ESQUIRE FINANCIAL HOLDINGS, INC. General
Management's discussion and analysis of financial condition atJune 30, 2021 andDecember 31, 2020 and results of operations for the three and six months endedJune 30, 2021 and 2020 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, 2020 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;
? 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;
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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
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 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;
? 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 payment processing income as a result of reduced demand,
competition and changes in laws or government regulations or policies affecting
? financial institutions, 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;
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? 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.
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 remain substantially reopened, and higher levels of unemployment continue for an extended period of time, loan delinquencies, problem assets, and foreclosures may increase; collateral for loans, especially real estate, may decline in value; our allowance for loan losses may increase if borrowers experience financial difficulties; the net worth and liquidity of loan guarantors may decline, impairing their ability to honor commitments to us; and our cyber security risks are increased as the result of an increase in the number of employees working remotely. 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, 2020 , 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. 27 Table of Contents
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 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.
COVID-19 Pandemic Programs
We are participating in the Paycheck Protection Program administered by the SBA. 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 ofJune 30, 2021 , we have cumulatively funded PPP loans totaling$45.5 million , and have been remitted forgiveness principal payments from the SBA of$21.9 million , resulting in a net PPP loan balance of$23.6 million . All of our calendar year 2020 PPP loan originations have been fully repaid by the SBA. 28
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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 ofJune 30, 2021 , there were no participants in our payment deferral program.
Comparison of Financial Condition at
Assets. Our total assets were$1.1 billion atJune 30, 2021 , an increase of$121.4 million , or 13.0%, from$936.7 million atDecember 31, 2020 , primarily due to increases in cash and cash equivalents of$80.6 million , or 123.6%, loans of$35.0 million , or 5.2%, and securities available-for-sale of$8.6 million , or 7.3%.
Loans. The following table provides information regarding the composition of our loan portfolio at the dates indicated:
At June 30, At December 31,
2021 2020
Amount Percent Amount Percent
(In thousands)
Real estate:
1 - 4 family $ 44,423 6.3 % $ 48,433 7.2 %
Multifamily 201,171 28.4 169,817 25.3
Commercial real estate 53,771 7.6 54,717 8.1
Construction - - - -
Total real estate 299,365 42.3 272,967 40.6
Commercial 373,887 52.8 358,410 53.3
Consumer 35,213 4.9 41,362 6.1
Total Loans $ 708,465 100.0 % $ 672,739 100.0 %
Deferred loan fees and unearned
premiums, net (1,088) (318)
Allowance for loan losses (14,017) (11,402)
Loans, net $ 693,360 $ 661,019
At June 30, 2021 , loans were $707.4 million , or 77.3% of total deposits,
compared to $672.4 million , or 83.6% of total deposits, at December 31, 2020 .
The growth in loans was primarily driven by increases in multifamily and
commercial loans. Multifamily loans increased $31.4 million , or 18.5%, to
$201.2 million at June 30, 2021 from $169.8 million at December 31, 2020 .
Commercial loans increased $15.5 million , or 4.3%, to $373.9 million at June 30,
2021 from $358.4 million at December 31, 2020 .
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The following table sets forth the composition of our Litigation-Related loan portfolio by type of loan at the dates indicated:
June 30, 2021 December 31, 2020
Amount Percent Amount Percent
(Dollars in thousands)
Litigation-Related Loans
Commercial Litigation-Related:
Working capital lines of credit $ 183,183 51.8 % $ 202,021
61.4 %
Case cost lines of credit 100,594 28.4 87,104 26.4
Term loans 41,167 11.7 10,527 3.2Total Commercial Litigation-Related 324,944 91.9 299,652
91.0
Consumer Litigation-Related: Post-settlement consumer loans 28,558 8.1 29,342
8.9
Structured settlement loans 166 0.0 236
0.1
Total Consumer Litigation-Related 28,724 8.1 29,578
9.0
Total Litigation-Related Loans
100.0 %
At June 30, 2021 , our Litigation-Related loans, which include commercial loans
to law firms and consumer lending to plaintiffs/claimants and attorneys, totaled
$353.7 million , or 49.9% of our total loan portfolio, compared to $329.2 million
at December 31, 2020 . In addition, we had $18.6 million in PPP loans as of June
30, 2021 to attorney customers which are excluded from the table above. We
remain focused on prudently growing our Litigation-Related loan portfolio.
Securities. Securities available-for-sale increased $8.6 million , or 7.3%, to
$126.3 million at June 30, 2021 from $117.7 million at December 31, 2020 , driven
by purchases of $43.8 million , offset by paydowns of $33.2 million , unrealized
losses of $1.5 million through other comprehensive income, and net amortization
of $458 thousand .
Funding. Total deposits increased $110.6 million , or 13.8%, to $914.7 million at
June 30, 2021 from $804.1 million at December 31, 2020 . 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 $903.4
million at June 30, 2021 , or 98.8% of total deposits at that date, compared to
$792.9 million or 98.6% of total deposits at December 31, 2020 .
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 $546.9 million at June 30, 2021
which is a $166.6 million , or 43.8%, increase from the December 31, 2020 balance
of $380.3 million .
At June 30, 2021 , we had the ability to borrow a total of $116.9 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 $28.9 million . At
June 30, 2021 , 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, 2021 .
Equity. Total stockholders' equity increased
Asset Quality. Nonperforming assets, totaling$2.3 million , consisted of several nonaccrual consumer loans as ofJune 30, 2021 . AtJune 30, 2021 , nonperforming assets as a percentage of total loans and total assets were 0.32% and 0.21% respectively, and our coverage ratio was 617%. As ofJune 30, 2021 , the allowance for loan losses was$14.0 million , or 1.98% of total loans, as compared to$11.4 million , or 1.70% of total loans atDecember 31, 2020 . The increase in the allowance as a percentage of loans was driven by a prudent increase in the general reserve attributable to growth in our loan portfolio and the inherent credit risk associated with the NFL consumer post settlement portfolio. AtJune 30, 2021 , special mention and substandard loans totaled$28.8 million and$9.4 million , respectively. 30
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As previously disclosed, we believe the revisions to various claims
administration protocols surrounding potential claims of fraud and the ongoing
effects of the pandemic has extended 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, as well as claims process recalibration to address race
norming allegations 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 June 30, 2021 , NFL consumer loan exposure totaled $24.6 million with a
weighted average life of less than one year. The Company increased its general
allowance allocation to consumer loans to $6.1 million , or 17.4%, as of June 30,
2021 , as compared to $2.0 million , or 4.7%, of the consumer portfolio as of June
30, 2020 .
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,
2021 2020
(Dollars in thousands)
Average Average Average Average
Balance Interest Yield/Cost Balance Interest Yield/Cost
INTEREST EARNING ASSETS
Loans $ 700,349 $ 10,120 5.80 % $ 593,964 $ 8,678 5.88 %
Securities, includes restricted
stock 134,828 538 1.60 % 131,873 752 2.29 %
Securities purchased under
agreements to resell 51,142 160 1.25 % - - - %Interest earning cash and other 65,947 42 0.26 %
99,942 36 0.14 %
Total interest earning assets 952,266 10,860 4.57 % 825,779 9,466 4.61 %
NONINTEREST EARNING ASSETS 31,519 26,452
TOTAL AVERAGE ASSETS $ 983,785 $ 852,231
INTEREST BEARING LIABILITIES
Savings, NOW, Money Market
deposits $ 416,389 $ 173 0.17 % $ 415,659 $ 197 0.19 %
Time deposits 10,980 19 0.69 % 19,570 96 1.97 %Total interest bearing deposits 427,369 192 0.18 %
435,229 293 0.27 % Borrowings 104 1 3.86 % 141 1 2.84 % Total interest bearing liabilities 427,473 193 0.18 % 435,370 294 0.27 % NONINTEREST BEARING LIABILITIES Demand deposits 414,216 291,020 Other liabilities 10,826 9,683 Total noninterest bearing liabilities 425,042 300,703 Stockholders' equity 131,270 116,158 TOTAL AVG. LIABILITIES AND EQUITY$ 983,785 $ 852,231 Net interest income$ 10,667 $ 9,172 Net interest spread 4.39 % 4.34 % Net interest margin 4.49 % 4.47 % 31 Table of Contents For the Six Months Ended June 30, 2021 2020 (Dollars in thousands) Average Average Average Average Balance Interest Yield/Cost Balance Interest Yield/Cost INTEREST EARNING ASSETS Loans$ 689,003 $ 19,699 5.77 %$ 576,651 $ 17,119 5.97 % Securities, includes restricted stock 127,370 1,005 1.59 % 137,985 1,638 2.39 % Securities purchased under agreements to resell 51,293 320 1.26 % - - - %
Interest earning cash and other 61,640 83 0.27 %
90,192 283 0.63 %
Total interest earning assets 929,306 21,107 4.58 % 804,828 19,040 4.76 %
NONINTEREST EARNING ASSETS 31,182 30,590
TOTAL AVERAGE ASSETS $ 960,488 $ 835,418
INTEREST BEARING LIABILITIES
Savings, NOW, Money Market
deposits $ 409,620 $ 347 0.17 % $ 424,242 $ 494 0.23 %
Time deposits 11,084 39 0.71 % 19,633 192 1.97 %Total interest bearing deposits 420,704 386 0.19 %
443,875 686 0.31 % Borrowings 77 2 5.24 % 116 3 5.20 % Total interest bearing liabilities 420,781 388 0.19 % 443,991 689 0.31 % NONINTEREST BEARING LIABILITIES Demand deposits 400,597 267,705 Other liabilities 9,807 8,995 Total noninterest bearing liabilities 410,404 276,700 Stockholders' equity 129,303 114,727 TOTAL AVG. LIABILITIES AND EQUITY$ 960,488 $ 835,418 Net interest income$ 20,719 $ 18,351 Net interest spread 4.39 % 4.45 % Net interest margin 4.50 % 4.59 % 32 Table of Contents 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, 2021 vs. 2020 2021 vs. 2020 Increase Total Increase Total (Decrease) due to Increase (Decrease) due to Increase Volume Rate (Decrease) Volume Rate (Decrease) (Dollars in thousands) Interest earned on: Loans$ 1,561 $ (119) $
1,442
17 (231) (214) (119) (514) (633)
Securities purchased under agreements
to resell 160 - 160 320 - 320
Interest earning cash and other (15) 21
6 (71) (129) (200)
Total interest income 1,723 (329) 1,394 3,319 (1,252) 2,067
Interest paid on:
Savings, NOW, Money Markets - (24) (24) (17) (130) (147)
Time deposits (31) (46) (77) (62) (91) (153)
Total deposits (31) (70) (101) (79) (221) (300)
Borrowings - - - (1) - (1)
Total interest expense (31) (70) (101) (80) (221) (301)Change in net interest income$ 1,754 $ (259) $
1,495 $ 3,399 $ (1,031) $ 2,368 Comparison of Operating Results for the Three Months Ended
General. Net income increased
Net Interest Income. Net interest income increased$1.5 million , or 16.3%, to$10.7 million for the three months endedJune 30, 2021 from$9.2 million for the three months endedJune 30, 2020 , due to a$1.4 million increase in interest income and a$101 thousand decrease in interest expense.
Our net interest margin increased 2 basis points to 4.49% for the three months
ended
Interest Income. Interest income increased$1.4 million , or 14.7%, to$10.9 million for the three months endedJune 30, 2021 from$9.5 million for the three months endedJune 30, 2020 and was attributable to an increase in loan, reverse repurchase interest income, and interest earning cash and other, offset by a decrease in interest income on securities. Loan interest income increased$1.4 million , or 16.6%, to$10.1 million for the three months endedJune 30, 2021 from$8.7 million for the three months endedJune 30, 2020 . This increase was attributable to a$106.4 million , or 17.9%, increase in the average loan balance primarily from our litigation-related and multifamily portfolios offset by an 8 basis point decrease in loan yields. The decrease in loan yields is due to the historically low interest rate environment caused by the pandemic and its effects on the overall economy. The impact of the decline in loan yields on interest 33
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income was partially offset by a 9 basis point decrease in rates on interest bearing deposits as part of the Company's overall asset/liability management strategy. Securities interest income decreased$214 thousand , or 28.5%, to$538 thousand for the three months endedJune 30, 2021 from$752 thousand for the three months endedJune 30, 2020 . This decrease was attributable to a 69 basis point decrease in yields, driven by accelerated prepayments due to the current interest rate environment. Securities purchased under agreements to resell income was$160 thousand for the three months endedJune 30, 2021 . We invested excess deposit funds in reverse repurchase agreements in the fourth quarter of 2020. Interest earning cash and other interest income increased$6 thousand , or 16.7%, to$42 thousand for the three months endedJune 30, 2021 from$36 thousand for the three months endedJune 30, 2020 . Interest Expense. Interest expense decreased$101 thousand , or 34.4%, to$193 thousand for the three months endedJune 30, 2021 from$294 thousand for the three months endedJune 30, 2020 , primarily attributable to rate reductions on deposits. The blended interest rate we paid on interest bearing deposits decreased 9 basis points to 0.18% for the three months endedJune 30, 2021 from 0.27% for the three months endedJune 30, 2020 . Our average balance of interest bearing deposits decreased$7.9 million , or 1.8%, to$427.4 million for the three months endedJune 30, 2021 from$435.2 million for the three months endedJune 30, 2020 attributable primarily to certificate of deposit maturities. Provision for Loan Losses. Our provision for loan losses was$850 thousand for the three months endedJune 30, 2021 compared to$1.9 million for the three months endedJune 30, 2020 . The second quarter 2021 provision for loan losses was driven by a prudent increase in the general reserve attributable to growth in our loan portfolio and the inherent credit risk associated with the NFL consumer post settlement portfolio. As previously disclosed, we also believe the$24.6 million legacy NFL portfolio's duration has extended as a result of revisions to various claims administration protocols surrounding potential claims of fraud, the ongoing effects of the pandemic coupled with revised qualifying physician requirements, and claims process recalibration to address race norming allegations. Noninterest Income. Noninterest income information is as follows: For the Three Months Ended June 30, Change 2021 2020 Amount Percent (Dollars in thousands) Payment processing fees Payment processing income$ 5,151 $ 2,689 $ 2,462 91.6 % ACH income 200 161 39 24.2 Customer related fees and service charges Administrative service income 10 13 (3) (23.1) Other 106 92 14 15.2 Total noninterest income$ 5,467 $ 2,955 $ 2,512 85.0 % Payment processing income increased due to the continued expansion of our sales channels through ISOs, the increased number of merchants, payment processing volume increases and fee allocation arrangements, as well as the reopening of the economy as the pandemic restrictions continued to ease nationally. Quarterly volumes increased$3.1 billion , or 98.8%, to$6.2 billion , as compared to the second quarter of 2020. 34 Table of Contents
Noninterest Expense. Noninterest expense information is as follows:
For the Three Months Ended
June 30, Change
2021 2020 Amount Percent
(Dollars in thousands)
Noninterest expenseEmployee compensation and benefits$ 5,669 $ 4,099 $ 1,570 38.3 % Occupancy and equipment 709 574 135 23.5 Professional and consulting services 804 690 114 16.5 FDIC and regulatory assessments 111 94
17 18.1
Advertising and marketing 315 42 273 650.0
Travel and business relations 69 12 57 475.0
Data processing 907 771 136 17.6
Other operating expenses 533 499 34 6.8
Total noninterest expense $ 9,117 $ 6,781 $ 2,336 34.4 %
Employee compensation and benefits costs increased due to increases in staffing
of 26% to support our investment in digital platforms and related
sales/marketing divisions, and the impact of salary and stock-based compensation
increases. Advertising, marketing, travel and business relations costs increased
as we continued our digital marketing efforts and thought leadership in our
national verticals. We have also re-engaged in our traditional high touch
marketing and sales efforts at conferences and other in-person industry forums.
Data processing costs increased due to increased processing volume, primarily
driven by our core banking platform, and additional costs related to our
technology implementations. 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. Professional and consulting expenses increased due to the
continued investment made to expand our business and support infrastructure.
Income Tax Expense. We recorded an income tax expense of $1.7 million for the
three months ended June 30, 2021 , reflecting an effective tax rate of 27.0%,
compared to $913 thousand , or 26.5%, for the three months ended June 30, 2020 .
Comparison of Operating Results for the Six Months Ended
General. Net income increased$3.5 million , or 69.1%, to$8.7 million for the six months endedJune 30, 2021 from$5.1 million for the six months endedJune 30, 2020 . The increase resulted from a$4.9 million increase in noninterest income and a$2.4 million increase in net interest income, partially offset by an increase in noninterest expense of$3.7 million . Net Interest Income. Net interest income increased$2.4 million , or 12.9%, to$20.7 million for the six months endedJune 30, 2021 from$18.4 million for the six months endedJune 30, 2020 , due to a$2.1 million increase in interest income and a$301 thousand decrease in interest expense. Our net interest margin decreased 9 basis points to 4.50% for the six months endedJune 30, 2021 from 4.59% for the six months endedJune 30, 2020 . The decrease in net interest margin was due to a 18 basis point decrease in the yields on interest earning assets, primarily due to the historically low interest rate environment and its negative effects on loans, securities, interest earning cash and other short-term investment yields. This decrease was offset by a 12 basis point decrease in our cost of funds on average interest bearing liabilities. Interest Income. Interest income increased$2.1 million , or 10.9%, to$21.1 million for the six months endedJune 30, 2021 from$19.0 million for the six months endedJune 30, 2020 and was attributable to an increase in loan and reverse repurchase interest income offset by a decrease in interest income on securities and interest earning cash and other. 35
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Loan interest income increased$2.6 million , or 15.1%, to$19.7 million for the six months endedJune 30, 2021 from$17.1 million for the six months endedJune 30, 2020 . This increase was attributable to a$112.4 million , or 19.5%, increase in the average loan balance primarily from our litigation-related and multifamily portfolios offset by a 20 basis point decrease in loan yields. The decrease in loan yields is due to the historically low interest rate environment caused by the pandemic and its effects on the overall economy. The impact of the decline in loan yields on interest income was partially offset by a 12 basis point decrease in rates on interest bearing deposits as part of the Company's overall asset/liability management strategy. Securities interest income decreased$633 thousand , or 38.6%, to$1.0 million for the six months endedJune 30, 2021 from$1.6 million for the six months endedJune 30, 2020 . This decrease was attributable to a$10.6 million , or 7.7%, decrease in average securities balances and an 80 basis point decrease in yields, both driven by accelerated prepayments due to the current interest rate environment.
Securities purchased under agreements to resell income was
Interest earning cash and other interest income decreased$200 thousand , or 70.7%, to$83 thousand for the six months endedJune 30, 2021 from$283 thousand for the six months endedJune 30, 2020 . This decrease was attributable to a 36 basis point decrease in yields driven by the current interest rate environment and a$28.6 million , or 31.7%, decrease in average cash balance primarily due to deployment of excess funds into higher yielding reverse repurchase agreements. Interest Expense. Interest expense decreased$301 thousand , or 43.7%, to$388 thousand for the six months endedJune 30, 2021 from$689 thousand for the six months endedJune 30, 2020 , primarily attributable to rate reductions on deposits. The blended interest rate we paid on interest bearing deposits decreased 12 basis points to 0.19% for the six months endedJune 30, 2021 from 0.31% for the six months endedJune 30, 2020 . Our average balance of interest bearing deposits decreased$23.2 million , or 5.2%, to$420.7 million for the six months endedJune 30, 2021 from$443.9 million for the six months endedJune 30, 2020 attributable primarily to decreases in average savings, NOW, money market, and time deposits. Provision for Loan Losses. Our provision for loan losses was$2.7 million for the six months endedJune 30, 2021 compared to$3.8 million for the six months endedJune 30, 2020 . The provision for loan losses was driven by a prudent increase in the general reserve attributable to growth in our loan portfolio and the inherent credit risk associated with the NFL consumer post settlement portfolio. As previously disclosed, we also believe the$24.6 million legacy NFL portfolio's duration has extended as a result of revisions to various claims administration protocols surrounding potential claims of fraud, the ongoing effects of the pandemic coupled with revised qualifying physician requirements, and claims process recalibration to address race norming allegations. Noninterest Income. Noninterest income information is as follows: For the Six Months Ended June 30, Change 2021 2020 Amount Percent (Dollars in thousands) Payment processing fees Payment processing income$ 10,318 $ 5,472 $ 4,846 88.6 % ACH income 403 334 69 20.7 Customer related fees and service charges Administrative service income 28 99 (71) (71.7) Other 183 170 13 7.6 Total noninterest income$ 10,932 $ 6,075 $ 4,857 80.0 % Payment processing income increased due to the continued expansion of our sales channels through ISOs, the increased number of merchants, payment processing volume increases and fee allocation arrangements as well as the 36
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reopening of the economy. Quarterly volumes increased$5.0 billion , or 80.2%, to$11.2 billion , as compared to the six months ended 2020. Customer related fees and service charges have decreased due to decreases in administrative service income on off-balance sheet funds, which is impacted by the volume of off-balance sheet funds, the duration of these funds and short-term interest rates. Off-balance sheet sweep funds totaled$546.9 million atJune 30, 2021 , demonstrating the continued strength of our branchless core business model.
Noninterest Expense. Noninterest expense information is as follows:
For the Six Months Ended
June 30, Change
2021 2020 Amount Percent
(Dollars in thousands)
Noninterest expenseEmployee compensation and benefits$ 10,666 $ 8,076 $ 2,590 32.1 % Occupancy and equipment 1,408 1,119 289 25.8 Professional and consulting services 1,579 1,537 42 2.7 FDIC and regulatory assessments 208 185
23 12.4 Advertising and marketing 647 118 529 448.3 Travel and business relations 108 140 (32) (22.9) Data processing 1,757 1,500 257 17.1 Other operating expenses 932 971 (39) (4.0) Total noninterest expense$ 17,305 $ 13,646 $ 3,659 26.8 %
Employee compensation and benefits costs increased due to a 26% increase in staffing to support our investment in digital platforms and related sales/marketing divisions, and the impact of salary and stock-based compensation increases. Advertising and marketing costs increased as we continued our new digital marketing efforts and thought leadership in our national verticals. We also re-engaged in our traditional high touch marketing and sales efforts at conferences and other in-person industry forums. Occupancy and equipment costs increased primarily due to amortization of our investments in internally developed software to support our new digital platform, precautionary office cleaning costs related to COVID-19 and additional office space to support our continued 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. Income Tax Expense. We recorded an income tax expense of$3.0 million for the six months endedJune 30, 2021 , reflecting an effective tax rate of 25.8%, compared to$1.9 million , or 26.5%, for the six months endedJune 30, 2020 . The decrease in tax rate was due to certain discrete tax benefits related to shared based compensation. 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
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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 ofEsquire 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, 2021 Estimated Changes in 12-Months Interest Rates Net Interest (Basis Points) Income Change (Dollars in thousands) 400$ 65,437 18,939 300 60,373 13,875 200 55,345 8,847 100 50,841 4,343 0 46,498 - -100 44,265 (2,233) -200 42,967 (3,531) 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. 38
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The following table presents the estimated changes in EVE of
At June 30,
2021
Changes in Economic
Interest Rates Value of
(Basis Points) Equity Change
(Dollars in thousands)
400 $ 207,898 61,489
300 194,227 47,818
200 179,447 33,038
100 163,914 17,505
0 146,409 -
-100 119,718 (26,691)
-200 106,641 (39,768)
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. AtJune 30, 2021 , cash and cash equivalents totaled$145.7 million . AtJune 30, 2021 , through pledging of our securities and certain loans, we had the ability to borrow a total of$116.9 million from theFederal Home Loan Bank of New York and had an available line of credit with theFederal Reserve Bank of New York discount window of$28.9 million . AtJune 30, 2021 , 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 atJune 30, 2021 . 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 theFederal 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 theOffice of the Comptroller of the Currency (the "OCC"), and theFederal Deposit Insurance Corporation . AtJune 30, 2021 ,Esquire Bank exceeded all applicable regulatory capital requirements, and was considered "well capitalized" under regulatory guidelines. 39
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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.
The following table presents our capital ratios as of the indicated dates forEsquire Bank . For Capital Adequacy Purposes Minimum Capital with Actual "Well Capitalized" Conservation Buffer At June 30, 2021 Total Risk-based Capital Ratio Bank 10.00 % 10.50 % 17.86 % Tier 1 Risk-based Capital Ratio Bank 8.00 % 8.50 % 16.60 % Common Equity Tier 1 Capital Ratio Bank 6.50 % 7.00 % 16.60 % Tier 1 Leverage Ratio Bank 5.00 % 4.00 % 12.29 % EffectiveJanuary 1, 2020 , the federal banking agencies adopted a rule to establish for institutions with assets of less than$10 billion that meet other specified criteria a "community bank leverage ratio" (the ratio of a bank's tangible equity capital to average total consolidated assets) of 9% that such institutions may elect to utilize in lieu of the generally applicable leverage and risk-based capital requirements noted above. A "qualifying community bank" with capital exceeding 9% will be considered compliant with all applicable regulatory capital and leverage requirements, including the requirement to be "well capitalized". The CARES Act and implementing rules temporarily reduced the community bank leverage ratio to 8%, to be gradually increased back to 9% by 2022. The CARES Act also provides that, during the same time period, if a qualifying community banking organization falls no more than 1% below the community bank leverage ratio, it will have a two-quarter grace period to satisfy the community bank leverage ratio. For the current period,Esquire Bank has elected to continue to utilize the generally applicable leverage and risk based requirements and not apply the community bank leverage ratio.
Off-Balance Sheet Arrangements
We are a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of our customers. These financial instruments include commitments to extend credit, which involve elements of credit and interest rate risk in excess of the amount recognized in the Consolidated Statements of Financial Condition. Our exposure to credit loss is represented by the contractual amount of the instruments. We use the same credit policies in making commitments as we do for on-balance sheet instruments.
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