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

Hello, everyone. Thank you for joining us, and welcome to Esquire Financial Holdings' Q3 2026 Earnings Release Conference Call. [Operator Instructions] I will now hand the conference over to Andrew Sagliocca, CEO, Vice Chairman and President. Andrew, please go ahead.

Thank you, Kenneth. Good morning, everybody. I'm joined in my office by Michael Lacapria, our SVP and CFO; and Eric Bader, our EVP and COO. I'd like to start the call by thanking and welcoming everybody, including our investors, analysts, Board members, managers and employees, including our new business partners from our new Signature division out of Chicago. I'm going to start the call with some high-level thoughts and comments, then turn the call over to Michael for a financial update, and then we'll address any questions from those on the call. During the quarter, we successfully closed the Signature Bank merger on August 1, '26, which diversified our loan portfolio and funding sources. And we also continued to show strong organic growth and performance on a combined basis. At closing, Signature had total assets, loans and deposits of approximately $1.9 billion, $1.4 billion and $1.7 billion, respectively. The combined results for Signature for the third quarter includes only 2 months out of the 3 months of Signature activity. Most importantly, the merger unites 2 highly talented management teams and employee bases with a strong client relationship and market expertise, positioning the combined company for continued industry-leading growth, performance metrics and enhanced success. Regarding the conversion, our core system conversions are in progress and targeted for April 2027. There has been no material client attrition to date. Our growth and performance metrics remain materially unchanged from announcement, with certain performance metrics improving as noted in our earnings release. A couple of quick highlights. Excluding the merger, we still experienced strong organic growth in loans and deposits over the past 12 months, totaling approximately $0.5 billion in loan growth and about $450 million in deposit growth. Also on a linked quarter basis, we continue to demonstrate similar organic loan and deposit growth as of the 12-month period. We have solid credit metrics, asset quality and reserve coverage ratios. And when we exclude the merger expenses and certain discrete tax benefit items in the tax line, our adjusted diluted earnings per share was $2.12, and our adjusted return on average assets and return on average tangible equity was 2.34% and 23%, respectively. The Signature merger, coupled with our combined asset size, enhanced resources and diversified loan and deposit platforms, positions our company for continued strong growth and performance, and we believe we will exceed our initial earnings expectations when we announced the merger on March 12, 2026. With that said, I turn it over to Michael to give you his financial update and financial highlights. Michael?

Thank you, Andrew, and good morning. I will provide a brief overview of our third quarter 2026 financial results as highlighted in our earnings release and investor presentation published earlier this morning. Like Andrew said, please note that this is our first quarter reflecting the post-merger combined company and the results include 2 months of Signature's activity from the August 1 closing date. This successful merger closed at a purchase price of $466 million, which is 10% accretive to tangible book value on day 1, giving rise to a combined company that is $4.8 billion in assets, $3.4 billion in loans, $4 billion in deposits and $492 million in tangible equity, net of $247 million in goodwill and a $47 million core deposit intangible as of September 30. So let me start with net income. For the third quarter, we reported GAAP net income of $17.5 million or $1.57 per diluted share. These results included $8.9 million of pretax merger expenses, which is $7.1 million net of tax, and $938,000 of discrete tax benefits related to share-based compensation. Excluding these items, our adjusted net income is $23.6 million or $2.12 per diluted share, which exceeds consensus estimates. This compares to an adjusted net income of $14 million or $1.60 per diluted share on a linked quarter basis, representing a 69% increase. Our adjusted returns on average assets and average tangible equity were 2.34% and 23.1%, respectively, for the quarter. These remain industry-leading metrics while we continue to invest in our current resources to support future growth and maintain excellence in client service that our customers have come to expect. Our net interest margin for the quarter was 5.74% compared to 5.96% for the trailing quarter. That being said, our normalized net interest margin was approximately 5.68% or 6 basis points less than the full quarter's result since Signature was included for 2 of the 3 months in the current quarter. This decline from prior quarters appropriately reflects the change in the combined asset and funding mix following the acquisition. Loans increased $1.5 billion or 80% to $3.43 billion from June 30, of which $1.4 billion was attributable to the Signature merger, while the remaining increase was primarily attributable to organic litigation-related loan growth of $160 million or 49% annualized, bringing our litigation book to $1.46 billion. Our litigation book now represents 42% of loans as compared to 67% in the trailing quarter, provided for by the expected diversification benefit of the combination. On a year-over-year basis, organic loan growth was $497 million or 32%. As it relates to our litigation loan portfolio, we continue to see strong organic growth, healthy client activity levels and a tremendous opportunity in the untapped Midwest market. The litigation vertical remains a primary strategic focus, which is a key source of low-cost core funding to the bank that supports asset growth across the balance sheet. Deposits increased $1.8 billion or 83% to $3.8 billion from June 30, of which $1.65 billion was attributable to the Signature merger and the remaining $147 million was primarily organic litigation-related deposit growth. From the June -- from the August 1 closing date, deposits increased $55 million or 8% annualized. And on a year-over-year basis, organic deposit growth was $447 million or 24%. Our litigation-related deposits concentration decreased from 79% to 54% as the merger diversified our exposure as expected. Our cost of funds for the quarter, including demand, was 113 basis points. Off-balance sheet sweeps remain a reliable source of liquidity at $776 million with approximately $255 million or 33% available for liquidity if needed. Administrative service payment fee income on these balances totaled $1.1 million for the quarter. Total liquidity, including cash, off-balance sheet sweeps and other borrowing capacity, was approximately $1.6 billion as of quarter end. Turning over to credit. Credit quality remains solid. Our allowance for credit losses remained at 1.3% of loans, consistent with the prior quarter, and we have 6 nonperforming assets totaling $9.7 million, representing 20 basis points on total assets. The 4% increase in NPAs from the trailing quarter is due to the merger. There are also no material charge-offs or significant downgrades to report. Noninterest income increased $1.5 million or 24% as compared to the trailing quarter to $7.9 million, representing 13% of total revenue. Our payments platform continues to be a meaningful contributor to earnings and client engagement. During the quarter, we supported 94,000 small business clients nationwide, processing approximately $10.5 billion in payment volume across 152 million transactions. Operating expenses increased $14.9 million or 71% as compared to the trailing quarter to $36 million, which is attributable to normal Signature operating expenses of $5.2 million, incremental merger expenses of $7.8 million and $1.8 million of core deposit intangible amortization. Excluding merger expenses and CDI amortization, the adjusted efficiency ratio was an industry-leading 41.1%. Merger expenses incurred inception to date was $11.6 million and is consistent with the guidance at announcement date. Our capital foundation remains strong. The bank Tier 1 leverage and total risk-based capital ratios were 11.2% and 13.65%, respectively, positioning us well above regulatory well-capitalized standards. Now I'll turn the call back over to Andrew for his remarks.

Thank you, Michael, for that thorough update. Kenneth, we're going to turn the call back over to you for the Q&A session.

[Operator Instructions] Your first question today comes from the line of Justin Crowley with Piper Sandler.

Some noise with Signature in the numbers, but still growth obviously looks really, really good here with the litigation vertical running on all cylinders. And so I wanted to maybe get your thoughts on that vertical and in particular, the opportunity in Chicago, which I know is a big reason for the deal. Just curious what you've learned so far in terms of what had to be done, maybe anything additional that needs to be done to penetrate that market as you bring Esquire's lending model to the Signature markets.

Great, Justin. Absolutely. So first and foremost, as you're aware, Signature, Mick and his team in Chicago run an excellent commercial banking platform. So there is tremendous opportunity in the commercial market itself in the Chicago and Greater Midwest area. So we start there by saying that's a market that we can continue to tap and continue to grow non-litigation C&I loans and select CRE, too. The Chicago market for the litigation-related C&I loans or plaintiff law firms that we primarily bank in our litigation vertical, very robust market, according to our numbers, the third or fourth largest plaintiff law firm market in the country. Signature has done a good job, before we've come along, in penetrating that market on the depository side. They have a small lending book in this market, but they have a lot of contacts. Mick and Bryan and Kevin, the executives over there and key members of the business development and relationship management team in the lending area have long-standing deep relationships, not only in the Chicago metro area, but in the litigation area. So that's what we've learned since we've announced the deal in March. I think it was March 12 through today. We've spent myself; Ari Kornhaber, who runs our litigation division; Frank Lonardo, who is our Chief Credit Officer and heads up the lending area with Bonnie Dougherty, who's our new CLO over the past year, have spent a lot of time in Chicago with Mick and his team, primarily on the business development side, and they have really strong relationships in the market and with plaintiff law firms that I believe we're going to be able to leverage as we move forward. I'll end with, because you've heard me say this, Justin, and it has proved itself out on our business development team that we hired prior to announcing the Signature deal. It's a long sales cycle with plaintiff law firms. They're all banked. They have to be banked. So their operating and escrow accounts are already banked somewhere. So the goal is to get them over to Esquire and attract them not only with our lending products and what they see as capital in the form of loans we give, but also attract them over because we understand the market and understand their depository needs, either/or or both.

Okay. Got it. That's super helpful. And then I feel like I kind of know the answer here, but just to confirm how you're thinking about growth looking out here, somewhere in the 15% to 20% annual growth. Is that still the right way to think about the combined company going forward here?

You should think of the combined company around 15%. So we're modeling '27 at about $0.5 billion of loan growth. Somebody may say that's conservative. You just did $0.5 billion ex Signature. But we may be able to print those type of numbers. But it's anything but easy. It's a big heavy lift to get $0.5 billion worth of growth done because it usually means we're double or more in notional originations to get that done because our stats on our lending side for our litigation-related loans clearly plays out at about 50% draws on the notional balance. So we're comfortable with $0.5 billion worth of growth, which is about 14%. So that's a good way to think about growth going into '27.

Okay. Got it. And then just pivoting a little, as far as the margin, I know it's some moving pieces with Signature only in there for 2 months. And so if we think about that 5.68% on an adjusted basis, how do you see that trending from there? I think you previously talked about the margin settling out in the 5.40% to 5.50% range. Obviously, the rate environment has shifted a fair bit since then. So just kind of curious for your updated thoughts there.

Yes. I mean we're using FHN Financial's model as of September 4, '26. They're looking at one more rate increase to 7.25. If we're looking at prime, if we're looking at Fed funds from 4% to 4.25%, which takes prime from 7% to 7.25%. And then they hold steady through the end of the third quarter. And then they have rates coming down 25 basis points in the fourth quarter and the first quarter of '28. So with that said, we're looking at a margin of about 5.70%, maybe as high as 5.75%. So a pretty stable margin from what we printed in the third quarter, even though Michael gave you the adjusted number of, I think, 5.68%.

Okay. And that 5.70% to 5.75%, is that kind of where you think -- where it reaches? Or are you giving a full year number for '27?

I'm looking at '27 saying we're going to be somewhere between 5.70% and 5.75% for '27.

Okay. Perfect. And then maybe just one last one. I think on a combined basis, you're running with what I think you'd probably describe as some excess liquidity, which I know would have also been the case stand-alone as well. How do you see that cash position trending? And what would be the sweet spot if you're able to deploy that liquidity?

I guess the best answer I can give you is we're looking at about 14% to 15% growth. In order to achieve $0.5 billion worth of growth, we're going to have to raise about $0.5 billion worth of core deposits, maybe a little less $400 million, $450 million. Deposits always lag loan growth, but the deposit base is higher than the loan growth because our loan-to-deposit ratio is about 86%. So we see both of those commensurate, $0.5 billion worth of loan growth, about $400 million, maybe a little bit more worth of deposit growth. That will deploy some of the excess liquidity. But we're not sitting on a lot of excess liquidity when you look at cash, and we prefer to grow naturally with core deposits and invest it in loans. And obviously, for liquidity purposes, we'll continue to stay in the bond market because they're pledgeable at the Federal Home Loan Bank and the Federal Reserve discount window. So we maintain a strong liquidity level. But that's how we see it. But we are -- we've played out '27, and we believe we're comfortable with where earnings is coming out in our revised numbers, along with our expense base and our other fee income base. So if that's something you want to talk about, we're open to talking about '27 and how we view it.

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

Yes. So my first one, I'm sorry if you already mentioned this, but am I -- I'm trying to understand from the press release, the 6 basis points within the NIM that you guys are talking about, was that the purchase accounting benefit from closing Signature?

No. If you think about it, our margin was around 6% and their margin was south of 6%. And mathematically, they're included in our margin for 2 months, not 3. If they were included for 3 months on a pro forma basis, Michael and I see the margin coming out at about 5.68%, give or take, a couple of basis points either way. So it has nothing to do with the loan mark. It has nothing to do with the securities and the accretion related to loans and securities. It has everything to do with them being mathematically included in the margin for 2 out of 3 months.

Okay. Okay. That makes sense. So what was the purchase accounting benefit on either a dollar or basis point basis?

The purchase accounting -- well, the purchase accounting on the securities was the mark, I think, Eric, was about $64 million.

Yes.

And we wound up liquidating most of that at market and buying back in opportunistically at market. So we're not tracking the purchase accounting on securities, Tim, which was a material piece because now it's embedded in the bonds that we want to own as a $5 billion company. So Eric's goal liquidating their position was simple. We're a $5 billion bank. We want to own larger blocks that are easier to pledge at the home loan bank or the discount window. And at the same time, we wanted to buy new issuances with shorter duration. That was the goal. So Eric expedited trading out of those bonds at the purchase accounting mark and buying into new bonds. So what that leaves us with is the loan mark. So the loan mark -- the accretable loan mark was about $16 million. And its average life is about 3 years. So it might impact margin by...

It's 13 basis points.