On this page of StockholderLetter.com we present the 4/14/2023 shareholder letter from Esquire Financial Holdings, Inc. — ticker symbol ESQ. Reading current and past ESQ letters to shareholders can bring important insights into the investment thesis.
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4/14/2023 Letter Continued (Full PDF)
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4/18/2024 ESQ Stockholder Letter
• 4/30/2025 ESQ Stockholder Letter
• More "Banking & Savings" Category Stockholder Letters
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ESQ Benford's Law Stock Score = 92
4/14/2023 Letter Continued (Full PDF)
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4/18/2024 ESQ Stockholder Letter•
4/30/2025 ESQ Stockholder Letter•
More "Banking & Savings" Category Stockholder Letters•
ESQ Benford's Law Stock Score = 92ESQ 4/14/2023 Shareholder/Stockholder Letter Transcript:
S U C C E E D B O L D LY 2022 A N N UA L REPORT Esquire Financial Holdings, Inc. is a financial holding company headquartered in Jericho, New York, with one branch office in Jericho, New York, and an administrative office in Boca Raton, Florida. Its wholly-owned subsidiary, Esquire Bank, National Association, is a full-service commercial bank dedicated to serving the financial needs of the litigation industry and small businesses nationally, as well as commercial and retail customers in the New York metropolitan area. The bank offers tailored financial and payment processing solutions to the litigation community and their clients as well as dynamic and flexible payment processing solutions to small-business owners. For more information, visit www.esquirebank.com. TO O U R F E L LOW S TA K E H O L D E R S , In light of recent industry events commencing with the Loan portfolio diversification with focused growth in failure of SVB Financial Group and Signature Bank, the higher yielding variable rate commercial loans anchored last several weeks have sparked uncertainty in the finan- by our litigation portfolio, totaling $947 million at year cial markets causing most in the industry to re-evaluate end with a CAGR of 23%, creating opportunities for full their balance sheet management and overall strategy. commercial relationship banking (deposits) through our We want to take this opportunity to explain to our commercial cash management platform. stakeholders why, during these tumultuous weeks, not a single Esquire client has left our Company nor moved their deposit relationships. First, we are a full-service commercial bank that focuses on old fashioned relationship banking, treating our clients as business partners, while coupling this with cutting edge technology and digital thought leadership content. Secondly, we have always prioritized our balance sheet management strategy, along with safety and soundness before earnings and our stock price focusing on credit quality, core relationship banking and funding, liquidity, interest rate Solid credit metrics, asset quality, and reserve coverage ratios with no nonperforming loans at year-end and 1.29% reserve to loans ratio. Stable low-cost core commercial relationship deposit model with a cost-of-funds of 0.15% totaling $1.2 billion and a CAGR of 22% generated from a highly efficient branchless technology-enabled deposit platform. Off-balance sheet commercial relationship litigation funds total $432 million at year-end, representing an additional source of funding. risk management, and capital. Finally, we believe that a Diluted earnings per share was $3.47 for the year with strong and fortified balance sheet starting with outstand- a CAGR of 46%, generating an industry leading return ing customer relationships will consistently generate on average assets and equity of 2.31% and 19.44%, long term growth and strong industry leading perfor- respectively (2.80% and 23.89% for the fourth quarter mance metrics as we say, slow and steady wins the 2022, respectively). Both our return on average assets race. In this message, we would like to expand on these and average stockholders equity had a CAGR of foundational values as well as expand on our transforma- approximately 30%. tional future. In summary, we generated industry leading returns and First, let s briefly review certain 2022 performance met- performance metrics fueled by our unique branchless rics to demonstrate that our core principles are grounded national verticals. Our diversified revenue streams were in industry leading returns and performance metrics. supported by our customer-centric employees and Review of 2022 unique technology platforms, generating a strong efficiency ratio of 49.8% (45.3% for the fourth quarter 2022) Esquire s industry leading performance metrics once while continually investing in technology and other again placed us among the top performing financial ser- resources to generate future growth. vices companies in the country. Since our growth metrics wanted to highlight several metrics for the year-ended Serving our Business Partners with Relationship Banking 2022 with associated compounded annual growth rates While some companies lose their clarity and purpose in ( CAGR ) since 2015, clearly demonstrating the consistent the pursuit of growth and earnings, our path has been, performance from our unique and valuable institution. and will continue to be focused and clearer than it has year over year are included in our Annual Report, we Exceptional revenue growth totaling $84 million for the current year with a CAGR of 28%, fueled by a strong net interest margin of 4.99% (5.81% for the fourth quarter 2022) and fee income representing 30% of total revenue. ever been. We start with living and breathing our two national platforms every day the litigation and payment processing verticals. Our client-centric approach to relationship banking starts with listening to the needs and wants of our customers (and prospective customers), ESQUIRE FINANCIAL HOLDINGS, INC. 1 meeting those needs and wants with tailored products steadfast commitment to their success and business and services, and making our clients success our top pri- growth over the years. For us at Esquire, this clearly ority. These core tenets coupled with our forward-think- demonstrates that true relationship banking translates ing managers, outstanding client service teams, and into core and loyal commercial clients (lending facilities, inclusive corporate culture differentiate us from most commercial cash management depository relationships, financial institutions. payment processing clients, and more). How do we do this? Simply put, in the litigation vertical, Foundational Balance Sheet Management First we have extensive experience in this unique industry for 17 years. We understand the difference between various types of law firms (i.e. class action, mass tort, single event, workers compensation, social security, hourly firms, and more). We have extensive experience in valuing the contingent fee collateral or inventories of law firms, and we understand that these contingent assets have longer durations than traditional commercial assets (creating atypical revenue streams for law firms). This experience and understanding creates deep relationships within the litigation market with not only our clients, but with non-client law firms, claims administrators, lien resolution firms, the courts, and other related professional service firms that assist this industry throughout the country. In the payment (merchant acquiring) processing vertical, we again have extensive experience in this unique industry for over 10 years, deep relationships with non-bank acquirers, we use proprietary and industry leading technology to ensure card brand and regulatory compliance, support multiple processing platforms, manage daily risk across 76,000 small business merchants in all 50 states, and perform commercial treasury clearing services for approximately $28 billion in debit and credit card processing volume across 536 million transactions annually (excluding our ACH processing platform). Also, we are one of only 85 acquiring banks in the country. How do these relationships translate during the most recent (and past) financial turmoil? During the first days of the recent market uncertainty (the week of March 17, 2023), our executive and senior teams spoke directly to most of our clients in both national verticals. These clients reaffirmed their trust in Esquire, we reaffirmed our commitment to them during the current and past market turmoil (i.e. the global pandemic), and reiterated Esquire s 2 ESQUIRE FINANCIAL HOLDINGS, INC. Safety and soundness of any company, especially a financial services company, starts and ends with strong balance sheet management and an unwavering commitment to not chasing short-term earnings, but long-term strategies that will position our Company for growth and success over the next decade. Credit Quality. Strong credit quality starts with our unique ability to couple traditional commercial underwriting with non-traditional asset-based underwriting, understanding the longer duration of law firm s contingent case inventories and the related valuation process. Our global loanto-value for these firms is typically less than 20%, clearly demonstrating a strong credit culture. In the payment processing vertical, we maintained ISO and merchant reserves and residuals in noninterest bearing demand deposit accounts totaling $144 million to protect our Company s capital from charge-back risk. Finally, we have no exposure to crypto currency nor do we offer it as a service for our customers. Core relationship banking and funding. Our commercial relationship banking model ensures that funding (deposits) is core to our Company. Our commercial loans tailored to the litigation market come with low cost core operating and escrow deposits, enhancing the overall yield on our loan portfolio, and enabling us to achieve industry leading net interest margins. The litigation vertical typically represents 65%-75% of our deposit base at any given time, with $564.0 million, or 46%, of total deposits in longer duration escrow (or claimant trust) settlement deposits at December 31, 2022. A significant part of our core deposit focus is on managing escrow or fiduciary funds for law firms and other related companies (i.e. claims administrators, courts, bankruptcy trustees) nationally. These law firm escrow accounts as well as other fiduciary deposit accounts are for the benefit of 11.33% and 14.21%, respectively. Including our after tax consumers (or claimants) with the FDIC insurance cover- available-for-sale and held-to-maturity securities portfo- age passing through the account to the beneficial owner lios fair values, our TCE/TA and CET1 ratios are still robust (claimant) of the funds. This is why only 25% of our depos- at 10.86% and 12.03%, respectively. These ratios are far its were not FDIC-insured at year end, with the majority in excess of industry averages and demonstrate a strong of our uninsured deposits representing customers with capital foundation to grow our Company. We also gener- full relationship banking at Esquire including, but not ate a significant amount of capital from earnings as limited to, law firm operating accounts, certain balances demonstrated by our average return on assets and of escrow accounts, merchant reserves, ISO reserves, equity of 2.80% and 23.89% for the fourth quarter 2022, ACH processing, and custodial accounts. respectively, and 2.31% and 19.44% for the year ended Liquidity and interest rate risk management. Our strong liquidity and thoughtful asset structure/duration, supported by our interest rate risk management, ensures that we can manage our Company in times of financial crisis, and in the absence of this, allows us to grow and support our clients (and prospective clients ) needs. At year end, our overall liquidity position including cash, 2022, respectively. Our ability to generate significant capital from earnings is due to our two unique high performing national platforms the litigation vertical that is primarily net interest margin focused and the payment processing vertical that is primarily stable non-interest income focused, coupled with a highly efficient branchless national platform. secured borrowings, unsecured borrowing, and reciprocal For 17 years, we have operated a simple, straightforward client sweep balances was $633 million, or 52% of our total business model centered on taking extraordinary care of deposits. We have never leveraged our balance sheet to our clients and servicing their business needs daily generate earnings, as we have always utilized core client to grow their companies and meet their liquidity needs. deposits to fund our asset growth and related earnings. As We have successfully navigated various macroeconomic we say, we keep our powder dry and maintain excess and interest rate environments, a pandemic, and today liquidity to manage through market turmoil or, to support we have among the industry s highest rates of client our growth. From an interest rate risk perspective, our satisfaction and retention, as well as returns and perfor- assets are short-duration while most of our loans (approx- mance metrics. imately 58%) are variable rate and tied to prime. Our funding sources for these assets are primarily core commercial deposits tied to overall relationship banking (i.e. commercial lending facilities to law firm, payment processing for ISOs and merchants) that are not interest rate sensitive. Non-interest-bearing commercial demand deposits and escrow funds total 36% and 46%, respectively, at year end. These factors create a highly liquid balance sheet that is not leveraged and, as rates rise, allows our net interest margin to improve materially (our net interest margin increased from 4.48% to 5.81% when comparing the fourth quarter of 2021 to 2022). Strong Capital. Finally, we have a solid capital foundation as our capital levels are significantly higher than regulatory requirements, with a tangible common equity to tangible assets ( TCE/TA ) and a CET1 ratio of Esquire s Transformational Future Second We operate in two significant national markets primed for disruption: a $443 billion litigation market with 100,000+ law firms and a $9.5 trillion payment processing market with 10+ million merchants/small businesses. These two national verticals represent tremendous untapped potential since Esquire is a fraction of both verticals and they are both primed for disruption by our client-centric and tech-focused institution. We are thought leaders in the litigation vertical, providing digital content to law firms to help grow their business, and provide C-suite access to ISOs for flexibility in the payment processing vertical. We differentiate our brand from other financial institutions in the U.S. and are positioned for growth, with tailored products and state-of-the-art technology geared towards effective client acquisition. ESQUIRE FINANCIAL HOLDINGS, INC. 3