Esquire Financial Holdings, Inc. — Q2 2020 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2020; unaudited. The company is a bank holding company serving the legal and small-business communities nationally, alongside commercial and retail customers in the New York metropolitan area.
Financial performance and condition
Dollars are in millions except per-share amounts and ratios.
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Net interest income | $9.17 | $8.58 | $18.35 | $16.51 |
| Provision for loan losses | $1.90 | $0.40 | $3.80 | $0.83 |
| Noninterest income | $2.96 | $3.09 | $6.08 | $5.17 |
| Noninterest expense | $6.78 | $6.51 | $13.65 | $11.99 |
| Net income | $2.53 | $3.47 | $5.13 | $6.45 |
| Diluted EPS | $0.33 | $0.45 | $0.67 | $0.83 |
| Net interest margin | 4.47% | 4.89% | 4.59% | 4.92% |
- Balance sheet at June 30: Assets were $851.9 million, up 6.8% from year-end 2019. Loans were $593.7 million, up $28.3 million; deposits were $724.9 million, up $44.3 million. Cash and cash equivalents totaled $114.4 million. Stockholders’ equity was $118.2 million.
- Credit reserves and asset quality: The allowance for loan losses was $10.7 million, or 1.80% of loans, versus $7.0 million, or 1.24%, at December 31, 2019. Nonperforming loans were $1.3 million, compared with $1.5 million at year-end; nonperforming assets were 0.16% of assets. The filing reports no TDRs.
- Cash flow, six months: Operating activities provided $12.9 million; investing activities used $4.3 million; financing activities provided $44.0 million. Cash increased $52.6 million to $114.4 million.
- Debt and liquidity: Secured borrowings were only $0.085 million at June 30. The company reported no amounts drawn on its FHLB, Federal Reserve discount-window, or correspondent-bank credit lines. It reported $125.6 million of FHLB borrowing capacity, $22.4 million of Federal Reserve capacity, and $67.5 million of unsecured correspondent lines. Core deposits were $705.6 million, or 97.3% of deposits. The Bank was reported as well capitalized; actual ratios were 17.50% total risk-based capital, 16.25% Tier 1 risk-based, 16.25% common equity Tier 1, and 12.28% Tier 1 leverage.
Material changes versus comparable periods
- Q2 net income fell 27.0%; first-half net income fell 20.5%. The primary driver was the higher loan-loss provision reflecting COVID-19 uncertainty.
- Q2 net interest income increased 6.8%, as loan growth and lower deposit costs outweighed reduced asset yields. Net interest margin declined 42 basis points year over year to 4.47%.
- First-half merchant processing income rose 23.3% to $5.81 million, supporting a 17.5% increase in total noninterest income. Q2 merchant processing income was nearly flat year over year at $2.85 million; customer-related fees declined.
- First-half noninterest expense rose 13.8%, reflecting higher compensation, technology/data-processing, occupancy, and professional costs. Q2 expense increased 4.2% year over year.
- Loan growth was concentrated in commercial lending. Commercial loans rose $38.6 million from year-end; the balance included $21.9 million of PPP loans. Securities available-for-sale fell $23.8 million, primarily from paydowns, while cash rose $52.6 million.
Outlook, commentary, risks, and unusual items
- COVID-19 and outlook: Management said the pandemic’s full impact was unknown and expected uncertainty to continue through the rest of 2020. No specific earnings or revenue guidance is provided. The company warned of possible effects on demand, credit quality, collateral values, allowance needs, asset yields, liquidity, and results.
- Payment deferrals: The company offered principal-and-interest deferrals and, consistent with CARES Act and regulatory guidance, continued to report otherwise-current participating loans as current during the deferral period. Deferrals declined from 68 borrowers and $90.1 million at June 30 to 27 borrowers and $35.9 million as of July 20. Management said the second-quarter financial statements had no material or systematic COVID-19 impacts apart from the increased loan-loss provision.
- PPP and merchant processing: PPP lending totaled about $21.9 million at June 30, and management did not expect significant further portfolio growth. Management reported merchant processing volumes recovered from $866.4 million in April to $1.2 billion in June; it had not identified elevated COVID-related merchant return or chargeback risk. The filing identifies potential SBA funding, litigation, regulatory, and reputational risks relating to PPP participation.
- Credit risk: Management increased reserves for pandemic-related qualitative risks, including consumer post-settlement loans where restrictions could delay borrowers’ follow-up medical reviews. The company also cited concentrations tied to real estate and the legal/litigation market, as well as risks from prolonged economic weakness and borrower hardship.
- Other items: The company repurchased 34,306 shares for $0.567 million during the first half, including 6,600 shares in May. No material pending legal proceeding was reported. Management concluded disclosure controls were effective and reported no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether the higher allowance adequately reflects ongoing COVID-19 credit risks, particularly in commercial, real-estate, and consumer post-settlement exposures.
- How deferral borrowers perform after assistance ends, and whether delinquency, nonaccrual, or charge-off levels rise.
- Whether loan growth, deposit funding, and liquidity capacity remain resilient as pandemic conditions and interest rates evolve.
- Whether merchant processing volumes, chargebacks, and PPP guarantees perform as management expected.
- Whether continued pressure on asset yields and margin, together with operating-cost growth, affects future earnings; the filing provides no formal forecast.