Esquire Financial Holdings (NASDAQ: ESQ)

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July 27, 2021

One of the new small bank positions that we purchased for the Fund is in Esquire Financial Holdings (“Esquire” or “ESQ”). Esquire is a bank headquartered on Long Island, focused on serving the banking market for attorneys. By the nature of their business, attorneys often have control of money in escrow accounts for the benefit of their clients. These escrow deposits are attractive to banks because they tend to be sticky and not rate sensitive. Attorneys also have borrowing needs that haven’t been well-served by traditional banks. In addition, Esquire has an attractive merchant acquiring business. Esquire has developed a good track record of earnings growth in the few years since its 2017 IPO.

We believe there is a disconnect between Esquire’s growth and its valuation. It trades at 8.4x 2022 consensus Wall Street estimated earnings, but the bank’s earnings per share (“EPS”) is growing at 20%. We believe the major reason for this disconnect stems from Esquire’s removal from the Russell 2000 index this past June. Index funds that track the Russell 2000 had to sell their Esquire shares. We believe prospective buyers of Esquire’s stock waited to buy until the Russell deletion date had passed. We think Esquire should trade at 15x or greater, which is in line with other high-growth banks.

We believe the most attractive part of the Esquire investment thesis is Esquire’s deposit franchise. Esquire’s deposits have a very low cost. Esquire also has more deposits than it needs.  It has a low loan-to-deposit ratio and sweeps more than $300 million of other customer funds off its balance sheet to other banks or money market mutual funds. Esquire gets these attractive deposits by:

  • Getting the law firm operating checking accounts when they extend credit to the law firms and
  • Capturing escrow deposits from law firms for funds and settlements that the law firm’s attorneys control.

These deposits are not rate-sensitive, as the attorneys place ease of use above the rate paid in choosing their banking relationships.

Esquire is growing its loan portfolio at an attractive rate because it is attacking several opportunities. First, Esquire is making loans to attorneys for two different purposes. One is to provide working capital to law firms for managing their cash flow. The second reason is to provide funding for law firm expenses in contingency cases. Law firms regularly have expenses in cases that they take on contingency, which are then reimbursed when the client’s case is settled.  However, attorneys cannot charge their clients a financing fee if they self-finance these up-front expenses. If the attorneys borrow money from a bank, they can get reimbursed for the interest paid to the bank when the client’s case is settled. Esquire doesn’t bear the contingency risk in these loans. Instead, the law firm’s overall cash flow is the security for these loans rather than the settlement proceeds from any particular case.

Esquire built a merchant acquiring business over the last 10-years, which generates a good amount of fee income and enhances the bank’s value. We are happy that Esquire’s management is focused on growing a fee income business. We are hopeful that the management team will expand into other fee-generating businesses such as trust & investments, insurance, and/or mortgage banking.

Esquire’s focus on the attorney market leads to wider margins than typical banks. As Esquire scales, we believe the wider margins will lead to higher returns and eventually a higher valuation. Esquire Bank has better net interest margins (“NIM”) than a typical bank. The bank’s focus on attorneys leads to higher than average loan yields and low deposit costs.

We admire the management team at Esquire. Andrew Sagliocca has been the CEO of Esquire for the past 13 years, but he is still relatively young for a bank CEO at 53 years old. Sagliocca previously worked at KPMG and North Fork Bank before joining Esquire as the CFO in 2007. We believe Sagliocca has focused the bank on an attractive niche. He understands how to create value as a banker. We look forward to how much value he can create at Esquire over the next 15 to 20 years.

The main risk with Esquire is the typical credit risk of any small bank. In addition to loans to law firms, Esquire also makes real estate loans in the New York City metro area. Through our research, we don’t have any outsized concerns about Esquire’s credit quality.

We think Esquire is a cheap small bank with attractive growth in a unique niche. We believe the bank has a long runway for growth and should have a valuation significantly higher than the current valuation.


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Disclaimer: The discussion of any security is meant solely as an illustration of our investment and thought process and should NOT be considered as a recommendation or suggestion to buy or sell any securities. Before you make any investment, do your own research and talk to your own financial adviser. Information in this report is received from external sources. Therefore, we can make no guarantee as to the completeness or accuracy of the information provided.

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