Esquire Financial Holdings, Inc. — Q1 2020 Form 10-Q
Reporting period: Three months ended March 31, 2020; unaudited. Esquire is a bank holding company serving legal and small-business clients nationally, alongside commercial and retail customers in the New York metropolitan area. Its results depend on lending, deposit funding, and merchant processing.
Financial results and condition
Dollars in millions, except per-share amounts and ratios.
| Metric | Q1 2020 / March 31, 2020 | Comparable / prior period |
|---|---|---|
| Interest income | $9.57 | $8.48 in Q1 2019 |
| Net interest income | $9.18 | $7.93 in Q1 2019 |
| Provision for loan losses | $1.90 | $0.43 in Q1 2019 |
| Noninterest income | $3.12 | $2.08 in Q1 2019 |
| Noninterest expense | $6.87 | $5.48 in Q1 2019 |
| Net income | $2.60; diluted EPS $0.33 | $2.99; diluted EPS $0.39 in Q1 2019 |
| Net interest margin / spread | 4.71% / 4.56% | 4.94% / 4.63% in Q1 2019 |
| Total assets | $821.5 | $798.0 at December 31, 2019 |
| Loans, net of allowance | $581.5 | $558.4 at December 31, 2019 |
| Deposits | $697.8 | $680.6 at December 31, 2019 |
| Cash and cash equivalents | $70.4 | $61.8 at December 31, 2019 |
| Allowance for loan losses | $8.9; 1.50% of loans | $7.0; 1.24% at December 31, 2019 |
| Nonperforming loans | $0.75, all consumer | $1.48 at December 31, 2019 |
| Operating cash flow | $7.35 | $0.57 in Q1 2019 |
| Secured borrowings | $0.085 | $0.086 at December 31, 2019 |
Material changes and drivers
- Net income fell 13% year over year. The $1.48 million increase in loan-loss provision and $1.39 million rise in operating expenses more than offset higher net interest income and noninterest income.
- Net interest income rose 15.8%, supported by loan growth; the average loan balance increased 21%. Lower short-term rates reduced asset yields, and net interest margin declined 23 basis points year over year.
- Merchant processing income increased 63% to $2.96 million, with quarterly processing volume up 28.7% to $3.1 billion. Customer-related fees declined 38%.
- Loans increased about $25 million from year-end, mainly from commercial lending. Attorney-related loans totaled $284.1 million, or 48.2% of loans. Deposits increased $17.2 million; core deposits were 97.2% of total deposits.
- Noninterest expense increased 25.3%, with higher compensation, professional services, data processing, and occupancy costs.
Outlook, risks, and unusual items
- Management said COVID-19’s full effect was unknown and expected greater negative impact in the remainder of 2020 than in Q1. It warned of potential effects on earnings, asset values, credit losses, liquidity, and capital; no formal earnings guidance was provided.
- The bank offered principal-and-interest payment deferrals to affected borrowers. As of April 30, 2020, 51 loans totaling $65.2 million were in the program, including four hospitality property loans totaling $16.1 million. Management expected deferral requests to increase in Q2. Deferrals were not reported as delinquencies when borrowers had been current before the deferral, consistent with applicable guidance.
- Merchant processing volumes were down approximately 20% in April compared with February, which management attributed to closures and stay-at-home orders. Management said declines could continue until economic conditions improved.
- By April 30, the company had originated approximately $20 million of Paycheck Protection Program loans. The filing identifies risks relating to PPP compliance, SBA guarantees, and possible litigation.
- Management reported $70.4 million in cash, $156.9 million in off-balance-sheet deposits, and $178.4 million of available borrowing lines; no amounts were drawn on those lines at quarter-end. The bank was reported as well capitalized. The filing gives two different Tier 1 leverage ratios: 13.84% in the COVID-19 discussion and 12.42% in the regulatory capital table.
- The company repurchased 27,706 shares in March for $0.485 million, at an average $17.49 per share. No available-for-sale securities impairment was recorded; unrealized losses were attributed to interest rates rather than credit quality.
Important facts for investors to verify
- Reconcile the reported Tier 1 leverage ratios of 13.84% and 12.42% and confirm the applicable measure.
- Track subsequent COVID-related deferrals, borrower performance—particularly hospitality and attorney-related exposures—and changes in the allowance for loan losses.
- Assess the duration and financial effect of reduced merchant processing volumes, including possible chargebacks and reserve adequacy.
- Monitor whether lower interest rates continue to compress asset yields and net interest margin, and whether loan growth and lower deposit costs offset that pressure.
- Confirm that PPP loan guarantees and servicing comply with SBA requirements and assess any related litigation or reputational exposure.