common equity Tier 1, and 13.11% Tier 1 leverage, and was classified as well capitalized.
Credit quality, outlook, and risks
- The allowance for loan losses was $6.7 million, or 1.26% of loans, versus $5.6 million, or 1.20%, at year-end 2018. Nine-month provision was $1.25 million versus $0.98 million. The filing reported $1.1 million of nonperforming consumer loans at quarter-end, compared with none at year-end; nonperforming assets were 0.14% of total assets. The loans involved several deceased NFL settlement claimants and a missed lien payment by a law firm.
- The company ceased originating NFL post-settlement consumer loans in December 2017; gross NFL consumer exposure remained approximately $30.5 million. Management cited court and claims-administration changes that could extend claim processing and loan repayment timelines. It reported payoffs on about 20% of its NFL claimant loans, compared with overall claim-registration payoffs of about 4.8%, and an approximately 2.2-year weighted-average remaining maturity, excluding nonaccrual loans. Potential borrower or related-party fraud was identified as a risk that could increase credit losses.
- Other stated risks include concentrations in real-estate lending and in loans and deposits connected to the legal/litigation market; interest-rate changes; loan losses; merchant/ISO counterparty and operational risks; competition; and technology, regulatory, and third-party service-provider risks. Management said the bank had no material pending legal proceeding expected to adversely affect its financial condition, results, or cash flows.
- The filing provides no specific earnings or growth guidance. Management described continued focus on growing attorney-related lending and core deposits. It cautioned that results for the interim periods are not necessarily indicative of full-year results.
- CECL adoption was planned for January 1, 2023 following an announced effective-date delay for qualifying smaller reporting companies. The company said it was preparing for implementation. It adopted lease accounting in 2019, recognizing $2.8 million of right-of-use assets and $3.4 million of lease liabilities at quarter-end.
- Management concluded disclosure controls were effective and reported no material change in internal control over financial reporting during the quarter. The interim statements were unaudited; management stated that all adjustments were recurring.
Important facts for investors to verify
- Whether merchant-processing growth and higher per-transaction fees are sustainable, and how much depends on ISO partners and fee arrangements.
- Trends in deposit pricing and funding costs relative to loan yields and net interest margin.
- Performance, delinquencies, payoffs, and expected recoveries in the $30.5 million NFL consumer portfolio, including the effects of claim-processing delays or fraud investigations.
- Credit quality and allowance adequacy as commercial lending grows; confirm the details and subsequent performance of the $1.1 million of nonperforming consumer loans.
- How growth in attorney-related and real-estate lending affects concentration risk, liquidity, and capital, and whether reported borrowing availability remains accessible on the stated terms.