Esquire Financial Holdings, Inc. ($ESQ)

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. [Operator Instructions] Thank you. I would now like to turn the call over to Andrew Sagliocca, 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 Bader, our EVP and COO; and Michael LaCapria, 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 premarket this morning. Let me start with our first quarter net income. For the current quarter, we printed GAAP net income of $12.2 million or $1.40 per diluted share. These results included $1.7 million of elevated pretax noninterest costs, of which 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 2 Board members. Excluding these 2 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 a 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 a customer. 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 3 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% 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 ITA 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 remains strong. Our allowance coverage was 1.3% with nonperforming loans totaling $736,000 at a ratio to total assets of only 3 basis points. We have 0 exposure to commercial office space or construction and vacant land loans. As far as credit activity for the quarter, we foreclosed on the properties securing our on $7.8 million nonaccrual multifamily loan and sold it to an unrelated third party, recognizing a $3.2 million net charge-off. Noninterest 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 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. 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, in his [indiscernible]. Zig is a founding board member, and he's been with us 20 years. I want to thank [indiscernible] for his vision, stewardship, dedication, belief in all of us, and last but not least, its friendship for over 2 decades. He's been invaluable to the institution and has been our Chairman of our Directors Loan Committee, which has been an invaluable role for the institution. So thank you. 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 2 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. And in order to demonstrate this, I'll give you a few highlights about our compounded annual growth rate over the past 5 years. loads, loan compounded annual growth rate over 5 years was 21%. Within the loan category, commercial litigation-related loans grew 31%. Our deposit compounded annual growth rate over the last 5 years was 20%. Within that, the commercial litigation deposit growth was 25%. And equity has grown for the same 5 years, 18%, and it's all generated from earnings with no associated capital raise. This has caused revenue to grow over the last 5 years at 23%, diluted EPS to grow at 29%. All this, while maintaining a net interest margin north of 6% and since 2023 despite significant short-term rate declines since '23 and despite SAR being asset sensitive. Last but not least, our return on average assets has been north of 2.25% since 2022, and our return on equity has been north of 8% since [indiscernible]. 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 following 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 as [indiscernible] and Signature. For anyone from signature on the line, we want to thank you for you trusted 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 1 of the 3 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 2 regional medias servicing the area besides our Los Angeles brand 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 flawless, 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.

[Operator Instructions] Your first question comes from the line of Tamas Reid with Raymond James.

It's been about a year since you announced the JV agreement fortress. Can you maybe talk about how that relationship is going and if there's the potential to maybe scale that up post signature, given the step down in litigation and deposit concentrations?

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 a litigation vertical. We've worked on various opportunities, 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 million or $80 million on a pro forma basis. The need for them would be less logically, but Fortress 10 and will be a good business partner for us on longer duration type inventories that law firms carry, and those usually revolve around mass [indiscernible]. But the relationship has been good. We've been able to get a couple of deals done together, also as the bank and then as the nonbank 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 color there. I appreciate that. And payment processing business just hasn't really grown in a meaningful way kind of becoming a smaller part of the overall franchise. I know you did the Tasley transaction a couple of 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. 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, debit cards and credit cards and 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 not, Fiserv First Data is not only a platform, but they bought 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. A 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 were -- had a more normal net interest margin of 4.5% or 4.75%, 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.

Your next question comes from the line of Tim Switzer with KBW.

So the first one I had is with Signature, both things have, I think, pretty unique but seems like similar cultures. Can you talk about how the reception has been from the signature side of things, especially in terms of shifting their focus a little bit towards that litigation-related living a little bit more -- and like how quickly can Signature get up to speed on Esquire's style of litigation lending and like ramp-up volume there? Like efforts in 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, 1.5 days, 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've 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. As you know, the deal in it financially has minimal cost savings. And from a people perspective, that's a good thing. So that makes people more comfortable that to compare and contrast the end-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 vertical is 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 Officer is at an event, a litigation event out in the Midwest. We've been talking myself and Mary Kornhever. -- 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, 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 training, I guess, for lack of a better term, but 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 or their clients now. And the best way to get it done is to go to those meetings with both sets of teams because that's the best on-the-job training you could ask for. And ironically, last but not least, the National Trial Association for AHA is in Chicago this July, so we're already planning for that event with both sets of teams.

Great. Appreciate the following [indiscernible], 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, Tim. So -- so we're looking at -- I know you'll see us sitting at 604 for the quarter. So in round numbers, we look to FHN for the forecast, not that it's better or worse than anybody. It's -- it covers a 2-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 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 50 basis points or 2 rate cuts for '27 starting in June to 350 from 375 and then going from $325 to $350 in the September 3rd quarter of '27. So we see the NIM on average being around 590-ish low, call [indiscernible] through the end of the year. We do see some compression from 604 and then we see another 10 basis points in '27.

Got you. Very helpful. And then the last one, sort of related -- what are your plans to deploy excess deposits, if any, like the time period for that? You have I think the $1 billion off balance sheet on the liquidity from Signature might add just forward to that. So I would love to get your guys' thoughts on 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 day line 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. I think any excess liquidity can be deployed fairly quickly quarters with what we're going to do on a combined basis, 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 a 5 or 10 basis point miss on the NIM for the quarter because we have excess liquidity than the latter, which is no core excess -- not that I'm afraid to borrow or any of us here are, as part of traditional banking. We've been very blessed and fortunate 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.

Your next question comes from the line of Justin Crowley with Piper Samer.

This is [indiscernible] filling in for Justin Crowley today. 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 pay downs. And I know the 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 accelerating or decelerating in the near term?

Yes. I don't see it decelerating. I gave you the the 5-year CAGR for the litigation book, it's 32%. And you would say that's weighted towards the earlier periods, and it's more weighted towards a latter of periods. -- the latter periods, we're in the high 30s for that litigation book as far as growth. There's a bullet or a part of a bullet in the earnings release and in the investor deck that talks about the analysis we did. We've officially included this in the Signature merger announcement back on March 12. 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 4 years or more. So that's customer growth based on facilities they use that we supply that they use to then grow their business, 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 2 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% 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, our business development pipeline is very robust. It is certainly not in a low water market, it's closer to a high watermark. The business development teams around the regions that we hired them in are doing excellent 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 2 years in the first quarter by a minimal 4% or 5%, 6% annualized growth because of those pay downs happening from the fourth quarter high watermark [indiscernible]. So we're very pleased with the 13% annualized growth this quarter. Quite honestly, myself pleasantly surprised.

I'll now turn the call back to Michael Lacapria, Chief Financial Officer, for closing remarks.

I think I'll turn that over to you.

Those are -- I assume, Kate, those are all the questions. We want to thank everybody for joining us on our first investor call conference call. Obviously, we'll continue to do it. Our earnings this way going forward. And I think it's more efficient and effective not only for us, but hopefully, for the people on the phone, certainly saves 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 all for joining. You may now disconnect.