Esquire Financial Holdings, Inc. (ESQ) Earnings Call Transcript & Summary

Ladies and gentlemen, thank you for standing by. My name is Abby, and I will be your operator today. At this time, I would like to welcome everyone to the Esquire Financial Holdings, Inc. Annual Meeting of Shareholders. [Operator Instructions] And I would now like to turn the meeting over to Mr. Andrew Sagliocca, CEO and President. You may begin.

Thank you, Abby. I'd like to welcome everybody also the Annual Meeting of Stockholders for Esquire Financial Holdings. The annual meeting will come to order. My name is Andrew Sagliocca, I'm the Vice Chairman, CEO and President of Esquire, I'll serve as Chairman of the Annual Meeting. I want to thank everybody for their time today and taking time from their busy schedules. I'd like to introduce Gary Lax. Gary is our SVP, Chief Legal Officer and Corporate Secretary. He will be Secretary of the Annual Meeting. One of Board of Directors, Selig Zises is also here today in attendance. Other Board members are on the phone. Around the room, I have Frank Lonardo, our CLO, Chief Lending Officer; Michael Lacapria, our CFO. And I'm not sure if Eric S Bader, our COO and EVP, who's been here 18 years running with me. And I believe Martin Korn, our CTO, is going to be joining us. For those who have any questions, we'll have time after the financial presentation to answer any questions. The Board of Directors has appointed Eric Bader, again, our EVP and COO, to act as the inspector of election for the annual meeting. The Inspector's report will be attached to the minutes of the annual meeting. We have delivered to the Inspector a list of stockholders of the company, titled to vote, arranged in alphabetical order as of the close of business, March 27, 2025, the record date. The record shows there are, I'd like to say 8.4 million shares. I will say 8,431,774 shares of common stock issued with approximately 4.2 million representing a majority. We have previously received confirmation that the notice of the annual meeting, the proxy and the proxy cards were mailed to the stockholders as of the close of business on the record date. We have previously delivered to the inspector a list of those stockholders and the proxies that have been received, a majority of the total outstanding shares entitled to vote at the annual meeting are in person or by proxy, most of them obviously by proxy. The inspector is making a final count and will submit the formal report at the end of the meeting. A quorum is declared present subject to confirmation of that fact by the inspector in the report. The business of this annual meeting, as stated in the notice, is the election of 1 director for a 3-year term, 2 directors for a 1-year term, the ratification of Crowe LLP as our independent public accounting firm and an advisory vote on executive compensation. There were no stockholder proposals properly filed with the company in advance of the meeting. And therefore, those 3 items will be the only order of business. Proxies solicited by the Board of Directors can be tallied at 1 time, even though each proxy contains 3 different matters. Similarly, the ballots that any stockholder presents -- present seeks to cast here can be handled in the same way. We intend to proceed as discussed, and we will move on to each item as we address each item. At the conclusion of the 3 items, we'll take a vote on all items. We will have a report on the operations of the company or the business of the company over the past year 2024. There will be an opportunity for Q&A, that can follow that and then the voting of the 3 matters and the operational report will conclude. We will consider the proposals in order of the notice of the annual meeting. There are 3 shareholders in attendance with us here today. So the ballots are available here, if anybody needs them, gentlemen, just ask Gary. Polls are now open. At the conclusion of the discussion and voting on all matters. I will announce the closing of the polls. First item of business is to be voted upon in the election of Todd Deutsch and Selig Zises, each who will serve a 1-year term and the election of Rena Nigam to serve a 3-year term. All of the directors of the company are described in the proxy. All nominees are current members of the Board. Their biographical information is included in the proxy. Are there any questions regarding the election of these 3 directors? Okay. Hearing none, the second item of business to be voted upon is the proposal to ratify the appointment of Crowe LLP as our independent public accounting firm for the year ended December 31, 2025. Are there any questions regarding the ratification of the appointment of Crowe LLP? Hearing none. I'll proceed to the next item. Final item of business to be voted upon is a proposal to approve an advisory vote on executive compensation. Are there any questions regarding the proposal to approve an advisory vote on executive compensation? Hearing none, we'll proceed to the next item. This concludes the discussion on these matters. Is there anyone present who did not vote by proxy or wishes to vote by ballot? Again, hearing none. Is there anyone present who would like to turn in his or her ballot or proxy card? All right. I declare the polls closed. All ballots and proxies are now in the custody of the Inspector of Election. And I'll take a few moments to talk about the performance of the company over the past year, and a little bit into the first quarter. So for people who know us a long time and have been investors or have followed us, the bank is a very different bank. We serve 2 significantly underserved national markets. One being $443 billion litigation market on a national basis. We believe there is not a bank out there that serves the way we do. We've run into banks from time to time that are involved in it. They do a good job, but I've yet in 18 years to find a bank that focuses the way this bank does. The other is an $11 trillion payment or merchant acquiring market, clearing debit and credit cards primarily. There are less than 100 banks out of probably about 4,000 in the country that do that. Unlike an issuing bank, our bank is the bank for the merchant and small business as opposed to the bank issuing the cards for the consumer, and we clear those payments. We do this without branches. We do this with a very tech-enabled platform as a $2 billion bank clearing $36 billion a year in debit and credit card payments, quite honestly, we do it with inadequate staff, but we only have about 140 people here at the company. Some accolades over the past year in '24, which is representative of our performance. We were included in Fortune 100's fastest-growing companies, which was quite a number. We were recognized by S&P Global as the best-performing community bank. And for 2 years running, I think, Eric, right, we were named in KBW's bank on roll with only about 5% of the banks that are publicly traded are in. So your bank for all the shareholders on the phone performs really well, roles really well as an industry leader in performance and return and growth and the like. I like to believe it is, but the accolades saying this. For 2024, I'll just cover some brief items. And I'll touch on how it pertains to growth over the last 5 years. So diluted earnings per share. We made $5.14 last year. EPS has grown 33% over the last 5 years on a compounded annual growth rate. To me, that's pretty remarkable, with returns on equity, assets and equity of north of 250 and north of 20%, while we maintain -- as far as we're concerned, excess capital well above our capital plan limits and well above like regulatory limits above 10%, right around 12%, 12.5% or more. Excellent deposit growth this past year of 17% with a compounded annual growth rate of 20% over 5 years, and a cost of funds of 91 basis points in the face of a Fed fund market last year, that problem on average was north of 5%, right, Eric? It was sitting at about 550, significant loan growth. For us, 16% is lower than normal. Our compounded annual growth rate over the last 5 years is about 20%. There is a reason for that. Commercial real estate and multifamily fell out of favor for a good reason or bad, it doesn't matter. It's not a primary business for us. It's a secondary or tertiary business for us, where we invest excess funding into that market, and it's local. So as a point of reference, our C&I portfolio grew 25% and more importantly, our litigation platform, our contingent fee, law firm lending nationally grew 37%. So it was a great year, solid credit metrics, asset quality, continued expansion in our revenue base. We grew total revenue of about $125 million in the past year. That's a compounded annual growth rate of 24% to meet another significant milestone. And our net interest margin, which drives most of that revenue was north of 6%, which, again, is an industry-leading metrics. We continue to look forward 3, 4 years, 5 years into the future. We continue to invest currently in that future in technology and people, what we call resources. And even while we do that and invest in our future, we run the bank at an efficiency ratio just south of 50%, right around 48%, which, again, is another industry-leading metrics. The focus, again, is the litigation market and the payment market augmented by commercial real estate and our bond portfolio where we invest -- we technically have 1 branch here in our headquarters that no one visits and nobody comes to. So we like to say we are branchless. We're in 31 states in the litigation market, we're in all 50 states in the payment market. We recently hired business development officers in 6 regions in the country. Midwest, California, Texas, Florida, Atlanta and up here in New York, Pennsylvania area, too. We are working on a significant technology platform for the litigation space that our CTO is running point on. We think that's a game changer as we head into '26 and beyond. And we also recently announced a joint venture with Fortress and Fortress is arguably the biggest litigation lender out there in the market that is a nonbank litigation lender. They might be the biggest out there in the market as far as banks and nonbanks. Again, in the payment market, we make about $20 million a year in topline revenue on $36 million of payments, about 600 million-plus transactions that we clear. And as we spoke about just this morning with our Board member Selig, it also brings $150 million in core demand deposits through ISO reserves and merchant reserves and residuals, which are ISO revenue that we hold for 45 [ days ]. In the current quarter, more of the same. If it's boring, then it's high performance at boring. So again, our margin is about just shy of 6% in the first quarter, 5.96%; performance metrics on return on assets right around 2.40%, right around 19% on equity as we maintain excess equity, and we see the same growth patterns for '25 as we look forward that we see in the past. So I can go on all day. I won't stop there and see if anybody on the call or in the room have any questions.

[Operator Instructions]

My name is [indiscernible], Private investor. Just you are probably sick of it, but multifamily in New York City rent control, I thought it was like $8 million, I think, $2.9 million write-down on a multifamily. Just kind of curious about not only in particular and also just broadly views on multifamily rent control in New York City.

Sure. So I'll start with credit. Credit was an $11 million credit that we put on nonaccrual a little over a year ago. We let the borrower work through there, what all deemed to be mismanagement of the property. We let them give them time to get the property renovated and re-leased up fully. To optimize the return, we chose this course of action, which is to basically charge off a portion of the note, call it, an AB note structure, the B notes, the charge-off, A notes the $8 million. We believe based on the underwriting that we've done with the borrower's help, obviously, that it will be a performing credit at $8 million. As we look forward, they have to perform. They have to have sustained performance for the majority of this year, call it, 6 months. If they do, then the $8 million will return to accrual status. That was better than foreclosing, taking it in lieu, selling the note mortgage or other alternatives. The bank has about $350 million, maybe a little bit more than that of multifamily loans, about $450 million in commercial real estate. Like I said, it's a secondary at best lending option for us. Everybody involved in it has been doing it for 3 decades or more. We focus on doing it with strong debt service and loan to values. Why? Because it's not primary, we don't have to chase it. We don't have to look for it. We don't have to chase it. We can be very selective on what we do. All that said, the problem in the multifamily market is simple. Rates were 0 and banks were originating product with a 3 handle; 3%, 3.5%, 3.75% and now rates are double, 6.50%, [indiscernible] and if you're going to lend on the razor edge of debt service coverage, then when rates double, you're going to have a problem. How New York wants to run their rent stabilized and rent controlled is their problem. But if inflation is as high as it was, operator, not that I am, but as an operator, it's kind of hard to keep pace with 8% or 9% cost inflation when you can raise rents 3% or 4%. If you're asking me about our loan portfolio, I don't think we have any material problems. I don't view the $11 million credit as a material problem. It's something we'll work through. The bank generates a tremendous amount of capital through earnings. The majority of the capital the bank has was generated through earnings, not through capital raises. And we will work through a handful of credits we have in any given year, hopefully, without any concerns. Unlike the $11 million, the handful we work through in '24, nobody is aware of. Why? Because there's no negative outcome. So that's just not our primary market. So we're able to do it, god willing, in a safe and sound thoughtful way. I really appreciate your question because nobody else has... We are happy, you see?

I can ask one more. Just I know you said before that no other bank does it. I'm just -- I'm really curious like I'm trying to understand like why -- like the numbers look terrific on your core business. Like what's the...

my answer is I agree with you.

Like why not like 6%...

I'll give you a factual answer. I agree with you. This is commercial lending. We're not that smart. It's not that difficult. We've participated loans with half a dozen or more banks out there, off on legal lending, when going in the legal space. We've probably spoken to frank, more than a dozen, dozen and a half institutions. We're pretty transparent on how we do it. And just pick those 6, 12, 18 institutions that have our detailed credit memos and credit files because how else would you participate in this? And none of them are actively competing with us. So my simple answer is we live and breathe it every day for 18 years. Board members like Selig Zises, who's sitting right across from you, have been doing this for almost 3 decades, certainly 25 years. They were doing it 10 years longer than me. We compiled a great Board, not that they're not great now, but great in the beginning. We had a lot of advisers that were Board members. We had a lot of insight into the market. It took quite a long while to get our business partners, the regulators comfortable because it is unusual. And the factual answer is you're really taking -- you're taking a commercial entity, called the law firm that has contingent inventory, not hard inventory, receivables or goods. That law firm, that contingent inventory has a duration of 2 to 3 years, and that's on average. Accounts receivable are 60 days at the most. So at 90 days, people start to discount. Inventories, if you turn an inventory over 4 times a year, 120 days, that's a good inventory turnover ratio. These people, and these lawyers in the litigation space are turning their inventory over every 2 or 3 years, which by definition means their cash flow is irregular, erratic, whatever you want to call it. And there's not many lenders out there like Frank, who are willing to look at a year where performance is down on an income statement and understand that, that's no different than somebody's performance being down for a month or a quarter in a normal industry. And what lender would throw somebody out the door if they had a bad quarter, probably nobody. So it is unusual. It is different. We do have a unique understanding of the collateral and how to value it and how to understand it. But again, that doesn't make us smarter than anybody. Maybe we're a little wiser. And we live it and breathe it every day. So the barriers to entry are you need to understand it, you need to want to do it every day. You need a Board through management to buy in, not the other way, right? Because most credits run up through management to the Board. My Board and my founders were the one who founded this institution for that reason. So they were all in before the institution had dollar #1 of capital. Getting the regulators comfortable with an industry that's unique and different is not easy, but they're your business partners, so slow and steady wins the race. Again, I could go on and on, on that answer, but those are all the reasons. That doesn't mean that we know of a major institution down in Louisiana that does this. We know of 1 out or 2 or 3 out in California that do it. We know of one down in the Southeast that doesn't. So it's not that people don't do it or that banks don't do it. It's that they don't focus on it as a primary lending and depository and business vertical the way we do. That's really the difference. But every law firm has a bank because every law firm has an operating account and every law firm has an escrow account. So every law firm has a bank. And probably the people that do it well are the community banks around the law firms, right, in the geographic community they're in. They do it well because out of 50,000 contingency plan of law firms all have banks. So they're all being banked, just not the way we do it. Good question, though.

[Operator Instructions] We have no phone questions at this time.

Excellent. Thank you, everybody. I do appreciate the questions. It makes it more interesting. Also, the meeting would have been over 10 minutes ago. The inspector has completed his count, and the Secretary will now read the certificate and report of the Inspector of Election. So Gary Lax, I hand it off to you.

Thank you. Okay. The report confirms that a quorum is and has been in attendance at the annual meeting for all purposes. The report also shows, one, each director nominee received the affirmative vote of at least 83.92% of the shares voted; two, 98.83% of the shares voted were cast for the ratification of the appointment of Crowe LLP as the company's independent registered accounting firm for the year ending December 31, 2025; and three, 96.77% of the shares voted were cast for approval of the executive compensation. Accordingly, each director nominee has been elected as a director of the company. The proposal to ratify the appointment of Crowe LLP has been approved, and the advisory votes on the executive compensation has been approved.

Excellent. Thank you, Gary. Thank you, Eric. The certificate of the Board of inspector of election has been accepted and approved and will be attached to the minutes of the annual meeting. There being no further business to come before the annual meeting, I make a motion to adjourn Zises?

I second.

Excellent. Eric?

It is all in favor.

All right. Hearing none opposed, the motion is carried. The annual meeting is adjourned. Once more, I thank you for being great business partners, for those on the phone, trusting us with your investment and/or for those clients who might be on the phone trusting us as your business partner and your bank. I want to thank all the Board members for their constant stewardship and guidance. And after 18 years' friendship, I want to thank not only the senior managers in the room, but all the senior managers at the company that run their individual departments, all the middle managers that run the divisions within those departments and quite honestly, and most of all, all the employees that support all of us. I'd like to say to the senior managers, we could all go on vacation for a week and the bank will operate. And if the staff goes on vacation for a day, we're screwed and we can't operate. So the round numbers, 80, 90, or 100 employees that run this company every day for the benefit of shareholders and Board members and employees and clients and prospective clients and the like are the ones that make the company work every day. So our gratitude, the Board and management's gratitude goes out to them. So thank you all. Another great year, and we hope to talk to you again next year at the same time.

Ladies and gentlemen, this concludes today's meeting, and we thank you for your participation. You may now disconnect.