Esquire Financial (US:ESQ)2023-11-08 16:00Business Overview - As of September 30, 2023, the company operates as a full-service commercial bank focused on the litigation industry and small businesses nationally, with a total addressable market of $443 billion for the litigation sector [122][125]. - The company reported that U.S. tort actions consume an estimated 1.85%-2.13% of U.S. GDP annually, indicating significant growth potential in the litigation market [125]. - The company has clients in 28 states, with major markets including New York, California, Texas, Florida, Pennsylvania, South Carolina, and New Jersey [126]. - The company emphasizes its unique ability to combine traditional commercial underwriting with non-traditional asset-based underwriting, which is crucial for understanding law firms' contingent case inventory [126]. Financial Performance - The company’s results of operations are primarily driven by net interest income, which is the difference between interest earned on assets and interest paid on liabilities [123]. - Noninterest income is mainly derived from payment processing income, administrative service payment fees, and customer-related fees [123]. - The company achieved a return on average assets of 2.71% and a return on average equity of 21.44% for the quarter ended September 30, 2023 [132]. - Net income increased by $2.1 million, or 27.6%, to $9.8 million for the three months ended September 30, 2023, compared to $7.7 million for the same period in 2022 [153]. - Net interest income rose by $6.2 million, or 39.7%, to $21.7 million for the three months ended September 30, 2023, driven by a $7.9 million increase in interest income [154]. - Interest income increased by $7.9 million, or 49.8%, to $23.9 million for the three months ended September 30, 2023, from $16.0 million for the same period in 2022 [156]. - The company recorded an income tax expense of $11.2 million for the nine months ended September 30, 2023, with an effective tax rate of 26.5% [185]. Asset and Loan Growth - Total assets increased by $86.8 million, or 6.2%, to $1.5 billion as of September 30, 2023, driven by a $166.1 million, or 17.5%, growth in loans held for investment [134]. - Loans held for investment totaled $1.1 billion, or 86.8% of total deposits, with commercial loans increasing by $110.2 million, or 20.0%, to $662.3 million [135]. - Litigation-related loans reached $573.8 million, or 51.5% of the total loan portfolio, up from $467.4 million, or 49.3%, at the end of 2022 [136]. - Total deposits rose by $54.4 million, or 4.4%, to $1.3 billion, with core deposits making up 99.4% of total deposits [139]. - Demand deposits increased by $27.7 million, or 6.2%, to $472.1 million, representing 36.8% of total deposits [139]. Credit Losses and Allowance - The company has adopted the CECL Standard, requiring it to estimate and record lifetime credit losses expected to be incurred on financial instruments [110]. - The company’s allowance for credit losses is considered a critical accounting policy due to the inherent subjectivity and uncertainty in estimating required levels [109]. - The allowance for credit losses was $15.3 million, or 1.38% of total loans, as of September 30, 2023, compared to 1.29% at the end of 2022 [144]. - Provision for credit losses increased to $1.2 million for Q3 2023, up from $650 thousand in Q3 2022, with an allowance to loans ratio of 1.38% compared to 1.24% a year earlier [162]. Liquidity and Capital Position - The company has strong available liquidity of $782.4 million, or 61% of deposits, with no outstanding borrowings [132]. - Total stockholders' equity increased by $27.5 million to $185.6 million, primarily due to net income of $31.1 million [143]. - The total liquidity position, including cash, borrowing capacity, and available sweep balances, amounted to $782.4 million, representing 61% of total deposits [201]. - Esquire Bank exceeded all regulatory capital requirements as of September 30, 2023, and was classified as "well capitalized" under regulatory guidelines [203]. - The total risk-based capital ratio was 15.59% as of September 30, 2023, significantly above the minimum requirement of 10.00% [206]. - The Tier 1 risk-based capital ratio stood at 14.34% as of September 30, 2023, exceeding the minimum requirement of 8.00% [206]. - The bank's common equity Tier 1 capital ratio was also 14.34%, well above the minimum requirement of 6.50% [206]. Technology and Market Risks - The company’s future success relies on developing and embracing cutting-edge technology to leverage its litigation and payment processing verticals [124]. - The company faces risks related to economic conditions, competition, and regulatory changes that could impact its financial performance [105][121]. Payment Processing - Payment processing volumes increased by $1.1 billion, or 14.6%, to $8.4 billion in Q3 2023, with transactions rising by 15.3 million, or 10.7%, to 157.3 million [165]. - Noninterest income for Q3 2023 was $6.5 million, a 1.5% increase from $6.4 million in Q3 2022, driven by a $163 thousand increase in payment processing fees [163]. - Payment processing income for the nine months ended September 30, 2023, increased by $599 thousand, or 3.8%, to $16.3 million compared to the same period in 2022 [181].