- Key insight: Acquiring Signature Bank will shrink Esquire's concentration of litigation-related loans, giving it more room to grow in the niche.
- Expert quote: "At some point there's a tipping point with concentration. … We have to be way out in front of that." — Esquire CEO Andrew Sagliocca
- Supporting data: Esquire has grown its total loan portfolio at a combined annual growth rate of 22% since 2021.
Esquire Financial Holdings in New York, which focuses on providing banking services to plaintiff law firms, has agreed to pay $348 million in stock to acquire privately held Signature Bank in Chicago.
The deal provides Esquire with a wider entree for serving the Windy City's large legal marketplace. According to Esquire, the holding company for the 20-year-old Esquire Bank, Chicago's litigation market ranks as the fourth-largest in the country, behind Los Angeles, New York and Houston.
"The geographic density of the law firms just in the downtown area is well over 1,000 law firms," Esquire Vice Chairman and CEO Andrew Sagliocca told analysts Thursday, in reference to the Chicago market.
To date, the $2.3 billion-asset Esquire has seen little success in Chicago. "We do not do a good job, we are number eleven as far as the penetration rankings," Sagliocca said. "All that means is that there is a lot of upside … for us."
Indeed, a big part of the rationale behind Thursday's deal is the idea that absorbing a local bank that understands and buys into Esquire's litigation-focused business will help supercharge its Chicago operation.
Signature already competes in the litigation-finance business, though on a smaller scale than Esquire, CEO Michael O'Rourke and his team "understand this vertical," Sagliocca said.
"They clearly understand the value of the plaintiff-law-firm market and the peripheral businesses," Sagliocca added. "They get the upside."
Signature selected Esquire just as much as the other way around, Sagliocca said in an interview following the conference call with analysts.
"When you choose a business partner and you're private, you're absolutely choosing someone and selecting someone that adds as much value to your franchise as you add to them," Sagliocca said.
Esquire focuses on serving law firms, especially plaintiff firms that file civil suits on a contingency basis, where they're paid with a portion of the settlement instead of up-front fees.
While Esquire's business model has produced strong results in recent years, with total loans growing at a 22% combined annual growth rate since 2021, it's also generated concentration concerns, since litigation loans have accumulated at a more rapid clip than conventional credits.
"We see that growth accelerating," Sagliocca told American Banker. "At some point there's a tipping point with concentration. … We have to be way out in front of that."
Acquiring the $2 billion-asset Signature, which focuses on middle-market commercial and commercial real estate lending, goes a long way toward allaying those worries. Assuming the deal closes, litigation loans will shrink to 39% of the combined company's loan portfolio — well under stand-alone Esquire's current 67% level.
Unlike most bank deals, which rely on trimming the seller's costs to help drive financial returns, Esquire expects to cut just 5% of Signature's operating expenses.
What's more important is the added maneuvering room to allow the combined company to proceed at full steam in growing its litigation franchise, according to Justin Crowley, an analyst at Piper Sandler.
Esquire "is adding a commercially focused, relationship-driven franchise that provides significant heft in Chicago, a market where the bank had minimal penetration," Crowley wrote Thursday in a research note.
The transaction's terms call for Signature shareholders to receive about 2.63 Esquire shares for each of their Signature shares. That exchange values Signature at $260.48 per share, or 153% of tangible book value per share.
O'Rourke and Signature Chairman Leonard Caronia will join Esquire's board at closing, which is expected to take place in the third quarter.
O'Rourke and two key lieutenants, Bryan Duncan and Kevin Bastuga, have agreed to remain with the merged company and manage Signature as a division of Esquire Bank. The combined company is projected to start with assets of $4.8 billion, loans of $3.3 billion and deposits totaling $4.1 billion.
"By bringing together Signature's strong Midwest commercial banking franchise with Esquire's national capabilities, we will have greater resources and expanded reach to support our clients as they grow," O'Rourke said Thursday in a press release. "This merger will provide our shareholders with enhanced liquidity and an opportunity to create greater value in the years ahead."
Investors appeared to agree. Esquire shares traded up about 7% Thursday, closing at $106.
