Esquire Financial Holdings, Inc. — Q3 2022 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2022. Dollar amounts are in millions unless stated otherwise. The company operates Esquire Bank, serving litigation-related businesses, small businesses, payment-processing clients, and local commercial and retail customers.
Financial performance
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Net interest income | $15.5 | $11.3 | $41.0 | $32.0 |
| Provision for loan losses | $0.7 | $3.8 | $2.1 | $6.4 |
| Noninterest income | $6.4 | $4.9 | $18.1 | $15.9 |
| Noninterest expense | $10.8 | $9.0 | $30.6 | $26.3 |
| Net income | $7.7 | $2.5 | $19.4 | $11.2 |
| Diluted EPS | $0.94 | $0.32 | $2.37 | $1.42 |
| Net interest margin | 5.18% | 4.50% | 4.69% | 4.50% |
Q3 net income rose 206%; nine-month net income rose 73%. Management attributed the improvement mainly to higher net interest income and lower loan-loss provision. Q3 revenue growth also reflected higher customer-related and administrative-service income; payment-processing fees increased 4.6% year over year.
Financial position, cash flow, and liquidity
- Total assets were $1.35 billion at September 30, up 14.3% from year-end 2021. Loans held for investment were $875.1 million, up 11.5%; deposits were $1.19 billion, up 15.5%.
- Loans were concentrated in commercial lending ($478.9 million, 54.7% of loans) and real estate ($378.7 million, 43.2%). Litigation-related loans totaled $402.7 million, or 46.0% of the loan portfolio.
- Cash and cash equivalents were $182.1 million. For the first nine months, operating cash flow was $30.4 million, investing cash outflow $155.1 million, and financing cash inflow $157.7 million. Deposits provided $159.0 million of financing cash.
- Core deposits represented 98.4% of deposits. The company reported $496.1 million in off-balance-sheet sweep funds. Available borrowing capacity included $159.1 million from the FHLB, $36.6 million at the Federal Reserve discount window, and $67.5 million of correspondent-bank lines; none was drawn.
- The filing reports no material funded borrowings outstanding at the FHLB or Federal Reserve. Esquire Bank’s capital ratios exceeded well-capitalized thresholds: total risk-based capital 15.90%, Tier 1 risk-based 14.77%, CET1 14.77%, and Tier 1 leverage 11.57%.
Material changes and notable items
- Q3 net interest margin increased 68 basis points year over year, aided by higher-yielding variable-rate commercial loans and rising short-term rates. The company said approximately 57% of its loan portfolio comprised variable-rate commercial loans tied to prime.
- Noninterest expense increased 20.3% in Q3, led by employee compensation, hiring, technology/data-processing costs, and marketing. Management cited investment in growth and digital platforms, alongside inflation-related salary increases.
- The allowance for loan losses was $10.9 million, or 1.24% of loans, versus $9.1 million, or 1.16%, at December 31, 2021. Nonperforming assets were $5.8 million, consisting of two commercial law-firm loan facilities; the filing says these had strong collateral values. Special-mention loans were $15.6 million and substandard loans $6.5 million.
- Available-for-sale securities had $22.0 million of gross unrealized losses at quarter-end, which management attributed to interest rates rather than credit quality. Accumulated other comprehensive loss was $15.9 million, net of tax. Held-to-maturity securities had an $8.7 million unrealized loss; their $80.1 million amortized cost compared with $71.4 million fair value. No impairment charges were recorded.
- In April, the company transferred its legacy NFL consumer post-settlement loan portfolio to a variable-interest entity in exchange for a $13.5 million nonvoting interest and continued servicing. It is not the VIE’s primary beneficiary; its maximum loss exposure is limited to the investment’s carrying amount.
- The company declared/paid common dividends of $0.09 per share during Q3. It reported no material pending legal proceedings, no material change in disclosed risk factors, and effective disclosure controls.
Outlook, risks, and contingencies
The filing provides no quantified earnings or growth guidance. Management described litigation lending, payment processing, and technology-enabled growth as opportunities, while noting that results depend on economic conditions, funding, credit quality, and interest rates. The company stated that COVID-19 had no material or systematic adverse impact on Q3 results, but warned that future effects remain uncertain.
Principal disclosed risks include concentrations in litigation-related loans and deposits and real estate lending; borrower credit deterioration and allowance-estimation uncertainty; interest-rate changes and securities valuation; deposit competition and payment-processing exposure to merchants and ISOs; technology, cybersecurity, and third-party-service risks; and regulatory, legal, and economic developments. The company planned to adopt CECL on January 1, 2023; the filing does not provide a quantified expected adoption impact.
Important facts for investors to verify
- Whether loan growth and credit performance remain sound, particularly in litigation-related and real estate exposures, and how the $5.8 million of nonperforming assets develops.
- How the allowance changes and what the company’s CECL adoption adds to reserves or reported earnings.
- Whether deposit growth and low funding costs persist as rates and competition change, given the concentration of deposits in litigation and payment-processing relationships.
- How rate movements affect net interest margin and the substantial unrealized losses in securities; management’s interest-rate simulations are estimates and may differ from actual outcomes.
- Whether payment-processing volumes and fee income sustain growth while expenses for staffing, technology, and marketing rise.
- The carrying value, performance, and ongoing exposure associated with the $13.5 million VIE investment.