Esquire Financial Holdings, Inc. — Q3 2021 Form 10-Q
Business context and reporting period
Esquire Financial Holdings, through Esquire Bank, serves the litigation industry and small businesses nationally, alongside commercial and retail customers in the New York metropolitan area. This unaudited filing covers the quarter and nine months ended September 30, 2021; comparisons are with the same 2020 periods unless noted. Amounts below are in U.S. dollars.
Financial performance and position
- Q3 earnings: Net income was $2.5 million, down 30.1%; diluted EPS was $0.32 versus $0.48. Net interest income rose 22.6% to $11.3 million, while provision for loan losses increased to $3.8 million from $0.9 million. Noninterest income was $4.9 million, up 26.8%, and noninterest expense was $9.0 million, up 23.6%.
- Nine-month earnings: Net income was $11.2 million, up 28.1%; diluted EPS was $1.42 versus $1.14. Net interest income increased 16.1% to $32.0 million; noninterest income increased 59.2% to $15.9 million; noninterest expense increased 25.7% to $26.3 million. Provision for loan losses was $6.4 million versus $4.7 million.
- Revenue drivers and margins: Payment-processing fees were $5.2 million in Q3, up from $3.7 million, and $15.9 million for nine months, up from $9.5 million. Processing volume was $6.2 billion in Q3 (+47.6%) and $17.4 billion for nine months (+67.3%). Net interest margin was 4.50% in Q3 versus 4.23%; for nine months it was 4.50% versus 4.46%.
- Balance sheet at September 30: Total assets were $1.123 billion, up 19.9% from year-end 2020. Loans held for investment were $744.1 million gross ($735.4 million net), up 10.7%; deposits were $977.0 million, up 21.5%; stockholders’ equity was $137.2 million. Cash and cash equivalents were $138.2 million, compared with $65.2 million at year-end.
- Cash flow, nine months: Operating activities provided $22.7 million; investing activities used $122.6 million, chiefly reflecting loan growth and securities purchases; financing activities provided $173.0 million, primarily from deposit growth. Cash increased $73.1 million.
- Credit and funding: The allowance for loan losses was $8.7 million, or 1.16% of loans, versus $11.4 million, or 1.70%, at year-end 2020. Nonperforming assets were $12,000; special-mention and substandard loans totaled $24.8 million and $4.8 million, respectively. Core deposits were 98.9% of deposits. The bank reported regulatory capital ratios of 15.90% total risk-based, 14.79% Tier 1 risk-based and CET1, and 11.32% Tier 1 leverage, and said it was well capitalized.
- Debt and liquidity: The filing reports no outstanding FHLB or Federal Reserve borrowings and no amounts drawn on stated credit lines. It lists $133.8 million of FHLB borrowing capacity, $27.5 million of Federal Reserve discount-window capacity, and $67.5 million of unsecured correspondent-bank lines. The financial statements show only $48,000 in secured borrowings at September 30.
Material changes and unusual items
- The principal unusual item was the transfer of the legacy NFL consumer post-settlement loan portfolio from held for investment to held for sale. The company recorded a $9.0 million charge-off, of which $3.0 million was recognized in Q3 provision, and a further $384,000 lower-of-cost-or-fair-value adjustment. The loans’ $14.2 million carrying value was included in other assets. Management attributed much of the Q3 year-over-year earnings decline to the portfolio reclassification and related pretax charges.
- Loan growth reflected increases in commercial and multifamily lending. Multifamily loans rose 41.4% from year-end to $240.1 million; commercial loans rose 11.2% to $398.5 million. Litigation-related loans were $357.8 million, or 48.0% of the loan portfolio. Real estate loans represented 45.3% of loans held for investment.
- Staffing increased 16% to support digital platforms and sales and marketing. Management cited higher compensation, data-processing, marketing, and occupancy costs as contributors to higher operating expenses.
- Available-for-sale securities grew to $141.7 million. Nine-month unrealized securities losses of $1.6 million, net of tax, reduced accumulated other comprehensive income to a loss of $167,000. Management attributed securities’ unrealized losses to interest rates, not credit quality, and recorded no impairment charge.
Outlook, commentary, risks, and contingencies
- The filing provides no numerical earnings or revenue guidance. Management described continued focus on growing litigation-related lending, payment processing, digital capabilities, and core deposits. Results for the interim periods are not necessarily indicative of full-year results.
- Management said COVID-19’s future impact remained difficult to quantify. No borrowers were participating in the payment-deferral program at September 30, 2021; management reported no material or systematic adverse effect on Q3 results from COVID-19 at that date.
- Key disclosed risks include credit quality and allowance estimates; concentrations in real estate and litigation-related lending and deposits; interest-rate changes and low asset yields; payment-processing competition and merchant/ISO exposure; deposit retention; technology and cybersecurity; third-party service providers; and economic, regulatory, and pandemic-related developments.
- The company reported no pending legal proceedings believed to have a material adverse effect and no material changes to the risk factors in its 2020 Form 10-K. It reported no material commitments likely to affect liquidity, while noting ordinary-course off-balance-sheet commitments to extend credit.
- Management concluded disclosure controls and procedures were effective as of September 30, 2021, with no material change in internal control over financial reporting during the quarter.
Investor verification points
- Review the NFL portfolio transfer, $9.0 million charge-off, provision treatment, $384,000 valuation adjustment, and expected disposition or remaining exposure.
- Assess whether growth in litigation-related, commercial, and multifamily loans is matched by underwriting quality; monitor the $29.6 million of special-mention and substandard loans and the allowance methodology.
- Verify the sustainability of payment-processing growth and margins, including volume, merchant and ISO concentrations, and associated operating costs.
- Track deposit growth, the large share of noninterest-bearing/core funding, off-balance-sheet sweep funds, available borrowing capacity, and liquidity as loan growth continues.
- Monitor sensitivity to rates: the company’s model estimates higher 12-month net interest income under rate increases and lower income under rate decreases, but management cautions that model results depend on assumptions and may differ from actual outcomes.
- Confirm future adoption preparations and potential effects of CECL, which the company planned to adopt by January 1, 2023.