Esquire Financial Holdings, Inc. quarterly report, Q2 FY2022

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Esquire Financial Holdings, Inc. — Q2 2022 Form 10-Q

Reporting period: Quarter and six months ended June 30, 2022. Unless otherwise noted, financial amounts below are in millions of dollars. The company operates Esquire Bank, serving law firms and related clients nationally, small businesses through payment processing, and commercial and retail customers in the New York metropolitan area.

Financial performance and position

  • Q2 earnings: Net income was $6.35 million, up 41.1% from $4.50 million a year earlier. Diluted EPS was $0.78 versus $0.57.
  • First-half earnings: Net income was $11.69 million, up 34.8% from $8.68 million. Diluted EPS was $1.43 versus $1.10.
  • Interest income and margin: Q2 interest income was $13.96 million and net interest income was $13.67 million, up 28.2% year over year. Q2 net interest margin was 4.46%, down 3 basis points. For the first half, net interest income rose 22.9% to $25.46 million; margin was 4.44%, down 6 basis points.
  • Fee income: Q2 noninterest income increased 13.6% to $6.21 million; first-half noninterest income increased 7.1% to $11.71 million. Payment processing fees were $5.51 million in Q2 and $10.83 million for the first half.
  • Expenses and credit provision: Noninterest expense rose 14.0% to $10.39 million in Q2 and 14.3% to $19.77 million for the first half. Provision for loan losses was $0.85 million in Q2 and $1.49 million in the first half, compared with $2.65 million in the first half of 2021.
  • Balance sheet: Total assets were $1.31 billion at June 30, up 11.1% from year-end 2021. Loans held for investment were $859.3 million, up 9.5%; deposits were $1.16 billion, up 12.4%. Stockholders’ equity was $145.5 million.
  • Cash flow and liquidity: First-half operating cash flow was $18.5 million; investing activities used $138.9 million, while financing activities provided $126.5 million. Cash and cash equivalents ended at $155.2 million. Core deposits were 98.4% of deposits, and the company reported $496.8 million of off-balance-sheet sweep funds. No amounts were outstanding on reported FHLB, Federal Reserve discount-window, or correspondent-bank credit lines.
  • Debt and capital: The filing reports no outstanding FHLB advances or FRB borrowings at quarter-end. Esquire Bank reported a 15.27% total risk-based capital ratio and was described as well capitalized.

Material changes versus comparable periods

  • Q2 net income growth reflected higher net interest income and noninterest income, partly offset by higher operating expenses. First-half growth also benefited from lower loan-loss provision.
  • Loan growth was concentrated in commercial and commercial real estate lending. Commercial real estate loans rose 65.7% from year-end 2021 to $80.5 million. Litigation-related loans totaled $397.3 million, or 46.2% of the loan portfolio.
  • Noninterest expense increases reflected staffing and compensation, technology and data-processing costs, and renewed marketing and travel activity. Management also cited inflation-related salary increases.
  • Available-for-sale securities declined to $122.7 million, with substantial interest-rate-related unrealized losses. Accumulated other comprehensive loss reached $11.3 million, compared with a $0.9 million loss at year-end 2021. The company also held $76.3 million of securities classified as held-to-maturity, a new portfolio category in 2022.

Outlook, commentary, risks and unusual items

  • The filing gives no specific financial guidance or quantified earnings forecast. Management described litigation lending, payment processing, and technology investment as growth opportunities.
  • Management reported a 14.7% year-over-year increase in Q2 payment-processing volume to $7.1 billion and an 18.6% increase in transactions to 136.1 million. First-half volume was $13.3 billion, up 19.4%.
  • The legacy NFL consumer post-settlement loan portfolio was transferred on April 1 to a variable-interest entity in exchange for a $13.5 million nonvoting interest; the company continues servicing the portfolio but does not consolidate the entity. Management stated its maximum exposure is limited to the investment’s carrying amount. The MD&A also cites a $9.0 million charge-off associated with reclassification of this portfolio.
  • At June 30, the allowance for loan losses was $10.3 million, or 1.20% of loans, versus $9.1 million, or 1.16%, at year-end. Nonperforming assets were $4,000, consisting of two nonaccrual consumer loans. Special-mention loans were $22.5 million and substandard loans were $0.7 million.
  • Key risks cited include exposure to litigation-sector lending and deposits, real estate loan concentration, credit deterioration, interest-rate changes, deposit competition, payment-processing and third-party technology risks, inflation, and broader economic conditions. The company said COVID-19 had no material or systematic adverse impact on Q2 results, while noting future effects remain uncertain.
  • The company plans to adopt CECL on January 1, 2023. It expects to lose emerging-growth-company status on December 31, 2022. Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter; no material pending legal proceedings were reported.

Important facts for investors to verify

  1. How rising rates affect net interest margin, deposit costs, securities values, and the company’s modeled interest-rate sensitivity.
  2. Credit performance and allowance adequacy, especially in litigation-related, commercial real estate, and other concentrated lending exposures.
  3. The accounting, valuation, servicing economics, and ultimate risk exposure associated with the $13.5 million VIE investment and legacy NFL loan portfolio transfer.
  4. Whether payment-processing growth and fee income continue to offset rising operating expenses and technology investment.
  5. The effects of the accumulated unrealized securities losses, the held-to-maturity portfolio, and the planned CECL adoption on reported equity and credit-loss estimates.