Esquire Financial Holdings (NASDAQ:ESQ) Q3 2026 Earnings Call

0:00 Hello everyone. Thank you for joining us and welcome to Esquire Financial Holdings Q3 2026 Earnings Release Conference Call. After today's prepared remarks, we will host a question and answer session. If you would like to ask a question, please press star 1 to raise your hand. To withdraw your question, press star 1 again. I will now hand the conference over to Andrew Sagliocca, CEO, Vice Chairman, and President. Andrew, please go ahead.

0:39 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.

1:35 And we also continue 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 two months out of the three months of signature activity. Most importantly, the merger unites two 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.

2:30 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 experience strong organic growth in loans and deposits over the past 12 months, totaling approximately half a billion dollars in loan growth, and about $450 million in deposit growth. Also, on a link quarter basis, we continue to demonstrate similar organic loan and deposit growth as the 12-month period.

3:31 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 212 and our adjusted return on average assets and return on average tangible equity was 234 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 announce the merger on March 12th, 2026.

4:31 With that said, I turn it over to Michael to give you his financial update and financial highlights. Michael.

4:39 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 two months of signatures activity from the August 1st closing dates. This successful merger closed at a purchase price of $466 million which is 10% accretive to tangible book value on day one, 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 in tangible as of September 30th.

5:37 So let me start with net income. For the third quarter, we reported gap net income of $17.5 million, or $1.57 per diluted share. These results included $8.9 million of pre-tax merger expenses, which is $7.1 million net 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.

6:27 Our adjusted returns on average assets and average tangible equity were 234 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 six basis points less than the full quarter's result since signature was included for two of the three months in the current quarter.

7:15 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 30th, 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.

8:07 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.

8:58 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.

10:02 Turning over to credit, credit quality remained solid. Our allowance for credit losses remained at 1.3% of loans consistent with the prior quarter, and we have six non-performing 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 were also no material charge-offs or significant downgrades to report. Non-interest 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.

11:09 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 and tangible 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.

11:55 The bank tier one 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.

12:17 Thank you, Michael, for that thorough update. Kenneth, we're going to turn the call back over to you for the Q&A session. Great. Thanks, Andrew and Michael. We will now begin the question and answer session. If you would like to ask a question, please press star 1 to raise your hand. To withdraw your question, press star 1 again. We ask that you pick up your handset when asking a question to allow for optimum sound quality and if you are muted locally, please remember to unmute your device. Please stand by while we compile the Q&A roster. Your first question today comes from the line of Justin Crowley with Piper Sandler.

13:04 Justin, your line is open. Please go ahead.

13:08 Hey, good morning, guys. Good morning, Justin. You know, with, you know, some noise with signature in the numbers, but still, like, 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. I'm just curious what you've learned so far in terms of you know, what had to be done, maybe anything additional that needs to be done, you know, to penetrate that market, you know, as you bring the Esquire lending model to the signature markets.

13:47 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 CNI loans and select CRE too. The Chicago market for the litigation related CNI 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.

14:44 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 Brian and Kevin, the executives over there, and key members of the business development and relationship management team in the lending area have longstanding 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 12th.

15:33 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 Daugherty, 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's 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.

16:29 They have to be banked. They're operating in escrow accounts or 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.

17:02 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, you know, somewhere in the 15 to 20% annual growth, is that still the right way to think about, you know, the combined company going forward here?

17:19 You should think of the combined company around 15%. So we're modeling 27 at about half a billion dollars of loan growth. You know, somebody may say that's conservative. You just did a half a billion X 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 a half a billion dollars 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.

18:14 So we're comfortable with half a billion dollars worth of growth, which is about 14%. So that's a good way to think about growth going into 27. Okay, got it.

18:29 And then just pivoting a little, you know, as far as the margin, you know, I know it's a moving pieces with signature only in there for two months. And so if we think about that, that 560 on an adjusted basis, you know, how do you see that trending from from there? You know, I think you previously talked about, you know, the margin selling out in the 540 to 550 range. You know, obviously, the rate environment has shifted a fair bit since then. So just kind of curious for your updated thoughts there.

18:57 Yeah, I mean, we're using FHN financials model as of September 4th, 26. They're looking at one more rate increase to seven and a quarter. If we're looking at prime, if we're looking at fed funds from four to four and a quarter, which takes prime from seven to seven and a quarter, 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 570, maybe as high as 575. So a pretty stable margin from what we printed in the third quarter, even though Michael gave you the adjusted number of, I think, 568.

19:54 Okay, and that 575.75, is that kind of where you think it, you know, where it reaches? Or are you getting a full year number for 27?

20:05 I'm looking at 27 saying we're going to be somewhere between 570 and 575 for 27. Okay, perfect.

20:14 And then maybe just one last one. You know, I think on a, you know, combined basis, you're running with what I think you'd probably describe as some excess liquidity, I know it also in the case standalone 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?

20:36 I guess the best answer I can give you is we're looking at about 14 to 15 percent growth. In order to achieve half a billion dollars worth of growth, we're going to have to raise about half a billion dollars worth of core deposits, maybe a little less 400,450. Deposits always lag loan growth, but the deposit base is higher than the loan growth because our loans to deposit ratio is about 86%. So we see both of those commensurate, half a billion dollars worth of loan growth, about 400, 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 invested in loans and obviously for liquidity purposes will continue to stay in the bond market because they're pleasurable 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 you know 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.

21:59 So if that's something you want to talk about, we're open to talking about 27 and how we view it.

22:08 Great. I'll leave it there and let others ask questions and circle back if needed.

22:14 All right, Justin. Thank you. Your next question comes from the line of Tim Switzer with KBW. Tim, your line is open. Please go ahead.

22:25 Hey, good morning. Thanks for taking my question. I hope you guys are doing well.

22:31 Good morning, Tim. Thanks for joining.

22:35 Yeah, so my first one, I'm sorry if you already mentioned this, but I'm trying to understand from the press release, the six basis points within the NIN that you guys are talking about, was that the purchase accounting benefit from closing signature?

22:49 No, if you think about it, our margin was around six, and their margin was south of six. And mathematically, they're included in our margin for two months, not three. If they were included for three months on a pro forma basis, Michael and I see the margin coming out at about 568, give or take a couple of basis points either way. So it has nothing to do with the bone 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 two out of three months.

23:34 Okay. Okay. That makes sense. So what was the purchase accounting benefit on either a dollar basis point basis?

23:45 The purchase accounting on the securities was the mark, I think, Eric, was about $64 million. 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.

24:33 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 three years. So I think Michael might impact margin by 13 basis points. Yeah, but again, that's a three-year mark. So we'll be living with that for three years as we grow.

25:22 Okay, so 14 basis points is in this quarter. Should we expect a similar amount in Q4? Is it a little bit higher once you get the full quarter impact?

25:31 You should expect the NIM to be around 575.75. and if we surprise on the upside, then I'll be as surprised as you and we'll obviously change our guidance. But that's a pretty strong name considering we all believed on our side management when we announced the deal that we'd be operating somewhere in the high 540s or low 550s. So it's been a great run to the closing. We were opportunistically, like I said, able to trade into and other new issuances of bonds that made us very comfortable. And the purchase accounting came out materially close to what we thought it was going to be when we announced the deal.

26:19 Yeah, no, it's all good to see. What kind of deposit beta assumptions do you guys have embedded within your guidance? And can you also talk about how, you know, the pricing power you have on the loan side if rates can continue to move higher from here?

26:36 Yeah, so about at this point with the diversification in the loan book, I think it's about 60% of the total loan book is variable. Correct. All right, as opposed to probably close to 85 or 90 pre-acquisition, but it's 60 now. As rates move up, which again, our guidance that we're using is FHN financial So we only see rates moving up on Fed funds 25 basis points more according to their projections, which is minimal for anybody's model if we're going to use that. So the reason I keep giving guidance around 570,575 is we've already had one rate move, and that's played into where our NIM is winding up now at about 568 adjusted. And if there's another rate move, I know Eric Bader is going to come in my office and tell me that it'd be prudent to move up our IOLTA rates in certain material states, which would be prudent for those states that we operate in. We want to be a good corporate steward in the states we operate in and have IOLTA powers in. So we're comfortable with the margin hanging around 575-75, considering We only have one more rate increase built into our models.

28:10 Got it. Very helpful. Thank you, Andrew.

28:14 You're welcome, Tim. And again, like I said, Tim, if at any point on the call or after the call you want to talk about 27, both Michael and I have modeled that out and are comfortable with The revised guidance, which is why we put in our earnings release that we believe we're going to exceed the guidance we printed on March 12th with the deal.

28:48 Yeah, good to hear. Thank you.

28:51 All right. Your next question comes from the line of Steve Moss with Raymond James. Steve, please go ahead.

29:02 Good morning, guys. Nice quarter here. Good morning, Steve. Thank you. Good morning, Andrew, Eric, Michael. So maybe just on that subject of looking at the 27 here, I know you have the integration or the systems conversion and stuff coming up next year. Just kind of curious how you guys are thinking about expenses with regard to the moving parts there. And then also just kind of curious, what are your thoughts on additional investments in both franchises as you put them together.

29:37 Excellent. Excellent. I'm glad you asked. I really am because I'm going to start the way I never start, which is with what we believe our diluted EPS is going to be in 27. And I want to do that on this call, Steve, because as you know, not only is September not a clean quarter, the obvious noise is the merger charge. but there's only two out of three months of signature in there. So we haven't even printed a full quarter combined, which as you know, is going to be the fourth quarter. So the way we're looking at 27 is approximately $9 a share. And if you walk through the components of that, you're looking at about a half a billion dollars worth of loan growth, starting with about a $3.5 billion starting point at the end of December.

30:33 Again, you're looking at about a 570,575 margin. On a combined basis, we're looking at about 33, $34 million of fee income. And on a combined basis, we're looking at about 138 to 140 million of non-interest expense. And our run rate on the tax side is about 28 and a half percent as long as we don't have any discrete type items and option or restricted stock type exercises on a normalized basis, we're modeling that tax rate at about 28.5%. So that comes out to about give or take $9 a share on diluted EPS for 27.

31:25 And you hit it right on the head, Steve, you know us long enough. We're going to continue to invest in resources. and that is people and technology. Because at these kind of growth rates, starting with a $3.5 billion loan book and a $4.8 billion combined asset base and size for the company, printing about 14% loan growth or half a billion dollars, which again means We're going to print about a billion or more of Notional to get about half a billion dollars worth of loan growth. We are going to continue to invest in business development, relationship managers where they're managing the ongoing clients. We're going to continue to invest in the lending area, especially on the C&I side, both litigation and commercial where we see growth.

32:33 We have and Signature had a great commercial real estate team. We think that the combined team will be able to handle the growth in that portfolio on a combined basis across those two regions. And obviously, we continually invest in technology, which when I say that, It could be as simple as investing in data, which we continuously do, to make sure that our digital marketing platform is leading and in front of our business development officers nationally around the country.

33:16 Appreciate all that color there. I mean, I guess just kind of, you know, As you guys continue to invest and grow here, and you put up a really good quarter here in terms of growth, it feels like the loan growth guidance may be a little bit conservative, maybe just getting a little spoiled here with the numbers you're putting up. But if the pipeline's strong, I know you put on a lot this quarter. I hear you in terms of a billion in commitments. Is there anything... Is that just you guys being concerned here on loan growth, or are there maybe a few takes that we're not thinking of?

34:00 Well, I think in any year or any quarter, we always have a minority of larger opportunities and a majority of smaller opportunities. So I can't always count on the minority of larger opportunities happening on a continuous basis. I am very comfortable with, when I say the small loans, those loans call it, if I had to pick a number, I'd say $25 million in notional and below. And those loans that are greater than $25 million in notional and above, I can't build and run a company counting on those type of opportunities over and over again.

34:49 Am I being conservative? I think I'm being realistic with half a billion dollars worth of loan growth. I think we just closed the deal on August 1. We, as a combined entity where now we have not only doubled the size of the company effectively, but we've doubled the employee base. We have not gone through system conversions. Core system conversions isn't the only thing that any bank has to focus on as they look towards April 07 for conversion. There are management systems we need to convert. There are CRM platforms and loan underwriting platforms and deposit and loan origination platforms.

35:43 There's culture we have to align. You know, there's a lot of work in deals that goes unnoticed that the numbers don't reflect. So I don't think we're being conservative. I think we're being realistic. I think 14, 15% growth is a great print. I think, you know, $9 a share give or take is a great print right after the deal. And what I don't want to do is over promise on a call like this knowing how much work we have to do that has nothing to do with originating the next loan.

36:32 Great, Andrew. No, I appreciate all that color. Really helpful here and, you know, great quarter and good luck with the integration.

36:42 Thank you, Steve. And as you know, as we get through the fourth quarter and into the first, If we're feeling better about growth and we think half a billion dollars is on the conservative end, you know, people like you and Tim and Justin will be the first to know.

37:03 Appreciate that. Looking forward to it.

37:05 All right, Steve, thank you. Your next question comes from the line of Alan Strauss with Ithaca Capital. Alan, your line is open. Please go ahead.

37:19 Good morning. A few questions. One on the system conversion. Are the two companies on the same core operating system or are you on different systems that makes this even heavier lifting?

37:32 We are on Fiserv Signature. They are on Jack Henry. So we are on two different core systems. Not sure if it makes it a heavier lift. It obviously does. compared to us being on the same platform. But Jack Henry is signature and we are on Fiserv.

37:53 Okay. Which one's going to be the weighing system?

37:57 Fiserv. The Fiserv signature system will be what our new clients at the former signature bank will be converted to.

38:10 Okay. Great. Looking out, say, a year to two years, is it feasible to take out some of the asset sensitivity of the bank, or will the combined entities always be asset sensitive?

38:27 The combined entity will always be asset sensitive, starting with today, obviously. Our concentration is less. It's about 60%, and I think 100 basis points up We're looking at about a 6.7% increase in net interest income, which we put in the investor deck on page 11. Okay.

38:55 All right. And then last question on the combined company, given the loan growth that you see, what would be the appropriate payout ratio on the dividend looking out?

39:09 That's a good question, and that's a discussion we need to have at the board meeting. We've traditionally paid out about 10 or 12 percent dividend payout ratio based on earnings. That's our traditional pre-merger ratio that we reevaluate going into the end of the year and typically announce in early the following year. With these growth projections, our focus is not necessarily on tangible capital to assets or the leverage ratio. Our focus is on our total capital ratio, since we are heavily weighted towards C&I loans, which are 100% risk weighted.

40:01 So when we look at dividends, we're not only looking at a dividend payout ratio, we're looking at Capital Preservation as we balance it between using capital towards growth or using capital towards dividend with a keen eye on the total risk-adjusted capital ratio. Is that about right, Michael?

40:21 Sounds right to me.

40:25 Okay. Yeah. Thanks.

40:30 Thank you.

40:31 And that's it. There are no further questions at this time. I will now turn the call back to Andrew for closing remarks.

40:47 Great, Kenneth. Thank you. I want to thank everybody on the call. I know that we have some investors and analysts, obviously, board members, managers, employees. I hope our friends and our new business partners at Signature in Chicago were able to join us. I want to congratulate everybody, our board, our management team, our employee base. This was a very heavy lift, as you could imagine. The bank prior to the acquisition was about a $2.7 billion bank. So again, we not only doubled the size of assets and loans and deposits, but we doubled the employee base.

41:34 As you're aware, Chicago is about 850 miles away from New York. So there's been a lot of traveling back and forth between management group and employees to make this happen and also plan for the system conversion scheduled at this point for April 27. So I just want to take a moment to thank all of our employees for their focus, their care, their dedication and their diligent and hard work to get us to this point. We are very pleased with the company's combined performance, and we are very positive about our earnings expectations and performance as we look forward.

42:23 So thank you, everybody, and thank you, Kenneth. This concludes today's call. Thank you for attending. You may now disconnect