Esquire Financial Holdings, Inc. (ESQ) Q1 2026 Earnings Call Transcript

Thank you for standing by. My name is Kate and I will be your conference operator today. At this time, I would like to welcome everyone to the Q1 2026 Earnings Release Conference Call. All lights have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press star followed by the number one on your telephone keypad. If you would like to withdraw your question, press star 1 again. I would like to turn the call over to Andrew Segliaca, Vice Chairman, Chief Executive Officer, and President. Please go ahead.

Thank you, Kate, and good morning, all. I want to welcome you all to Esquire's first formal conference call for the first quarter earnings release. on the call with me is eric peter our evp and coo and michael la capria our svp and cfo our format for our first call will be simple i plan to hand the call over to michael to give you a financial update for the first quarter after michael is done i'll have a few comments and update you on several items that i feel are important and finally we'll open the call up to questions from our investors, analysts, and other guests on the call. At this time, I'll hand the call over to Michael.

Thank you, Andrew. To those in attendance on the call, I intend to provide a brief summary of our performance highlighted in the earnings release and investor presentation published pre-market this morning. Let me start with our first quarter net income. For the current quarter, we printed gap net income of $12.2 million or $1.40 per diluted share. These results included $1.7 million of elevated pre-tax non-interest costs, of which $1.3 million were merger costs associated with our acquisition of Signature Bank Corporation and $398,000 in accelerated stock compensation expense related to the previously announced departure of two board members. Excluding these two items, our adjusted net income was $13.8 million, or $1.58 per diluted share. These adjusted results are in line with adjusted fourth quarter 2025 net income of $13.6 million, or $1.57 per share, and represent a $2.4 million or 21% increase over the first quarter 2025 net income of $11.4 million or $1.33 per diluted share. Our adjusted returns on average assets and equity continue to be industry leading at 2.37% and 18.95% respectively, while we invest in our current resources to support future growth and maintain excellence in client service from which our customers have grown accustomed to. Our net interest margin remained resilient at 604 basis points, fairly consistent with prior periods despite our asset-sensitive balance sheet and significant declines in short-term interest rates over these past three years. Loan growth on a linked quarter basis was $56.7 million, or 13% annualized, reaching $1.82 billion. This growth consisted of $30 million in commercial loans and $23.3 million in commercial real estate, which was tempered by 53.1 million in anticipated litigation loan paydowns in response to seasonal elevated commercial loan draws we saw linked to the prior quarter. As it relates to our litigation loan portfolio, we saw 44 million or 15 percent annualized net growth bringing our litigation book to 1.22 billion at a yield of approximately 9% for the quarter. On an average basis, our overall loan portfolio grew 115.6 million, or 28% annualized, compared to the trailing quarter fueled by our national litigation platform. Deposit growth on a linked quarter basis was 39.6 million, or 8% annualized, where our total deposits reached $2.1 billion at a cost of funds, inclusive of demand, remaining flat at 1%. This quarter's deposit growth was again tempered by the anticipated escrow and IOLTA disbursements from elevated settlement balances in the prior quarter. Off-balance sheet sweep funds totaled $1 billion, where approximately 33% is available for on-balance sheet liquidity. Our administrative service fees associated with these funds totaled $1.1 million. Additional available liquidity, including cash borrowings and additional sweep balances, totaled approximately $1.1 billion. Asset quality remained strong. Our allowance coverage was 1.3%, with non-performing loans totaling $736,000 at a ratio to total assets of only three basis points. We have zero exposure to commercial office space or construction and vacant land loans. As far as credit activity for the quarter, we foreclosed on the property securing our one $7.8 million non-accrual multifamily loan and sold it to an unrelated third party, recognizing a $3.2 million net charge off. Non-interest income was stable at 6.5 million, or 16% of total revenue, led by our payment processing platform that services 93,000 small business clients and processed $9.7 billion across 137 million transactions this quarter. Adjusted operational expenses of $19 million were in line with the trailing quarter driving an industry-leading adjusted efficiency ratio of 46.9% as we continue to invest in our platform. Our capital foundation is strong and well-capitalized with equity assets of 12.44% and bank-level regulatory leverage and CET1 ratios at 11.85% and 14.25% respectively. From a corporate perspective, we increased our regular quarterly cash dividend by 14% to $0.20 per share paid this past March. Now I'll turn it over to Andrew to provide commentary on the business.

Thank you, Michael. So I'd like to take a moment before we get started on any comments to recognize one of our former board members who just retired for health reasons, Zig Dices. Zig is a founding board member, and he's been with us 20 years. I want to thank Zig for his vision, stewardship, dedication, belief in all of us, and last but not least, his friendship for over two decades. He's been invaluable to the institution and has been our chairman of our director's loan committee, which has been an invaluable role. As Michael noted, we had another strong quarter, including or excluding certain adjustments, totaling $1.7 million related to the pending signature merger and certain acceleration on stock grants related to the two former board members. so i don't want to go back over michael's comments it was very thorough but just to add to michael's growth and performance metrics comments i think it's worth noting that this quarter is not an anomaly for our institution um and in order to demonstrate this i'll give you a few uh highlights about our compounded annual growth rate over the past five years. Loans. Loan compounded annual growth rate over five years was 21%. Within the loan category, commercial litigation related loans grew 31%. Our deposit compounded annual growth rate over the last five years was 20 percent within that the commercial litigation deposit growth was 25 percent equity has grown for the same five years 18 percent and it's all generated from earnings with no associated capital raise this has caused revenue to grow over the last five years at 23 percent diluted eps to grow at 29 percent all this while maintaining a net interest margin north of six percent since 2023 despite significant short-term rate declines since 23 and despite esquire being

asset sensitive last but not least our return on average assets has been north of 2.25 5% since 2022, and our return on equity has been north of 8% since 2020.

I'll give you a quick update on our pending merger with Signature. We've made strong progress on the Signature merger to date, including filing all regulatory applications, filing our Form S-4 with the SEC. We've engaged a nationally recognized advisory firm to assist with the merger and integration milestones and to keep us on task and on point, and we've already conducted various key merger and integration planning sessions with both management teams from Esquire and Signature. For anyone from Signature on the line, we want to thank you for your trust in us and also for working closely with us before the announcement and obviously after. We believe, as we've disclosed in the past, that the signature merger is transformational for us and the next foothold in one of the three largest markets that we see by both population and number of contingent fee law firms, that being the New York market where we are headquartered the Los Angeles market which is our second largest market where we recently at the end of 25 opened our Los Angeles branch and we also have two regional videos servicing the area besides our Los Angeles branch staff and obviously the Chicago metro area which is key to the signature

acquisition.

So we're going to focus on rolling up our sleeves, making sure the integration is floorless, making sure we continue to service our clients, and also making sure we continue to grow in a safe and sound manner. With that being said, I will now turn it back over to Kate to open it up for any questions.

At this time, I would like to remind everyone in order to ask the question press star then the number one on your telephone keypad we will pause for just a moment to compile the q a roster your first question comes from the line of salmis reed with raymond james your line is open hey good morning guys good morning uh you know it's been about a year since you uh 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 concentration?

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 uh we've worked on various opportunities uh 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, 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.

Okay. That's good, Caller. I appreciate that. And, 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 Taisley 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?

That is absolutely core to the overall strategy. 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 100 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 1,000-plus independent sales organizations. There are huge, if you want to call them mega-ISOs. Believe it or or not, Fiserv First Data is not only a platform, but they board their own merchants and work with ISOs and banks, probably one of the biggest. Obviously Chase and Citi and Wells are all part of it. The platform as we've established 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, 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.

Makes sense. Thanks for taking my questions, and congrats on a good quarter.

Excellent.

Your next question comes from the line of TM Spitzer with KBW.

Your line is open. hey good morning thanks for taking my question absolutely good morning um so the first one i have is um with signature but both things have i think pretty unique but seems like similar cultures can you talk about how the reception has been um from the signature side of things especially in terms of you know shifting their focus a little bit towards that litigation related lending a little bit more um and like how quickly can signature get up to speed on Esquire style of litigation lending and like ramp up volume there, you know, like efforts and training started already or is that post acquisition?

Good question, Tim. So 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 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 um as you know the deal uh in it um financially has minimal cost savings and from a people perspective that's a good thing so that makes uh people a little more comfortable that uh 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 verticals 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 myself and Ari 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 um or their clients know um and the best way to get it done is to go to those meetings with both sets of teams um because that's the best on-the-job training you could ask for and ironically last but not least uh the national trial association for aaj is in chicago this july um so we're already planning for that event with both sets of teams um appreciate the full answer

there, Andrew. Moving to a different topic, how should we think about the NIM trajectory going forward? And just to make it simple, let's assume no rate cuts.

Sure. Well, you know, Michael and I, we've already done that 10. So we're looking at, I know you're seeing us sitting at 604 for the quarter. So in round numbers, we look to FHN for their forecast, not that it's better or worse than anybody it's it covers a two-year period and it's traditionally what we've used and it's traditionally what eric uses internally for asset liability management and the alco models and all that good stuff so we just want to stay consistent there so if you look at their rate forecast they have no rate cuts for 26 and then they have uh 50 basis points for two rate cuts for 27 starting in june to 350 from 375 and then going from 325 to 350 uh in uh this september third quarter of 27 so uh we see the nim on average being around 590 ish low call it 590 um through the end of the year we do see some compression from 604 and then we see another 10 basis points in uh 27. gotcha very helpful um and then the last one sort of related you know what are your plans to deploy excess deposits if any like the time period for that you have you know close 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 you at all sure so if we start with liquidity at the top of the house We keep around $100 million 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 um i think any excess liquidity uh can be deployed uh fairly quickly quarters with what we're going to do on a combined basis uh 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, you know, 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 it, 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.

Awesome. Thanks, Andy. That's all I got.

Your next question comes from the line of Justin Crowley with Piper Sandler. Your line is open.

Hey, good morning, guys. This is Bader just filling in for Justin Crowley today.

Good morning.

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, this quarter came in at a slightly lower pace with the anticipated paydowns. 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?

Yeah, I don't see it decelerating. You know, I gave you the five-year CAGR for the litigation book. it's 32 percent and you would think that's weighed towards the earlier periods and it's not it's more more weighted towards the latter periods a lot of periods were in the high 30s for that litigation book as far as growth uh you know there's a there's a bullet or a part of a bullet in the earnings release and in the investor deck that talks about uh the analysis we did we 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. So 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 percent 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 you internally because they're using our lending facilities the way that most people think of capital. So we're very comfortable. The sales pipeline or business development pipeline is very robust. It is certainly not at a low watermark. It's closer to a high watermark. The business development teams around the regions that we hired them in are doing excellent. We've significantly increased the lending back office team and the underwriting team and the servicing team, both in lending and in operations. And we're very comfortable where the loan pipeline stands today. And last but not least, we usually grow, certainly, my recollection is, last year and maybe the last two years in the first quarter by a minimal 4%, 5%, 6% annualized growth because of those paydowns happening from the fourth quarter high watermark draws. uh so we're very pleased with the 13 percent annualized growth this quarter uh quite honestly myself pleasantly surprised thank you for the color that that's all for me thanks for taking that question excellent thank you i'll now turn the call back to michael lucabria chief financial officer for closing remarks i think i'll turn that over to you okay those are i i assume case those are all the questions uh we want to thank everybody for joining us on our first investor call conference call obviously we'll continue to do it uh our earnings this way going forward i think it's more efficient and effective not only for us but hopefully for the people on the phone uh certainly saves uh eric and michael and i a lot of time from having multiple calls that were only accelerating. And obviously, with the pending signature merger, my hope is that the earnings calls become more robust as we combine not only the banks, but the investor base across both companies. So I want to thank everybody and wish everybody a great weekend.

And thank you all. ladies and gentlemen that concludes today's call thank you for joining you may now disconnect