As a small-cap bank stock with a market capitalisation of US$160m,a device containing this favorite may not be connected Esquire Financial Holdings, Inc.’s (

NASDAQ:ESQ

) risk and profitability are largely determined by the underlying economic growth of the US regions in which it operates. A bank’s cash flow is directly impacted by economic growth as it is the main driver of deposit levels and demand for loans which it profits from. Following the Financial Crisis in 2008, a set of reforms termed Basel III was enforced to bolster risk management, regulation, and supervision in the financial services industry. These reforms target banking regulations and intends to enhance financial institutions’ ability to absorb shocks resulting from economic stress which could expose banks like Esquire Financial Holdings to vulnerabilities. Unpredictable macro events such as political instability could weaken its financial position which is why it is important to understand how well the bank manages its risk levels. Strong management of leverage and liquidity could place the bank in a protected position at the face of macro headwinds. We can gauge Esquire Financial Holdings’s risk-taking behaviour by analysing three metrics for leverage and liquidity which I will take you through now.

Check out our latest analysis for Esquire Financial Holdings

NasdaqCM:ESQ Historical Debt January 2nd 19

Is ESQ’s Leverage Level Appropriate?

A low level of leverage subjects a bank to less risk and enhances its ability to pay back its debtors. Leverage can be thought of as the amount of assets a bank owns relative to its shareholders’ funds. Financial institutions are required to have a certain level of buffer to meet capital adequacy levels. Esquire Financial Holdings’s leverage level of 7.3x is very safe and substantially below the maximum limit of 20x. This means the bank has a sensibly high level of equity compared to the level of debt it has taken on to maintain operations which places it in a strong position to pay back its debt in unforeseen circumstances. If the bank needs to firm up its capital cushion, it has ample headroom to increase its debt level without deteriorating its financial position.

How Should We Measure ESQ’s Liquidity?

Handing Money Transparent

Since loans are relatively illiquid, we should know how much of the bank’s total assets are comprised of these loans. Usually, they should not be higher than 70% of total assets, which is the case for Esquire Financial Holdings’s ratio at 67%. This means slightly over half of the bank’s total assets are tied up in the form of illiquid loans, leading to a sensible balance between interest income and liquidity.

Story continues

What is ESQ’s Liquidity Discrepancy?

Banks operate by lending out its customers’ deposits as loans and charge a higher interest rate. These loans may be fixed term and often cannot be readily realized, conversely, on the liability side, customer deposits must be paid in very short notice and on-demand. This mismatch between illiquid loans and liquid deposits poses a risk for the bank if unusual events occur and requires it to immediately repay its depositors. Compared to the appropriate industry loan to deposit level of 90%, Esquire Financial Holdings’s ratio of over 78% is sensibly lower and within the safe margin, which places the bank in a relatively safe liquidity position given it has not excessively lent out its deposits and has maintained a suitable level for compliance.

Next Steps:

Esquire Financial Holdings passes all of our liquidity and leverage checks which shows it is prudent in managing those factors. This gives us confidence in the operational side of the business, an important aspect to consider before investing in the stock. High liquidity and low leverage places the bank in an ideal position to repay financial liabilities in case of adverse headwinds. Today, we’ve only explored one aspect of Esquire Financial Holdings. However, as a potential stock investment, there are many more fundamentals you need to consider. Below, I’ve compiled three relevant factors you should further research:

Future Outlook

: What are well-informed industry analysts predicting for ESQ’s future growth? Take a look at our

free research report of analyst consensus

for ESQ’s outlook.

Valuation

: What is ESQ worth today? Has the future growth potential already been factored into the price? The

intrinsic value infographic in our free research report

helps visualize whether ESQ is currently mispriced by the market.

Other High-Performing Stocks

: Are there other stocks that provide better prospects with proven track records? Explore our

free list of these great stocks here

.

To help readers see past the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price-sensitive company announcements.

The author is an independent contributor and at the time of publication had no position in the stocks mentioned. For errors that warrant correction please contact the editor at

[email protected]

.

View comments