Esquire Financial Holdings, Inc. (ESQ) Earnings

Management highlights

Net income results included elevated non-interest costs. Loan growth was driven by commercial and commercial real estate loans. Litigation loan portfolio had net growth. Deposit growth was tempered by disbursements. Non-interest income was stable. Adjusted operational expenses were in line. Capital is strong. Pending merger with Signature Bank has made progress. Compounded annual growth rates over five years for loans, deposits, equity, revenue, and EPS. Focus on flawless integration of Signature merger.

Guidance

NIM trajectory expects compression from 604 basis points, with expectation of around 590 basis points. Excess liquidity can be deployed fairly quickly, with aim to maintain good loan to deposit ratio around 85%.

Segment performance

First quarter net income was $12.2 million or $1.40 per diluted share. Adjusted net income was $13.8 million or $1.58 per diluted share. Net interest margin was 604 basis points. Loan growth on linked quarter basis was $56.7 million or 13% annualized. Litigation loan portfolio had 44 million or 15% annualized net growth. Deposit growth on linked quarter basis was $39.6 million or 8% annualized. Non-interest income was $6.5 million or 16% of total revenue. Adjusted operational expenses were $19 million with an adjusted efficiency ratio of 46.9%. Capital foundation is strong with equity assets of 12.44% and regulatory ratios at 11.85% and 14.25%. Quarterly cash dividend increased by 14% to 20 cents per share.

Risks & headwinds

Litigation loan portfolio can be lumpy. Integration of Signature Bank has potential risks.

Analyst Q&A

• Q: Hey, good morning, guys. You know, it's been about a year since you announced the JV agreement with Fortress. You know, can you maybe talk about how that relationship's going and if there's the potential to maybe scale that up post-signature given, you know, the step down in litigation and deposit concentrations?

  A: Sure. The relationship with Fortress is going well. We speak to their senior and executive team fairly frequently. We've shared information and notes on the vertical, that being the litigation vertical. We've worked on various opportunities. A handful have come to fruition. I would say that with the signature merger and our legal lending limit significantly increasing from right around 40 odd million to as much as 70 or 80 million on a pro forma basis. The need for them would be less logically, but Fortress can and will be a good business partner for us on longer duration type inventories that law firms carry And those usually revolve around mass tort and class actions. But the relationship has been good. We've been able to get a couple of deals done together, us as the bank and them as the non-bank finance company in a very synergistic way. And it continues to build momentum. But I don't think we're slowing Fortress down from their growth that they've experienced over decades And certainly, we're doing well with or without the relationship looking forward.

• Q: You know, payment processing business just hasn't really grown in a meaningful way. It's kind of becoming a smaller part of the overall franchise. And I know you did the Paisley transaction a couple years ago. Is that business something that you view as core to the overall strategy, or would you be open to potentially divesting from that?

  A: That is absolutely core to the overall strategy. If you look at the payments business, we've grown about 10% in volume a year. So it has grown volume-wise, but a $12 billion industry in the U.S. is a commodity. Everybody has prepaid cards and debit cards and credit cards in their wallets. Everybody uses them. There's less than a hundred banks that are merchant acquiring banks in the industry. So we believe the platform is very valuable and we have no plans on divesting of it. But it is a commodity. There are a thousand plus independent sales organizations There are huge, if you want to call them mega ISOs, believe it or not, Fiserv, First Data, is not only a platform, but they board their own merchants and work with ISOs and banks. It's probably one of the biggest. Obviously, Chase and Citi and Wells are all part of it. A platform... as we've established it, it is a low risk focus with about 75, 80% of it being low risk. But if you think about it mathematically, maybe the revenue is fairly static, the volumes grow. And quite honestly, when we had a more normal net interest margin of four and a half or 475, you know, it represented 20 plus percent of the revenue. So just because it's less of the overall revenue base doesn't make it less valuable. We don't garnish any to speak of fee income from our commercial clients other than our ASP fee income on managing mass torts. So the platform is invaluable and we have no notion or thought of divesting it, and we will continue to grow it, and we will continue to look towards doing direct business with merchants, especially with the pending signature merger, rather than the indirect business that we do almost holistically now through the ISO networks that we have.

• Q: the first one i have is um with signature both things have i think pretty unique but seems like similar cultures can you talk about how the reception has been from the signature side of things, especially in terms of shifting their focus a little bit towards that litigation-related lending a little bit more. And how quickly can signature get up to speed on Esquire's style of litigation lending and ramp up volume there? Have efforts and training started already, or is that post-acquisition?

  A: Good questions, Tim. The integration is going really well. The reception has been outstanding. We've been to their shop in Chicago and met with all their employees, not just a handful, not just management, all of their employees over the course of an entire day, day and a half, call it. Not only was the feedback outstanding when we were there, but the feedback after we left has been great. and the collaboration to date on the merger and integration because, as I've said, we've already had numerous meetings over the last couple of weeks, more than I anticipated, which is good. The collaboration and communication between the management teams at the merger and integration level has been really strong. Vice versa, the signature team came out to Jericho And not only met with the senior management team, but met with all employees in all departments. And the reception here was excellent. So I hate to say check the box, but check the box. Things are going really well. As you know, the deal in it financially has minimal cost savings. And from a people perspective, that's a good thing. So that makes people a little more comfortable that to compare and contrast an in-market acquisition, as you know, there'd be a lot more cost savings, which not only comes down to systems, but would come down to overlapping people. So that's not the case here. As far as the litigation's vertical is concerned, we've started working internally before the merger announcement. on the data and data analytics and CRM and how we're going to focus on marketing. We already have a senior business development officer in the Midwest out of Minneapolis. That individual has already met with some of the signature business development officers at an event, a litigation event out in the Midwest. We've been talking to myself and Mari Kornhaver, who runs our business development vertical for litigation. We've been on various calls with their senior executive team and their business development team. And yes, we plan on discussing planning towards and the like prior to closing. As far as training, as far as training goes, You know, probably the best way to answer that question is we have a really robust commercial underwriting team over here. So I'm not concerned about the signature team on the lending side worrying about underwriting, especially when we merge and even thereafter call it shortly thereafter business development wise. They have great business development people over there. And yes, we plan on sitting with them and quote training, I guess, for lack of a better term. But, you know, the best way to go about this is to go out and visit law firms in the Chicago market that are either their clients or that they know and are aware of signature or their clients know. And the best way to get it done is to go to those meetings with both sets of teams, because that's the best on-the-job training you could ask for. And ironically, last but not least, the National Trial Association for AAJ is in Chicago this July. So we're already planning for that event with both sets of teams.

• Q: How should we think about the NIM trajectory going forward? And just to make it simple, let's assume no rate cuts.

  A: Sure. Well, you know, Michael and I, we've already done that 10-so. So we're looking at, you know, I know你知道，我已经考虑过了。所以我们看，你知道，我知道你现在看到的是本季度的604。所以大致来说，我们看fhn的预测，这不是说比任何人好或坏，它涵盖了两年的周期，这是我们传统上使用的，也是埃里克内部用于资产负债管理和alco模型等的。所以我们只是想保持一致。所以如果你看他们的利率预测，2026年没有利率削减，然后2027年有两次50个基点的利率削减，从6月开始从375降到350，然后在2027年第三季度从325降到350。所以我们看到净息差平均在590左右。年底前会从604压缩一些，然后2027年再压缩10个基点。

• Q: what are your plans to deploy excess deposits if any like the time period for that you you have know i think the billion dollars off balance sheet on the liquidity from signature might add just more to that um so we'd love to get your guys thoughts on you know if that's an opportunity for你知道，你对多余存款的部署计划是什么，如果有的话，比如时间范围。你知道，来自Signature的十亿美元表外流动性可能会增加更多。所以我们很想听听你们对这是否是一个机会的看法。

  A: Sure so if we start with liquidity at the top of the house uh we keep around around 100 million uh over the weekend closer to 150 million on the balance sheet for the merchant platform Obviously, with almost $10 billion clearing a quarter, there's a lot clearing through our Fed account. Eric has secured significant daylight overdraft lines at the Fed, so we don't worry. But we also don't want to make our friends at the Fed worry. So we'd rather keep the excess cash on hand. So call it on average about $100 million. that make us comfortable and our friends at the Fed comfortable managing our merchant platform. I think any excess liquidity can be deployed fairly quickly, quarters with what we're going to do on a combined basis. My hope and prayer is that we always have excess liquidity. I'd always I'd rather have the NIM compress a little bit and have a lot of dry powder on the balance sheet and be talking to you about a five or 10 basis point miss on the NIM for the quarter because we have excess liquidity than the latter, which is no core excess liquidity. Not that I'm afraid to borrow or any of us here are, it's part of, traditional banking, we've been very blessed and fortunate that we do not have to borrow to date. But I think on a pro forma basis, when you look at either us independent of signature today or pro forma combined looking forward, where we run now about 85% loan to deposit ratio is probably a good ratio before and after the merger is consummated.

• Q: I just had a question about the litigation book. I know we've seen impressive growth over the past couple of quarters. And as you mentioned, you know, this quarter came in at a slightly lower pace with the anticipated pay downs. And I know this segment can be a little lumpy. Could you give us a sense for maybe the current pipeline of new law firm relationships and maybe the loan demand you're seeing in that segment, whether it's, you know, accelerating or decelerating in the near term?

  A: Yeah, I don't see it decelerating. You know, I gave you the five-year CAGR for the litigation book. It's 32%, and you would think that's way towards the earlier periods, and it's not. It's more weighted towards the latter periods. The latter periods were in the high 30s for that litigation book as far as growth. You know, there's a bullet or part of a bullet in the earnings release and in the investor deck that talks about the analysis we did. We initially included this in the signature merger announcement back on March 12th, and it's pretty important. And we spent multiple quarters on this to make sure that we were accurate with the data. But the compounded annual growth rate for loans and deposits for customers that have been with us four years or more. So that's customer growth based on facilities they use that we supply, that they use to then grow their business, that then they come back every year and are looking for more availability. That's 15% on the loan side. and 30% on the deposit side. So our legacy customers, year in and year out, grow with us internally because they use the facilities correctly to grow their book of business, to grow their revenue stream, and then to earn the right to come back to us and ask us for more availability. You got two items going on here in the loan book. You have new customer origination that is very robust and strong and we're very comfortable with and comfortable with the independent street estimates with us standing around 15 to 17% loan growth. God willing, we do more. I'd love to do more overall on a blended basis. But you have a second piece which is unique, certainly unique for me after 38 years of doing this, where you have your own customers growing with你知道，我已经给了你诉讼账簿的五年复合年增长率。是32%，你会认为这是更早时期的情况，但不是。它更多地倾向于后期。就增长而言，后期的诉讼账簿处于30多岁的高位。你知道，在收益报告和投资者资料中有一个要点或部分要点，谈到了我们进行的分析。我们最初在3月12日的Signature合并公告中包含了这个，这非常重要。我们花了多个季度来确保数据准确。但与我们合作四年或更久的客户的贷款和存款的复合年增长率。所以这是基于他们使用我们提供的设施的客户增长，他们用这些设施来发展他们的业务，然后每年回来寻求更多的可用性。贷款方面是15%，存款方面是30%。所以我们的老客户，年复一年，在内部与我们一起增长，因为他们正确使用我们的贷款设施来发展他们的业务，增加他们的收入流，然后获得回来向我们请求更多可用性的权利。你在贷款账簿中有两个项目。你有非常强劲和强大的新客户起源，我们对此非常满意，并且对独立的市场估计感到满意，我们的贷款增长约为15%到17%。如果一切顺利，我们会做得更多。我很想在混合基础上做得更多。但你有第二个独特的部分，对我来说，在做了38年之后肯定是独特的，你有自己的客户在内部与你一起增长，因为他们以大多数人认为的资本方式使用我们的贷款设施。所以我们非常满意。销售管道或业务发展管道非常强劲。它肯定不是处于低点。它更接近高点。我们在各个地区聘请的业务发展团队做得非常出色。显著增加了贷款后台团队、承销团队和服务团队，无论是在贷款还是运营方面。我们对当前的贷款管道非常满意，最后但并非最不重要的是，我记得去年和可能过去两年的第一季度，由于第四季度高点支取导致的偿还，通常有最低的四到五 percent六 percent的年化增长，所以我们对本季度13%的年化增长非常满意。老实说，我自己，非常惊喜。