ITEM 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
This discussion and analysis reflects our financial statements and other relevant statistical data, and is intended to enhance your understanding of our financial condition and results of operations. The information in this section has been derived from the financial statements, which appear elsewhere in this Annual Report. You should read the information in this section in conjunction with the other business and financial information provided in this annual report.
Overview
We are a financial holding company headquartered in Jericho, New York and registered under the BHC Act. Through our wholly owned bank subsidiary, Esquire Bank, National Association, we are a full service commercial bank dedicated to serving the financial needs of the legal and small business communities on a national basis, as well as commercial and retail customers in the New York metropolitan market. We offer tailored products and solutions to the legal community and their clients as well as dynamic and flexible merchant services solutions to small business owners, both on a national basis. We also offer traditional banking products for businesses and consumers in our local market area.
Our results of operations depend primarily on our net interest income which is the difference between the interest income we earn on our interest-earning assets and the interest we pay on our interest-bearing liabilities. Our results of operations also are affected by our provisions for loan losses, noninterest income and noninterest expense. Noninterest income currently consists primarily of merchant processing income and customer related fees and charges. Noninterest expense currently consists primarily of employee compensation and benefits and professional and consulting services. Our results of operations also may be affected significantly by general and local economic and competitive conditions, changes in market interest rates, governmental policies, the litigation market and actions of regulatory authorities.
Critical Accounting Policies
A summary of our accounting policies is described in Note 1 to the Consolidated Financial Statements included in this annual report. Critical accounting estimates are necessary in the application of certain accounting policies and procedures and are particularly susceptible to significant change. Critical accounting policies are defined as those involving significant judgments and assumptions by management that could have a material impact on the carrying value of certain
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assets or on income under different assumptions or conditions. Management believes that the most critical accounting policies, which involve the most complex or subjective decisions or assessments, are as follows:
Allowance for Loan Losses. Management considers the accounting policy relating to the allowance for loan losses to be a critical accounting policy given the inherent subjectivity and uncertainty in estimating the levels of the allowance required to cover credit losses in the portfolio and the material effect that such judgements can have on the results of operations.
Emerging Growth Company. Pursuant to the JOBS Act, an emerging growth company is provided the option to adopt new or revised accounting standards that may be issued by the Financial Accounting Standards Board (“FASB”) or the SEC either (i) within the same periods as those otherwise applicable to non-emerging growth companies or (ii) within the same time periods as private companies. We have irrevocably elected to adopt new accounting standards within the public company adoption period.
We have taken advantage of some of the reduced regulatory and reporting requirements that are available to it so long as we qualify as an emerging growth company, including, but not limited to, not being required to comply with the auditor attestation requirements of Section 404(b) of the Sarbanes-Oxley Act, reduced disclosure obligations regarding executive compensation, and exemptions from the requirements of holding non-binding advisory votes on executive compensation and golden parachute payments.
Discussion and Analysis of Financial Condition for the Years Ended December 31, 2020 and 2019
Assets. Our total assets were $936.7 million at December 31, 2020, an increase of $138.7 million from $798.0 million at December 31, 2019. The increase was primarily due to growth in our loan portfolio and cash.
Loan Portfolio Analysis. At December 31, 2020, loans were $672.7 million, or 71.8% of total assets, compared to $565.0 million, or 70.8% of total assets, at December 31, 2019. Commercial loans increased $100.5 million, or 38.9%, to $358.4 million at December 31, 2020 from $258.0 million at December 31, 2019. Multifamily loans increased $17.2 million, or 11.3%, to $169.8 million at December 31, 2020 from $152.6 million at December 31, 2019. Commercial real estate loans increased $2.2 million, or 4.3%, to $54.7 million at December 31, 2020 from $52.5 million at December 31, 2019. 1 – 4 family loans increased $0.3 million, or 0.6%, to $48.4 million at December 31, 2019 from $48.1 million at December 31, 2019. Consumer loans decreased $6.0 million or 12.6%, to $41.4 million at December 31, 2020 from $47.3 million at December 31, 2019. Construction loans decreased $6.5 million, as we no longer had construction loans as of December 31, 2020.
Loan Portfolio Composition. The following table sets forth the composition of our loan portfolio by type of loan at the dates indicated.
At December 31,
Amount Percent Amount Percent
(Dollars in thousands)
Real estate:
Deferred loan costs and unearned premiums, net (318) 390
Allowance for loan losses (11,402) (6,989)
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The following table sets forth the composition of our Attorney-Related Loan portfolio by type of loan at the dates indicated.
Amount Percent Amount Percent
(Dollars in thousands)
Attorney-Related Loans
Commercial Attorney-Related:
Consumer Attorney-Related:
Structured settlement loans 236 0.1 746 0.3
The largest contributor of growth in the portfolio from December 31, 2019 was our Attorney-Related loans. At December 31, 2020, our Attorney-Related Loans, which include commercial and consumer lending to attorneys, law firms and plaintiffs/claimants, totaled $329.2 million, or 48.9% of our total loan portfolio, compared to $253.8 million at December 31, 2019. In addition, we had $18.4 million in PPP loans as of December 31, 2020 to attorney customers which are excluded from the table above.
Loan Maturity. The following table sets forth certain information at December 31, 2020 regarding the contractual maturity of our loan portfolio. Demand loans, loans having no stated repayment schedule or maturity, and overdraft loans are reported as being due in one year or less. The table does not include any estimate of prepayments that could significantly shorten the average life of all loans and may cause our actual repayment experience to differ from that shown below.
Commercial
(In thousands)
Amounts due in:
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The following table sets forth fixed and adjustable-rate loans at December 31, 2020 that are contractually due after December 31, 2021.
Due After December 31, 2021
Fixed Adjustable Total
(In thousands)
Real estate
Construction — — —
At December 31, 2020, $316.8 million, or 85.0% of our adjustable interest rate loans were at their interest rate floor.
Nonperforming Assets
Nonperforming assets include loans that are 90 or more days past due or on nonaccrual status, including troubled debt restructurings on nonaccrual status, and real estate and other loan collateral acquired through foreclosure and repossession. Loans 90 days or greater past due may remain on an accrual basis if adequately collateralized and in the process of collection. At December 31, 2020 and 2019, we did not have any accruing loans past due 90 days or greater.
Real estate that we acquire as a result of foreclosure or by deed-in-lieu of foreclosure is classified as foreclosed real estate until it is sold. When property is acquired, it is initially recorded at the fair value less costs to sell at the date of foreclosure, establishing a new cost basis. Holding costs and declines in fair value after acquisition of the property result in charges against income. At December 31, 2020 and 2019, we have not had any foreclosed assets.
Troubled debt restructurings include loans for economic or legal reasons related to the borrower’s financial difficulties, for which we grant a concession to the borrower that we would not consider otherwise. Troubled debt restructurings are separately identified for impairment disclosures and are measured at the present value of estimated future cash flows using the loan’s effective rate at inception. If a troubled debt restructuring is considered to be a collateral dependent loan, the loan is reported, net, at the fair value of the collateral. For troubled debt restructurings that subsequently default, we determine the amount of reserve in accordance with the accounting policy for the allowance for loan losses.
In 2020, the Company implemented a customer payment deferral program in response to the COVID-19 crisis and elected to evaluate the modified loan population under the Coronavirus Aid, Relief and Economic Security Act (the “CARES Act”) which allows for troubled debt restructuring categorization to be suspended. The Company had no loans identified as troubled debt restructurings at December 31, 2020 and 2019. Further, there were no loan modifications during 2020, 2019, and 2018 that were troubled debt restructurings.
The implemented customer payment deferral program (principal and interest) is designed to assist business borrowers and certain consumers that may be experiencing financial hardship due to COVID-19 related challenges. These loans will continue to accrue interest during the deferral period unless otherwise classified as nonperforming. Consistent with regulatory guidance and the provisions of the CARES Act, borrowers that were otherwise current on loan payments that were granted COVID-19 related financial hardship payment deferrals will continue to be reported as current loans during the deferral period and not evaluated as to whether they are troubled debt restructurings (“TDR”). There were no delinquent loans upon adoption of our payment deferral program.
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The following table provides the principal balance of payment deferral program loans as of December 31, 2020:
Weighted Average Weighted Average
Number of Loan Debt Service Loan to
Borrowers Balance Coverage Value Ratio
(Dollars in thousands)
Consumer 3 9 NA NA
The $29.2 million deferred loan principal balance represents 4.3% of total loans of $672.7 million as of December 31, 2020, a decline of $36.0 million from $65.2 million at April 30, 2020. There are no loans that have come off of deferral that are past due or on nonaccrual as of December 31, 2020. Special mention loans on deferral totaled $3.7 million as of December 31, 2020 which were included in the 1-4 family and multifamily portfolios.
The following table sets forth information regarding our nonperforming assets at the dates indicated.
At December 31,
(Dollars in thousands)
Nonaccrual loans:
1 – 4 family $ — $ —
Multifamily — —
Commercial real estate — —
Construction — —
Commercial — —
Total nonaccrual loans $ 2,303 $ 1,476
Other real estate owned — —
Loans past due 90 days and still accruing — —
Troubled debt restructurings — —
Total nonperforming assets $ 2,303 $ 1,476
Total nonaccrual loans to total loans 0.34 % 0.26 %
Total nonperforming assets to total assets 0.25 % 0.18 %
Allowance for loan losses to nonaccrual loans 495.08 % 473.51 %
Allowance for loan losses to nonperforming loans 495.08 % 473.51 %
Allowance for loan losses to total loans at end of the period(1) 1.70 % 1.24 %
Allowance for Loan Losses
Please see “— Critical Accounting Policies — Allowance for Loan Losses” for additional discussion of our allowance policy.
The allowance for loan losses is maintained at levels considered adequate by management to provide for probable loan losses inherent in the loan portfolio as of the Consolidated Statements of Financial Condition reporting dates. The
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allowance for loan losses is based on management’s assessment of various factors affecting the loan portfolio, including portfolio composition, delinquent and nonaccrual loans, national and local business conditions and loss experience and an overall evaluation of the quality of the underlying collateral.
The following table sets forth activity in our allowance for loan losses for the periods indicated.
For the years ended December 31,
(In thousands)
Charge-offs:
1 – 4 family — — —
Multifamily — 63 —
Commercial real estate — — —
Construction — — —
Commercial 2 19 —
Recoveries:
1 – 4 family — — —
Multifamily — — —
Commercial real estate — — —
Construction — — —
Commercial — — —
Consumer — — —
Total recoveries — — —
Allocation of Allowance for Loan Losses. The following tables set forth the allowance for loan losses allocated by loan category and the percent of the allowance in each category to the total allocated allowance at the dates indicated. The allowance for loan losses allocated to each category is not necessarily indicative of future losses in any particular category and does not restrict the use of the allowance to absorb losses in other categories.
At December 31,
Percent of Percent of Percent of Percent of
Allowance Loans in Allowance Loans in
for Loan Each for Loan Each
Allowance Losses to Category Allowance Losses to Category
for Loan Total to Total for Loan Total to Total
Losses Allowance Loans Losses Allowance Loans
(Dollars in thousands)
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Loans rated special mention increased $4.5 million to $7.9 million as of December 31, 2020 from $3.4 million as of December 31, 2019 driven by our 1-4 family, multifamily, and consumer portfolios which increased $3.0 million, $0.7 million, and $0.7 million, respectively. Loans rated substandard increased $0.8 million to $2.4 million as of December 31, 2020, from $1.6 million at December 31, 2019. The allowance for loan losses as a percentage of loans was 1.70% and 1.24% as of December 31, 2020 and 2019, respectively. Charge-offs were $1.8 million for the year ended December 31, 2020 which is an increase of $1.3 million as compared to the prior year. The increase in the allowance as a percentage of loans, charge-offs, and substandard loans is primarily attributable to the consumer portfolio, specifically, our legacy post settlement NFL loan program as well as the ongoing effects of the COVID-19 pandemic on economic and non-economic credit risk factors.
Our NFL consumer post settlement loan exposure as of December 31, 2020 is approximately $23.6 million with a weighted average remaining maturity of approximately one year where $4.2 million and $2.3 million have been classified as special mention and substandard, respectively, representing approximately 28% of the remaining exposure. All substandard loan exposures related to this program have been placed on nonaccrual and $4.2 million, or 37%, of the allowance for loan losses has been allocated to the consumer portfolio. NFL loan principal balances charged-off since inception to date and calendar year 2020 were $2.1 million and $1.8 million, respectively. We believe the NFL portfolio’s duration has extended and there may be future risks associated with these loans (see “Item 1A—Risk Factors—Potential fraud by our post-settlement consumer loan customers who are claimants or others related to the NFL Concussion Settlement Program, revisions to qualifying physician requirements, and other administrative changes could increase our actual loan losses which would decrease earnings” on Page 24) and management has proactively refined and applied its internal risk rating criteria specific to this portfolio. This refined risk rating criteria considers factors including, but not limited to, the potential for fraud by our borrower or their representatives (i.e., lawyer, doctor); denial of our borrower’s claim by the claims administrator based on revised medical guidelines issued by the claims administrator in May 2019; the COVID-19 impact on a borrower’s ability to adhere to the claims administration protocols; death of our borrower; or loan maturities that are not in the process of collection. These factors, among other factors, may be used to assess future changes in risk ratings for the loans in our NFL loan portfolio.
We had impaired loans of $2.3 million and $1.5 million at December 31, 2020 and 2019, respectively, related to the NFL portfolio and no specific reserves were recorded. These loans were also classified as nonperforming assets.
Although we believe that we use the best information available to establish the allowance for loan losses, future adjustments to the allowance for loan losses may be necessary and our results of operations could be adversely affected if circumstances differ substantially from the assumptions used in making the determinations. Furthermore, while we believe we have established our allowance for loan losses in conformity with generally accepted accounting principles in the United States of America, there can be no assurance that regulators, in reviewing our loan portfolio, will not require us to increase our allowance for loan losses. In addition, because future events affecting borrowers and collateral cannot be predicted with certainty, there can be no assurance that the existing allowance for loan losses is adequate or that increases will not be necessary should the quality of any loans deteriorate as a result of the factors discussed above. Any material increase in the allowance for loan losses may adversely affect our financial condition and results of operations.
Merchant Processing Credit Risk
From a merchant processing perspective, we have taken action to identify and assess our COVID-19 related credit exposure, primarily defined as merchant returns and chargebacks, by merchant industry type and category. These industry types include, but are not limited to, restaurants, hospitality, travel, and entertainment. We have also assessed the level and adequacy of our ISO and merchant reserves held on deposit at Esquire Bank. Currently, based on our assessments, we have not identified any elevated credit risk in these affected industry types and other categories and our returns and chargeback ratios remain relatively consistent with pre-COVID-19 levels and commensurate to the merchant portfolio risk profile.
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Debt Securities Portfolio
At December 31, 2020 and 2019, all debt securities were carried at fair value and we had no investments in a single company or entity, other than government and government agency securities, which had an aggregate book value in excess of 10% of our equity.
We review the investment portfolio on a quarterly basis to determine the cause, magnitude and duration of declines in the fair value of each security. In estimating other-than-temporary impairment (OTTI), we consider many factors including: (1) the length of time and extent that fair value has been less than cost, (2) the financial condition and near term prospects of the issuer, (3) whether the market decline was affected by macroeconomic conditions, and (4) whether we have the intent to sell the security or more likely than not will be required to sell the security before its anticipated recovery. If either of the criteria regarding intent or requirement to sell is met, the entire difference between amortized cost and fair value is recognized as impairment through earnings. For securities that do not meet the aforementioned criteria, the amount of impairment is split into two components as follows: (1) OTTI related to credit loss, which must be recognized in the income statement and (2) OTTI related to other factors, which is recognized in other comprehensive income. The credit loss is defined as the difference between the present value of the cash flows expected to be collected and the amortized cost basis. The assessment of whether any other than temporary decline exists may involve a high degree of subjectivity and judgment and is based on the information available to management at a point in time. We evaluate securities for OTTI at least on a quarterly basis, and more frequently when economic or market conditions warrant such an evaluation.
At December 31, 2020 and December 31, 2019, securities in unrealized loss positions were issuances from government sponsored entities. The decline in fair value is attributable to changes in interest rates and illiquidity, not credit quality and because we do not have the intent to sell the securities and it is likely that we will not be required to sell the securities before their anticipated recovery, we do not consider the securities to be other-than-temporarily impaired at December 31, 2020 and 2019.
No impairment charges were recorded for the years ended December 31, 2020, 2019 and 2018.
Portfolio Maturities and Yields. The composition and maturities of the investment securities portfolio at December 31, 2020, are summarized in the following table. Maturities are based on the final contractual payment dates and do not reflect the impact of prepayments or early redemptions that may occur. No tax-equivalent yield adjustments have been made, as we have no tax free interest earning assets.
More Than One Year More Than Five Years
Weighted Weighted Weighted Weighted Weighted
(Dollars in thousands)
Deposits
Total deposits increased $123.4 million, or 18.1%, to $804.1 million at December 31, 2020 from $680.6 million at December 31, 2019. We continue to focus on the acquisition and expansion of core deposit relationships, which we define as all deposits except for certificates of deposit. Core deposits totaled $792.9 million at December 31, 2020, or 98.6% of total deposits at that date.
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The following tables set forth the distribution of average deposits by account type at the dates indicated.
For the Year Ended December 31,
Average Average Average Average
Balance Percent Rate Balance Percent Rate
(Dollars in thousands)
As of December 31, 2020 and 2019, the aggregate amount of uninsured deposits (deposits in amounts greater than or equal to $250,000, which is the maximum amount for federal deposit insurance)was $579.8 million and $525.5 million, respectively. These uninsured balances disclosed do not consider that FDIC insurance can be further extended by claimant within certain law firm deposit accounts. In addition, as of December 31, 2020, the aggregate amount of all our uninsured certificates of deposit was $6.8 million. We have no deposits that are uninsured for any reason other than being in excess of the maximum amount for federal deposit insurance. The following table sets forth the maturity of the uninsured certificates of deposit as of December 31, 2020.
At
(In thousands)
Maturing period:
Three months or less $ 37
Over three months through six months —
Over six months through twelve months 13
Over twelve months 6,761
Borrowings
At December 31, 2020, we had the ability to borrow a total of $122.4 million from the Federal Home Loan Bank of New York. We also had an available line of credit with the Federal Reserve Bank of New York discount window of $18.7 million. At December 31, 2020, we also had lines of credit with other financial institutions totaling $67.5 million. No amounts were outstanding on any of the aforementioned lines as of December 31, 2020.
Stockholders’ Equity
Total stockholders’ equity increased $15.0 million, or 13.5%, to $126.1 million at December 31, 2020, from $111.1 million at December 31, 2019. The increase for the year ended December 31, 2020 was primarily due to the increase in net income, unrealized gains on our available-for-sale portfolio and amortization of share based compensation.
Average Balance Sheets and Related Yields and Rates
The following tables present average balance sheet information, interest income, interest expense and the corresponding average yields earned and rates paid for the years ended December 31, 2020, 2019 and 2018. The average balances are daily averages and, for loans, include both performing and nonperforming balances. Interest income on loans includes the effects of discount accretion and net deferred loan origination costs accounted for as yield adjustments. No tax-equivalent adjustments have been made.
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For the Years Ended December 31,
Average Average Average Average Average Average
(Dollars in thousands)
INTEREST EARNING ASSETS
INTEREST BEARING LIABILITIES
Short-term borrowings 29 — — % 1 — — % 478 12 2.51 %
NONINTEREST BEARING LIABILITIES
Net interest spread 4.34 % 4.56 % 4.56 %
Net interest margin 4.47 % 4.86 % 4.73 %
The following table presents the dollar amount of changes in interest income and interest expense for major components of interest earning assets and interest bearing liabilities for the periods indicated. The table distinguishes between: (1) changes attributable to volume (changes in volume multiplied by the prior period’s rate); (2) changes attributable to rate (change in rate multiplied by the prior year’s volume) and (3) total increase (decrease) (the sum of the
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previous columns). Changes attributable to both volume and rate are allocated ratably between the volume and rate categories.
For the Years Ended
December 31,
Increase Total
(Decrease) due to Increase
Volume Rate (Decrease)
(Dollars in thousands)
Interest earned on:
Securities, includes restricted stock (519) (834) (1,353)
Securities purchased under agreements to resell 94 — 94
Interest earning cash and other 566 (1,134) (568)
Interest paid on:
Short-term borrowings — — —
Secured borrowings — — —
Change in net interest income $ 5,773 $ (2,444) $ 3,329
For the Years Ended
December 31,
Increase Total
(Decrease) due to Increase
Volume Rate (Decrease)
(Dollars in thousands)
Interest earned on:
Securities, includes restricted stock (77) 41 (36)
Securities purchased under agreements to resell — — —
Interest earning cash and other 193 136 329
Interest paid on:
Short-term borrowings (12) — (12)
Secured borrowings (9) (3) (12)
Change in net interest income $ 6,767 $ (395) $ 6,372
Results of Operations for the Years Ended December 31, 2020 and 2019
General. Net income decreased $1.5 million or 10.8%, to $12.6 million for the year ended December 31, 2020 from $14.1 million for the year ended December 31, 2019. The decrease resulted from a $4.4 million increase in provision for loan losses as a result of the effects of the pandemic on the economic and non-economic risk factors associated with the
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allowance for loan losses, a $3.7 million increase in noninterest expense, partially offset by an increase in net interest income of $3.3 million and a $2.8 million increase in noninterest income.
Net Interest Income. Net interest income increased $3.3 million, or 9.8%, to $37.4 million for the year ended December 31, 2020 from $34.1 million for the year ended December 31, 2019, due to a $2.0 million net increase in interest income and a $1.4 million decrease in interest expense.
Our net interest margin decreased 39 basis points to 4.47% for the year ended December 31, 2020 from 4.86% for the year ended December 31, 2019. The decrease in net interest margin was due to a 61 basis point decrease in the yields on interest earning assets, primarily due to the historically low interest rate environment caused by the pandemic and changing composition of our interest earning assets. This decrease was offset by a 39 basis point decrease in our cost of funds on average interest bearing liabilities.
Interest Income. Interest income increased $2.0 million or 5.4%, to $38.6 million for the year ended December 31, 2020 from $36.7 million for the year ended December 31, 2019 and was attributable to an increase in loan and reverse repurchase interest income offset by a decrease in interest income on securities and interest earning cash and other.
Loan interest income increased $3.8 million, or 11.9%, to $35.6 million for the year ended December 31, 2020 from $31.8 million for the year ended December 31, 2019. This increase was attributable to a $97.7 million, or 19.3%, increase in the average loan balance from our attorney-related, multifamily, and commercial real estate portfolios offset by a 38 basis point decrease in loan yields. The decrease in loan yields is due to the historically low interest rate environment caused by the pandemic and its effects on the overall economy. The impact of the decline in loan yields on interest income was primarily offset by a 39 basis point decrease in rates on interest bearing deposits as part of the Company’s overall asset/liability management strategy.
Securities interest income decreased $1.4 million, or 34.6%, to $2.6 million for the year ended December 31, 2020 from $3.9 million for the year ended December 31, 2019. This decrease was attributable to a $21.6 million, or 14.6%, decrease in average securities balances and a 62 basis point decrease in yields, both driven by accelerated prepayments due to the current interest rate environment.
Interest earning cash and other interest income decreased $568 thousand, or 59.2%, to $392 thousand for the year ended December 31, 2020 from $960 thousand for the year ended December 31, 2019. This decrease was attributable to a 164 basis point decrease in yields driven by the current interest rate environment offset by a $52.0 million, or 110.5%, increase in average cash balance primarily due to growth in our merchant payment processing volumes as well as increases in our core deposits.
Interest Expense. Interest expense decreased $1.4 million, or 53.3%, to $1.2 million for the year ended December 31, 2020 from $2.5 million for the year ended December 31, 2019, primarily attributable to rate reductions on deposits. Interest rates we paid on interest bearing deposits decreased 39 basis points to 0.27% for the year ended December 31, 2020 from 0.66% for the year ended December 31, 2019. Our average balance of interest bearing deposits increased $51.9 million, or 13.4%, to $438.3 million for the year ended December 31, 2020 from $386.4 million for the year ended December 31, 2019 attributable primarily to attorney related deposit growth.
Provision for Loan Losses. Our provision for loan losses was $6.3 million for the year ended December 31, 2020 compared to $1.9 million for the year ended December 31, 2019. The increase from the prior year was primarily related to the effects of the pandemic on economic and non-economic risk factors associated with the allowance for loan losses, loan growth and consumer loan charge-offs related to our legacy NFL portfolio and increased duration risk in our legacy NFL portfolio.
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Noninterest Income. Noninterest income information is as follows:
For the Year Ended
December 31, Change
(Dollars in thousands)
Noninterest income
Customer related fees and service charges
Administrative service income $ 183 $ 491 $ (308) (62.7) %
Merchant processing income
Merchant processing income increased due to the expansion of our sales channels through ISOs, merchants and additional fee allocation arrangements, with annual volumes increasing 25.2% to $14.8 billion for 2020 compared to $11.9 billion for 2019. For the month ended December 2020 volumes increased 37.4% to $1.5 billion compared to $1.1 billion for the month ended December 2019. Customer related fees and charges have decreased due to decreases in administrative service income due to reductions in short term rates offset by an increase in off balance sheet funds. Our off balance sheet funds increased $120.9 million, or 46.6%, to $380.3 million as of December 31, 2020 as compared to adjustable $259.3 million as of December 31, 2019. These administrative service fees are impacted by the volume of off-balance sheet funds, the duration of these funds and short-term interest rates.
Noninterest Expense. Noninterest expense information is as follows:
For the Year Ended
December 31, Change
(Dollars in thousands)
Noninterest expense
Professional and consulting services 3,229 2,919 310 10.6
FDIC and regulatory assessments 375 242 133 55.0
Advertising and marketing 584 518 66 12.7
Travel and business relations 210 548 (338) (61.7)
Employee compensation and benefits costs increased due to increases in staffing to support our continued growth, investment in our digital platform and the impact of salary and stock-based compensation increases. Data processing costs increased due to increased processing volume, primarily driven by our core banking platform, as well as additional costs related to our technology implementations. Occupancy and equipment costs increased primarily due to our investment in internally developed software to support our digital platform, precautionary office cleaning costs related to COVID-19 and additional office space to support growth. Professional and consulting fees increased due to the expansion of our technology initiatives tied to our digital platform. Other operating expenses increased due to donations to charitable organizations as we focused on our corporate responsibility to support those impacted by the current crisis. Travel and sales related costs decreased due to a freeze on travel and a transition to webcast-based business development and digital marketing.
Income Tax Expense. We recorded income tax expense of $4.5 million for the year ended December 31, 2020, reflecting an effective tax rate of 26.5%, compared to $5.0 million, or an effective tax rate of 26.1%, for the year ended December 31, 2019.
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Results of Operations for the Years Ended December 31, 2019 and 2018
General. Net income increased $5.4 million or 61.9%, to $14.1 million for the year ended December 31, 2019 from $8.7 million for the year ended December 31, 2018. The increase resulted from a $6.4 million increase in net interest income and a $4.0 million increase in noninterest income, which were partially offset by a $2.6 million increase in noninterest expense.
Interest Income. Interest income increased $7.7 million or 26.6%, to $36.7 million for the year ended December 31, 2019 from $29.0 million for the year ended December 31, 2018. This was attributable to an increase in the average balance of interest earning assets totaling $116.2 million, or 19.8%, to $702.3 million when compared to the year ended 2018. Average loans increased $108.9 million, or 27.3%, to $507.5 million for the year ended December 31, 2019 from $398.6 million for the year ended December 31, 2018.
Interest Expense. Interest expense increased $1.3 million, or 110.2%, to $2.5 million for the year ended December 31, 2019 from $1.2 million for the year ended December 31, 2018, primarily attributable to an increase in average balance of interest-bearing deposits and an increase in average rate on interest bearing deposits. Interest rates we paid on interest bearing deposits increased 29 basis points to 0.66% for the year ended December 31, 2019 from 0.37% for the year ended December 31, 2018. Our average balance of interest bearing deposits increased $65.5 million, or 20.4%, to $386.4 million for the year ended December 31, 2019 from $321.0 million for the year ended December 31, 2018.
Net Interest Income. Net interest income increased $6.4 million, or 23.0%, to $34.1 million for the year ended December 31, 2019 from $27.7 million for the year ended December 31, 2018. Our net interest margin increased 13 basis points to 4.86% for the year ended December 31, 2019 from 4.73% for the year ended December 31, 2018. Our net interest spread remained consistent year over year at 4.56%.
Provision for Loan Losses. Our provision for loan losses was $1.9 million for the year ended December 31, 2019 compared to $1.4 million for the year ended December 31, 2018. The increase from prior year was primarily related to growth, composition of the loan portfolio, and to replenish the reserve for charge-offs incurred during the year, including a $324 thousand charge-off related to an NFL consumer post-settlement loan. The provisions recorded resulted in an allowance for loan losses of $7.0 million, or 1.24% of total loans at December 31, 2019, compared to $5.6 million, or 1.20% of total loans at December 31, 2018.
Noninterest Income. Noninterest income information is as follows:
For the Years Ended
December 31, Change
(Dollars in thousands)
Noninterest income
Merchant processing income increased due to expansion of our sales channels through ISOs, merchants and additional fee allocation arrangements, with annual volumes increasing 65.7% to $11.9 billion for 2019 compared to $7.2 billion for 2018. For the month ended December 2019 volumes increased to $1.1 billion compared to $685.7 million for the month ended December 2018. Customer related fees and charges have decreased due to decreases in administrative service income on off-balance sheet funds which is impacted by the volume of off-balance sheet funds, the duration of these funds and short-term interest rates.
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Noninterest Expense. Noninterest expense information is as follows:
For the Years Ended
December 31, Change
(Dollars in thousands)
Noninterest expense
Professional and consulting services 2,919 2,589 330 12.7
FDIC and regulatory assessments 242 321 (79) (24.6)
Travel and business relations 548 504 44 8.7
Employee compensation and benefits increased for the year ended December 31, 2019 from the year ended December 31, 2018 primarily due to an increase in the number of employees as well as increases in salary and bonuses. Data processing costs increased as processing volumes increased as well as additional costs related to certain system implementations. Professional and consulting costs increased due to our IT enterprise-wide architecture assessments and our investment in certain proprietary technology.
Income Tax Expense. We recorded an income tax expense of $5.0 million for the year ended December 31, 2019, reflecting an effective tax rate of 26.1%, compared to $3.2 million, or an effective tax rate of 26.8%, for the year ended December 31, 2018. The decrease in the effective tax rate was a result of tax credits from our investment in proprietary technology and the continued expansion of our national litigation and merchant platforms.
Management of Market Risk
General. The principal objective of our asset and liability management function is to evaluate the interest rate risk within the balance sheet and pursue a controlled assumption of interest rate risk while maximizing net income and preserving adequate levels of liquidity and capital. The board of directors of our bank has oversight of our asset and liability management function, which is managed by our Asset/Liability Management Committee. Our Asset/Liability Management Committee meets regularly to review, among other things, the sensitivity of our assets and liabilities to market interest rate changes, local and national market conditions and market interest rates. That group also reviews our liquidity, capital, deposit mix, loan mix and investment positions.
As a financial institution, our primary component of market risk is interest rate volatility. Fluctuations in interest rates will ultimately impact both the level of income and expense recorded on most of our assets and liabilities, and the fair value of all interest earning assets and interest bearing liabilities, other than those which have a short term to maturity. Interest rate risk is the potential of economic losses due to future interest rate changes. These economic losses can be reflected as a loss of future net interest income and/or a loss of current fair values. The objective is to measure the effect on net interest income and to adjust the balance sheet to minimize the inherent risk while at the same time maximizing income.
We manage our exposure to interest rates primarily by structuring our balance sheet in the ordinary course of business. We do not typically enter into derivative contracts for the purpose of managing interest rate risk, but we may do so in the future. Based upon the nature of our operations, we are not subject to foreign exchange or commodity price risk. We do not own any trading assets.
Net Interest Income Simulation. We use an interest rate risk simulation model to test the interest rate sensitivity of net interest income and the balance sheet. Instantaneous parallel rate shift scenarios are modeled and utilized to evaluate risk and establish exposure limits for acceptable changes in net interest margin. These scenarios, known as rate shocks,
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simulate an instantaneous change in interest rates and use various assumptions, including, but not limited to, prepayments on loans and securities, deposit decay rates, pricing decisions on loans and deposits, reinvestment and replacement of asset and liability cash flows.
The following table presents the estimated changes in net interest income of Esquire Bank, National Association, calculated on a bank-only basis, which would result from changes in market interest rates over twelve-month periods beginning December 31, 2020. The tables below demonstrate that we are asset-sensitive in a rising interest rate environment.
At December 31,
Estimated
Changes in 12-Months
Interest Rates Net Interest
(Basis Points) Income Change
(Dollars in thousands)
Economic Value of Equity Simulation. We also analyze our sensitivity to changes in interest rates through an economic value of equity (“EVE”) model. EVE represents the present value of the expected cash flows from our assets less the present value of the expected cash flows arising from our liabilities adjusted for the value of off-balance sheet contracts. EVE attempts to quantify our economic value using a discounted cash flow methodology. We estimate what our EVE would be as of a specific date. We then calculate what EVE would be as of the same date throughout a series of interest rate scenarios representing immediate and permanent, parallel shifts in the yield curve. We currently calculate EVE under the assumptions that interest rates increase 100, 200, 300 and 400 basis points from current market rates, and under the assumption that interest rates decrease 100 and 200 basis points from current market rates.
The following table presents the estimated changes in EVE of Esquire Bank, National Association, calculated on a bank-only basis, that would result from changes in market interest rates as of December 31, 2020.
At December 31,
Changes in Economic
Interest Rates Value of
(Basis Points) Equity Change
(Dollars in thousands)
Many assumptions are used to calculate the impact of interest rate fluctuations. Actual results may be significantly different than our projections due to several factors, including the timing and frequency of rate changes, market conditions and the shape of the yield curve. The computations of interest rate risk shown above do not include actions that our management may undertake to manage the risks in response to anticipated changes in interest rates, and actual results may also differ due to any actions taken in response to the changing rates.
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Liquidity and Capital Resources
Liquidity is the ability to meet current and future financial obligations of a short-term nature. Our primary sources of funds consist of deposit inflows, loan repayments and maturities and sales of securities. While maturities and scheduled amortization of loans and securities are predictable sources of funds, deposit flows and mortgage prepayments are greatly influenced by general interest rates, economic conditions and competition.
We regularly review the need to adjust our investments in liquid assets based upon our assessment of: (1) expected loan demand, (2) expected deposit flows, (3) yields available on interest earning deposits and securities, and (4) the objectives of our asset/liability management program. Excess liquid assets are invested generally in interest earning deposits and short-and intermediate-term securities.
Our most liquid assets are cash and cash equivalents. The levels of these assets are dependent on our operating, financing, lending and investing activities during any given period. At December 31, 2020 and 2019, cash and cash equivalents totaled $65.2 million and $61.8 million, respectively. As of December 31, 2020, management is not aware of any events that are reasonably likely to have a material adverse impact on our liquidity, capital resources or operations. In addition, management is not aware of any regulatory recommendations regarding liquidity that would have a material adverse effect on us.
At December 31, 2019, through pledging of our securities and certain loans, we had the ability to borrow a total of $122.4 million from the Federal Home Loan Bank of New York and had an available line of credit with the Federal Reserve Bank of New York discount window of $18.7 million. At December 31, 2020, we also had $67.5 million in aggregated unsecured lines of credit with unaffiliated correspondent banks. No amounts were outstanding on any of the aforementioned lines as of December 31, 2020.
We have no material commitments or demands that are likely to affect our liquidity. In the event loan demand were to increase faster than expected, or any unforeseen demand or commitment were to occur, we could access our borrowing capacity with the Federal Home Loan Bank of New York or obtain additional funds through brokered certificates of deposit.
Esquire Bank, National Association is subject to various regulatory capital requirements administered by Office of the Comptroller of the Currency, and the Federal Deposit Insurance Corporation. At December 31, 2020 and 2019, Esquire Bank exceeded all applicable regulatory capital requirements, and was considered “well capitalized” under regulatory guidelines. See Note 13 of the Notes to the Consolidated Financial Statements for additional information.
We manage our capital to comply with our internal planning targets and regulatory capital standards administered by the OCC and review capital levels on a monthly basis. At December 31, 2020, Esquire Bank was classified as well-capitalized.
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The following table presents our capital ratios as of the indicated dates for Esquire Bank.
For Capital Adequacy
Purposes
Minimum Capital with Actual
“Well Capitalized” Conservation Buffer At December 31, 2020
Total Risk-based Capital Ratio
Tier 1 Risk-based Capital Ratio
Common Equity Tier 1 Capital Ratio
Tier 1 Leverage Ratio
Effective January 1, 2020, the federal banking agencies adopted a rule to establish for institutions with assets of less than $10 billion that meet other specified criteria a “community bank leverage ratio” (the ratio of a bank’s tangible equity capital to average total consolidated assets) of 9% that such institutions may elect to utilize in lieu of the generally applicable leverage and risk-based capital requirements noted above. A “qualifying community bank” with capital exceeding 9% will be considered compliant with all applicable regulatory capital and leverage requirements, including the requirement to be “well capitalized”. The CARES Act and implementing rules temporarily reduced the community bank leverage ratio to 8%, to be gradually increased back to 9% by 2022. The CARES Act also provides that, during the same time period, if a qualifying community banking organization falls no more than 1% below the community bank leverage ratio, it will have a two-quarter grace period to satisfy the community bank leverage ratio. For the current period, Esquire Bank has elected to continue to utilize the generally applicable leverage and risk based requirements and not apply the community bank leverage ratio.
Off-Balance Sheet Arrangements
Off-Balance Sheet Arrangements. We are a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of our customers. These financial instruments include commitments to extend credit, which involve elements of credit and interest rate risk in excess of the amount recognized in the Consolidated Statements of Financial Condition. Our exposure to credit loss is represented by the contractual amount of the instruments. We use the same credit policies in making commitments as we do for on-balance sheet instruments.
For further information, see Note 11 of the Notes to the Consolidated Financial Statements.
ITEM 7A. Quantitative and Qualitative Disclosures About Market Risk
The quantitative and qualitative disclosures about market risk are included under the section of this Annual Report entitled “Item 7 — Management’s Discussion and Analysis of Financial Condition and Results of Operations — Management of Market Risk.”
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ITEM 8. Financial Statements and Supplementary Data
Crowe LLPIndependent Member Crowe Global
Report of Independent Registered Public Accounting Firm
Shareholders and the Board of Directors of
Esquire Financial Holdings, Inc.
Jericho, New York
Opinion on the Financial Statements
We have audited the accompanying consolidated statements of financial condition of Esquire Financial Holdings, Inc. (the "Company") as of December 31, 2020 and 2019, the related consolidated statements of income, comprehensive income, changes in stockholders’ equity, and cash flows for each of the years in the three-year period ended December 31, 2020, and the related notes (collectively referred to as the "financial statements"). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2020 and 2019, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 2020, in conformity with accounting principles generally accepted in the United States of America.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) ("PCAOB") and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
/s/ Crowe LLP
We have served as the Company’s auditor since 2006.
New York, New York
March 19, 2021
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ESQUIRE FINANCIAL HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(Dollars in thousands, except per share data)
December 31, December 31,
ASSETS
Securities purchased under agreements to resell, at cost 51,726 —
Securities available-for-sale, at fair value 117,655 146,419
Securities, restricted, at cost 2,694 2,665
Less: allowance for loan losses (11,402) (6,989)
Premises and equipment, net 3,017 2,835
Accrued interest receivable 4,529 3,242
LIABILITIES AND STOCKHOLDERS’ EQUITY
Deposits:
Secured borrowings 49 86
Accrued expenses and other liabilities 6,535 6,240
Commitments and contingencies — —
Stockholders’ equity:
Accumulated other comprehensive income 1,408 386
Treasury stock at cost, 34,306 and 0 shares, respectively (567) —
Total liabilities and stockholders’ equity $ 936,714 $ 798,008
See accompanying notes to consolidated financial statements.
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ESQUIRE FINANCIAL HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF INCOME
(Dollars in thousands, except per share data)
For the Years Ended December 31,
Interest income:
Securities purchased under agreements to resell 94 — —
Interest earning deposits and other 392 960 631
Interest expense:
Savings, NOW and money market deposits 888 2,070 908
Borrowings 5 5 29
Noninterest income:
Customer related fees and service charges 548 835 2,894
Noninterest expense:
Professional and consulting services 3,229 2,919 2,589
FDIC and regulatory assessments 375 242 321
Advertising and marketing 584 518 392
Travel and business relations 210 548 504
Earnings per share
See accompanying notes to consolidated financial statements.
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ESQUIRE FINANCIAL HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Dollars in thousands)
For the Years Ended December 31,
Other comprehensive income:
Total other comprehensive income 1,022 3,000 (1,224)
See accompanying notes to consolidated financial statements.
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ESQUIRE FINANCIAL HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
(Dollars in thousands)
Accumulated
Additional Retained other Total
Net income — — — — — 8,734 — — 8,734
Restricted stock grants — 163,500 — 2 (2) — — — —
Net income — — — — — 14,143 — — 14,143
Restricted stock grants — 110,500 — 2 (2) — — — —
Net income — — — — — 12,618 — — 12,618
Restricted stock grants — 121,750 — 1 (1) — — — —
See accompanying notes to consolidated financial statements.
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ESQUIRE FINANCIAL HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
For the Years Ended December 31,
Cash flows from operating activities:
Deferred tax (benefit) expense (955) (116) (370)
Net amortization (accretion):
Right of use asset 391 382 —
Changes in other assets and liabilities:
Accrued interest receivable (1,287) 613 (1,019)
Operating lease liability (418) (314) —
Accrued expenses and other liabilities 89 882 1,213
Cash flows from investing activities:
Purchase of securities, restricted (29) (82) (400)
Purchases of premises and equipment (750) (647) (569)
Development of capitalized software (2,386) (1,415) (684)
Cash flows from financing activities:
Decrease in secured borrowings (37) (3) (189)
Exercise of stock options 401 50 378
Purchase of common stock (567) — —
Increase in cash and cash equivalents 3,379 31,244 (12,515)
Cash and cash equivalents at end of the period $ 65,185 $ 61,806 $ 30,562
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Noncash transactions:
See accompanying notes to consolidated financial statements.
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ESQUIRE FINANCIAL HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2020 and 2019
(Dollars in thousands, except per share data)
NOTE 1 — Business and Summary of Significant Accounting Policies
Business
Esquire Financial Holdings, Inc. (the “Company”) is a financial holding company incorporated in Maryland and headquartered in Jericho, New York, with one branch office in Jericho, New York and an administrative office in Boca Raton, Florida. Its wholly-owned subsidiary, Esquire Bank, National Association (the “Bank”), is a full service commercial bank dedicated to serving the financial needs of the legal industry and small businesses nationally, as well as commercial and retail customers in the New York metropolitan area.
The Bank offers tailored products and solutions to the legal community and their clients as well as dynamic and flexible merchant services solutions to small business owners. Banking products offered for businesses and consumers include checking, savings, money market and time deposits; a wide range of commercial and consumer loans, as well as customary banking services. These activities, primarily anchored by our legal community focus, generate a stable source of low cost core deposits and a diverse asset base to support our overall operations.
The Bank operates a merchant services platform through third party Independent Sales Organizations (“ISOs”). As an acquiring bank, fees are charged to merchants for the settlement of credit card, debit card and ACH transactions. The Bank’s revenue from these operational services is presented as merchant processing income on the Consolidated Statement of Income.
The Consolidated Financial Statements include Esquire Financial Holdings, Inc. and its wholly owned subsidiary, Esquire Bank, N.A. and are referred to as “the Company.” Intercompany transactions and balances are eliminated in consolidation.
Risks and Uncertainties
On March 11, 2020, the World Health Organization declared COVID-19, the disease caused by the novel coronavirus, a pandemic as a result of the global spread of the coronavirus illness. In response to the outbreak, federal and state authorities in the U.S. introduced various measures to try to limit or slow the spread of the virus, including travel restrictions, nonessential business closures, stay-at-home orders, and strict social distancing. The full impact of COVID-19 is unknown and rapidly evolving.
We have implemented a customer payment deferral program (principal and interest) to assist business borrowers and certain consumers that may be experiencing financial hardship due to COVID-19 related challenges. These loans will continue to accrue interest during the deferral period unless otherwise classified as nonperforming. Consistent with regulatory guidance and the provisions of the Coronavirus Aid, Relief and Economic Security Act (the “CARES Act”), borrowers that were otherwise current on loan payments that were granted COVID-19 related financial hardship payment deferrals will continue to be reported as current loans during the deferral period and not evaluated as to whether they are troubled debt restructurings (“TDR”). There were no delinquent loans upon adoption of our payment deferral program.
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ESQUIRE FINANCIAL HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2020 and 2019
(Dollars in thousands, except per share data)
At December 31, 2020 the Company had 12 loans in the COVID-19 payment deferral program with a total principal balance of $29,223.
From a merchant processing perspective, we have taken action to identify and assess our COVID-19 related credit exposure, primarily defined as merchant returns and chargebacks, by merchant industry type and category. These industry types include, but are not limited to, restaurants, hospitality, travel, and entertainment. We have also assessed the level and adequacy of our ISO and merchant reserves held on deposit at Esquire Bank. Currently, based on our assessments, we have not identified any elevated credit risk in these affected industry types and other categories and our returns and chargeback ratios remain relatively consistent with pre-COVID-19 levels and commensurate to the merchant portfolio risk profile.
At this time, it is difficult to quantify the impact COVID-19 will have on future periods. This could cause the Company to experience a material adverse effect on our business operations, asset valuations, financial condition, and results of operations. Material adverse impacts may include all or a combination of an increase in the allowance for loan losses, valuation impairments on our investments or deferred tax assets. The Company has evaluated the impact of the effects of COVID-19 and determined that there were no material or systematic adverse impacts on the Company's 2020 Consolidated Statement of Financial Condition and Consolidated Statement of Income except for a continued elevated level of general provisioning for loan losses and related allowance for loan losses.
Common Stock
In 2017, we completed our initial public offering (“IPO”) and sold 2,154,580 shares of common stock for aggregate net proceeds of approximately $26,341, after deducting underwriting discount and other offering related expenses.
Preferred Stock
In December of 2014, the Company issued 157,9850.00% Series B Non-Voting Preferred shares at a price of $12.50 per share for proceeds, net of offering costs, of approximately $1,800. The preferred stock did not have a maturity date and was not convertible by the holder, but was convertible on a one for one basis into common stock by us under certain circumstances. In addition, the preferred stock did not have a liquidation preference and had equal rights to receive dividends when dividends are declared on common stock, and thus were considered participating securities. These shares were later exchanged for 157,985 shares of common stock, par value $0.01. As of December 31, 2020 and 2019, there are no preferred shares outstanding.
Dividend Restriction
Banking regulations require maintaining certain capital levels and may limit the dividends paid by the bank to the holding company or by the holding company to shareholders.
Basis of Presentation and Use of Estimates
The accounting and financial reporting policies are in conformity with U.S. generally accepted accounting principles (GAAP). The preparation of financial statements requires that management make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of income and expenses during the reporting period. Such estimates are subject to
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ESQUIRE FINANCIAL HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2020 and 2019
(Dollars in thousands, except per share data)
change in the future as additional information becomes available or previously existing circumstances are modified. Actual results could differ from those estimates.
Statement of Cash Flows
For purposes of the accompanying statements of cash flows, cash and cash equivalents are defined as the amounts included in the Consolidated Statements of Financial Condition under the captions “Cash and cash equivalents”, with contractual maturities of less than 90 days. Net cash flows are reported for customer loan and deposit transactions.
Securities Purchased Under Agreements to Resell
The Company enters into purchases of securities under agreements to resell identical securities which consist of mortgage loans that meet the GNMA pooling qualifications. The cash advanced to the counterparty are reflected as assets on the Statement of Financial Condition and are accounted for at cost. The Company obtains possession of securities collateral with a market value equal to or in excess of the principal amount loaned under the resell agreement and has the right to request additional collateral, based on its daily monitoring of the fair value of the securities. As of December 31, 2020, there is one open contract with one counterparty that is scheduled to mature within thirty days.
Debt Securities
All securities are classified as available-for-sale and carried at fair value. Unrealized gains and losses on these securities are reported, net of applicable taxes, as a separate component of accumulated other comprehensive income (loss), a component of stockholders’ equity.
Interest income on securities, including amortization of premiums and accretion of discounts, is recognized using the level yield method without anticipating prepayments (except for mortgage-backed securities where prepayments are anticipated) over the lives of the individual securities. Realized gains and losses on sales of securities are computed using the specific identification method.
Loans
Loans that management has the intent and ability to hold for the foreseeable future until maturity or payoff are stated at the principal amount outstanding, net of deferred loan fees and costs for originated loans and net of unamortized premiums or discounts for purchased loans. Interest income is recognized using the level yield method. Net deferred loan fees, origination costs, unamortized premiums or discounts are recognized in interest income over the loan term as a yield adjustment.
Nonaccrual
Interest income on mortgage and commercial loans is discontinued at the time the loan is 90 days delinquent unless the loan is well-secured and in process of collection. Consumer loans are typically charged-off no later than 120 days past due. Past due status is based on the contractual terms of the loan. In all cases, loans are placed on nonaccrual or charged-off at an earlier date if collection of principal or interest is considered doubtful. Nonaccrual loans and loans past due 90 days still on accrual include both smaller balance homogeneous loans that are collectively evaluated for impairment and individually classified impaired loans. A loan is moved to nonaccrual status in accordance with the Company’s policy, typically after 90 days of non-payment.
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ESQUIRE FINANCIAL HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2020 and 2019
(Dollars in thousands, except per share data)
All interest accrued but not received for loans placed on nonaccrual is reversed against interest income. Interest received on such loans is accounted for on the cash-basis or cost-recovery method, until qualifying for return to accrual. Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured.
Provision and Allowance for Loan Losses
The allowance for loan losses is a valuation allowance for probable incurred credit losses. The allowance for loan losses is increased by provisions for loan losses charged to income. Losses are charged to the allowance when all or a portion of a loan is deemed to be uncollectible. Subsequent recoveries of loans previously charged-off are credited to the allowance for loan losses when realized. Management estimates the allowance balance required using past loan loss experience, the nature and volume of the portfolio, information about specific borrower situations and estimated collateral values, economic conditions and other factors. Allocations of the allowance may be made for specific loans, but the entire allowance is available for any loan that, in management’s judgment, should be charged-off.
The allowance consists of specific and general components. The specific component relates to loans that are individually classified as impaired when, based on current information and events, it is probable that the Company will be unable to collect all amounts due according to the contractual terms of the loan agreement.
Factors considered by management in determining impairment include payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record, and the amount of the shortfall in relation to the principal and interest owed.
All loans, except for smaller dollar consumer loans, are individually evaluated for impairment. If a loan is impaired, a portion of the allowance is allocated as a specific allowance. The measurement of an impaired loan is based on (i) the present value of expected future cash flows discounted at the loan’s effective interest rate, (ii) the loan’s observable market price or (iii) the fair value of the collateral if the loan is collateral dependent.
Loans for which the terms have been modified resulting in a concession, and for which the borrower is experiencing financial difficulties, are considered troubled debt restructurings and classified as impaired. Troubled debt restructurings are separately identified for impairment disclosures and are measured at the present value of estimated future cash flows using the loan’s effective rate at inception. If a troubled debt restructuring is considered to be a collateral dependent loan, the loan is reported, net, at the fair value of the collateral. For troubled debt restructurings that subsequently default, the Company determines the amount of reserve in accordance with the accounting policy for the allowance for loan losses.
The general component is based on historical loss experience adjusted for current factors. The historical loss experience is determined by portfolio segment and is based on the actual loss history experienced by the Company. This actual loss experience is supplemented with other economic factors based on the risks present for each portfolio segment. These economic factors include consideration of the following: levels of and trends in delinquencies and impaired loans; levels of and trends in charge-offs and recoveries; trends in volume and terms of loans; effects of any changes in risk selection and underwriting standards; other changes in lending policies, procedures, and practices; experience, ability, and depth of lending management and other relevant staff; national and local economic trends and conditions; industry conditions; and effects of changes in credit concentrations. The determination of the economic factors is a qualitative assessment that involves significant management judgment and subjective measurement.
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ESQUIRE FINANCIAL HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2020 and 2019