Esquire Financial (ESQ) - 2023 Q1 - Quarterly Report

Market Overview - As of March 31, 2023, the company operates as a full-service commercial bank focused on the litigation industry and small businesses, with a total addressable market of $443 billion for 2020 in the U.S. tort actions sector [125]. - The company has clients in 28 states, with significant markets including New York, California, Texas, Florida, Pennsylvania, South Carolina, and New Jersey [126]. - The litigation market is projected to consume 1.85%-2.13% of U.S. GDP annually, indicating a strong growth opportunity for the company [125]. Financial Performance - The company reported a return on average assets of 3.68% and a return on average equity of 30.45% for the quarter ended March 31, 2023 [130]. - Net income increased by$ 6.8 million, or 128.0%, to $12.2 million for the three months ended March 31, 2023, compared to$ 5.3 million for the same period in 2022 [148]. - Net interest income rose by $7.5 million, or 63.7%, to$ 19.3 million for the three months ended March 31, 2023, driven by an $8.3 million increase in interest income [149]. - Noninterest income surged by$ 4.8 million, or 86.5%, to $10.3 million, primarily due to a$ 4.0 million nonrecurring gain on an equity investment [158]. - Total noninterest expense increased by $3.1 million, or 33.1%, to$ 12.5 million, with significant rises in employee compensation and professional services [161]. Asset and Liability Management - Total assets increased by $55.2 million, or 4.0%, to$ 1.5 billion as of March 31, 2023, driven by a 24.2% increase in cash and cash equivalents [132]. - Loans held for investment grew to $966.9 million, representing 76.4% of total deposits, with commercial loans increasing by$ 13.8 million, or 2.5% [133]. - Total deposits rose by $36.1 million, or 2.9%, to$ 1.3 billion, with demand deposits increasing by $104.2 million, or 23.4% [137]. - The allowance for credit losses was$ 13.0 million, or 1.34% of total loans, reflecting an increase due to loan growth and economic uncertainties [142]. - Off-balance sheet sweep funds totaled approximately $262.5 million, with$ 140.5 million available to be swept back onto the balance sheet [139]. Interest Income and Margin - Interest income increased by $8.3 million, or 69.4%, to$ 20.4 million for the three months ended March 31, 2023, attributed to growth in loans, securities, and interest earning cash [151]. - Loan interest income increased by $6.6 million, or 59.8%, to$ 17.6 million, supported by a $175.4 million, or 22.6%, increase in average loan balance [152]. - The net interest margin improved by 160 basis points to 6.03% for the three months ended March 31, 2023, from 4.43% in the prior year [150]. - The net interest margin was 6.03%, with stable fee income representing 21% of total revenue, including a nonrecurring gain of$ 4.0 million [130]. Credit Losses and Provisions - The provision for credit losses was $500 thousand, a decrease of$ 140 thousand from the previous year, with an allowance to loans ratio of 1.34% [157]. - The company maintained no nonperforming assets as of March 31, 2023, with special mention loans decreasing from $13.7 million to$ 5.4 million [142]. Technology and Competitive Edge - The company emphasizes its unique ability to combine traditional commercial underwriting with non-traditional asset-based underwriting, enhancing its competitive edge [126]. - The company’s future success relies on developing and embracing cutting-edge technology to differentiate itself from other financial firms [124]. Economic and Regulatory Risks - The company faces risks from economic conditions, competition, and regulatory changes that could impact its financial performance [123]. Capital and Liquidity - Total stockholders' equity increased by $12.6 million to$ 170.8 million, primarily due to net income of $12.2 million [141]. - The overall liquidity position was$ 588.4 million, representing 47% of total deposits, indicating a highly liquid balance sheet [177]. - Total risk-based capital ratio was 16.14% as of March 31, 2023, exceeding the minimum requirement of 10.00% [180]. - The bank is asset-sensitive in a rising interest rate environment, with estimated net interest income increasing by $18.185 million under a 400 basis point increase in rates [169]. - Economic value of equity (EVE) increased by$ 48.265 million under a 400 basis point increase in interest rates, totaling $327.504 million [171]. Operational Costs - Employee compensation and benefits costs increased due to staff growth and year-end salary adjustments, impacting overall expenses [162]. - Professional services costs rose due to the retention of a global executive search firm to enhance sales and underwriting capabilities [162]. - Advertising and marketing costs increased as the company expanded its brand and digital marketing efforts [162]. Taxation - Income tax expense for Q1 2023 was$ 4.4 million, reflecting an effective tax rate of 26.5%, consistent with Q1 2022 [163].