Esquire Financial Holdings, Inc. — Q2 2017 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2017. Unaudited consolidated results include Esquire Financial Holdings and its wholly owned bank subsidiary. Unless noted otherwise, amounts are in millions of dollars. The company completed its IPO on June 30, 2017.
Financial performance
| Metric | Q2 2017 | Q2 2016 | Six months 2017 | Six months 2016 |
|---|---|---|---|---|
| Interest income | $4.756 | $3.970 | $9.188 | $7.704 |
| Net interest income | $4.620 | $3.838 | $8.915 | $7.470 |
| Provision for loan losses | $0.300 | $0.130 | $0.450 | $0.275 |
| Non-interest income | $1.359 | $1.042 | $2.564 | $2.029 |
| Non-interest expense | $4.169 | $3.524 | $8.193 | $6.944 |
| Net income | $1.027 | $0.748 | $1.842 | $1.391 |
| Basic and diluted EPS | $0.20 | $0.15 | $0.36 | $0.27 |
| Net interest margin | 4.34% | 4.38% | 4.29% | 4.33% |
- Q2 net income rose 37.3%; first-half net income rose 32.4%. Growth reflected higher net interest income and fee income, partly offset by increased expenses and loan-loss provision.
- Q2 customer-related fees and service charges increased 112% to $0.528 million; merchant processing income rose 4.8% to $0.831 million. Management attributed fee growth to sweep income, loan-related fees, more independent sales organizations, and higher processing volumes.
- Q2 non-interest expense increased 18.3%, led by compensation, occupancy and equipment, and data processing. Management cited hiring and salary increases, the new headquarters, and technology investment.
- Q2 provision rose to $0.300 million from $0.130 million, reflecting growth in higher-yielding commercial and consumer loans. First-half net charge-offs were $0.040 million versus net recoveries of $0.026 million a year earlier.
Financial position, cash flow and liquidity
- Total assets were $455.8 million at June 30, up 7.3% from year-end 2016. Net loans were $303.6 million, up 10.3%; available-for-sale securities were $97.3 million, up 5.0%.
- Total deposits were $376.4 million, up 1.5%. Core deposits were $348.7 million, or 92.7% of deposits. Loans were 80.7% of deposits, compared with 74.2% at year-end.
- Cash and cash equivalents were $39.9 million. The six-month cash flow statement reported $2.847 million provided by operations, $33.748 million used in investing, and $27.768 million provided by financing; cash declined $3.133 million.
- Stockholders’ equity increased to $77.0 million from $52.2 million, primarily due to $21.7 million net IPO proceeds received by June 30. Secured borrowings were $0.282 million; no FHLB, Federal Reserve discount-window, or correspondent-line borrowings were outstanding.
- Available borrowing capacity included $78.1 million at the FHLB, $14.8 million at the Federal Reserve discount window, and $7.5 million in unsecured correspondent-bank lines. The company also reported $203.6 million in off-balance-sheet funds maintained through its mass-tort deposit sweep program.
- The bank was reported as “well capitalized.” June 30 regulatory ratios included a 11.94% Tier 1 leverage ratio, 15.63% Tier 1 risk-based ratio, 15.63% total risk-based ratio, and 16.79% common equity Tier 1 ratio.
- Loan commitments totaled $11.3 million, including $1.6 million in standby letters of credit. Time deposits due within one year were $24.9 million. Contractual obligations included $4.1 million of operating leases.
Material changes, outlook and risks
- Loan growth was concentrated in commercial, multifamily, and consumer lending. Attorney-related loans totaled $123.7 million, or 40.4% of the loan portfolio; commercial attorney-related loans alone were 35.3% of total loans.
- Credit indicators were strong at period-end: no delinquent or non-performing loans, no troubled debt restructurings, and no quarterly charge-offs. One commercial exposure totaling $0.895 million was classified special mention; none were classified substandard or doubtful. The allowance was $3.823 million, or 1.24% of reported total loans.
- Management reported a 4-basis-point year-over-year decline in net interest margin for both Q2 and the first half, primarily due to lower asset yields, particularly loan yields. Its interest-rate model showed the bank as asset-sensitive: modeled 12-month net interest income increased under rising-rate scenarios and declined under falling-rate scenarios. These are model estimates, not forecasts.
- The IPO sold 1.8 million company shares at $14 per share, generating approximately $21.7 million net proceeds by June 30. On July 20, the underwriter exercised its overallotment option for 354,580 additional shares, generating approximately $4.6 million net proceeds. Management said proceeds would support lending growth, potential strategic acquisitions, and general corporate purposes.
- On July 31, the company and preferred shareholder agreed to exchange 66,985 non-voting preferred shares for the same number of common shares; no preferred shares remained outstanding after the exchange.
- No earnings guidance or quantified operating outlook was provided. Management cautioned that interim results are not necessarily indicative of full-year results. Key risks include concentration in real estate and legal/litigation-related lending and deposits, interest-rate changes, credit losses, merchant-services exposure, competition, technology and third-party risks, and regulatory or compliance costs. Management said no material legal proceedings were pending and no material loss contingencies were identified.
- The company marked “No” to having filed all required Exchange Act reports during the preceding 12 months. Disclosure controls were assessed as effective, with no material internal-control changes reported during the quarter.
Important facts for investors to verify
- Reconcile loan balances across disclosures: the loan-class table reports $306.3 million of loans, while the balance sheet reports $307.4 million before the allowance and $303.6 million net.
- Assess whether rising attorney-related lending and the 40.4% attorney-related portfolio concentration are matched by underwriting quality and adequate loss reserves as the portfolio grows.
- Track the increase in provision and allowance against loan growth, including changes in delinquencies, criticized loans, charge-offs, and consumer-loan performance.
- Monitor net interest margin, funding costs, deposit stability, and actual sensitivity to interest-rate changes compared with management’s modeled scenarios.
- Confirm the final IPO share count, proceeds and dilution after the overallotment and preferred-to-common exchange; the filing reports 7,312,410 common shares outstanding as of August 1.