SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended
OR
TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
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Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: As of August 1, 2022, there were
Esquire Financial Holdings, Inc.
Form 10-Q
Table of Contents
2
PART I – FINANCIAL INFORMATION
Item 1.Financial Statements
ESQUIRE FINANCIAL HOLDINGS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(Dollars in thousands, except per share data)
(Unaudited)
June 30, | December 31, | |||||
| 2022 |
| 2021 | |||
ASSETS | ||||||
Cash and cash equivalents | $ | | $ | | ||
Securities purchased under agreements to resell, at cost | | | ||||
Securities available-for-sale, at fair value | | | ||||
Securities held-to-maturity, at cost (fair value $ | | — | ||||
Securities, restricted, at cost | | | ||||
Loans held for investment | | | ||||
Less: allowance for loan losses | ( | ( | ||||
Loans, net of allowance | | | ||||
Premises and equipment, net | | | ||||
Accrued interest receivable | | | ||||
Other assets | | | ||||
Total assets | $ | | $ | | ||
LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||
Deposits: | ||||||
Demand | $ | | $ | | ||
Savings, NOW and money market | | | ||||
Time | | | ||||
Total deposits | | | ||||
Accrued expenses and other liabilities | | | ||||
Total liabilities | $ | | $ | | ||
Commitments and contingencies | ||||||
Stockholders’ equity: | ||||||
Preferred stock, par value $ | ||||||
Common stock, par value $ | | | ||||
Additional paid-in capital | | | ||||
Retained earnings | | | ||||
Accumulated other comprehensive loss | ( | ( | ||||
Treasury stock at cost, | ( | ( | ||||
Total stockholders’ equity | | | ||||
Total liabilities and stockholders’ equity | $ | | $ | | ||
See accompanying condensed notes to interim condensed consolidated financial statements.
3
ESQUIRE FINANCIAL HOLDINGS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Dollars in thousands, except per share data)
(Unaudited)
For the Three Months | For the Six Months | |||||||||||
Ended June 30, | Ended June 30, | |||||||||||
| 2022 |
| 2021 |
| 2022 |
| 2021 | |||||
Interest income: | ||||||||||||
Loans | $ | | $ | | $ | | $ | | ||||
Securities | | | | | ||||||||
Securities purchased under agreements to resell | | | | | ||||||||
Interest earning deposits and other | | | | | ||||||||
Total interest income | | | | | ||||||||
Interest expense: | ||||||||||||
Savings, NOW and Money Market deposits | | | | | ||||||||
Time deposits | | | | | ||||||||
Borrowings | | | | | ||||||||
Total interest expense | | | | | ||||||||
Net interest income | | | | | ||||||||
Provision for loan losses | | | | | ||||||||
Net interest income after provision for loan losses | | | | | ||||||||
Noninterest income: | ||||||||||||
Payment processing fees | | | | | ||||||||
Customer related fees, service charges and other | | | | | ||||||||
Total noninterest income | | | | | ||||||||
Noninterest expense: | ||||||||||||
Employee compensation and benefits | | | | | ||||||||
Occupancy and equipment | | | | | ||||||||
Professional and consulting services | | | | | ||||||||
FDIC and regulatory assessments | | | | | ||||||||
Advertising and marketing | | | | | ||||||||
Travel and business relations | | | | | ||||||||
Data processing | | | | | ||||||||
Other operating expenses | | | | | ||||||||
Total noninterest expense | | | | | ||||||||
Net income before income taxes | | | | | ||||||||
Income tax expense | | | | | ||||||||
Net income | $ | | $ | | $ | | $ | | ||||
Earnings per share | ||||||||||||
Basic | $ | | $ | | $ | | $ | | ||||
Diluted | $ | | $ | | $ | | $ | | ||||
See accompanying condensed notes to interim condensed consolidated financial statements.
4
ESQUIRE FINANCIAL HOLDINGS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Dollars in thousands)
(Unaudited)
For the Three Months | For the Six Months | |||||||||||
Ended June 30, | Ended June 30, | |||||||||||
| 2022 |
| 2021 |
| 2022 |
| 2021 | |||||
Net income | $ | | $ | | $ | | $ | | ||||
Other comprehensive (loss) income: | ||||||||||||
Unrealized (losses) gains arising during the period on securities available-for-sale | ( | | ( | ( | ||||||||
Reclassification adjustment for net (losses) gains included in net income | — | — | — | — | ||||||||
Tax effect | | ( | | | ||||||||
Total other comprehensive (loss) income | ( | | ( | ( | ||||||||
Total comprehensive income | $ | | $ | | $ | | $ | | ||||
See accompanying condensed notes to interim condensed consolidated financial statements.
5
ESQUIRE FINANCIAL HOLDINGS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
(Dollars in thousands, except per share data)
(Unaudited)
Accumulated | ||||||||||||||||||||||||
Additional | other | Total | ||||||||||||||||||||||
Preferred | Common | Preferred | Common | paid-in | Retained | comprehensive | Treasury | stockholders' | ||||||||||||||||
shares | shares | stock | stock | capital | earnings | loss | stock | equity | ||||||||||||||||
Balance at April 1, 2022 | — | | $ | — | $ | | $ | | $ | | $ | ( | $ | ( | $ | | ||||||||
Net income | — | — | — | — | — | | — | — | | |||||||||||||||
Other comprehensive loss | — | — | — | — | — | — | ( | — | ( | |||||||||||||||
Exercise of stock options | — | | — | — | | — | — | — | | |||||||||||||||
Restricted stock award forfeitures | — | ( | — | — | — | — | — | — | — | |||||||||||||||
Stock compensation expense | — | — | — | — | | — | — | — | | |||||||||||||||
Cash dividends paid to common stockholders ($ | — | — | — | — | — | ( | — | — | ( | |||||||||||||||
Balance at June 30, 2022 | — | | $ | — | $ | | $ | | $ | | $ | ( | $ | ( | $ | | ||||||||
Accumulated | ||||||||||||||||||||||||
Additional | other | Total | ||||||||||||||||||||||
Preferred | Common | Preferred | Common | paid-in | Retained | comprehensive | Treasury | stockholders' | ||||||||||||||||
shares | shares | stock | stock | capital | earnings | (loss) income | stock | equity | ||||||||||||||||
Balance at April 1, 2021 | — | | $ | — | $ | | $ | | $ | | $ | ( | $ | ( | $ | | ||||||||
Net income | — | — | — | — | — | | — | — | | |||||||||||||||
Other comprehensive income | — | — | — | — | — | — | | — | | |||||||||||||||
Exercise of stock options | — | | — | — | | — | — | — | | |||||||||||||||
Stock compensation expense | — | — | — | — | | — | — | — | | |||||||||||||||
Balance at June 30, 2021 | — | | $ | — | $ | | $ | | $ | | $ | | $ | ( | $ | | ||||||||
Accumulated | ||||||||||||||||||||||||
Additional | other | Total | ||||||||||||||||||||||
Preferred | Common | Preferred | Common | paid-in | Retained | comprehensive | Treasury | stockholders' | ||||||||||||||||
shares | shares | stock | stock | capital | earnings | loss | stock | equity | ||||||||||||||||
Balance at January 1, 2022 | — | | $ | — | $ | | $ | | $ | | $ | ( | $ | ( | $ | | ||||||||
Net income | — | — | — | — | — | | — | — | | |||||||||||||||
Other comprehensive loss | — | — | — | — | — | — | ( | — | ( | |||||||||||||||
Exercise of stock options | — | | — | — | | — | — | — | | |||||||||||||||
Restricted stock award forfeitures | — | ( | — | — | — | — | — | — | — | |||||||||||||||
Stock compensation expense | — | — | — | — | | — | — | — | | |||||||||||||||
Vested restricted stock awards settlement | — | ( | — | — | — | — | — | ( | ( | |||||||||||||||
Cash dividends paid to common stockholders ($ | — | — | — | — | — | ( | — | — | ( | |||||||||||||||
Balance at June 30, 2022 | — | | $ | — | $ | | $ | | $ | | $ | ( | $ | ( | $ | | ||||||||
Accumulated | ||||||||||||||||||||||||
Additional | other | Total | ||||||||||||||||||||||
Preferred | Common | Preferred | Common | paid-in | Retained | comprehensive | Treasury | stockholders' | ||||||||||||||||
shares | shares | stock | stock | capital | earnings | income (loss) | stock | equity | ||||||||||||||||
Balance at January 1, 2021 | — | | $ | — | $ | | $ | | $ | | $ | | $ | ( | $ | | ||||||||
Net income | — | — | — | — | — | | — | — | | |||||||||||||||
Other comprehensive loss | — | — | — | — | — | — | ( | — | ( | |||||||||||||||
Exercise of stock options, net of repurchases ( | — | | — | | | — | — | — | | |||||||||||||||
Stock compensation expense | — | — | — | — | | — | — | — | | |||||||||||||||
Balance at June 30, 2021 | — | | $ | — | $ | | $ | | $ | | $ | | $ | ( | $ | |
See accompanying condensed notes to interim condensed consolidated financial statements.
6
ESQUIRE FINANCIAL HOLDINGS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
(Unaudited)
For the Six Months Ended June 30, | ||||||
| 2022 |
| 2021 | |||
Cash flows from operating activities: | ||||||
Net income | $ | | $ | | ||
Adjustments to reconcile net income to net cash provided by operating activities: | ||||||
Provision for loan losses | | | ||||
Depreciation | | | ||||
Stock compensation expense | | | ||||
Gain on loans held for sale | ( | — | ||||
Net amortization (accretion): | ||||||
Securities | | | ||||
Loans | ( | ( | ||||
Right of use asset | | | ||||
Software | | | ||||
Changes in other assets and liabilities: | ||||||
Accrued interest receivable | ( | | ||||
Other assets | | | ||||
Operating lease liability | ( | ( | ||||
Accrued expenses and other liabilities | | | ||||
Net cash provided by operating activities | | | ||||
Cash flows from investing activities: | ||||||
Net change in loans | ( | ( | ||||
Net change in securities purchased under agreements to resell | | | ||||
Purchases of securities available-for-sale | ( | ( | ||||
Purchases of securities held-to-maturity | ( | — | ||||
Principal repayments on securities available-for-sale | | | ||||
Principal repayments on securities held-to-maturity | | — | ||||
Redemption (purchase) of securities, restricted | ( | | ||||
Payoff of loans held for sale |
| |
| — | ||
Purchases of premises and equipment | ( | ( | ||||
Development of capitalized software | ( | ( | ||||
Net cash used in investing activities | ( | ( | ||||
Cash flows from financing activities: | ||||||
Net increase in deposits | | | ||||
Decrease in borrowings | ( | — | ||||
Exercise of stock options | | | ||||
Tax withholding payments for vested equity awards | ( | — | ||||
Cash dividends paid to common stockholders | ( | — | ||||
Net cash provided by financing activities | | | ||||
Increase in cash and cash equivalents | | | ||||
Cash and cash equivalents at beginning of the period | | | ||||
Cash and cash equivalents at end of the period | $ | | $ | | ||
Supplemental disclosures of cash flow information: | ||||||
Cash paid during the period for: | ||||||
Interest | $ | | $ | | ||
Taxes | | | ||||
Noncash transactions: | ||||||
Contribution of loans held for sale in exchange for an equity interest in a variable interest entity | | — | ||||
See accompanying condensed notes to interim condensed consolidated financial statements.
7
ESQUIRE FINANCIAL HOLDINGS, INC.
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1 — Basis of Presentation and Summary of Significant Accounting Policies
Basis of Presentation
The Interim Consolidated Financial Statements include the accounts of Esquire Financial Holdings, Inc. and its wholly owned subsidiary, Esquire Bank, N.A., are collectively referred to as “the Company.” All significant intercompany accounts and transactions have been eliminated in consolidation.
The accompanying unaudited Interim Condensed Consolidated Financial Statements have been prepared in accordance with generally accepted accounting principles for interim financial information. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial information. In the opinion of management, the interim statements reflect all adjustments necessary for a fair presentation of the financial position, results of operations and cash flows of the Company on a consolidated basis and all such adjustments are recurring in nature. These financial statements and the accompanying notes should be read in conjunction with the Company’s audited financial statements for the years ended December 31, 2021 and 2020. Operating results for the three and six months ended June 30, 2022 are not necessarily indicative of the results that may be expected for the year ending December 31, 2022 or any other period. Certain balances in the prior year financial statements were reclassified to conform to current presentation. The reclassifications had no effect on prior year net income or stockholders’ equity.
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. 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 second quarter 2022 Consolidated Statement of Financial Condition and Consolidated Statement of Income.
Subsequent Events
The Company has evaluated events for recognition and disclosure through the date of issuance.
Investment in Variable Interest Entity
On April 1, 2022, the Company sold its legacy NFL consumer post-settlement loan portfolio to a variable interest entity (VIE) in exchange for a nonvoting interest valued at $
Loss Contingencies
Loss contingencies, including claims and legal actions arising in the ordinary course of business, are recorded as liabilities when the likelihood of loss is probable and an amount or range of loss can be reasonably estimated. Management does not believe there now are such matters that will have a material effect on the Consolidated Financial Statements.
8
Loans Held for Sale
Loans held for sale are accounted for at lower of cost or fair value. Net unrealized losses, if any, are recorded as a valuation allowance and charged to earnings. Loans held for sale is included with Other assets on the Consolidated Statement of Financial Condition.
New Accounting Pronouncements
In June 2016, the FASB issued Accounting Standards Update (“ASU”) 2016-13, “Financial Instruments — Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments” (the ASU). This ASU replaces the incurred loss model with an expected loss model, referred to as “current expected credit loss” (CECL) model. It will significantly change estimates for credit losses related to financial assets measured at amortized cost, including loans receivable and certain other contracts. This ASU will be effective for a smaller reporting company on January 1, 2023. The Company plans to adopt ASU 2016-13 on January 1, 2023, using the required modified retrospective method with a cumulative effect adjustment as of the beginning of the reporting period. The Company has gathered the necessary data and continues to prepare for the implementation of this standard.
In March 2020, the FASB issued ASU 2020-04, “Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting.” ASU 2020-04 provides optional expedients and exceptions for accounting related to contracts, hedging relationships and other transactions affected by reference rate reform if certain criteria are met. ASU 2020-04 applies only to contracts, hedging relationships, and other transactions that reference LIBOR or another reference rate expected to be discontinued because of reference rate reform and do not apply to contract modifications made and hedging relationships entered into or evaluated after December 31, 2022, except for hedging relationships existing as of December 31, 2022, that an entity has elected certain optional expedients for and that are retained through the end of the hedging relationship. ASU 2020-04 was effective upon issuance and generally can be applied through December 31, 2022. Adoption of the standard is not expected to have a material impact on the Company’s operating results or financial condition.
In March 2022, the FASB issued ASU 2022-02, “Financial Instruments — Credit Losses (Topic 326): Troubled Debt Restructuring and Vintage Disclosures”. ASU 2022-02 eliminates the accounting guidance for TDRs by creditors in Subtopic 310-40, “Receivables — Troubled Debt Restructurings by Creditors”, while enhancing disclosure requirements for certain loan refinancing and restructurings by creditors when a borrower is experiencing financial difficulty. Additionally, the amendments in this ASU require that public business entities disclose current-period gross write-offs by year of origination for financing receivables and net investments in leases within the scope of ASU 326-20, “Financial Instruments — Credit Losses: Measured at Amortized Cost”. The Company is in the process of evaluating the ASU in conjunction with its adoption of CECL on January 1, 2023.
9
NOTE 2 — Debt Securities
The following tables summarize the amortized cost and fair value of securities available-for-sale and securities held-to-maturity and the corresponding amounts of gross unrealized gains and losses recognized in accumulated other comprehensive loss and gross unrecognized gains and losses:
June 30, 2022 | ||||||||||||
Gross | Gross | |||||||||||
Amortized | Unrealized | Unrealized | Fair | |||||||||
| Cost |
| Gains |
| Losses |
| Value | |||||
(In thousands) | ||||||||||||
Securities available-for-sale: | ||||||||||||
Mortgage-backed securities – agency | $ | | $ | | $ | ( | $ | | ||||
Collateralized mortgage obligations (CMOs) – agency | | | ( | | ||||||||
Total available-for-sale | $ | | $ | | $ | ( | $ | | ||||
Gross | Gross | |||||||||||
Amortized | Unrecognized | Unrecognized | Fair | |||||||||
Cost |
| Gains |
| Losses |
| Value | ||||||
(In thousands) | ||||||||||||
Securities held-to-maturity: | ||||||||||||
Collateralized mortgage obligations (CMOs) – agency | $ | | $ | | $ | ( | $ | | ||||
Total held-to-maturity | $ | | $ | | $ | ( | $ | | ||||
December 31, 2021 | ||||||||||||
Gross | Gross | |||||||||||
Amortized | Unrealized | Unrealized | Fair | |||||||||
Cost |
| Gains |
| Losses |
| Value | ||||||
(In thousands) | ||||||||||||
Securities available-for-sale: | ||||||||||||
Mortgage-backed securities – agency | $ | | $ | | $ | ( | $ | | ||||
Collateralized mortgage obligations (CMOs) – agency | | | ( | | ||||||||
Total available-for-sale | $ | | $ | | $ | ( | $ | | ||||
As of December 31, 2021, there were
Mortgage-backed securities include all pass-through certificates guaranteed by FHLMC, FNMA, or GNMA and the CMOs are backed by government agency pass-through certificates. CMOs, by virtue of the underlying residential collateral or structure, are fixed rate current pay sequentials or planned amortization classes (PACs). As actual maturities may differ from contractual maturities because certain borrowers have the right to call or prepay certain obligations, these securities are not considered to have a single maturity date.
There were
At June 30, 2022, securities having a carrying value of $
At June 30, 2022, securities having a fair value of $
10
The following table provides the gross unrealized and unrecognized losses and fair value, aggregated by investment category and length of time the individual securities have been in a continuous unrealized or unrecognized loss position as of:
June 30, 2022 | ||||||||||||||||||
Less Than 12 Months | 12 Months or Longer | Total | ||||||||||||||||
| Fair |
| Gross |
| Fair |
| Gross |
| Fair |
| Gross | |||||||
(In thousands) | ||||||||||||||||||
Securities available-for-sale: | ||||||||||||||||||
Mortgage-backed securities – agency | $ | | $ | ( | $ | | $ | ( | $ | | $ | ( | ||||||
CMOs – agency | | ( | | ( | | ( | ||||||||||||
Total temporarily impaired securities | $ | | $ | ( | $ | | $ | ( | $ | | $ | ( | ||||||
Less Than 12 Months | 12 Months or Longer | Total | ||||||||||||||||
| Fair |
| Gross |
| Fair |
| Gross |
| Fair |
| Gross | |||||||
(In thousands) | ||||||||||||||||||
Securities held-to-maturity: | ||||||||||||||||||
CMOs – agency | $ | | $ | ( | $ | — | $ | — | $ | | $ | ( | ||||||
Total temporarily impaired securities | $ | | $ | ( | $ | — | $ | — | $ | | $ | ( | ||||||
December 31, 2021 | ||||||||||||||||||
Less Than 12 Months | 12 Months or Longer | Total | ||||||||||||||||
Fair |
| Gross |
| Fair |
| Gross |
| Fair |
| Gross | ||||||||
(In thousands) | ||||||||||||||||||
Securities available-for-sale: | ||||||||||||||||||
Mortgage-backed securities - agency | $ | | $ | ( | $ | | $ | ( | $ | | $ | ( | ||||||
CMOs - Agency | | ( | — | — | | ( | ||||||||||||
Total temporarily impaired securities | $ | | $ | ( | $ | | $ | ( | $ | | $ | ( | ||||||
Management reviews 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), management considers 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 the Company has 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 debt 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. Management evaluates securities for OTTI at least on a quarterly basis, and more frequently when economic or market conditions warrant such an evaluation.
At June 30, 2022, securities in unrealized or unrecognized loss positions were issuances from government sponsored entities. Due to the decline in fair value being attributable to changes in interest rates, not credit quality and because the Company does not have the intent to sell the securities and it is likely that it will not be required to sell the securities before their anticipated recovery, the Company does not consider the securities to be other-than-temporarily impaired at June 30, 2022.
11
NOTE 3 — Loans
The composition of loans by class is summarized as follows:
At June 30, | At December 31, | |||||
2022 | 2021 | |||||
(In thousands) | ||||||
Real estate: |
|
|
| |||
Multifamily | $ | | $ | | ||
Commercial real estate |
| |
| | ||
1 – 4 family | | | ||||
Construction |
| — |
| — | ||
Total real estate |
| |
| | ||
Commercial |
| |
| | ||
Consumer |
| |
| | ||
Total loans held for investment | $ | | $ | | ||
Deferred loan fees and unearned premiums, net |
| ( |
| ( | ||
Allowance for loan losses |
| ( |
| ( | ||
Loans held for investment, net | $ | | $ | | ||
At December 31, 2021, the commercial loans balance included Small Business Administration (“SBA”) Paycheck Protection Program (“PPP”) loans of $
The following tables present the activity in the allowance for loan losses by class for the three months ending June 30, 2022 and 2021:
| Commercial |
|
|
|
|
| |||||||||||||||
| Multifamily | Real Estate | 1‑4 Family | Construction | Commercial | Consumer | Total | ||||||||||||||
(In thousands) | |||||||||||||||||||||
June 30, 2022 | |||||||||||||||||||||
Allowance for loan losses: | |||||||||||||||||||||
Beginning balance | $ | | $ | | $ | | $ | — | $ | | $ | | $ | | |||||||
Provision for loan losses | | | | — | | | | ||||||||||||||
Recoveries | | | | | | | | ||||||||||||||
Loans charged-off | | | | | ( | ( | ( | ||||||||||||||
Total ending allowance balance | $ | | $ | | $ | | $ | — | $ | | $ | | $ | | |||||||
June 30, 2021 | |||||||||||||||||||||
Allowance for loan losses: | |||||||||||||||||||||
Beginning balance | $ | | $ | | $ | | $ | — | $ | | $ | | $ | | |||||||
Provision (credit) for loan losses | ( | ( | ( | — | ( | | | ||||||||||||||
Recoveries | | | | | | | | ||||||||||||||
Loans charged-off | | | | | | ( | ( | ||||||||||||||
Total ending allowance balance | $ | | $ | | $ | | $ | — | $ | | $ | | $ | | |||||||
12
The following tables present the activity in the allowance for loan losses by class for the six months ending June 30, 2022 and 2021:
| Commercial |
|
|
|
|
| |||||||||||||||
| Multifamily | Real Estate | 1‑4 Family | Construction | Commercial | Consumer | Total | ||||||||||||||
(In thousands) | |||||||||||||||||||||
June 30, 2022 | |||||||||||||||||||||
Allowance for loan losses: | |||||||||||||||||||||
Beginning balance | $ | | $ | | $ | | $ | — | $ | | $ | | $ | | |||||||
Provision (credit) for loan losses | | | ( | — | | | | ||||||||||||||
Recoveries | | — | — | — | | — | | ||||||||||||||
Loans charged-off | ( | — | — | — | ( | ( | ( | ||||||||||||||
Total ending allowance balance | $ | | $ | | $ | | $ | — | $ | | $ | | $ | | |||||||
June 30, 2021 | |||||||||||||||||||||
Allowance for loan losses: | |||||||||||||||||||||
Beginning balance | $ | | $ | | $ | | $ | — | $ | | $ | | $ | | |||||||
Provision (credit) for loan losses | | | ( | — | | | | ||||||||||||||
Recoveries | — | — | — | — | — | — | — | ||||||||||||||
Loans charged-off | — | — | — | — | — | ( | ( | ||||||||||||||
Total ending allowance balance | $ | | $ | | $ | | $ | — | $ | | $ | | $ | | |||||||
13
The following tables present the balance in the allowance for loan losses and the recorded investment in loans by class and based on impairment method as of June 30, 2022 and December 31, 2021:
|
| Commercial |
|
|
|
|
| ||||||||||||||
Multifamily | Real Estate | 1‑4 Family | Construction | Commercial | Consumer | Total | |||||||||||||||
(In thousands) | |||||||||||||||||||||
June 30, 2022 |
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||
Allowance for loan losses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||
Ending allowance balance attributable to loans: |
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||
Individually evaluated for impairment | $ | | $ | | $ | | $ | | $ | | $ | | $ | | |||||||
Collectively evaluated for impairment |
| |
| |
| |
| — |
| |
| |
| | |||||||
Total ending allowance balance | $ | | $ | | $ | | $ | — | $ | | $ | | $ | | |||||||
Loans: |
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||
Loans individually evaluated for impairment | $ | | $ | | $ | | $ | | $ | | $ | | $ | | |||||||
Loans collectively evaluated for impairment |
| |
| |
| |
| — |
| |
| |
| | |||||||
Total ending loans balance | $ | | $ | | $ | | $ | — | $ | | $ | | $ | | |||||||
|
| Commercial |
|
|
|
|
| ||||||||||||||
Multifamily | Real Estate | 1‑4 Family | Construction | Commercial | Consumer | Total | |||||||||||||||
(In thousands) | |||||||||||||||||||||
December 31, 2021 |
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||
Allowance for loan losses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||
Ending allowance balance attributable to loans: |
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||
Individually evaluated for impairment | $ | | $ | | $ | | $ | | $ | | $ | | $ | | |||||||
Collectively evaluated for impairment |
| |
| |
| |
| — |
| |
| |
| | |||||||
Total ending allowance balance | $ | | $ | | $ | | $ | — | $ | | $ | | $ | | |||||||
Loans: |
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||
Loans individually evaluated for impairment | $ | | $ | | $ | | $ | | $ | | $ | | $ | | |||||||
Loans collectively evaluated for impairment |
| |
| |
| |
| — |
| |
| |
| | |||||||
Total ending loans balance | $ | | $ | | $ | | $ | — | $ | | $ | | $ | | |||||||
Recorded investment is not adjusted for accrued interest, deferred fees and costs, and unearned premiums and discounts.
14
There were no impaired loans as of June 30, 2022 and December 31, 2021.
The following table provides an analysis of average recorded investment and interest income recognized by segment on impaired loans during the three and six months ended June 30, 2022.
For the Three Months Ended June 30, | For the Six Months Ended June 30, | |||||||||||||||||||||||
2022 | 2021 | 2022 | 2021 | |||||||||||||||||||||
Average | Interest | Average | Interest | Average | Interest | Average | Interest | |||||||||||||||||
Recorded | Income | Recorded | Income | Recorded | Income | Recorded | Income | |||||||||||||||||
| Investment |
| Recognized |
| Investment |
| Recognized |
| Investment |
| Recognized |
| Investment |
| Recognized | |||||||||
(In thousands) | ||||||||||||||||||||||||
Multifamily | $ | — | $ | — | $ | | $ | — | $ | | $ | — | $ | | $ | — | ||||||||
Commercial real estate | — | — | — | — | — | — | — | — | ||||||||||||||||
1-4 family | — | — | — | — | — | — | — | — | ||||||||||||||||
Construction | — | — | — | — | — | — | — | — | ||||||||||||||||
Commercial | | — | — | — | | — | — | — | ||||||||||||||||
Consumer | — | — | | — | | — | | — | ||||||||||||||||
Total | $ | | $ | — | $ | | $ | — | $ | | $ | — | $ | | $ | — | ||||||||
The following tables present the aging of the recorded investment in past due loans by class of loans as of June 30, 2022 and December 31, 2021:
Total Past | |||||||||||||||||||||
30-59 | 60-89 | Greater than | Due | ||||||||||||||||||
Days | Days | 90 Days | Nonaccrual | Nonaccrual | Loans Not | ||||||||||||||||
| Past Due |
| Past Due |
| Past Due |
| Loans |
| Loans |
| Past Due |
| Total | ||||||||
(In thousands) | |||||||||||||||||||||
June 30, 2022 | |||||||||||||||||||||
Multifamily | $ | | $ | | $ | | $ | — | $ | | $ | | | ||||||||
Commercial real estate | | | | — | | | | ||||||||||||||
1 – 4 family | | | | — | | | $ | | |||||||||||||
Construction | | | | — | | — | — | ||||||||||||||
Commercial | | | | — | | | | ||||||||||||||
Consumer | | | | | | | | ||||||||||||||
Total | $ | | $ | | $ | | $ | | $ | | $ | | $ | | |||||||
Total Past | |||||||||||||||||||||
30-59 | 60-89 | Greater than | Due | ||||||||||||||||||
Days | Days | 90 Days | Nonaccrual | Nonaccrual | Loans Not | ||||||||||||||||
| Past Due |
| Past Due |
| Past Due |
| Loans |
| Loans |
| Past Due |
| Total | ||||||||
(In thousands) | |||||||||||||||||||||
December 31, 2021 | |||||||||||||||||||||
Multifamily | $ | | $ | | $ | | $ | — | $ | | $ | | $ | | |||||||
Commercial real estate | | | | — | | | | ||||||||||||||
1 – 4 family | | | | — | | | | ||||||||||||||
Construction | | | | — | | — | — | ||||||||||||||
Commercial | | | | — | | | | ||||||||||||||
Consumer | | | | | | | | ||||||||||||||
Total | $ | | $ | | $ | | $ | | $ | | $ | | $ | | |||||||
Credit Quality Indicators
The Company categorizes loans into risk categories based on relevant information about the ability of borrowers to service their debt such as: current financial information, historical payment experience, credit documentation, public
15
information, and current economic trends, among other factors. The Company analyzes loans individually by classifying the loans as to credit risk. This analysis is performed whenever a credit is extended, renewed or modified, or when an observable event occurs indicating a potential decline in credit quality, and no less than annually for large balance loans.
The Company uses the following definitions for risk ratings:
Special Mention - Loans classified as special mention have a potential weakness that deserves management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan or of the institution’s credit position at some future date.
Substandard - Loans classified as substandard are inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. Loans so classified have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the institution will sustain some loss if the deficiencies are not corrected.
Doubtful - Loans classified as doubtful have all the weaknesses inherent in those classified as substandard, with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable.
Loans not meeting the criteria above that are analyzed individually as part of the above described process are considered to be pass rated loans.
Based on the most recent analysis performed, the risk category of loans by class of loans is as follows:
| Pass |
| Special Mention |
| Substandard |
| Doubtful | |||||
(In thousands) | ||||||||||||
June 30, 2022 | ||||||||||||
Multifamily | $ | | $ | | $ | | $ | | ||||
Commercial real estate | | | | | ||||||||
1 – 4 family | | | | | ||||||||
Construction | — | | | | ||||||||
Commercial | | | | | ||||||||
Consumer | | | | | ||||||||
Total | $ | | $ | | $ | | $ | | ||||
| Pass |
| Special Mention |
| Substandard |
| Doubtful | |||||
(In thousands) | ||||||||||||
December 31, 2021 | ||||||||||||
Multifamily | $ | | $ | | $ | | $ | | ||||
Commercial real estate | | | | | ||||||||
1 – 4 family | | | | | ||||||||
Construction | — | | | | ||||||||
Commercial | | | | | ||||||||
Consumer | | | | | ||||||||
Total | $ | | $ | | $ | | $ | | ||||
The Company considers the performance of the loan portfolio and its impact on the allowance for loan losses. For smaller dollar commercial and consumer loan classes, the Company evaluates credit quality based on the aging status of the loan, which was previously presented, and by payment activity.
The Company has
16
a borrower is experiencing financial difficulty, an evaluation is performed of the probability that the borrower will be in payment default on any of its debt in the foreseeable future without the modification.
Pledged Loans
At June 30, 2022, loans totaling $
NOTE 4 — Noninterest Income
Descriptions of revenue-generating activities that are within the scope of Accounting Standards Codification (ASC) 606, Revenue from Contracts with Customers, and are presented in the Consolidated Statements of Income as components of noninterest income, are as follows:
For the Three Months Ended June 30, | For the Six Months Ended June 30, | |||||||||||
| 2022 |
| 2021 |
| 2022 |
| 2021 | |||||
(In thousands) | ||||||||||||
Payment processing fees | ||||||||||||
Payment processing income | $ | | $ | | $ | | $ | | ||||
ACH income | | | | | ||||||||
Customer related fees, service charges and other | ||||||||||||
Administrative service income | | | | | ||||||||
Other | | | | | ||||||||
(Loss) gain on loans held for sale (1) | ( | — | | — | ||||||||
Total noninterest income | $ | | $ | | $ | | $ | | ||||
| (1) | Represents a valuation adjustment on loans held for sale, not within the scope of ASC 606. |
The Company has made no significant judgments in applying the revenue guidance prescribed in ASC 606 that affect the determination of the amount and timing of revenue from the above-described contracts with customers.
| ● | Payment processing income – We provide payment processing services as an acquiring bank through the third-party or independent sales organization (ISO) business model in which we process credit and debit card transactions on behalf of merchants. We enter into a tri-party merchant agreement, between the Company, ISO and each merchant. The Company’s performance obligation is clearing and settling credit and debit transactions on behalf of the merchants. The Company recognizes revenue monthly once it summarizes and computes all revenue and expenses applicable to each ISO, which is our performance obligation. |
| ● | ACH income – We provide ACH services for merchants and other commercial customers. Contracts are entered into with third parties that require ACH transactions processed on behalf of their customers. Fees are variable and based on the volume of transactions within a given month. Our performance obligations are processing and settling ACHs on behalf of the customers. Our obligation is satisfied within each business day when the transactions (ACH files) are sent to the Federal Reserve Bank for clearing. Revenue is recognized based on the total volume of transactions processed that month for a given customer. |
| ● | Administrative service income – Administrative service income is derived primarily from the management of qualified settlement funds (QSFs), which are funds from settled mass torts and class action lawsuits. Our performance obligations with the QSFs are outlined in court approved orders which includes ensuring funds are invested into safe investment vehicles such as U.S. treasuries and FDIC insured products. Our fees for placing these funds in appropriate vehicles are earned over the course of a month, representing the period over which the Company satisfies the performance obligation. |
17
| ● | Other – The other category includes revenue from service charges on deposit accounts, debit card fees, and certain loan related fees where revenue is recognized as performance obligations are satisfied. |
NOTE 5 — Share-Based Payment Plans
The Company issues incentive and nonqualified stock options and restricted stock awards to certain employees and directors pursuant to its equity incentive plans, which have been approved by the stockholders. Share-based awards are granted by the Compensation Committee of the Board of Directors.
Under the plans, options are granted with an exercise price equal to the fair value of the Company’s stock at the date of the grant. Options granted vest over or
The fair value of each option award is estimated on the date of grant using a closed form option valuation (Black-Scholes) model that uses the assumptions noted in the table below. Expected volatilities are based on peer volatility. The Company uses peer data to estimate option exercise and post-vesting termination behavior. The expected term of options granted is based on peer data and represents the period of time that options granted are expected to be outstanding, which takes into account that the options are not transferable. The risk-free interest rate for the expected term of the option is based on the U.S. Treasury yield curve in effect at the time of the grant.
There were
The following table presents a summary of the activity related to options as of June 30, 2022:
|
|
| Weighted | ||||
Weighted | Average | ||||||
Average | Remaining | ||||||
Exercise | Contractual | ||||||
| Options |
| Price |
| Life (Years) | ||
June 30, 2022 |
|
|
|
|
|
| |
Outstanding at beginning of year |
| | $ | |
|
| |
Granted |
| |
| |
|
| |
Exercised |
| ( |
| |
|
| |
Forfeited |
| ( |
| |
|
| |
Expired |
| — |
| — |
|
| |
Outstanding at period end |
| | $ | |
| ||
Vested or expected to vest |
| | $ | |
| ||
Exercisable at period end |
| | $ | |
| ||
The Company recognized compensation expense related to options of $
18
Information related to stock option exercises during each period is as follows:
For the Three Months Ended | For the Six Months Ended | |||||||||||
June 30, | June 30, | |||||||||||
| 2022 |
| 2021 |
| 2022 |
| 2021 | |||||
(In thousands) | ||||||||||||
Intrinsic value of options exercised | $ | | $ | | $ | | $ | | ||||
Cash received from option exercises | | | | | ||||||||
Excess tax benefit from option exercises | — | | — | | ||||||||
The following table presents a summary of the activity related to restricted stock as of June 30, 2022:
|
| Weighted Average | |||
Grant Date | |||||
Shares | Fair Value | ||||
June 30, 2022 | |||||
Outstanding at beginning of year |
| |
| $ | |
Granted |
| — | — | ||
Vested |
| ( | | ||
Forfeited |
| ( | | ||
Outstanding at period end |
| |
| $ | |
The Company recognized compensation expense related to restricted stock of $
NOTE 6 — Earnings per Share
The factors used in the earnings per share computation follow:
For the Three Months Ended | For the Six Months Ended | |||||||||||
June 30, | June 30, | |||||||||||
| 2022 |
| 2021 |
| 2022 |
| 2021 | |||||
(Dollars in thousands, except per share data) | ||||||||||||
Basic | ||||||||||||
Net income | $ | | $ | | $ | | $ | | ||||
Weighted average shares outstanding | | | | | ||||||||
Basic earnings per share | $ | | $ | | $ | | $ | | ||||
Diluted | ||||||||||||
Net income | $ | | $ | | $ | | $ | | ||||
Weighted average shares outstanding for basic earnings per share | | | | | ||||||||
Add: Dilutive effects of share based awards | | | | | ||||||||
Average shares and dilutive potential shares | | | | | ||||||||
Diluted earnings per share | $ | | $ | | $ | | $ | | ||||
Share-based awards totaling
19
NOTE 7 — Leases
The Company recognizes the present value of its operating lease payments related to its office facilities and retail branch as operating lease assets and corresponding lease liabilities on the Consolidated Statements of Financial Condition. These operating lease assets represent the Company’s right to use an underlying asset for the lease term, and the lease liability represents the Company’s obligation to make lease payments over the lease term. As these leases do not provide an implicit rate, the Company used its incremental borrowing rate, the rate of interest to borrow on a collateralized basis for a similar term, at the lease commencement date in order to determine present value.
Short-term lease payments, those leases with original terms of 12 months or less, are recognized in the Consolidated Statements of Income, on a straight-line basis over the lease term. Certain leases may include one or more options to renew. The exercise of lease renewal options is typically at the Company’s discretion and are included in the operating lease liability if it is reasonably certain that the renewal option will be exercised. Certain real estate leases may contain lease and non-lease components, such as common area maintenance charges, real estate taxes, and insurance, which are generally accounted for separately and are not included in the measurement of the lease liability since they are generally able to be segregated. The Company does not sublease any of its leased properties and does not lease properties from any related parties.
As of June 30, 2022, right of use (“ROU”) lease and related lease were $
Maturities of the Company’s operating lease liabilities at June 30, 2022 are as follows:
Operating Lease | |||
Liabilities | |||
(In thousands) | |||
2022 | $ | | |
2023 |
| | |
2024 |
| | |
2025 |
| | |
2026 |
| | |
Thereafter |
| — | |
Total operating lease payments | $ | | |
Less: interest | | ||
Present value of operating lease liabilities | $ | |
As of June 30, | |||||||
2022 | 2021 | ||||||
Weighted-average remaining lease term | years | years | |||||
Weighted-average discount rate | | % | | % | |||
The components of total lease cost are as follows:
For the Three Months Ended | For the Six Months Ended | ||||||||||||
| June 30, | ||||||||||||
2022 | 2021 | 2022 | 2021 | ||||||||||
(In thousands) | |||||||||||||
Operating lease cost | $ | | $ | | $ | | $ | | |||||
Short-term lease cost | — | | — | | |||||||||
Total lease cost | $ | | $ | | $ | | $ | | |||||
Cash paid for operating leases | $ | | $ | | $ | | $ | | |||||
20
NOTE 8 — Fair Value Measurements
Fair value is the exchange price that would be received for an asset or paid to transfer a liability (exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. There are three levels of inputs that may be used to measure fair values.
Level 1 – Quoted prices (unadjusted) for identical assets or liabilities in active markets that the entity has the ability to access as of the measurement date.
Level 2 – Significant other observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data.
Level 3 – Significant unobservable inputs that reflect a company’s own assumptions about the assumptions that market participants would use in pricing an asset or liability.
For available-for-sale securities where quoted prices are not available, fair values are calculated based on market prices of similar securities (Level 2).
Assets and liabilities measured at fair value on a recurring basis are summarized below:
Fair Value Measurements Using | |||||||||
Quoted Prices | Significant | Significant | |||||||
| (Level 1) |
| (Level 2) |
| (Level 3) | ||||
(In thousands) | |||||||||
June 30, 2022 | |||||||||
Assets | |||||||||
Available-for-sale securities | |||||||||
Mortgage-backed securities – agency | $ | | $ | | $ | | |||
CMOs – agency | | | | ||||||
Total | $ | | $ | | $ | | |||
December 31, 2021 | |||||||||
Assets | |||||||||
Available-for-sale securities | |||||||||
Mortgage-backed securities – agency | $ | | $ | | $ | | |||
CMOs – agency | | | | ||||||
Total | $ | | $ | | $ | | |||
There were
There were no assets at fair value measured on a nonrecurring basis at June 30, 2022. The legacy NFL consumer loan portfolio was measured on a nonrecurring basis and assigned a Level 3 fair value of $
21
The following tables present the carrying amounts and fair values (represents exit price) of financial instruments not carried at fair value at June 30, 2022 and December 31, 2021:
Fair Value Measurement at June 30, 2022, Using: | |||||||||||||||
Carrying | |||||||||||||||
| Value |
| (Level 1) |
| (Level 2) |
| (Level 3) |
| Total | ||||||
(In thousands) | |||||||||||||||
Financial Assets: | |||||||||||||||
Cash and cash equivalents | $ | | $ | | $ | | $ | | $ | | |||||
Securities purchased under agreements to resell, at cost | | — | — | | | ||||||||||
Securities, held-to-maturity | | — | | — | | ||||||||||
Securities, restricted, at cost | | N/A | N/A | N/A | N/A | ||||||||||
Loans held for investment, net | | | | | | ||||||||||
Accrued interest receivable | | | | | | ||||||||||
Financial Liabilities: | |||||||||||||||
Time deposits | | — | | — | | ||||||||||
Demand and other deposits | | | | | | ||||||||||
Secured borrowings | | | | | | ||||||||||
Accrued interest payable | | | | | | ||||||||||
Fair Value Measurement at December 31, 2021, Using: | |||||||||||||||
Carrying | |||||||||||||||
| Value |
| (Level 1) |
| (Level 2) |
| (Level 3) |
| Total | ||||||
(In thousands) | |||||||||||||||
Financial Assets: | |||||||||||||||
Cash and cash equivalents | $ | | $ | | $ | | $ | | $ | | |||||
Securities purchased under agreements to resell, at cost | | — | — | | | ||||||||||
Securities, restricted, at cost | | N/A | N/A | N/A | N/A | ||||||||||
Loans held for investment, net | | | | | | ||||||||||
Accrued interest receivable | | | | | | ||||||||||
Financial Liabilities: | |||||||||||||||
Time deposits | | | | | | ||||||||||
Demand and other deposits | | | | | | ||||||||||
Secured borrowings | | | | | | ||||||||||
Accrued interest payable | | | | | | ||||||||||
22
NOTE 9 — Accumulated Other Comprehensive (Loss) Income
The following presents changes in accumulated other comprehensive (loss) income by component, net of tax, for the three and six months ending June 30, 2022 and 2021:
Three Months Ended | Six Months Ended | |||||||||||
June 30, | ||||||||||||
| 2022 |
| 2021 |
| 2022 |
| 2021 | |||||
(In thousands) | ||||||||||||
Unrealized (Losses) Gains on Available-for-Sale Securities | ||||||||||||
Beginning balance | $ | ( | $ | ( | $ | ( | $ | | ||||
Other comprehensive (loss) income before reclassifications, net of tax | ( | | ( | ( | ||||||||
Amounts reclassified from accumulated other comprehensive income | | | | | ||||||||
Net current period other comprehensive (loss) income | ( | | ( | ( | ||||||||
Ending balance | $ | ( | $ | | $ | ( | $ | | ||||
There were
23
Item 2.Management’s Discussion and Analysis of Financial Condition and Results of Operations
General
Management’s discussion and analysis of financial condition at June 30, 2022 and December 31, 2021 and results of operations for the three and six months ended June 30, 2022 and 2021 is intended to assist in understanding the financial condition and results of operations of Esquire Financial Holdings, Inc. The information contained in this section should be read in conjunction with the unaudited Consolidated Financial Statements and the audited Consolidated Financial Statements as of December 31, 2021 and the notes thereto appearing in Part I, Item 1, of this quarterly report on Form 10-Q.
Cautionary Note Regarding Forward-Looking Statements
This quarterly report contains forward-looking statements, which can be identified by the use of words such as “may,” “might,” “should,” “could,” “predict,” “potential,” “believe,” “expect,” “attribute,” “continue,” “will,” “anticipate,” “seek,” “estimate,” “intend,” “plan,” “projection,” “goal,” “target,” “outlook,” “aim,” “would,” “annualized” and “outlook,” or the negative version of those words or other comparable words or phrases of a future or forward-looking nature. These forward-looking statements include, but are not limited to:
| ● | statements of our goals, intentions and expectations; |
| ● | statements regarding our business plans, prospects, growth and operating strategies; |
| ● | statements regarding the quality of our loan and investment portfolios; and |
| ● | estimates of our risks and future costs and benefits. |
These forward-looking statements are based on our current beliefs and expectations and are inherently subject to significant business, economic and competitive uncertainties and contingencies, many of which are beyond our control. In addition, these forward-looking statements are subject to assumptions with respect to future business strategies and decisions that are subject to change. We are under no duty to and do not take any obligation to update any forward-looking statements after the date of this quarterly report.
The following factors, among others, could cause actual results to differ materially from the anticipated results or other expectations expressed in the forward-looking statements:
| ● | our ability to manage our operations under the current economic conditions nationally and in our market area; |
| ● | adverse changes in the financial industry, securities, credit and national local real estate markets (including real estate values); |
| ● | risks related to a high concentration of loans secured by real estate located in our market area; |
| ● | the continuing impact of the COVID-19 pandemic on our business and results of operation; |
| ● | risks related to a high concentration of loans and deposits dependent upon the legal and “litigation” market; |
| ● | the impact of any potential strategic transactions; |
| ● | our ability to enter new markets successfully and capitalize on growth opportunities; |
24
| ● | significant increases in our loan losses, including as a result of our inability to resolve classified and nonperforming assets or reduce risks associated with our loans, and management’s assumptions in determining the adequacy of the allowance for loan losses; |
| ● | interest rate fluctuations, which could have an adverse effect on our profitability; |
| ● | external economic and/or market factors, such as changes in monetary and fiscal policies and laws, including the interest rate policies of the Board of Governors of the Federal Reserve System (“FRB”), inflation or deflation, changes in the demand for loans, and fluctuations in consumer spending, borrowing and savings habits, which may have an adverse impact on our financial condition; |
| ● | continued or increasing competition from other financial institutions, credit unions, and non-bank financial services companies, many of which are subject to different regulations than we are; |
| ● | credit risks of lending activities, including changes in the level and trend of loan delinquencies and write-offs and in our allowance for loan losses and provision for loan losses; |
| ● | our success in increasing our legal and “litigation” market lending; |
| ● | our ability to attract and maintain deposits and our success in introducing new financial products; |
| ● | losses suffered by merchants or Independent Sales Organizations (ISOs) with whom we do business; |
| ● | our ability to effectively manage risks related to our payment processing business; |
| ● | our ability to leverage the professional and personal relationships of our board members and advisory board members; |
| ● | changes in interest rates generally, including changes in the relative differences between short-term and long-term interest rates and in deposit interest rates, that may affect our net interest margin and funding sources; |
| ● | fluctuations in the demand for loans; |
| ● | technological changes that may be more difficult or expensive than expected; |
| ● | changes in consumer spending, borrowing and savings habits; |
| ● | declines in the yield on our assets resulting from a low interest rate environment; |
| ● | declines in our payment processing income as a result of reduced demand, competition and changes in laws or government regulations or policies affecting financial institutions, including the Dodd-Frank Act and the JOBS Act, which could result in, among other things, increased deposit insurance premiums and assessments, capital requirements, regulatory fees and compliance costs, particularly the new capital regulations, and the resources we have available to address such changes; |
| ● | changes in accounting policies and practices, as may be adopted by the bank regulatory agencies, the Financial Accounting Standards Board, the Securities and Exchange Commission or the Public Company Accounting Oversight Board; |
| ● | loan delinquencies and changes in the underlying cash flows of our borrowers; |
25
| ● | the impairment of our investment securities; |
| ● | our ability to control costs and expenses, particularly those associated with operating as a publicly traded company; |
| ● | the failure or security breaches of computer systems on which we depend; |
| ● | political instability; |
| ● | acts of war, terrorism, natural disasters or global market disruptions, including global pandemics; |
| ● | competition and innovation with respect to financial products and services by banks, financial institutions and non-traditional providers, including retail businesses and technology companies; |
| ● | changes in our organization and management and our ability to retain or expand our management team and our board of directors, as necessary; |
| ● | the costs and effects of legal, compliance and regulatory actions, changes and developments, including the initiation and resolution of legal proceedings, regulatory or other governmental inquiries or investigations, and/or the results of regulatory examinations and reviews; |
| ● | the ability of key third-party service providers to perform their obligations to us; and |
| ● | other economic, competitive, governmental, regulatory and operational factors affecting our operations, pricing, products and services described elsewhere in this Quarterly Report on Form 10-Q. |
The foregoing factors should not be construed as exhaustive and should be read in conjunction with other cautionary statements that are included in our Annual Report on Form 10-K for the year ended December 31, 2021, as supplemented by subsequent Quarterly Reports on Form 10-Q. If one or more events related to these or other risks or uncertainties materialize, or if our underlying assumptions prove to be incorrect, actual results may differ materially from what we anticipate. Accordingly, you should not place undue reliance on any such forward-looking statements. Any forward-looking statement speaks only as of the date on which it is made, and we do not undertake any obligation to publicly update or review any forward-looking statement, whether as a result of new information, future developments or otherwise. New risks and uncertainties arise from time to time, and it is not possible for us to predict those events or how they may affect us. In addition, we cannot assess the impact of each factor on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements.
Summary of Significant Accounting Policies
A summary of our accounting policies is described in Note 1 to the Consolidated Financial Statements included in our 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 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 loan losses in the portfolio and the material effect that such judgements can have on the results of operations.
26
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.
A company loses emerging growth company status on the earlier of: (i) the last day of the fiscal year of the company during which it had total annual gross revenues of $1.07 billion or more; (ii) the last day of the fiscal year of the issuer following the fifth anniversary of the date of the first sale of common equity securities of the company pursuant to an effective registration statement under the Securities Act of 1933; (iii) the date on which such company has, during the previous three-year period, issued more than $1.0 billion in non-convertible debt; or (iv) the date on which such company is deemed to be a “large accelerated filer” under Securities and Exchange Commission regulations (generally, at least $700 million of voting and non-voting equity held by non-affiliates).
The Company will lose its emerging growth company status on December 31, 2022 since that would be the last day of the fiscal year of the Company following the fifth anniversary of the date of the first sale of the common equity securities of the Company pursuant to an effective registration statement under the Securities Act of 1933.
Overview
We are a financial holding company headquartered in Jericho, New York and registered under the Bank Holding Company Act of 1956, as amended. Through our wholly owned bank subsidiary, Esquire Bank, National Association (“Esquire Bank” or the “Bank”), we are a full service commercial bank dedicated to serving the financial needs of the litigation industry and small businesses nationally, as well as commercial and retail customers in the New York metropolitan market. We offer tailored financial and payment processing solutions to the litigation community and their clients as well as dynamic and flexible payment processing 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 provision for loan losses, noninterest income and noninterest expense. Noninterest income currently consists primarily of payment processing fees 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.
The Company’s foundation for success has been our nationwide branchless litigation and payment processing verticals supported by our forward-thinking senior managers, outstanding client service teams, and inclusive corporate culture. The future of our success will be the ability to continue developing and embracing cutting-edge technology to significantly leverage these verticals, differentiating us from other technology enabled financial firms and creating the catalyst for industry leading growth and returns.
Litigation Market Commercial Banking. The litigation market has been and will continue to be a significant growth opportunity for our Company as we offer focused and tailored products and services to law firms nationally. U.S. tort actions alone are estimated to consume 1.5%-2.0% of U.S. GDP annually(1) or $429 billion(2) (the total addressable market or “TAM”). We do not compete directly with non-bank finance companies, the primary funders in this market, and believe there are various and significant barriers to entry including, but not limited to, our clear industry track record for
27
15 years, extensive in-house experience, deep relationships with respected firms nationally, and unique products tailored to commercial law firms’ needs and wants.
We currently have clients in 27 states and our larger markets include the New York metro area, California, Texas, New Jersey, and Florida. Our success is tied to our unique ability to couple traditional commercial underwriting with non-traditional asset-based underwriting. Our team understands law firms’ contingent case inventory valuation process (as well as traditional hourly billing firms). Typically, these inventories of claims for injured consumers have a duration of 2-3 years, significantly longer than traditional accounts receivables or inventories of goods that can have a duration of 30-60 days or 120 days, respectively. These factors (the unique industry, contingent collateral, longer durations of the law firms’ inventories, atypical revenue streams of the law firms and more) coupled with the TAM create a unique and valuable opportunity for the Company with minimal incumbent competition. This unique risk profile translates into a blended 7.6% variable rate asset yield on these commercial loans for the quarter ended June 30, 2022. More importantly, for every $1.00 we advance on these loans we receive on average $1.91 of low-cost (our cost of funds for the quarter ended June 30, 2022 is 10 basis points) core operating and escrow deposits through our branchless platform, fueling and funding additional growth in our other asset classes. Our extremely low historic delinquency rates and low charge-off rates clearly demonstrate our strong underwriting process and expertise in this vertical. Coupling this with our off-balance sheet commercial litigation funds of $496.8 million at June 30, 2022, this vertical represents a highly desirable core low-cost funding platform for the entire company fueling growth in other lending areas.
Payment Processing. The payment processing (merchant acquiring) market has also been and will continue to be a significant growth opportunity for our company, as we offer focused and tailored products and services to small businesses nationally. The payment industry grew 9.7% from 2019 to 2021 with payment volumes or TAM of $9.5 trillion(3). Couple this with the fact that there are less than 85 acquiring financial institutions in the U.S. and this vertical clearly represents a significant growth opportunity for our company. We believe there are various and significant barriers to entry to this market including, but not limited to, our clear industry track record for 10 years, extensive in-house experience, deep relationships with non-bank acquirers, and our unique approach to servicing these small business merchants and their respective verticals. We use proprietary and industry leading technology to ensure card brand and regulatory compliance, support multiple processing platforms, manage daily risk across approximately 72,000 small business merchants in all 50 states, and perform commercial treasury clearing services for approximately $7.1 billion in processing volume across 136.1 million transactions in the most recent quarter.
Proprietary Technology. We are a branchless digital first company with best-in-class technology to fuel future growth with industry leading client retention rates. We have built a customized and fully integrated customer relationship management (“CRM”) platform, integrated into our digital marketing cloud and our nCino loan platform (all built on Salesforce for excellence in client service and operational efficiency) and have begun to invest in artificial intelligence (“AI”) to facilitate precision marketing and client acquisition across both national verticals.
The success of our nationwide branchless technology enabled litigation and payment processing verticals has led to industry leading performance. Our branchless commercial banking loans and deposits have compound annual growth rates of 23% since 2015, a net interest margin of 4.46% for the quarter ended June 30, 2022, and drives a company wide efficiency ratio of 52.3% for the quarter ended June 30, 2022. Our payment processing vertical has a compound annual growth rate of 58% since 2017 and diversifies our product offerings with stable fee income comprising 31% of revenues. The integration of these competencies and businesses has provided a sustainable average return on assets and tangible common equity of 2.00% and 17.81%, respectively, for the quarter ended June 30, 2022.
(1) Towers Watson U.S. Tort Trends
(2) U.S. Chamber of Commerce IRL Costs and Compensation of U.S. Tort System
(3) The Strawhecker Group
COVID-19 Pandemic Programs
We elected to participate in the Paycheck Protection Program administered by the SBA with the intention to provide our customer base access to this critical program. The PPP provides borrower guarantees for lenders, as well as loan forgiveness incentives for borrowers that utilize the loan proceeds to cover employee compensation-related costs and
28
other qualifying business costs. As of March 31, 2022, we had been fully repaid on our PPP loan portfolio cumulatively totaling $45.5 million, which concluded our participation in the program.
In 2020, management implemented a customer payment deferral program (principal and interest) under the CARES Act to assist business borrowers and certain consumers that may have been experiencing financial hardship due to COVID-19 related challenges. As of June 30, 2022, there were no participants in our payment deferral program, which is now closed.
Comparison of Financial Condition at June 30, 2022 and December 31, 2021
Assets. Our total assets were $1.3 billion at June 30, 2022, an increase of $130.9 million, or 11.1%, from $1.2 billion at December 31, 2021, due to growth in our securities portfolio funded with low cost deposits where securities held-to-maturity increased $76.3 million, and increases in loans held for investment of $74.8 million, or 9.5%, offset by net paydowns and unrealized losses on securities available-for-sale of $25.7 million, or 17.3%.
Loans. The following table provides information regarding the composition of our loans held for investment portfolio at the dates indicated:
At June 30, | At December 31, | |||||||||||
2022 | 2021 | |||||||||||
| Amount |
| Percent |
| Amount |
| Percent |
| ||||
(Dollars in thousands) | ||||||||||||
Real estate: |
|
|
|
|
|
|
|
|
| |||
Multifamily | $ | 259,579 |
| 30.2 | % | $ | 254,852 |
| 32.5 | % | ||
Commercial real estate |
| 80,488 |
| 9.3 |
| 48,589 |
| 6.1 | ||||
1 – 4 family | 33,565 |
| 3.9 | 40,753 |
| 5.2 | ||||||
Total real estate |
| 373,632 |
| 43.4 |
| 344,194 |
| 43.8 | ||||
Commercial |
| 478,149 |
| 55.6 |
| 427,859 |
| 54.6 | ||||
PPP | — | — | 4,249 | 0.5 | ||||||||
Consumer |
| 8,327 |
| 1.0 |
| 8,681 |
| 1.1 | ||||
Total loans held for investment | $ | 860,108 |
| 100.0 | % | $ | 784,983 |
| 100.0 | % | ||
Deferred loan fees and unearned premiums, net |
| (778) |
|
|
| (466) |
|
| ||||
Allowance for loan losses |
| (10,271) |
|
|
| (9,076) |
|
| ||||
Loans, held for investment | $ | 849,059 |
|
| $ | 775,441 |
|
| ||||
Loans held for sale, net (included in Other assets) | $ | — |
|
| $ | 14,100 |
|
| ||||
At June 30, 2022, loans were $859.3 million, or 74.4% of total deposits, compared to $784.5 million, or 76.3% of total deposits, at December 31, 2021. The growth in loans was primarily driven by net production in commercial and commercial real estate loans. Commercial loans increased $50.3 million, or 11.8%, to $478.1 million at June 30, 2022 from $427.9 million at December 31, 2021, driven by both our litigation related loans and other commercial relationships. Commercial real estate loans increased $31.9 million, or 65.7%, to $80.5 million at June 30, 2022 from $48.6 million at December 31, 2021.
29
The following table sets forth the composition of our Litigation-Related loans held for investment portfolio by type of loan at the dates indicated:
June 30, 2022 | December 31, 2021 | |||||||||||
| Amount |
| Percent |
|
| Amount |
| Percent |
| |||
(Dollars in thousands) | ||||||||||||
Litigation-Related Loans | ||||||||||||
Commercial Litigation-Related: | ||||||||||||
Working capital lines of credit | $ | 195,224 | 49.1 | % | $ | 210,148 | 54.4 | % | ||||
Case cost lines of credit | 134,974 | 34.0 | 127,859 | 33.1 | ||||||||
Term loans | 64,654 | 16.3 | 45,415 | 11.8 | ||||||||
Total Commercial Litigation-Related | 394,852 | 99.4 | 383,422 | 99.3 | ||||||||
Consumer Litigation-Related: | ||||||||||||
Post-settlement consumer loans | 2,366 | 0.6 | 2,451 | 0.7 | ||||||||
Structured settlement loans | 75 | 0.0 | 116 | 0.0 | ||||||||
Total Consumer Litigation-Related | 2,441 | 0.6 | 2,567 | 0.7 | ||||||||
Total Litigation-Related Loans | $ | 397,293 | 100.0 | % | $ | 385,989 | 100.0 | % | ||||
At June 30, 2022, our Litigation-Related loans, which include commercial loans to law firms and consumer lending to plaintiffs/claimants and attorneys, totaled $397.3 million, or 46.2% of our total loan portfolio, compared to $386.0 million, or 49.2% of our total loan portfolio at December 31, 2021. We remain focused on prudently growing our Litigation-Related loan portfolio.
Securities. Securities available-for-sale decreased $25.7 million, or 17.3%, to $122.7 million at June 30, 2022 from $148.4 million at December 31, 2021, driven by unrealized losses of $14.4 million and paydowns of $12.9 million, offset by purchases of $1.7 million. Commencing in the first quarter of 2022, we invested a portion of our excess liquidity in held-to-maturity securities, totaling $76.3 million at June 30, 2022.
Funding. Total deposits increased $127.1 million, or 12.4%, to $1.2 billion at June 30, 2022 from $1.0 billion at December 31, 2021. We continue to focus on the acquisition and expansion of core deposit relationships, which we define as all deposits except certificates of deposit. Core deposits totaled $1.1 billion at June 30, 2022, or 98.4% of total deposits at that date, compared to $1.0 billion or 98.1% of total deposits at December 31, 2021. Of which, litigation and payment processing deposits represent 64% and 15%, respectively, of total deposits. Demand deposits (noninterest bearing) increased $103.8 million, or 25.4%, to $513.1 million, representing 44.4% of total deposits.
In addition to our core deposits as a source of funding, the Company continues to prudently manage its balance sheet through deposit sweep programs, maintaining off-balance sheet funds totaling $496.8 million at June 30, 2022.
At June 30, 2022, we had the ability to borrow a total of $157.1 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 $39.6 million. At June 30, 2022, we also had $67.5 million in aggregate unsecured lines of credit with unaffiliated correspondent banks. No amounts were outstanding on any of the aforementioned lines of credit at June 30, 2022.
Equity. Total stockholders’ equity increased $1.8 million to $145.5 million at June 30, 2022, from $143.7 million at December 31, 2021, primarily due to net income of $11.7 million and amortization of share based compensation of $1.1 million, partially offset by other comprehensive losses of $10.4 million due to the decline in fair value of available-for-sale securities reflective of the recent increases in short-term market interest rates and a common stock dividend of $727 thousand.
Asset Quality. Nonperforming assets, totaling $4 thousand, consisted of two nonaccrual consumer loans as of June 30, 2022. As of June 30, 2022, the allowance for loan losses was $10.3 million, or 1.20% of total loans, as compared to $9.1 million, or 1.16% of total loans at December 31, 2021. The increase in the allowance as a percentage of loans was related to qualitative factors due to the current economic and inflationary environment. At June 30, 2022, special mention
30
and substandard loans totaled $22.5 million and $721 thousand, respectively. At December 31, 2021, special mention and substandard loans totaled $24.8 million and $4.3 million, respectively.
Average Balance Sheets and Rate/Volume Analysis
The following tables present average balance sheet information, interest income, interest expense and the corresponding average yields earned and rates paid for periods indicated. The average balances are daily averages and, for loans, include both performing and nonperforming balances. Interest income on loans includes the effects of net premium amortization and net deferred loan origination fees accounted for as yield adjustments. No tax-equivalent yield adjustments were made, as we have no tax exempt investments.
For the Three Months Ended June 30, |
| ||||||||||||||||
2022 | 2021 |
| |||||||||||||||
(Dollars in thousands) | |||||||||||||||||
Average |
| Average | Average |
| Average |
| |||||||||||
| Balance |
| Interest |
| Yield/Cost |
| Balance |
| Interest |
| Yield/Cost |
| |||||
INTEREST EARNING ASSETS |
|
|
|
|
|
|
|
|
|
|
|
| |||||
Loans, held for investment | $ | 841,336 | $ | 12,423 |
| 5.92 | % | $ | 700,349 | $ | 10,120 |
| 5.80 | % | |||
Securities, includes restricted stock |
| 208,091 |
| 1,033 |
| 1.99 | % |
| 134,828 |
| 538 |
| 1.60 | % | |||
Securities purchased under agreements to resell |
| 48,536 |
| 190 |
| 1.57 | % |
| 51,142 |
| 160 |
| 1.25 | % | |||
Interest earning cash and other |
| 132,487 |
| 309 |
| 0.94 | % |
| 65,947 |
| 42 |
| 0.26 | % | |||
Total interest earning assets |
| 1,230,450 |
| 13,955 |
| 4.55 | % |
| 952,266 |
| 10,860 |
| 4.57 | % | |||
NONINTEREST EARNING ASSETS |
| 45,672 |
|
|
|
|
| 31,519 |
|
|
|
| |||||
TOTAL AVERAGE ASSETS | $ | 1,276,122 |
| $ | 983,785 |
| |||||||||||
INTEREST BEARING LIABILITIES |
|
|
|
|
|
|
|
|
|
|
|
| |||||
Savings, NOW, Money Market deposits | $ | 608,817 | $ | 255 |
| 0.17 | % | $ | 416,389 | $ | 173 |
| 0.17 | % | |||
Time deposits |
| 19,178 |
| 26 |
| 0.54 | % |
| 10,980 |
| 19 |
| 0.69 | % | |||
Total interest bearing deposits |
| 627,995 |
| 281 |
| 0.18 | % |
| 427,369 |
| 192 |
| 0.18 | % | |||
Borrowings |
| 103 |
| 1 |
| 3.89 | % |
| 104 |
| 1 |
| 3.86 | % | |||
Total interest bearing liabilities |
| 628,098 |
| 282 |
| 0.18 | % | 427,473 |
| 193 |
| 0.18 | % | ||||
NONINTEREST BEARING LIABILITIES |
|
|
|
|
|
|
|
|
|
|
|
| |||||
Demand deposits |
| 493,997 |
|
|
|
|
| 414,216 |
|
|
|
| |||||
Other liabilities |
| 11,021 |
|
|
|
|
| 10,826 |
|
|
|
| |||||
Total noninterest bearing liabilities |
| 505,018 |
|
|
|
|
| 425,042 |
|
|
|
| |||||
Stockholders' equity |
| 143,006 |
|
|
|
|
| 131,270 |
|
|
|
| |||||
TOTAL AVG. LIABILITIES AND EQUITY | $ | 1,276,122 |
|
|
|
| $ | 983,785 |
|
|
|
| |||||
Net interest income |
|
| $ | 13,673 |
|
|
| $ | 10,667 |
| |||||||
Net interest spread | 4.37 | % | 4.39 | % | |||||||||||||
Net interest margin |
|
|
|
|
| 4.46 | % |
|
|
|
|
| 4.49 | % | |||
31
For the Six Months Ended June 30, |
| ||||||||||||||||
2022 | 2021 |
| |||||||||||||||
(Dollars in thousands) | |||||||||||||||||
Average |
| Average | Average |
| Average |
| |||||||||||
| Balance |
| Interest |
| Yield/Cost |
| Balance |
| Interest |
| Yield/Cost |
| |||||
INTEREST EARNING ASSETS |
|
|
|
|
|
|
|
|
|
|
|
| |||||
Loans, held for investment | $ | 809,130 | $ | 23,443 |
| 5.84 | % | $ | 689,003 | $ | 19,699 |
| 5.77 | % | |||
Securities, includes restricted stock |
| 194,782 |
| 1,849 |
| 1.91 | % |
| 127,370 |
| 1,005 |
| 1.59 | % | |||
Securities purchased under agreements to resell |
| 49,071 |
| 322 |
| 1.32 | % |
| 51,293 |
| 320 |
| 1.26 | % | |||
Interest earning cash and other |
| 102,637 |
| 366 |
| 0.72 | % |
| 61,640 |
| 83 |
| 0.27 | % | |||
Total interest earning assets |
| 1,155,620 |
| 25,980 |
| 4.53 | % |
| 929,306 |
| 21,107 |
| 4.58 | % | |||
NONINTEREST EARNING ASSETS |
| 48,216 |
|
|
|
|
| 31,182 |
|
|
|
| |||||
TOTAL AVERAGE ASSETS | $ | 1,203,836 |
| $ | 960,488 |
| |||||||||||
INTEREST BEARING LIABILITIES |
|
|
|
|
|
|
|
|
|
|
|
| |||||
Savings, NOW, Money Market deposits | $ | 549,361 | $ | 473 |
| 0.17 | % | $ | 409,620 | $ | 347 |
| 0.17 | % | |||
Time deposits |
| 19,210 |
| 45 |
| 0.47 | % |
| 11,084 |
| 39 |
| 0.71 | % | |||
Total interest bearing deposits |
| 568,571 |
| 518 |
| 0.18 | % |
| 420,704 |
| 386 |
| 0.19 | % | |||
Borrowings |
| 76 |
| 2 |
| 5.31 | % |
| 77 |
| 2 |
| 5.24 | % | |||
Total interest bearing liabilities |
| 568,647 |
| 520 |
| 0.18 | % | 420,781 |
| 388 |
| 0.19 | % | ||||
NONINTEREST BEARING LIABILITIES |
|
|
|
|
|
|
|
|
|
|
|
| |||||
Demand deposits |
| 482,034 |
|
|
|
|
| 400,597 |
|
|
|
| |||||
Other liabilities |
| 9,725 |
|
|
|
|
| 9,807 |
|
|
|
| |||||
Total noninterest bearing liabilities |
| 491,759 |
|
|
|
|
| 410,404 |
|
|
|
| |||||
Stockholders' equity |
| 143,430 |
|
|
|
|
| 129,303 |
|
|
|
| |||||
TOTAL AVG. LIABILITIES AND EQUITY | $ | 1,203,836 |
|
|
|
| $ | 960,488 |
|
|
|
| |||||
Net interest income |
|
| $ | 25,460 |
|
|
| $ | 20,719 |
| |||||||
Net interest spread | 4.36 | % | 4.39 | % | |||||||||||||
Net interest margin |
|
|
|
|
| 4.44 | % |
|
|
|
|
| 4.50 | % | |||
32
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 previous columns). Changes attributable to both volume and rate are allocated ratably between the volume and rate categories.
For the Three Months Ended | For the Six Months Ended | |||||||||||||||||||
June 30, | June 30, | |||||||||||||||||||
2022 vs. 2021 | 2022 vs. 2021 | |||||||||||||||||||
| Increase |
| Total |
| Increase |
| Total | |||||||||||||
(Decrease) due to | Increase | (Decrease) due to | Increase | |||||||||||||||||
Volume | Rate | (Decrease) | Volume |
| Rate | (Decrease) | ||||||||||||||
(In thousands) | ||||||||||||||||||||
Interest earned on: |
|
| ||||||||||||||||||
Loans held for investment | $ | 2,077 | $ | 226 | $ | 2,303 | $ | 3,477 | $ | 267 | $ | 3,744 | ||||||||
Securities, includes restricted stock |
| 342 |
| 153 |
| 495 |
| 610 |
| 234 |
| 844 | ||||||||
Securities purchased under agreements to resell |
| (8) |
| 38 |
| 30 |
| (14) |
| 16 |
| 2 | ||||||||
Interest earning cash and other |
| 73 |
| 194 |
| 267 |
| 81 |
| 202 |
| 283 | ||||||||
Total interest income |
| 2,484 |
| 611 |
| 3,095 |
| 4,154 |
| 719 |
| 4,873 | ||||||||
Interest paid on: |
|
|
|
|
|
|
|
|
|
|
|
| ||||||||
Savings, NOW, Money Market deposits |
| 81 |
| 1 |
| 82 |
| 120 |
| 6 |
| 126 | ||||||||
Time deposits |
| 12 |
| (5) |
| 7 |
| 22 |
| (16) |
| 6 | ||||||||
Total deposits |
| 93 |
| (4) |
| 89 |
| 142 |
| (10) |
| 132 | ||||||||
Borrowings |
| — |
| — |
| — |
| — |
| — |
| — | ||||||||
Total interest expense |
| 93 |
| (4) |
| 89 |
| 142 |
| (10) |
| 132 | ||||||||
Change in net interest income | $ | 2,391 | $ | 615 | $ | 3,006 | $ | 4,012 | $ | 729 | $ | 4,741 | ||||||||
Comparison of Operating Results for the Three Months Ended June 30, 2022 and 2021
General. Net income increased $1.8 million, or 41.1%, to $6.4 million for the three months ended June 30, 2022 from $4.5 million for the three months ended June 30, 2021. The increase resulted from a $3.0 million increase in net interest income and an increase in noninterest income of $742 thousand, partially offset by an increase of $1.3 million in noninterest expense.
Net Interest Income. Net interest income increased $3.0 million, or 28.2%, to $13.7 million for the three months ended June 30, 2022 from $10.7 million for the three months ended June 30, 2021, due to a $3.1 million increase in interest income, partially offset by a $89 thousand increase in interest expense.
Our net interest margin decreased 3 basis points, due to elevated levels of average interest earning cash to manage customer settlement activity, to 4.46% for the three months ended June 30, 2022 from 4.49% for the three months ended June 30, 2021.
Interest Income. Interest income increased $3.1 million, or 28.5%, to $14.0 million for the three months ended June 30, 2022 from $10.9 million for the three months ended June 30, 2021 and was attributable to an increase in loan interest income, securities interest income, interest earning cash and other, and reverse repurchase interest income.
Loan interest income increased $2.3 million, or 22.8%, to $12.4 million for the three months ended June 30, 2022 from $10.1 million for the three months ended June 30, 2021. This increase was attributable to a $141.0 million, or 20.1%, increase in the average loan balance primarily from our litigation-related and multifamily portfolios and a 12 basis point increase in loan yields.
Securities interest income increased $495 thousand, or 92.0%, to $1.0 million for the three months ended June 30, 2022 from $538 thousand for the three months ended June 30, 2021. This increase was primarily attributable to the
33
investment of excess liquidity in the first quarter of 2022 into held-to-maturity agency securities totaling $76.3 million at June 30, 2022, driving a $73.3 million, or 54.3%, increase in these higher yielding average securities balances, driving a 39 basis point increase in yields.
Interest earning cash and other interest income increased $267 thousand, or 635.7%, to $309 thousand for the three months ended June 30, 2022 from $42 thousand for the three months ended June 30, 2021, attributable to a $66.6 million, or 101% increase, in average interest earning cash balances as well as increases in short-term interest rates.
Securities purchased under agreements to resell income increased $30 thousand, or 18.8%, to $190 thousand for the three months ended June 30, 2022 from $160 thousand for the three months ended June 30, 2021, attributable to increases in short-term interest rates.
Interest Expense. Interest expense increased $89 thousand, or 46.1%, to $282 thousand for the three months ended June 30, 2022 from $193 thousand for the three months ended June 30, 2021, primarily attributable to a $200.6 million, or 46.9%, increase in the average balance of interest bearing deposits, driven by our litigation depository relationships. The blended interest rate we paid on interest bearing deposits remained at 18 basis points for both the three months ended June 30, 2022 and 2021.
Provision for Loan Losses. Our provision for loan losses was $850 thousand for the three months ended June 30, 2022, consistent with the same period in 2021. The allowance for loan losses to loans ratio was 1.20% as compared to 1.98% in the prior year quarter. The decrease was primarily due to the charge-off of $9.0 million upon reclassification of the legacy NFL consumer post settlement loan portfolio which was subsequently sold to a fund in the second quarter of 2022.
Noninterest Income. Noninterest income information is as follows:
For the Three Months Ended | ||||||||||||
June 30, | Change | |||||||||||
| 2022 |
| 2021 |
| Amount |
| Percent |
| ||||
(Dollars in thousands) | ||||||||||||
Payment processing fees | ||||||||||||
Payment processing income | $ | 5,300 | $ | 5,151 | $ | 149 | 2.9 | % | ||||
ACH income | 213 | 200 | 13 | 6.5 | ||||||||
Customer related fees and service charges | ||||||||||||
Administrative service income | 617 | 10 | 607 | 6,070.0 | ||||||||
Other | 81 | 106 | (25) | (23.6) | ||||||||
Loss on loans held for sale | (2) | — | (2) | NA | ||||||||
Total noninterest income | $ | 6,209 | $ | 5,467 | $ | 742 | 13.6 | % | ||||
Payment processing income in the second quarter of 2022 increased $162 thousand to $5.5 million, as compared to the same period in 2021. Payment processing fees in 2021 totaling $5.4 million included $500 thousand in early termination fees on ISO contracts. Excluding these early termination fees, payment processing fees increased $662 thousand, or 13.6%, from the second quarter of 2021. Payment processing volumes and transactions for the credit and debit card processing platform increased $915.9 million, or 14.7%, to $7.1 billion and 21.4 million, or 18.6%, to 136.1 million transactions, respectively, for the quarter ended June 30, 2022, as compared to the same period in 2021. These increases were driven by expansion of our sales channels through ISOs, increased number of merchants, volume increases, the reopening of the economy post pandemic and were facilitated by our focus on technology and other resources in the payments vertical. Customer related fees and service charges increased due to the movement in short-term interest rates and its impact on administrative service income on off-balance sheet funds. Off-balance sheet sweep funds totaled $496.8 million at June 30, 2022, demonstrating the continued strength of our branchless core business model.
34
Noninterest Expense. Noninterest expense information is as follows:
For the Three Months Ended | ||||||||||||
June 30, | Change | |||||||||||
| 2022 |
| 2021 |
| Amount |
| Percent |
| ||||
(Dollars in thousands) | ||||||||||||
Noninterest expense | ||||||||||||
Employee compensation and benefits | $ | 6,299 | $ | 5,669 | $ | 630 | 11.1 | % | ||||
Occupancy and equipment | 749 | 709 | 40 | 5.6 | ||||||||
Professional and consulting services | 847 | 804 | 43 | 5.3 | ||||||||
FDIC and regulatory assessments | 136 | 111 | 25 | 22.5 | ||||||||
Advertising and marketing | 404 | 315 | 89 | 28.3 | ||||||||
Travel and business relations | 134 | 69 | 65 | 94.2 | ||||||||
Data processing | 1,052 | 907 | 145 | 16.0 | ||||||||
Other operating expenses | 770 | 533 | 237 | 44.5 | ||||||||
Total noninterest expense | $ | 10,391 | $ | 9,117 | $ | 1,274 | 14.0 | % | ||||
Employee compensation and benefits costs increased due to increases in staff and officer level employees to support our growth, investment in digital platforms and related sales/marketing divisions, and the impact of salary, bonus and stock-based compensation increases. Due to the effects of inflation on the overall economy and consumer prices, we proactively increased our employees’ base salary at year-end in excess of industry and national averages to support employee retention. Hiring related costs, a component of other operating expenses, increased as we continue to invest in staffing to support our growth. Data processing costs increased due to increased processing volume, primarily driven by our core banking platform, and additional costs related to our technology implementations. Advertising and marketing costs increased as we continued to grow our digital marketing platform and expand our thought leadership in our national verticals. Travel and business relations costs increased as we re-engaged in our traditional high touch marketing and sales efforts to complement our digital marketing efforts.
Income Tax Expense. We recorded an income tax expense of $2.3 million for the three months ended June 30, 2022, reflecting an effective tax rate of 26.5%, compared to $1.7 million, or 27.0%, for the three months ended June 30, 2021.
Comparison of Operating Results for the Six Months Ended June 30, 2022 and 2021
General. Net income increased $3.0 million, or 34.8%, to $11.7 million for the six months ended June 30, 2022 from $8.7 million for the six months ended June 30, 2021. The increase resulted from a $4.7 million increase in net interest income, a decrease in the provision for loan losses of $1.2 million and an increase of $779 thousand in noninterest income, partially offset by an increase of $2.5 million in noninterest expense.
Net Interest Income. Net interest income increased $4.7 million, or 22.9%, to $25.5 million for the six months ended June 30, 2022 from $20.7 million for the six months ended June 30, 2021, due to a $4.9 million increase in interest income, partially offset by a $132 thousand increase in interest expense.
Our net interest margin decreased 6 basis points, due to elevated levels of average interest earning cash in the second quarter 2022 to manage customer settlement activity, to 4.44% for the six months ended June 30, 2022 from 4.50% for the six months ended June 30, 2021.
Interest Income. Interest income increased $4.9 million, or 23.1%, to $26.0 million for the six months ended June 30, 2022 from $21.1 million for the six months ended June 30, 2021 and was attributable to an increase in loan interest income, securities interest income, interest earning cash and other, and reverse repurchase interest income.
Loan interest income increased $3.7 million, or 19.0%, to $23.4 million for the six months ended June 30, 2022 from $19.7 million for the six months ended June 30, 2021. This increase was attributable to a $120.1 million, or 17.4%,
35
increase in the average loan balance primarily from our litigation-related and multifamily portfolios and a 7 basis point increase in loan yields.
Securities interest income increased $844 thousand, or 84.0%, to $1.8 million for the six months ended June 30, 2022 from $1.0 million for the six months ended June 30, 2021. This increase was primarily attributable to the investment of excess liquidity into held-to-maturity agency securities totaling $76.3 million at June 30, 2022, driving a $67.4 million, or 52.9%, increase in these higher yielding average securities balances driving a 32 basis point increase in yields.
Interest earning cash and other interest income increased $283 thousand, or 341.0%, to $366 thousand for the six months ended June 30, 2022 from $83 thousand for the six months ended June 30, 2021, attributable to a $41.0 million, or 67% increase, in average interest earning cash balances as well as increases in short-term interest rates.
Securities purchased under agreements to resell income increased $2 thousand to $322 thousand for the six months ended June 30, 2022 from $320 thousand for the six months ended June 30, 2021.
Interest Expense. Interest expense increased $132 thousand, or 34.0%, to $520 thousand for the six months ended June 30, 2022 from $388 thousand for the six months ended June 30, 2021, primarily attributable to a $147.9 million, or 35.1%, increase in the average balance of interest bearing deposits, driven by our litigation depository relationships. The blended interest rate we paid on interest bearing deposits decreased slightly from 19 basis points for the six months ended June 30, 2021 to 18 basis points for the six months ended June 30, 2022.
Provision for Loan Losses. Our provision for loan losses was $1.5 million for the six months ended June 30, 2022 compared to $2.7 million for the six months ended June 30, 2021. The decrease in the provision relates to a reduced pandemic related uncertainty and the sale of our legacy NFL consumer loan portfolio to a fund in the second quarter of 2022.
Noninterest Income. Noninterest income information is as follows:
For the Six Months Ended | ||||||||||||
June 30, | Change | |||||||||||
| 2022 |
| 2021 |
| Amount |
| Percent |
| ||||
(Dollars in thousands) | ||||||||||||
Payment processing fees | ||||||||||||
Payment processing income | $ | 10,401 | $ | 10,318 | $ | 83 | 0.8 | % | ||||
ACH income | 428 | 403 | 25 | 6.2 | ||||||||
Customer related fees, service charges and other | ||||||||||||
Administrative service income | 626 | 28 | 598 | 2,135.7 | ||||||||
Other | 168 | 183 | (15) | (8.2) | ||||||||
Gain on loans held for sale | 88 | — | 88 | NA | ||||||||
Total noninterest income | $ | 11,711 | $ | 10,932 | $ | 779 | 7.1 | % | ||||
Payment processing income for the six months ended 2022 increased $108 thousand to $10.8 million, as compared to the same period in 2021. Payment processing fees in 2021 totaling $10.7 million included $500 thousand in early termination fees on ISO contracts. Excluding these early termination fees, payment processing fees increased $608 thousand, or 5.9%, as compared to the six months ended 2021. Payment processing volumes and transactions for the credit and debit card processing platform increased $2.2 billion, or 19.4%, to $13.3 billion and 44.5 million, or 21.3%, to 253.9 million transactions, respectively, for the six months ended June 30, 2022, as compared to the same period in 2021. These increases were driven by expansion of our sales channels through ISOs, increased number of merchants, volume increases, the reopening of the economy post pandemic and were facilitated by our focus on technology and other resources in the payments vertical. Customer related fees and service charges increased due to the impact of increasing short-term interest rates and its impact on administrative service income on off-balance sheet funds. Off-balance sheet sweep funds totaled $496.8 million at June 30, 2022, demonstrating the continued strength of our branchless core business model.
36
Noninterest Expense. Noninterest expense information is as follows:
For the Six Months Ended | ||||||||||||
June 30, | Change | |||||||||||
| 2022 |
| 2021 |
| Amount |
| Percent |
| ||||
(Dollars in thousands) | ||||||||||||
Noninterest expense | ||||||||||||
Employee compensation and benefits | $ | 12,433 | $ | 10,666 | $ | 1,767 | 16.6 | % | ||||
Occupancy and equipment | 1,500 | 1,408 | 92 | 6.5 | ||||||||
Professional and consulting services | 1,458 | 1,579 | (121) | (7.7) | ||||||||
FDIC and regulatory assessments | 259 | 208 | 51 | 24.5 | ||||||||
Advertising and marketing | 629 | 647 | (18) | (2.8) | ||||||||
Travel and business relations | 224 | 108 | 116 | 107.4 | ||||||||
Data processing | 2,060 | 1,757 | 303 | 17.2 | ||||||||
Other operating expenses | 1,209 | 932 | 277 | 29.7 | ||||||||
Total noninterest expense | $ | 19,772 | $ | 17,305 | $ | 2,467 | 14.3 | % | ||||
Employee compensation and benefits costs increased due to increases in staff and officer level employees to support our growth, investment in digital platforms and related sales/marketing divisions, and the impact of salary, bonus and stock-based compensation increases. Due to the effects of inflation on the overall economy and consumer prices, we proactively increased our employees’ base salary at year-end in excess of industry and national averages to support employee retention. Professional and consulting service costs decreased, partially offsetting the increase in employee compensation and benefits as previously contracted consultants were hired, primarily in our technology development and digital marketing departments. Data processing costs increased due to increased processing volume, primarily driven by our core banking platform, and additional costs related to our technology implementations. Hiring related costs, a component of other operating expenses, increased as we continue to invest in staffing to support our growth. Travel and business relations costs increased as we re-engaged in our traditional high touch marketing and sales efforts to complement our digital marketing efforts. Occupancy and equipment costs increased primarily due to amortization of our investments in internally developed software to support our new digital platform and additional office space to support our continued growth.
Income Tax Expense. We recorded an income tax expense of $4.2 million for the six months ended June 30, 2022, reflecting an effective tax rate of 26.5%, compared to $3.0 million, or 25.8%, for the six months ended June 30, 2021. The effective tax rate increase was driven by certain discrete tax benefits related to share-based compensation in the first quarter of 2021.
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.
37
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, 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 a twelve-month period.
At June 30, | ||||||
2022 | ||||||
Estimated | ||||||
Changes in | 12-Months | |||||
Interest Rates | Net Interest | |||||
(Basis Points) |
| Income |
| Change | ||
(Dollars in thousands) | ||||||
400 | $ | 87,580 | $ | 24,444 | ||
300 | 81,419 | 18,283 | ||||
200 | 75,283 | 12,147 | ||||
100 | 69,160 | 6,024 | ||||
0 | 63,136 | — | ||||
-100 | 57,223 | (5,913) | ||||
-200 | 52,311 | (10,825) | ||||
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 at June 30, 2022.
At June 30, | ||||||
2022 | ||||||
Changes in | Economic | |||||
Interest Rates | Value of | |||||
(Basis Points) |
| Equity |
| Change | ||
(Dollars in thousands) | ||||||
400 | $ | 289,093 | $ | 49,417 | ||
300 | 278,236 | 38,560 | ||||
200 | 266,476 | 26,800 | ||||
100 | 253,862 | 14,186 | ||||
0 | 239,676 | — | ||||
-100 | 221,543 | (18,133) | ||||
-200 | 194,872 | (44,804) | ||||
38
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.
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 June 30, 2022, cash and cash equivalents totaled $155.2 million.
At June 30, 2022, through pledging of our securities and certain loans, we had the ability to borrow a total of $157.1 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 $39.6 million. At June 30, 2022, we also had $67.5 million in aggregate unsecured lines of credit with unaffiliated correspondent banks. No amounts were outstanding on any of the aforementioned lines of credit at June 30, 2022.
We have no material commitments or demands that are likely to affect our liquidity other than set forth below. 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 is subject to various regulatory capital requirements administered by the Office of the Comptroller of the Currency (the “OCC”), and the Federal Deposit Insurance Corporation. At June 30, 2022, Esquire Bank exceeded all applicable regulatory capital requirements, and was considered “well capitalized” under regulatory guidelines.
We manage our capital to comply with our internal planning targets and regulatory capital standards administered by the OCC. We review capital levels on a monthly basis.
39
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 June 30, 2022 |
| ||||
Total Risk-based Capital Ratio |
|
|
|
|
|
| |
Bank |
| 10.00 | % | 10.50 | % | 15.27 | % |
Tier 1 Risk-based Capital Ratio |
|
|
|
|
|
| |
Bank |
| 8.00 | % | 8.50 | % | 14.17 | % |
Common Equity Tier 1 Capital Ratio |
|
|
|
|
|
| |
Bank |
| 6.50 | % | 7.00 | % | 14.17 | % |
Tier 1 Leverage Ratio |
|
|
|
|
|
| |
Bank |
| 5.00 | % | 4.00 | % | 10.53 | % |
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.
Effects of Inflation. The impact of inflation, as it affects banks, differs substantially from the impact on non-financial institutions. Banks have assets which are primarily monetary in nature and which tend to move with inflation. This is especially true for banks with a high percentage of rate sensitive interest-earning assets and interest-bearing liabilities. A bank can further reduce the impact of inflation with proper management of its rate sensitivity gap. This gap represents the difference between interest rate sensitive assets and interest rate sensitive liabilities. The Company attempts to structure its assets and liabilities and manages its gap to protect against substantial changes in interest rate scenarios, in order to minimize the potential effects of inflation.
Item 3.Quantitative and Qualitative Disclosures About Market Risk
The information required by this item is included in Item 2 of this quarterly report under “Management of Market Risk.”
Item 4.Controls and Procedures
An evaluation was performed under the supervision and with the participation of the Company’s management, including the Principal Executive Officer and the Principal Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) promulgated under the Securities and Exchange Act of 1934, as amended) as of June 30, 2022. Based on that evaluation, the Company’s management, including the Principal Executive Officer and the Principal Financial Officer, concluded that the Registrant’s disclosure controls and procedures were effective.
40
During the quarter ended June 30, 2022, there have been no changes in the Company’s internal controls over financial reporting that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
41
PART II – OTHER INFORMATION
Item 1. Legal Proceedings
Periodically, we are involved in claims and lawsuits, such as claims to enforce liens, condemnation proceedings on properties in which we hold security interests, claims involving the making and servicing of real property loans and other issues incident to our business. At June 30, 2022, we are not a party to any pending legal proceedings that we believe would have a material adverse effect on our financial condition, results of operations or cash flows.
Item 1A. Risk Factors
There have been no material changes to our risk factors as disclosed in the Company’s Annual Report on Form 10-K.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
The following table presents information with respect to purchases we made of our common stock during the quarter ended June 30, 2022.
Period | Total number of shares purchased | Average price paid per share | Total number of shares purchased as part of publicly announced plans or programs | Maximum number of shares that may yet be purchased under the plans or programs (1) | |||||
April 1, 2022 through April 30, 2022 | — | $ | — | — | 265,694 | ||||
May 1, 2022 through May 31, 2022 | — | — | — | 265,694 | |||||
June 1, 2022 through June 30, 2022 | — | — | — | 265,694 |
| (1) | On January 9, 2019, the Company announced a share repurchase program, which authorized the purchase of up to 300,000 shares of common stock. There is no expiration date for the stock repurchase program. |
Item 3. Defaults Upon Senior Securities
None.
Item 4. Mine Safety Disclosures
Not applicable.
Item 5. Other Information
None.
42
Item 6. Exhibits
Exhibit |
| |
Number |
| Description |
3.1 | Articles of Incorporation of Esquire Financial Holdings, Inc. (1) | |
3.2 | Amended and Restated Bylaws of Esquire Financial Holdings, Inc. (2) | |
31.1 | ||
31.2 | ||
32 | ||
101.0 | The following materials for the quarter ended June 30, 2022, formatted in XBRL (Extensible Business Reporting Language): (i) Balance Sheets, (ii) Statements of Income, (iii) Statements of Comprehensive Income, (iv) Statements of Cash Flows, and (v) Notes to Financial Statements. | |
101.INS | XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document. | |
101.SCH | XBRL Taxonomy Extension Schema Document | |
101.CAL | XBRL Taxonomy Calculation Linkbase Document | |
101.DEF | XBRL Taxonomy Extension Definition Linkbase Document | |
101.LAB | XBRL Taxonomy Label Linkbase Document | |
101.PRE | XBRL Taxonomy Presentation Linkbase Document | |
104 | Cover Page Interactive Data File - the cover page interactive data file does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document. |
| (1) | Incorporated by reference to Exhibit 3.1 in the Registration Statement on Form S-1 (File No. 333-218372) originally filed by the Company under the Securities Act of 1933 with the Commission on May 31, 2017, and all amendments or reports filed thereto. |
| (2) | Incorporated by reference to Exhibit 3.3 in the Registration Statement on Form S-1/A (File No. 333-218372) originally filed by the Company under the Securities Act of 1933 with the Commission on June 22, 2017, and all amendments or reports filed thereto. |
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| ESQUIRE FINANCIAL HOLDINGS, INC. |
|
|
Date: August 12, 2022 | /s/ Andrew C. Sagliocca |
| Andrew C. Sagliocca |
| President and Chief Executive Officer |
|
|
Date: August 12, 2022 | /s/ Michael Lacapria |
| Michael Lacapria |
| Senior Vice President and Chief Financial Officer |
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