Esquire Financial Holdings, Inc. — Q2 2018 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2018. Dollar figures below are in millions unless stated otherwise. Esquire is a bank holding company serving legal and small-business customers nationally, alongside commercial and retail customers in the New York metropolitan area.
Financial performance
| Metric | Q2 2018 | Q2 2017 | Six months 2018 | Six months 2017 |
|---|---|---|---|---|
| Net interest income | $6.641 | $4.620 | $12.736 | $8.915 |
| Provision for loan losses | $0.300 | $0.300 | $0.525 | $0.450 |
| Non-interest income | $1.980 | $1.359 | $4.055 | $2.564 |
| Non-interest expense | $5.289 | $4.169 | $10.561 | $8.193 |
| Net income | $2.221 | $1.027 | $4.179 | $1.842 |
| Diluted earnings per share | $0.29 | $0.20 | $0.54 | $0.36 |
| Net interest margin | 4.63% | 4.34% | 4.65% | 4.29% |
- Q2 net income rose 116.3%; six-month net income rose 126.9%. Management attributed improvement mainly to higher net interest income and non-interest income, partly offset by higher operating costs.
- Q2 interest income increased 44.3% to $6.864 million, while interest expense rose 64.0% to $0.223 million. Higher average loan and securities balances and improved yields supported net interest income; deposit costs also increased.
- Non-interest income growth reflected merchant processing and customer-related fees. For the first half, these rose 33.7% and 103.9%, respectively. Management cited more ISOs and merchants, higher processing volumes, and increased administrative service income.
- Non-interest expense increased 26.9% in Q2 and 28.9% for the first half. Hiring, including senior managers, public-company costs, and strategic projects contributed to the increase. The effective tax rate declined to 26.8% for the first half from 35.0%, which the company attributed to federal tax reform.
Financial position, cash flow, and liquidity
- Total assets were $587.2 million at June 30, up 10.1% from year-end 2017. Loans were $391.7 million, up 12.2%; available-for-sale securities were $147.8 million, up 14.8%.
- Total deposits were $497.1 million, up 10.8%. Core deposits were $480.7 million, or 96.7% of deposits. The company also reported $251.2 million of off-balance-sheet funds associated with mass-tort deposit sweep programs.
- Cash and cash equivalents were $27.5 million, down from $43.1 million at December 31, 2017. The company reported $147.8 million of available-for-sale securities and unused borrowing capacity of $123.2 million at the FHLB, $17.6 million at the Federal Reserve discount window, and $7.5 million in correspondent-bank lines.
- Six-month operating cash flow was $2.845 million; investing activities used $67.413 million, primarily reflecting loan growth and securities purchases. Financing activities provided $48.995 million, primarily from deposit growth. Cash and cash equivalents decreased $15.573 million.
- Secured borrowings were $0.274 million; no FHLB, Federal Reserve, or correspondent-bank line balances were outstanding. Stockholders’ equity was $86.5 million. The bank was classified as well capitalized; actual June 30 ratios included 12.87% Tier 1 leverage, 17.53% Tier 1 risk-based and total risk-based capital, and 18.67% common equity Tier 1.
Credit, market risk, and notable items
- The allowance for loan losses was $4.789 million, or 1.22% of loans, compared with $4.264 million, or 1.22%, at year-end 2017. There were no delinquent or non-performing loans and no charge-offs in the first half. Commercial loans included $9.499 million rated special mention and $0.210 million substandard; management reported no troubled debt restructurings.
- Attorney-related loans totaled $164.1 million, or 42.0% of the loan portfolio. The filing identifies legal/litigation-market and real-estate concentrations as risks. Management cautions that allowance estimates depend on judgments about borrowers, collateral values, and economic conditions, and that a material near-term allowance change is reasonably possible but not estimable.
- Available-for-sale securities had $4.497 million of gross unrealized losses at June 30, versus $1.939 million at year-end 2017; accumulated other comprehensive loss was $3.257 million. Management attributed the securities declines to interest rates rather than credit quality and did not consider them other-than-temporarily impaired.
- The company invested $2.410 million for a 4.95% interest in private technology company Litify LLC. The investment remained at cost at quarter-end; management reported no impairment indicators based on its qualitative assessment.
- Interest-rate simulations indicate asset sensitivity: a +100 basis-point shock was estimated to increase 12-month net interest income by $1.507 million, while a -100 basis-point shock was estimated to reduce it by $2.139 million. The EVE model estimated declines of $6.001 million and $18.662 million under -100 and -200 basis-point scenarios, respectively. These are model estimates and depend on assumptions.
- There was no specific earnings or financial guidance in the filing. Management’s outlook is subject to interest-rate changes, competition, economic conditions, loan and deposit growth, credit performance, and execution in merchant services and the legal market. The company said there were no material changes to its previously disclosed risk factors, no material pending legal proceedings, and no material changes in internal controls during the quarter.
- Revenue standard ASC 606 adoption had no material effect. The company was reviewing lease arrangements for the upcoming lease standard and gathering data to implement CECL, effective for it in fiscal years beginning after December 15, 2019.
Most important facts for investors to verify
- Whether loan growth—particularly commercial, attorney-related, and real-estate lending—remains consistent with underwriting standards and is reflected adequately in the allowance.
- Whether the strong earnings growth and wider net interest margin persist as funding costs rise and interest rates change.
- The stability and economics of core deposits and mass-tort sweep-related off-balance-sheet funds, and the effect of deposit flows on liquidity.
- Whether unrealized securities losses recover or deepen, and how rate changes affect both net interest income and economic value of equity.
- How rising staffing, public-company, technology, and strategic-project costs develop relative to revenue growth; the filing does not provide quantified forward guidance.