Esquire Financial Holdings, Inc. — Q1 2021 Form 10-Q
Reporting period: Three months ended March 31, 2021. Balance-sheet comparisons are with December 31, 2020; operating results are compared with Q1 2020. The company provides commercial banking and payment processing, with significant lending to the litigation industry.
Key financial results
| Metric | Q1 2021 | Q1 2020 or comparison |
|---|---|---|
| Net interest income | $10.1 million | $9.2 million; up 9.5% |
| Provision for loan losses | $1.8 million | $1.9 million |
| Noninterest income | $5.5 million | $3.1 million; up 75.1% |
| Noninterest expense | $8.2 million | $6.9 million; up 19.3% |
| Net income | $4.2 million | $2.6 million; up 60.7% |
| Diluted EPS | $0.53 | $0.33 |
| Net interest margin | 4.50% | 4.71%; down 21 basis points |
| Net cash from operating activities | $13.3 million | $7.7 million |
- Payment processing income increased 85.6% to $5.2 million. Quarterly processing volume rose 58.1% to $4.9 billion. Q1 2021 income included $500,000 in ISO early termination fees.
- Net interest income benefited from loan growth and lower deposit costs, while lower asset yields pressured the margin. Loan interest income rose 13.5%; interest expense fell 50.5%.
- Cash and cash equivalents were $87.9 million at quarter-end, up from $65.2 million. Investing cash outflow was $46.2 million, reflecting loan growth and securities purchases; financing cash inflow was $55.6 million, primarily from deposit growth.
Financial position and liquidity
- Total assets were $998.3 million, up 6.6% from year-end. Loans, net, were $689.7 million; gross loans were $704.0 million.
- Deposits were $859.7 million, up 6.9%. Core deposits were $848.6 million, or 98.7% of deposits. Off-balance-sheet sweep funds were $515.2 million.
- Allowance for loan losses was $13.2 million, or 1.88% of gross loans, versus $11.4 million, or 1.70%, at year-end. Nonperforming assets were $3.0 million, 0.30% of total assets; allowance coverage of nonperforming assets was 441%.
- Stockholders’ equity was $129.3 million. Secured borrowings were $49,000, with no outstanding FHLB or Federal Reserve advances. Available borrowing capacity included $131.3 million from the FHLB, $17.0 million at the Federal Reserve discount window, and $67.5 million in correspondent-bank lines; none was drawn.
- Esquire Bank reported a 16.74% total risk-based capital ratio and a 12.46% Tier 1 leverage ratio and was considered well capitalized.
Material changes and management commentary
- Loans grew 4.5% from year-end, led by multifamily and commercial lending. Attorney-related loans totaled $338.9 million, or 48.1% of gross loans.
- Special-mention and substandard loans increased during the quarter. Management attributed the increase primarily to attorney-related commercial borrowers affected by pandemic-related court closures and said it did not expect temporary closures to affect ultimate collectability.
- The company’s legacy NFL post-settlement consumer exposure was $24.1 million, with a weighted average life of approximately one year. Management said claims-administration changes and pandemic-related delays could extend settlement and repayment timelines. The company ceased NFL loan originations in December 2017.
- Noninterest expense growth reflected increased staffing, digital-platform investment, marketing, and technology costs. Employee compensation and benefits rose 25.6%.
- Available-for-sale securities were $131.6 million. Unrealized losses reduced other comprehensive income by $1.5 million in the quarter; management attributed the declines to interest rates rather than credit quality and recorded no impairment charge.
Outlook, risks, and contingencies
- The filing gives no specific earnings or financial guidance. Management cautions that Q1 results are not necessarily indicative of full-year results.
- COVID-19 effects remain uncertain. At March 31, nine borrowers with $32.8 million in loans were in payment deferral; as of April 1, four borrowers with $16.4 million remained. The company reported no TDR classification or nonperforming status for participating borrowers and no elevated merchant return or chargeback risk identified in its assessment.
- Key disclosed risks include credit deterioration, real-estate and litigation-market concentration, delayed legal settlements, interest-rate changes, competition, deposit retention, merchant/ISO losses, technology and cybersecurity risks, and continuing pandemic effects.
- The company reported no pending legal proceedings believed to have a material adverse effect and no material changes to previously disclosed risk factors. Management stated disclosure controls were effective and reported no material change in internal controls during the quarter.
Most important facts for investors to verify
- Whether payment-processing growth is sustainable, and how much future results depend on transaction volume, ISO relationships, and nonrecurring termination fees.
- Credit performance and reserve adequacy, particularly for attorney-related loans, consumer loans, and the legacy NFL portfolio; monitor criticized loans, deferrals, delinquencies, and charge-offs.
- Whether the decline in net interest margin continues as asset yields and funding costs change.
- Liquidity and deposit trends, including the nature and stability of sweep funds and the availability of reported borrowing facilities.
- The impact of pandemic-related economic conditions, court operations, and interest rates on loan repayment, collateral values, earnings, and capital.