Update on Esquire Bank (NASDAQ:ESQ)
This post is an update on Esquire Bank’s Q2 2024.
Esquire Bank is a community bank headquartered in Jericho, New York with $1.4 billion in deposits that focuses on lending to the legal industry.
Part one of my original writeup can be found here: https://possiblevalue.substack.com/p/esquire-bank-nasdaq-esq-part-1
Part two of my original writeup can be found here: https://possiblevalue.substack.com/p/esquire-bank-nasdaq-esq-part-2
Esquire issued an earnings release for Q2 2024 along with a corresponding investor presentation. Links to both filings can be found here:
Business Update
All the financial information below was taken from the earnings release and investor presentation linked above.
Net income – Q2 2024 net income of $10.5 million or $1.25 per diluted share compared to $9.1 million or $1.10 per diluted share in Q2 2023.
Net income for the six-month period ended June 30, 2024 was $20.5 million or $2.45 per diluted share compared to $21.3 million or $2.57 per diluted share for the same six month period in 2023.
ROE and ROAA – Q2 2024 ROE and ROAA were 20.16% and 2.58% respectively, compared to 21.03% and 2.65% in Q2 2023.
ROE and ROAA for the six month period ended June 30, 2024 were 20.15% and 2.59% respectively, compared to 3.15% and 25.55% for the six month period ended 6/30/2023.
Net interest income – Q2 2024 net interest income increased $4.2 million, or 21.1%, to $24.3 million, due to growth in average interest earning assets (funded with low-cost core deposits) totaling $243.4 million, or 18.2%, to $1.58 billion as well as a 17 basis point increase in our net interest margin to 6.19% when compared to the same period in 2023. The loan-to-deposit ratio was 84.8%.
Net interest income for the six-month period ended 6/30/2024 increased $7.8 million, or 19.8%, to $47.2 million, due to growth in average interest earning assets (funded with low-cost core deposits) totaling $230.6 million, or 17.5%, to $1.55 billion as well as an 11 basis point increase in our net interest margin to 6.13 when compared to the same period in 2023.
Provision for loan losses - The provision for credit losses was $1.0 million for the second quarter of 2024, a $325 thousand decrease from the second quarter 2023 provision. As of June 30, 2024, its allowance to loans ratio was 1.47% as compared to 1.34% as of June 30, 2023. The increase in the allowance as a percentage of loans was general reserve driven considering loan growth and qualitative factors associated with the current short-term interest rate environment as well as the current uncertain economic environment including, but not limited to, its potential impact on the New York metro multifamily and commercial real estate market.
The provision for the sixth month period ended 6/30/2024 was $2.0 million, a $175,000 increase from the same period in 2023 due the same factors listed in the previous paragraph.
Noninterest income - Noninterest income totaled $6.3 million for the second quarter of 2024 as compared to $6.7 million in the same period for 2023. Payment processing income was $5.3 million for the second quarter of 2024, a $442 thousand decrease from the same period in 2023, primarily due to the anticipated ISO attrition and changes in Esquire’s overall merchant risk profile. Payment processing volumes for the credit and debit card processing platform increased $810 million, or 9.6%, to $9.3 billion and transactions decreased 1.2 million, or 0.8%, to 155.6 million, for the current quarter, as compared to the same period in 2023.
Noninterest income totaled $12.7 million for the six months ended June 30, 2024 as compared to $17.0 million in the same period for 2023. Excluding the $4.0 million gain on our Litify fintech investment, adjusted noninterest income in the six months ended June 30, 2023 was $12.9 million. Payment processing income was $10.6 million for the six months ended June 30, 2024, a $659 thousand decrease from the same period in 2023, primarily due to the anticipated ISO attrition and changes in our overall merchant risk profile. Payment processing volumes and transactions for the credit and debit card processing platform increased $1.7 billion, or 10.8%, to $17.9 billion and 6.4 million, or 2.1%, to 306.1 million transactions, respectively, for the six months ended June 30, 2024, as compared to the same period in 2023.
Noninterest expense - Noninterest expense increased $2.3 million, or 17.4%, to $15.2 million for the second quarter of 2024, as compared to the same period in 2023. This increase was primarily due to increases in employee compensation and benefits, advertising and marketing, data processing, and occupancy and equipment, partially offset by decreases in professional services costs.
Noninterest expense increased $4.3 million, or 17.1%, to $29.8 million for the six months ended June 30, 2024, as compared to the same period in 2023. This increase was due to the same reasons listed in the previous paragraph.
Efficiency ratio – Esquire’s Q2 2024 efficiency ratio was 49.8%, compared to 48.4% in Q2 2023. Its efficiency ratio for the sixth month period ended June 30, 2024 was 49.8%, compared to 45.2% for the same period in 2023.
Asset quality – Esquire had one nonperforming loan of $10.9 million and no exposure to commercial office space or constriction loans and only $15 million in performing loans to the hospitality industry.
The allowance for credit losses was $18.5 million, or 1.47% of total loans, as compared to $14.2 million, or 1.34% of total loans at June 30, 2023.
The ratio of nonperforming loans to total loans and total assets was 0.87% and 0.64%, respectively.
The allowance for credit losses to nonperforming loans was 169%. The increase in the allowance as a percentage of loans was general reserve driven considering loan growth and qualitative factors associated with the current short-term interest rate environment as well as the current uncertain economic environment including, but not limited to, its potential impact on the New York metro multifamily and commercial real estate market.
Assets - At June 30, 2024, total assets were $1.72 billion, reflecting a $265.2 million, or 18.3% increase from June 30, 2023. This increase was primarily attributable to growth in loans totaling $205.3 million, or 19.4%, to $1.26 billion. Higher yielding variable rate commercial loans increased $151.7 million, or 23.9%, during this same period.
Deposits - Total deposits were $1.49 billion as of June 30, 2024, a $227.9 million, or 18.1%, increase from June 30, 2023. This was primarily due to a $262.4 million, or 36.0%, increase in Savings, NOW and Money Market deposits, driven primarily by our IOLTA and other escrow deposits and, to a lesser extent, our commercial relationship money market deposits (primarily our mass tort/class action funds), offset by a $25.9 million, or 5.1%, decrease in demand deposits.
Esquire’s deposit strategy still primarily focuses on developing full service commercial banking relationships with our clients through lending facilities, payment processing, and other unique commercial cash management services in our two national verticals, rather than competing with other institutions on rate.
Esquire’s loan portfolio is shown in screencap below and was taken from the 8K that was issued today that included its earnings statement and investor presentation.
The bank’s lending profile remains tied to its litigation loans and, to a lesser extent, its multifamily loans. I’ve seen a couple of tweets about the amount of rent controlled/regulated loans in its multifamily portfolio. Per the Q2 2024 Investor Presentation linked above, “Rent regulated, free market, and mixed (both rent regulated and free market) represent approximately one-third each of the $352 million multifamily loan portfolio.” That puts its total exposure to these kinds of loans at $117+ million at minimum with it likely being substantially more. I don’t want to speculate on how much more because there was no information provided about the split between the “mixed” multifamily loans.
Other Highlights
KBW 2024 Bank Honor Roll.
Piper Sandler 2023 Bank & Thrift Small Market All Stars
Raymond James’ Top Performing Community Bank (2018-2023)
Closing Comments
Esquire’s performance, while down cumulatively for the first six months of the year, remains robust across nearly every category. Its exposure to rent controlled/regulated loans doesn’t seem dangerous for now, but I absolutely need to keep track of them as I continue to follow the business. Overall, I’m still bullish on the business and believe my thesis remains valid.
Disclosure: I do not own shares in Esquire Bank.