Esquire Financial Holdings, Inc. — 2020 Form 10-K
Reporting period: Fiscal year ended December 31, 2020; comparisons are with the year ended December 31, 2019. This is an annual filing, not a standalone fourth-quarter report. Esquire is a commercial bank focused on legal-industry and small-business customers, with nationwide attorney lending and merchant processing, alongside traditional banking in the New York metropolitan area.
Financial results and condition
| Metric | 2020 | 2019 |
|---|---|---|
| Total revenue (net interest income plus noninterest income) | $52.1 million | $45.9 million |
| Net interest income | $37.4 million | $34.1 million |
| Net income | $12.6 million | $14.1 million |
| Diluted earnings per share | $1.65 | $1.82 |
| Net interest margin | 4.47% | 4.86% |
| Noninterest income | $14.6 million | $11.8 million |
| Provision for loan losses | $6.3 million | $1.9 million |
| Noninterest expense | $28.7 million | $24.9 million |
- At year-end, assets were $936.7 million, gross loans approximately $672.7 million, deposits $804.1 million, and stockholders’ equity $126.1 million. Loans grew 19.0% and deposits 18.1% year over year.
- Merchant processing income rose 28.5% to approximately $14.1 million; the platform served about 54,000 merchants and processed $14.8 billion in annual card volume. Merchant processing represented 27.1% of revenue.
- Net cash provided by operating activities was $15.6 million; investing activities used $135.4 million and financing activities provided $123.2 million. Cash and cash equivalents ended the year at $65.2 million.
- Core deposits were $792.9 million, or 98.6% of deposits; the reported average cost of deposits was 0.16%. The loan-to-deposit ratio was 83.63%.
- Borrowings were not a significant funding source: $49,000 of secured borrowings were outstanding at year-end. Available facilities included $122.4 million from the FHLB, $18.7 million at the Federal Reserve discount window, and $67.5 million of lines with other financial institutions; none of these facilities had outstanding balances.
- The Bank reported total risk-based capital of 16.69%, Tier 1 risk-based capital of 15.44%, and a Tier 1 leverage ratio of 12.51%, and was classified as well capitalized.
Material changes and notable items
- Net income declined 10.8% despite revenue growth. Higher loan-loss provisioning and operating expenses outweighed growth in net interest income and merchant fees.
- Net interest margin fell 39 basis points as asset yields declined in the low-rate environment; lower deposit costs partly offset the pressure.
- The allowance for loan losses increased to $11.4 million, or 1.70% of loans, from $7.0 million, or 1.24%. Net charge-offs were $1.8 million, primarily related to consumer loans in the legacy NFL concussion-settlement program.
- Attorney-related loans totaled $329.2 million, 48.9% of gross loans. Commercial loans overall were 53.3% of the portfolio; real-estate loans were 40.6%. The filing identifies geographic concentration: 59.0% of loans were in New York and 46.5% in New York City.
- Year-end NFL consumer loan exposure was approximately $23.6 million; $2.3 million was nonaccrual, and the filing says 28% of remaining exposure was classified special mention or substandard. Delays in claim administration, qualifying-physician rules, pandemic disruptions, and possible fraud could extend repayment or increase losses.
- The Company had $29.2 million of loans in its COVID-19 payment-deferral program at year-end, down from $65.2 million at April 30. Management reported no deferral loans that had returned to payment and were past due or on nonaccrual at year-end.
- The Company held $21.9 million in PPP loans. It also reported a $51.7 million securities-purchased-under-agreements-to-resell position with one counterparty, scheduled to mature within 30 days.
Outlook, risks, and contingencies
Management describes continued growth in attorney lending, core deposits, and merchant services as strategic priorities and cited new digital and CRM capabilities launched in October 2020. The filing provides no numerical earnings, revenue, or growth guidance. Management said it was not aware of events reasonably likely to materially impair liquidity or capital resources at year-end.
- Key risks include COVID-19 effects on borrowers and collateral, low interest rates and margin sensitivity, loan concentrations in attorney-related lending and New York real estate, and execution of continued growth.
- Other significant exposures include the NFL settlement loan portfolio, merchant/ISO losses and chargebacks, dependence on third-party processors and service providers, cybersecurity and operational risks, and concentration among large depositors. The ten largest deposit clients represented 22.6% of deposits.
- Management reported no pending legal proceeding expected to have a material adverse effect. The audited financial statements received an unqualified opinion; management assessed disclosure controls and internal control over financial reporting as effective. The auditor did not provide an internal-control attestation.
- The Company does not expect to pay cash dividends for the foreseeable future. It repurchased 34,306 shares during 2020 under its authorized repurchase program.
Important facts for investors to verify
- Track performance and credit quality of the legacy NFL loans, including remaining exposure, claim payoffs, classifications, and charge-offs.
- Review subsequent loan-loss provisions, delinquencies, deferral-program outcomes, and adoption planning for CECL, scheduled for 2023.
- Assess whether attorney-related and New York-area loan concentrations are changing, and whether growth is accompanied by adequate underwriting and reserves.
- Monitor deposit concentration, uninsured balances, sweep-program funds, and the stability and cost of core deposits.
- Evaluate merchant-processing growth alongside chargebacks, reserves, ISO exposure, and reliance on third-party processors.
- Confirm the reported cash-flow and liquidity figures and the status of the $51.7 million resale agreement and available borrowing facilities in subsequent filings.