Esquire Financial Holdings, Inc.

Hello everyone, thank you for joining us and welcome to the Esquire Financial Holdings Q2 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.

Thank you, Paige. I want to let everyone know on the call that I'm joined in the room with Michael Lacapria, our SVP and Chief Financial Officer, as well as Eric Bader, our EVP and Chief Operating Officer. I'd like to start by thanking everybody and welcoming everybody to the investor call, including our current investors, analysts, board members, and employees. as well as our business partners and signature stakeholders, including their board employees and investors too. As Paige indicated, I'm going to kick off this call with some high-level thoughts and comments, then turn it over to Michael for a financial update, and then we can address any questions that any of the callers have. As highlighted in the earnings release, the signature merger is scheduled to close on August 1, 2026. The Chicago metro market represents one of the top three largest markets in the country, including New York City and Los Angeles, for both population and contingent fee law firms, which is our and many more. As we previously noted, we believe the signature merger will accelerate growth in the Chicago and Midwest markets in the future, where Esquire on a standalone basis currently underserves this very robust metro area. This is primarily because signature has a well-established and well-known Chicago-based management team and brand. And if we couple this with Esquire's deep understanding of this extremely large, complex, and fragmented national litigation vertical, which is approximately half a trillion dollars a year in settlements, we believe the combined company with its strong brand, culture, and foundation will drive sustained growth, industry-leading performance metrics, and industry-leading returns in the future. With that said, I'll turn it over to Michael to give you a financial update for the second quarter. Michael.

Thank you, Andrew. To those joining us on the call, I will provide a brief overview of our second quarter financial results as highlighted in our earnings release and investor presentation published earlier this morning. For the current quarter, we printed gap net income of $13 million or $1.49 per diluted share. These results included approximately $1.1 million of pre-tax merger related expenses associated with our acquisition of Signature Bank Corporation. Excluding these expenses, adjusted net income totaled $14 million or $1.60 per diluted share. Adjusted earnings increased 16% as compared to the prior year quarter, demonstrating continued strength across our business as we also continue to invest in our platform. Our average returns on assets and average equity were 2.09% and 17.06% respectively, excluding merger-related expenses. Adjusted returns on average assets and equity were 2.25% and 18.33% respectively. These results reflect the pace of our profitable growth and our operational efficiencies. Our net interest margin remained resilient at 596 basis points. That's despite the significant decline in short-term interest rates from peak levels experienced over the past several years. Further, Our margin was negatively impacted by approximately 10 basis points due to elevated interest earning cash balances funded by our core deposit franchise. Loan growth remained exceptionally strong. On a linked quarter basis, total loans increased $87.2 million, or 19% annualized, reaching $1.9 billion, while experiencing $76.1 million in loan payoffs during the quarter. This growth was driven by commercial loan and real estate loan production of $61.6 million and $25.6 million, respectively. As it relates to our litigation loan portfolio, we saw $72.6 million, or 24% annualized net growth, bringing our litigation book to $1.29 billion at a blended yield of 8.8%. This translates to 41% loan growth year over year. It is important to also note that client activity levels and production pipelines remain healthy as we enter the second half of the year. Despite deposit loan growth was equally strong. Total deposits increased $77.1 million on a link quarter basis, or 15% annualized, reaching $2.18 billion. Our cost of funds remained relatively flat at 1.03% as we continue to effectively manage our funding base. This growth was fueled by litigation-related escrow and IOLTA deposits, reflecting the continued success of our relationship-focused commercial banking strategy. Off-balance sheet sweep balances totaled $1 billion, with approximately 38% of that available for liquidity purposes if needed. administrative service payment fee income on these balances totaled $1.1 million for the quarter. Total liquidity, including both cash and borrowing capacity, was $1.2 billion as of quarter end. Credit quality remained solid. Our allowance for credit losses remained at 1.3% of total loans consistent with the prior quarter. and we have two non-performing loans totaling $5.1 million, representing 20 basis points on total assets. During the quarter, we transferred a previously criticized multifamily credit to non-accrual status and recognized a $1.6 million charge-off. Importantly, we have no additional exposures to that real estate sponsor, no other real estate credits assessed as special mention or substandard, no exposure to commercial office, and limited exposure to hospitality at 13.17 million. As far as our litigation loan portfolio is concerned, it's worth noting we have no current exposure assessed as special mention or substandard. Non-interest income remains stable at 6.4 million, representing approximately 15% of total revenue. Our payments platform continues to be a meaningful contributor to earnings and client engagement. During the quarter, we supported 93,000 small business clients nationwide, processing approximately $10.6 billion in payment volume across 153 million transactions. Operational expenses continue to reflect disciplined investment and future growth. Total non-interest expense was $21.1 million including merger-related costs associated with pending signature acquisition. Excluding these expenses, our adjusted efficiency ratio was 47.6%, reflecting continued operating leverage while we invest in technology, business development, risk management, and client service initiatives. Our capital foundation also remains strong. At quarter end, consolidated equity to assets and the bank level tier one capital ratios were approximately 12.5% and 14.2% respectively. This positioning us well above regulatory well capitalized standards and provides us substantial flexibility as we approach the closing of the signature transaction. With that, I'll turn it back over to Andrew for his additional comments.

Thank you, Michael. That was very thorough. I'm going to turn it back over to Paige for any questions that our guests on the call have.

We will now begin the question and answer session. Your first question comes from the line of Steve Moss with Raymond James. Your line is open. Please go ahead.

Hey, guys. Good morning. This is Chase on for Steve.

Hey, Chase. How are you?

I'm doing good. So, you know, litigation growth was strong as per usual, but there's strong CRE growth in the mix as well this quarter. How do you think about that mix going forward as well?

As we've talked about in the past, our focus is on national growth in the litigation platform. CRE growth, I think, was only about $25 million for the quarter. So I guess that's strong for us. It's a small number for us. There's opportunities in the market, which is a very large CRE multifamily market out there. but our focus very simply is our national litigation platform. That's primary. That is an overall higher yielding blend and also brings core funding to the bank, not only for loan growth, but it funds the entire balance sheet for asset growth. So we are always looking in the CRE market for opportunities that meet our criteria. We're looking for strong debt service coverage and strong loan to values. And if we have to sacrifice some yield to get those, we will since our litigation portfolio bolsters our overall net interest margin.

Got it. Appreciate that color there. And where are new litigation loans coming on at these days? How are those yields holding up?

Yields are holding up strong. If you look at past quarters, we were closer to 9% than where we are today at 880. But I know we, I, and my executive group and senior management group focus on our overall margin. We can manage the margin prior to signature, which will change the complexion of the margin, as I think we all understand. We can manage the margin around 6%. I think that's a pretty good net interest margin and obviously generates really good returns. If we can manage that overall margin around 6%, I'm not worried about the individual loan composition that comprises that. We printed a 596 margin, but compared to a year ago, cash is about $50 million elevated. Compared to a quarter ago, it's about $30 million elevated. We only need about $100 million on average in cash to run our two national platforms.

Most of that cash is for our payments platform.

So in round numbers, we have about $100 million of excess cash sitting on the balance sheet to deploy in the loan portfolio. If we deploy even 50 of that, our margin would have been 10 basis points higher or about 605, 606. All right.

Thanks for all the color there, Andrew. I'm going to step back. Thank you.

Thank you.

As a reminder, if you would like to ask a question, press star one to raise your hand. Your next question comes from the line of Emily Lee with KBW. Your line is open. Please go ahead.

Hey, everyone. It's Emily stepping in for Tim. Thanks for taking my question.

Absolutely. Hello, Emily. How are you?

I'm good. So with the signature merger scheduled for August 1st close and last quarter, you noted that the integration and reception has been Outstanding. Can you just provide an update on how that process is going and just remind us how quickly Signature's team can get up to speed on, you know, Esquire-style litigation lending and, you know, ramping up that volume?

Absolutely. So, the process has gone extremely well. The cooperation and partnership has been outstanding. We've both been in each other's shops, obviously, We at Esquire have been out to Chicago a lot more than they need to be here at this time. So there's been a lot of trips out there besides phone calls and team Zoom calls. At this point, I really have no concerns heading into the 8-1 date. The legal day one integration and readiness is there. There are no concerns. And we've been working over the last two months with Mick and his team on the lending side and business development side to review how we view, approach, and underwrite the litigation vertical or plaintiff law firms along with working with them on prospective clients within our CRM database and for lack of a better phrase, cross checking with them on who they know at those law firms and I think we're gonna have a pretty good start to putting the companies together. We're not waiting to put the companies together, Emily, to have those discussions, not only about the litigation vertical and our business development approach and our underwriting, but probably more important than all of that, identifying key prospective law firms in the Chicago and Midwest market that we can focus on as a combined team.

That's great to hear. Thank you. And then I guess shifting over to the payment side of things, last quarter you mentioned your intent to move towards more direct, doing more direct business with merchants post-signature and sort of moving away from that indirect ISO model. Is there any update on that push and like how will that impact fees, I guess?

Sure. So, you know, for the time being over the next year, if not year and a half, as you know, 26 is coming to a close quickly. So for the next four to six quarters, the merchant model is more of a battleship. The volume will grow somewhere around 10%. The only reason the volume is down year over year is one or two ISOs that we banked sold their platform to other ISOs in the market. which obviously impacts us if they're no longer with us. But barring that, the volume tends to grow at about 10%. The revenue tends to grow somewhere around 3% or 5%. That's on the indirect model on the merchant platform. And yes, with the acquisition of Signature, we will focus on their non-litigation commercial customers in their market and hopefully be able to move them to a direct merchant acquiring platform with us. But once again, that's a slow and steady process. Nothing's going to turn on a dime. So I know where our friends at KBW have us in merchant processing fee income is still consistent with how we see it on our side.

All right, great. And then if I could squeeze in one more. Now that you're moving towards a NIM around 6%, what factors would you anticipate bringing that below or above that range?

Yeah, I mean, our standalone NIM is going to hang around six, but we're not going to be standalone for much longer. We only have about eight days until we're no longer standalone. And I think you know, Emily, that signature in round numbers is about a $2 billion platform. So where we see the NIM going and we provided guidance to your firm and the other firms that cover us is right around call it 540, 545 overall on a combined basis day one. And I say day one because obviously we are going to work as a combined company and we are going to focus on Those higher yielding assets, specifically the litigation vertical in their market, that brings low cost core funding to the table. And as you know, math is math. So the more we elevate that concentration of a vertical like that over time, the better the margin is going to do over time. but we see it starting right in that 540, 550 range overall, call it 545 as the net interest margin day one. Probably more reflective in a full quarter for December than in a partial quarter for September. And we take it from there.

Okay, awesome. Thank you for taking my questions, guys.

Absolutely.

Your next question comes from the line of Alan Strauss with Ithaca. Your line is open. Please go ahead.

Yes, just a quick question. Post-merger, what happens to the interest rate sensitivity of the balance sheet?

Believe it or not, Alan, and thank you for the question, it's relatively unchanged. Eric Bader is here with me in the office. Eric, besides being COO and is also runs the treasury function. So maybe Eric can give you a little more color than me, but we've already simulated the model using, I believe, December and March on a pro forma combined basis. And if I know Eric well enough, and I do know him 25 plus years, I'm sure he's gonna do the same with the June quarter year end. So Eric.

Yeah, no, thank you, Andrew, you're correct. Hey, Alan, hope all's well. As Andrew indicated, we ran a couple of pro forma models of the combined institution through our systems, and there's really no significant change. They have a lot of floating rate assets like we do, so we don't anticipate any significant changes to how the balance sheet is managed from an interest rate risk perspective at this time.

So we would assume that it's slightly asset sensitive?

Yes. Yes, you got it, Alan.

Yeah, Alan, you know, the best answer I can give you is you know we're going to give you In our cues and in our investor deck, the models and simulation models that, you know, being a regulated entity, have to conform to industry standards and regulatory standards so they can compare them across companies. The best answer I can give you is rates are down about 300 basis points since 23. and our margin has moved maybe 10 basis points, 15 basis points from a high watermark of about 615 to about six. And if you normalize the cash, which is significant and rates are down significantly on interest earning cash or even Fed funds sold, we've been able to hang in around that 6% range. for several years now, even though if you look back at our modeling assumptions in our queue back in 23 and 24, the impact should have been greater than what actually happened. So the signature team, which from an interest rate risk standpoint will be managed centralized under ERIC going forward, have experienced the same kind of sensitivity. They're asset sensitive. Their internal reports reflected that, but they've been able to do a good job managing their net interest margin, too, over time.

Okay, great, and thanks for that. Congrats on being one of the few slightly asset sensitive banks in the country. Just one other question, just clarification. The debt service coverage that you wrote about for the multifamily portfolio. That is on current debt service coverage as of June 30th for the multifamily portfolio or at time of origination?

No, it's current, Alan. So we annually for loans over a certain size, I believe it's $3 million. So very small loans. We don't get annual updates. The bulk of our loans, as you can imagine, are above that amount. So annually, we get new rent rolls and new net operating statements from the sponsors, and we update those debt service coverage ratios currently, and those are what are in the model where we summarize it into one bullet. So you are exactly right. It is current debt service coverage. And I think more importantly, Alan, by looking out over the next year or two because we look at it by loan, not by groupings and portfolio. This one multifamily loan that we put on non-accrual, we've been signaling to the market and telling our analysts for over a year, it's been in the queue, that we have one other $6 million loan to the same sponsor that was special mention. So unfortunately, it went not accrual. I'm not shocked. I'm also not happy. But looking forward over the rest of this year, a year forward and one to two years forward, we are very comfortable with what's sitting in our multifamily portfolio also at this point.

Okay, great. And the banking. has become large enough you can absorb these slight nicks anyway on this portfolio. Yeah.

Yeah, I mean, even at great point, Alan, even at $2.5 billion where we are now in round numbers, you know, this $1.6 million charge-off, you know, we still hit or exceeded earnings estimates even with this charge-off. So you're absolutely right. With the amount of earnings and capital we generate just from earnings at a call it a two and a quarter ROA or above really helps fortify and protect the overall balance sheet and portfolio. And to your point, you know, absorbing what are smaller losses as we get bigger becomes more normalized than when we were a billion and a half not too long ago.

All right. I'll let somebody else ask any questions.

Thank you, Alan.

There are no further questions at this time. I will now turn the call back to Andrew for closing remarks.

Excellent. Well, I want to thank everybody for joining us again. Esquire and the team led by Mick over at Signature in Chicago are really excited to get this deal closed next Saturday on August 1. It's going to be a great business combination. and I believe the best is in front of us, not behind us. And we will continue to perform at the top of the market and both in growth and performance metrics and returns. So I look forward to speaking to everybody at quarter end September and October. And quite honestly, I think the end of the year with the full quarter of December is going to be really exciting and a good telltale sign of how the combined entities going to perform going forward. So thank you, everybody. I appreciate your time today.

This concludes today's call. Thank you for attending. You may now disconnect.