ESQUIRE FINANCIAL HOLDINGS, INC. General
Management's discussion and analysis of financial condition atSeptember 30, 2020 andDecember 31, 2019 and results of operations for the three and nine months endedSeptember 30, 2020 and 2019 is intended to assist in understanding the financial condition and results of operations ofEsquire 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 ofDecember 31, 2019 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. Further, given its ongoing and dynamic nature, it is difficult to predict the full impact of the COVID-19 outbreak on our business. The extent of such impact will depend on future developments, which are highly uncertain, including when the coronavirus can be controlled and abated and when and how the economy may be reopened. As the result of the COVID-19 pandemic and the related adverse local and national economic consequences, we could be subject to any of the following risks, any of which could have a material, adverse effect on our business, financial condition, liquidity, and results of operations: the demand for our products and services may decline, making it difficult to grow assets and income; if the economy is unable to substantially reopen, and high levels of unemployment continue for an extended period of time, loan delinquencies, problem assets, and foreclosures may increase, resulting in increased charges and reduced income; collateral for loans, especially real estate, may decline in value, which could cause loan losses to increase; our allowance for loan losses may increase if borrowers experience financial difficulties, which will adversely affect our net income; the net worth and liquidity of loan guarantors may decline, impairing their ability to honor commitments to us; as the result of the decline in theFederal Reserve Board's target federal funds rate to near 0%, the yield on our assets may decline to a greater extent than the decline in our cost of interest-bearing liabilities, reducing our net interest margin and spread and reducing net income; our cyber security risks are increased as the result of an increase in the number of employees working remotely; and we face litigation, regulatory enforcement and reputation risk as a result of our participation in the PPP and the risk that the SBA may not fund some or all PPP loan guaranties. 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.
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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;
? 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;
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
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 with whom we do
business;
? our ability to effectively manage risks related to our merchant services
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;
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? changes in consumer spending, borrowing and savings habits;
? declines in the yield on our assets resulting from the current low interest
rate environment;
declines in our merchant 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 Wall Street Reform and
? Consumer Protection Act and the Jumpstart Our Business Startups Act (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
and
? loan delinquencies and changes in the underlying cash flows of our borrowers;
? 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 or terrorism;
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 endedDecember 31, 2019 , 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 26
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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. 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 theFinancial Accounting Standards Board ("FASB") or theSEC 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.
Overview
We are a financial holding company headquartered inJericho, 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 theNew York metropolitan market. We offer tailored financial and payment processing solutions to the litigation community and their clients as well as dynamic and flexible merchant 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 merchant processing income and customer related fees and charges. Noninterest expense currently consists primarily of employee compensation and benefits and professional and consulting services. Our results of operations also may be affected significantly by general and local economic and competitive conditions, changes in market interest rates, governmental policies, the litigation market and actions of regulatory authorities.
Recent Events - COVID-19 Pandemic
We are participating in the Paycheck Protection Program ("PPP") administered by
the U.S. Small Business Association . 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 other qualifying
business costs. As of
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From a lending and credit risk perspective, we have taken actions to identify
and assess our COVID-19 related credit exposures by borrower and loan category.
No specific COVID-19 related credit impairment was identified within our loan
and securities portfolios.
We implemented a customer payment deferral program (principal and interest) to
assist business borrowers and certain consumers that may be experiencing
financial hardship due to COVID-19 related challenges. These loans will continue
to accrue interest during the deferral period unless otherwise classified as
nonaccrual. Consistent with the CARES Act and regulatory guidance, borrowers
that were otherwise current on loan payments that were granted COVID-19 related
financial hardship payment deferrals will continue to be reported as current
loans throughout the agreed upon deferral period. There were no delinquent loans
upon adoption of our payment deferral program. The following table provides
information regarding payment deferral loans.
As of November 6, 2020
(Dollars in thousands)
Weighted Average Weighted Average
Number of Loan Debt Service Loan to
Borrowers Balance Coverage Value Ratio
1 - 4 family 1 $ 3,015 1.23x 68 %
Commercial 1 2,954 NA NA
Multifamily 1 3,751 1.19x 69Commercial real estate 2 1,759 1.34x
35
Construction - - NA NA
Consumer 8 27 NA NA
Total 13 $ 11,506
As of November 6, 2020 , a total of thirteen borrowers with aggregate loan
principal balances totaling $11.5 million , or approximately 1.8% of our total
loan portfolio, are participating in the payment deferral program. This is a
decrease of $78.6 million from the June 30, 2020 balance of $90.1 million . To
date, none of the borrowers that have participated in the payment deferral
program received loan modifications qualifying as a TDR nor have they been
placed on nonperforming status.
The current COVID-19 health crisis may extend the duration of our NFL post
settlement loan portfolio. Specifically, the current uncertainty related to our
borrowers' ("claimants") access to qualified testing, doctors, their attorneys
and other administrative support, has introduced incremental duration risk which
may further extend the settlement of claims and payoff of our NFL loans beyond
the contractual maturity. The Company ceased NFL loan originations in December
2017 . At September 30, 2020 , loan balances were $27.9 million with a weighted
average life of approximately 1.1 years. The Company has allocated an additional
portion of its allowance for loan losses for the quarter ended September 30,
2020 based on this additional duration risk associated with the COVID-19
pandemic.
From a merchant processing perspective, we have taken action to identify and
assess our COVID-19 related credit exposure, primarily defined as merchant
returns and chargebacks, by merchant industry type and category. These industry
types include, but are not limited to, restaurants, hospitality, travel and
entertainment. We have also assessed the level and adequacy of our ISO and
merchant reserves held on deposit at Esquire Bank . Currently, based on this
assessment, we have not identified any elevated credit risk in these affected
industry types and other categories and our return and chargeback ratios remain
relatively consistent with pre-COVID-19 levels.
The COVID-19 pandemic may continue to impact our financial results and demand
for our products and services during the final quarter of 2020 and potentially
beyond. The short and long-term implications of this healthcare and economic
crisis may continue to affect our revenues, earnings results, allowance for loan
losses, capital reserves, and liquidity in the future.
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Comparison of Financial Condition at
Assets. Our total assets were$880.9 million atSeptember 30, 2020 , an increase of$82.9 million , or 10.4%, from$798.0 million atDecember 31, 2019 , primarily due to increases in loans of$70.3 million , or 12.4%, cash and cash equivalents of$48.8 million , or 78.9%, offset by a decrease in securities available for sale of$36.0 million , or 24.6%. Loans. AtSeptember 30, 2020 , loans were$635.7 million , or 85.3% of total deposits, compared to$565.4 million , or 83.1% of total deposits, atDecember 31, 2019 . The growth in loans was primarily driven by increases in commercial loans. Commercial loans increased$63.0 million , or 24.4%, to$321.0 million atSeptember 30, 2020 from$258.0 million atDecember 31, 2019 .
The following table sets forth the composition of our Attorney-Related loan portfolio by type of loan at the dates indicated:
September 30, 2020 December 31, 2019
Amount Percent Amount Percent
(Dollars in thousands)
Attorney-Related Loans
Commercial Attorney-Related:Working capital lines of credit$ 170,097 58.4 % $
148,186 58.4 % Case cost lines of credit 79,880 27.4 59,057 23.2 Term loans 9,756 3.4 12,359 4.9 Post-settlement commercial and other commercial attorney-related loans - - - - Total Commercial Attorney-Related 259,733 89.2 219,602 86.5 Consumer Attorney-Related: Post-settlement consumer loans 31,098 10.7 33,463 13.2 Structured settlement loans 284 0.1 746 0.3 Total Consumer Attorney-Related 31,382 10.8
34,209 13.5 Total Attorney-Related Loans$ 291,115 100.0 %$ 253,811 100.0 %
AtSeptember 30, 2020 , our Attorney-Related loans, which include commercial loans to law firms and consumer lending to plaintiffs/claimants and attorneys, totaled$291.1 million , or 45.8% of our total loan portfolio, compared to$253.8 million atDecember 31, 2019 . In addition, we had$18.4 million in PPP loans as ofSeptember 30, 2020 to attorney customers which are excluded from the table above. We remain focused on prudently growing our Attorney-Related loan portfolio. Securities. Securities available for sale decreased$36.0 million , or 24.6%, to$110.4 million atSeptember 30, 2020 from$146.4 million atDecember 31, 2019 , driven by paydowns of$46.6 million and net amortization of$742 thousand , offset by purchases of$9.5 million and unrealized gains of$1.8 million . Funding. Total deposits increased$64.9 million , or 9.5%, to$745.5 million atSeptember 30, 2020 from$680.6 million atDecember 31, 2019 . We continue to focus on the acquisition and expansion of core deposit relationships, which we define as all deposits except for certificates of deposit. Core deposits totaled$741.2 million atSeptember 30, 2020 , or 99.4% of total deposits at that date, compared to$660.9 million or 97.1% of total deposits atDecember 31, 2019 . 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$393.2 million atSeptember 30, 2020 which is a$133.9 million , or 51.7%, increase from theDecember 31, 2019 balance of$259.3 million . AtSeptember 30, 2020 , we had the ability to borrow a total of$111.3 million from theFederal Home Loan Bank of New York . We also had an available line of credit with theFederal Reserve Bank of New York discount window of$20.6 million . AtSeptember 30, 2020 , we also had$67.5 million in aggregate unsecured lines of credit with 29 Table of Contents
unaffiliated correspondent banks. No amounts were outstanding on any of the
aforementioned lines of credit at
Equity. Total stockholders' equity increased
Asset Quality. Nonperforming assets, totaling$7.6 million , consisted of loans 90 days past due and still accruing totaling$5.8 million and several nonaccrual consumer loans totaling$1.8 million as ofSeptember 30, 2020 . Loans 90 days past due were comprised of one multifamily loan serviced by a third party that is past maturity with loan payments held byEsquire Bank . Subsequent toSeptember 30, 2020 , this loan has been extended and is current and performing. AtSeptember 30, 2020 , nonperforming assets as a percentage of total loans, assets and the allowance for loan losses to nonperforming assets was 1.20%, 0.86% and 152%, respectively, including loans 90 days past due and still accruing. As ofSeptember 30, 2020 , the allowance for loan losses was$11.6 million , or 1.82% of total loans, as compared to$7.0 million , or 1.24% of total loans atDecember 31, 2019 . The increase in the allowance as a percentage of loans was related to increases in economic and non-economic qualitative risk factors associated with the COVID-19 pandemic and its effects on the economy, as well as loan growth in the commercial attorney and commercial real estate loan categories. The ultimate impact of the crisis is unknown and highly uncertain at this time. 30 Table of Contents
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 the effect thereof was not material.
For the Three Months Ended September 30,
2020 2019
(Dollars in thousands)
Average Average Average Average
Balance Interest Yield/Cost Balance Interest Yield/Cost
INTEREST EARNING ASSETS
Loans $ 608,313 $ 8,936 5.84 % $ 528,328 $ 8,312 6.24 %
Securities, includes restricted stock 113,580 494 1.73 % 146,408 950 2.57 %
Interest earning cash and other 143,420 66 0.18 % 45,688 236 2.05 %
Total interest earning assets 865,313 9,496 4.37 % 720,424 9,498 5.23 %
NONINTEREST EARNING ASSETS 28,708 34,267 TOTAL AVERAGE ASSETS$ 894,021 $ 754,691 INTEREST BEARING LIABILITIES Savings, NOW, Money Markets$ 430,511 $ 203 0.19 %$ 381,533 $ 625 0.65 % Time deposits 17,751 85 1.90 % 19,902 125 2.49 % Total interest-bearing deposits 448,262 288 0.26 % 401,435 750 0.74 % Short-term borrowings 2 - - % 1 - - % Secured borrowings 85 1 4.68 % 88 1 6.22 %
Total interest-bearing liabilities 448,349 289 0.26 % 401,524 751 0.74 %
NONINTEREST BEARING LIABILITIES Demand deposits 315,761
240,502
Other liabilities 10,260 8,785 Total noninterest bearing liabilities 326,021
249,287
Stockholders' equity 119,651
103,880
TOTAL AVG. LIABILITIES AND EQUITY$ 894,021
$ 754,691 Net interest income$ 9,207 $ 8,747 Net interest spread 4.11 % 4.49 % Net interest margin 4.23 % 4.82 % 31 Table of Contents For the Nine Months Ended September 30, 2020 2019 (Dollars in thousands) Average Average Average Average Balance Interest Yield/Cost Balance Interest Yield/Cost INTEREST EARNING ASSETS Loans$ 587,282 $ 26,055 5.93 %$ 498,989 $ 23,524 6.30 % Securities, includes restricted stock 129,791 2,132 2.19 % 151,557 3,073 2.71 % Interest earning cash and other 108,229 348 0.43 % 41,326 706 2.28 % Total interest earning assets 825,302 28,535 4.62 % 691,872 27,303 5.28 % NONINTEREST EARNING ASSETS 29,793 30,281 TOTAL AVERAGE ASSETS$ 855,095 $ 722,153 INTEREST BEARING LIABILITIES Savings, NOW, Money Markets$ 426,347 $ 697 0.22 %$ 356,812 $ 1,665 0.62 % Time deposits 19,001 277 1.95 % 20,034 375 2.50 % Total interest bearing deposits 445,348 974 0.29 % 376,846 2,040 0.72 % Short-term borrowings 20 - - % 1 - - % Secured borrowings 85 4 6.29 % 88 4 6.08 % Total interest bearing liabilities 445,453 978 0.29 % 376,935 2,044 0.73 %
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