Esquire Financial Holdings, Inc. — Q1 2022 Form 10-Q
Reporting period: Three months ended March 31, 2022; comparison is to the three months ended March 31, 2021 unless otherwise noted. Esquire is a financial holding company whose bank serves the litigation industry, small businesses, and commercial and retail customers, alongside its payment-processing business. Figures are in U.S. dollars; financial statement amounts are generally in millions unless stated otherwise.
Key financial results
| Metric | Q1 2022 | Q1 2021 / comparison |
|---|---|---|
| Interest income | $12.0 million | $10.2 million |
| Net interest income | $11.8 million | $10.1 million; up 17.2% |
| Net interest margin | 4.43% | 4.50%; down 7 basis points |
| Provision for loan losses | $640,000 | $1.8 million |
| Noninterest income | $5.5 million | $5.5 million; up 0.7% |
| Noninterest expense | $9.4 million | $8.2 million; up 14.6% |
| Net income | $5.3 million | $4.2 million; up 28.0% |
| Diluted earnings per share | $0.66 | $0.53 |
| Operating cash flow | $11.1 million | $13.3 million |
Financial position and liquidity
- Total assets were $1.243 billion at March 31, 2022, up $64.1 million, or 5.4%, from year-end 2021. Net loans were $808.5 million, up from $775.4 million; total deposits were $1.090 billion, up 6.0%.
- Cash and cash equivalents were $148.9 million. The company reported no outstanding balances on its available FHLB, Federal Reserve discount-window, or correspondent-bank credit lines. Its bank subsidiary was reported as well capitalized, with a 15.63% total risk-based capital ratio.
- Investing cash outflow was $72.8 million, including $47.5 million of purchases of held-to-maturity securities and loan growth. Financing cash inflow was $61.5 million, primarily from deposit growth. Cash declined $216,000 during the quarter.
- There was no material funded debt reported; the filing reports no outstanding FHLB advances or Federal Reserve borrowings. Securities and loans supported available borrowing capacity.
Material changes and management commentary
- Net income growth reflected higher net interest income and a $1.2 million lower loan-loss provision, partly offset by a $1.2 million increase in noninterest expense. Loan interest income rose with higher average loan balances; management attributed the lower provision to reduced pandemic-related uncertainty and the prior reclassification of the legacy NFL portfolio to loans held for sale.
- Payment-processing fees were nearly flat at $5.3 million. Management reported processing volume of $6.2 billion, up 25.5%, and 117.8 million transactions, up 24.5%, year over year.
- Employee compensation and benefits increased 22.8%, which management attributed to staffing, growth and technology investments, and compensation increases. Data-processing expense also rose, partly due to higher volumes and technology implementations.
- Stockholders’ equity was $143.4 million, down $350,000 from year-end. Net income was offset principally by a $6.2 million after-tax other comprehensive loss from unrealized available-for-sale securities losses. Management attributed the securities decline to interest-rate changes rather than credit concerns and reported no impairment charges.
- Asset quality indicators included $7,000 of nonperforming assets, no impaired loans, and no loans in COVID-19 payment deferral or modified as troubled debt restructurings. The allowance for loan losses was $9.5 million, or 1.16% of loans. Special-mention loans were $29.5 million and substandard loans were $3.9 million.
Outlook, risks, and unusual items
- The filing gives no numerical earnings or revenue guidance. Management cautions that Q1 results are not necessarily indicative of full-year results.
- Interest-rate exposure is a key risk. The bank’s model estimated 12-month net interest income would rise by $20.8 million under an immediate 400-basis-point increase and fall by $2.6 million under a 100-basis-point decrease, relative to its modeled base case. Management cautions that actual results may differ materially because of assumptions, market conditions, and management actions.
- Other disclosed risks include credit and real-estate concentration, dependence on the legal/litigation market and related deposits, payment-processing counterparties and operations, competition, inflation, technology and cybersecurity, and economic or regulatory changes. The company said risk factors were not materially changed from its 2021 Form 10-K.
- COVID-19’s future impact remained uncertain, although management reported no material or systematic adverse effect on Q1 statements and no active payment-deferral participants at quarter-end.
- After quarter-end, on April 1, 2022, the company completed the sale of its legacy NFL consumer post-settlement loan portfolio for a nonvoting economic interest in a sponsored fund valued at $13.5 million. On April 28, it announced its first regular quarterly cash dividend of $0.09 per share, payable June 1, 2022 to holders of record May 16.
- The company planned to adopt CECL on January 1, 2023 and was preparing for implementation. Management expected to lose emerging growth company status on December 31, 2022.
- Management reported effective disclosure controls and procedures, no material changes to internal control over financial reporting, and no pending legal proceeding believed likely to have a material adverse effect.
Important facts for investors to verify
- Whether loan growth, especially commercial, commercial real-estate, and litigation-related lending, remains prudent; litigation-related loans were $395.3 million, or 48.3% of total loans.
- How deposit growth, including demand deposits, and off-balance-sheet sweep funds develop, and whether funding costs rise as rates change.
- Whether the unrealized securities losses remain rate-driven and recoverable, and how the new held-to-maturity classification affects reported equity and liquidity.
- The final financial and accounting effects of the April NFL portfolio sale and the ongoing performance of the fund interest received as consideration.
- The eventual allowance and capital effects of CECL adoption, as well as the sustainability of earnings given higher operating costs and the absence of specific company guidance.