Esquire Financial Holdings, Inc.
100 JERICHO QUADRANGLE, SUITE 100
JERICHO, NEW YORK 11753
Annual Report
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Esquire Financial Holdings, Inc.
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2018esq
CORPORATE INFORMATION
DIRECTORS AND EXECUTIVE OFFICERS
DIRECTORS
Anthony Coelho
Chairman of the Board
Andrew C. Sagliocca
President, Chief Executive Officer
and Director
INVESTOR INFORMATION
CORPORATE HEADQUARTERS
100 Jericho Quadrangle, Suite 100
Jericho, New York 11753
(800) 996-0213
www.esquirebank.com
SPECIAL COUNSEL
Luse Gorman, PC
5335 Wisconsin Ave., N.W., Suite 780
Washington, D.C. 20015
(202) 274-2000
TRANSFER AGENT
American Stock Transfer &
Trust Company, LLC
6201 15th Avenue
Brooklyn, New York 11219
(800) 937-5449
Todd Deutsch
Marc Grossman
Russ M. Herman
Janet Hill
Robert J. Mitzman
John Morgan
Richard T. Powers
Jack Thompson
Kevin C. Waterhouse
Selig A. Zises
EXECUTIVE OFFICERS
Andrew C. Sagliocca
President, Chief Executive Officer
and Director
Eric S. Bader
Executive Vice President, Chief Operating
Officer and Corporate Secretary
Ari P. Kornhaber
Executive Vice President, Director of Sales
Michael Lacapria
Senior Vice President, Chief Financial Officer
INDEPENDENT REGISTERED PUBLIC
ACCOUNTING FIRM
Crowe LLP
354 Eisenhower Parkway, Suite 2050
Livingston, New Jersey 07039
(973) 422-2420
ANNUAL MEETING
The Annual Meeting of the Stockholders
will be held on May 30, 2019 at 10:00 a.m.,
Eastern time, at the executive offices of
Esquire Financial Holdings, Inc. located
at 100 Jericho Quadrangle, Jericho,
New York 11753.
GENERAL INQUIRIES
A copy of our Annual Report to the SEC
may be obtained without charge by written
request of stockholders to Eric Bader or by
calling us at (800) 996-0213. The Annual
Report is also available on our website at
www.esquirebank.com. Our Code of Ethics,
Audit Committee Charter, Corporate Gov er-
nance and Nominating Committee Charter,
Compensation Committee Charter, and
Beneficial Ownership reports of our directors
and executive officers are also available on
our website.
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OUR FELLOW SHAREHOLDER,
In 2018, our Company delivered outstanding financial results and
record earnings through the combined efforts of our Board of
Directors, management team and employees.
Our unique national platforms in the litiga-
our employees and investing in technology
and exclusive development agreement with
tion and small business (merchant) com-
and talent for the future. At Esquire, we
Litify, this team has developed proprietary
munities were the keys to our success.
appreciate and value our employees and
real time asset-based lending applications
Industry leading returns were driven by
our client-partners, understanding that
for commercial law firms. These apps, Litify
our strong net interest margin, low-cost
these relationships need to be earned
and our internal nCino cloud banking
branchless deposits, diverse mix of revenue
every day. These attributes have and will
system, are built on a Salesforce platform
including fee-based merchant income
continue to transform Esquire into a leading
and will allow Esquire to continue to build
and a strong efficiency ratio. Based on
financial and technology provider (fintech)
a unique technology stack tailored for the
our outstanding performance, Raymond
in the national litigation and small business
legal and small business communities. We
James ranked our Company #3 out of all
markets, differentiating us from other finan-
plan to further enhance our IT infrastructure
publicly held community banks nationally,
cial institutions.
by implementing a tailored Salesforce CRM
while locally, we were recognized as one
of the best workplaces. Despite a very
challenging and competitive banking
environment and rising short-term interest
rates, we significantly grew our net income
by 140%, primarily due to notable loan
growth of 34%, a strong net interest margin
of 4.73% and a 42% increase in fee income.
We remain steadfast and focused on our
long-term vision, transforming Esquire into
a top performing fintech institution primarily
driven by our litigation and payment
system, developing payment processing
and online consumer-based products and
investing in our brand and website technol-
ogy throughout 2019.
processing platforms and supported by
The continued success of our unique model
our talent and technology initiatives. 2018
has been the key component to delivering
included several achievements that pro-
outstanding financial results and record
pelled us toward our goal. We successfully
earnings in 2018. Net income increased
Financial markets had a challenging year
expanded resources in every department,
140% to $8.7 million or $1.13 per diluted
in 2018 with most major indexes declining,
including hiring a Chief Financial Officer
common share. This was driven by a
including bank indexes and stocks. The
and Chief Administrative Officer of Merchant
$119.1 million or 34% increase in loans to
KBW bank index declined 19.6% in 2018
Services, both with extensive experience in
$468.1 million and a 42% increase in fee
while Esquire’s stock increased 9.9%
their fields. Our expanded resources and
income to $7.9 million. Our net interest
during the same period. However, it is
talent across the Company will allow us to
margin was an enviable 4.73%, driven by
important to note that we do not manage
implement our business strategy, capitaliz-
higher yielding commercial loans funded
our Company based on short-term stock
ing on exciting growth opportunities. Due
with low-cost core deposits. The litigation
price goals. We believe in building long-term
to our strong performance and growth,
community remains the foundation for our
shareholder value through strong growth
we expanded our footprint in our Jericho,
impressive loan growth, increased loan
based on our brand recognition, quality
NY, headquarters and launched an internal
yields and our branchless low-cost deposits.
earnings and returns, smart diversification
IT development team under our Chief
This foundation is supported by our strong
in revenue streams, a positive culture for
Technology Officer. Based on our marketing
brand recognition in the litigation and small
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business markets nationally, increasing our
net interest margin, and fee-based merchant
entrepreneurial spirit that brought us all
distribution network.
services platform drove our efficiency ratio
together to create Esquire. His vision was
The growth in our fee income, representing
22% of total revenue, has been driven by
focused expansion in our merchant services
to 55.6% in the fourth quarter of 2018. We
to transform Esquire into a top performing
expect efficiency gains to continue as we scale
financial and technology provider in the
our unique business model beyond 2018.
industry. Our goal is to make his vision a
platform on a national basis. There are less
Our diligent approach to underwriting is
than 70 merchant acquiring banks in the
evident in our strong asset quality with no
reality. Our thoughts, prayers and love are
with his family.
U.S., with our Company providing dynamic
non-performing assets and an allowance
We want to thank each member of the
and flexible merchant services solutions to
for loan losses representing 1.20% of total
Board of Directors for their friendship,
small business owners, differentiating us
loans. We anticipate strong loan growth in
service and leadership throughout the years
from the larger institutions. Our merchant
2019, focusing on our litigation market
as well as our motivated and talented
services platform has grown to approxi-
products and services as well as our
employees that embody the spirit and
mately $7.2 billion in annual card volume,
commercial real estate lending, while our
reputation of our Company. We are inspired
servicing approximately 28,000 merchants
pipeline of merchant opportunities also
by our customers who trust us to serve
throughout the U.S. and generating $5.0
remains strong. Both loan and fee income
them and will continue to earn their trust
million in fee-based income for 2018. The
opportunities will continue to enhance
every day.
merchant platform also provided over $40
earnings in 2019.
Sincerely,
Anthony Coelho
Chairman of the Board
Andrew C. Sagliocca
President & Chief Executive Officer
million in low-cost core deposits at year end.
Since inception in 2012, we have not had
any merchant processing losses. These
small business customers represent a
significant opportunity for future growth in
fee income, core deposits and enhanced
lending opportunities.
Esquire enters 2019 well positioned for
future growth. Our solid capital base and
commitment to the litigation and small
business communities on a national basis
will continue to drive strong performance in
2019. We became a member of the broad
market Russell 3000 Index and the small-cap
Our branchless deposits, representing our
Russell 2000 Index less than a year after
primary funding source for growth, totaled
our initial public offering. As we continue to
$568.4 million, a 27% increase from 2017,
achieve strong growth and earnings, we
with an impressive cost of funds of 0.23%
believe the inclusion in the Russell 3000
(including demand deposits). These stable
Index should serve to increase our exposure
funds are primarily driven by our commercial
among investors, leading to increased
law firms’ operating and escrow deposits,
liquidity in our stock and added value to
representing more than 60% of total deposits.
our shareholders.
We continue to prudently manage growth
in deposits, utilizing commercial sweep pro-
grams for our larger mass tort and class
action business banking clients. Overall, our
low-cost branchless deposit model, strong
Finally, it is with deep sadness that we
write this year’s Shareholder Letter, mourning
the loss of our dear friend, business partner
and founding Executive Chairman, Dennis
Shields. It was his vision, passion and
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Esquire Financial Holdings, Inc.
F O R M 1 0 - K
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TABLE OF CONTENTS
PART I . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
ITEM 1. Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
ITEM 1A. Risk Factors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
ITEM 1B. Unresolved Staff Comments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
ITEM 2. Properties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
ITEM 3. Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
ITEM 4. Mine Safety Disclosures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
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PART II . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
ITEM 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases
of Equity Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
ITEM 6. Selected Financial Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
ITEM 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations . . . . . .
ITEM 7A. Quantitative and Qualitative Disclosures About Market Risk . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
ITEM 8. Financial Statements and Supplementary Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
ITEM 9. Changes In and Disagreements With Accountants on Accounting and Financial Disclosure . . . . .
ITEM 9A. Controls and Procedures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
ITEM 9B. Other Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
PART III . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
ITEM 10. Directors, Executive Officers and Corporate Governance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
ITEM 11. Executive Compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
ITEM 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder
Matters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
ITEM 13. Certain Relationships and Related Transactions, and Director Independence . . . . . . . . . . . . . . . . . .
ITEM 14. Principal Accountant Fees and Services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
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PART IV . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
ITEM 15. Exhibits and Financial Statement Schedules . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
ITEM 16. Form 10-K Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
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ITEM 1. Business
Forward Looking Statements
PART I
This annual report contains forward-looking statements within the meaning of the federal securities laws. These
forward-looking statements reflect our current views with respect to, among other things, future events and our financial
performance. These statements are often, but not always, made through the use of words or phrases 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 are not historical facts, and are based on current expectations, estimates and projections about
our industry, management’s beliefs and certain assumptions made by management, many of which, by their nature, are
inherently uncertain and beyond our control. Accordingly, we caution you that any such forward-looking statements are
not guarantees of future performance and are subject to risks, assumptions, estimates and uncertainties that are difficult to
predict. Although we believe that the expectations reflected in these forward-looking statements are reasonable as of the
date made, actual results may prove to be materially different from the results expressed or implied by the forward-looking
statements.
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:
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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
non-performing 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;
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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 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 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;
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;
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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 annual report.
The foregoing factors should not be construed as exhaustive and should be read in conjunction with other cautionary
statements that are included in this annual report. 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.
Esquire Financial Holdings, Inc.’s electronic filings with the SEC, including the Annual Report on Form 10-K,
Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and amendments to these reports filed or furnished
pursuant to Sections 13(a) or 15(d) of the Exchange Act, as amended, are made available at no cost in the Investor
Relations section of the Company’s website, www.esquirebank.com, as soon as reasonably practicable after the Company
files such material with, or furnishes it to, the SEC. The Company’s SEC filings are also available through the SEC’s
website at www.sec.gov.
Our Company
Esquire Financial Holdings, Inc. (“Esquire Financial” or the “Company”) is a bank holding company headquartered
in Jericho, New York and registered under the Bank Holding Company Act of 1956, as amended (the “BHC Act”). 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 legal and small business communities on a national
basis, as well as commercial and retail customers in the New York metropolitan market. We offer tailored products and
solutions to the legal community and their clients as well as dynamic and flexible merchant services 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 (a subset of the New York metropolitan market). We believe these activities, primarily anchored by our
legal community focus, generate a stable source of low cost core deposits and a diverse asset base to support our overall
operations. Our commercial and consumer loans tailored to the litigation market (“Attorney-Related Loans”) enhance our
overall yield on our loan portfolio, enabling us to earn attractive risk-adjusted net interest margins. Additionally, our
merchant processing activities generate a relatively stable source of fee income. We believe our unique and dynamic
business model distinguishes us from other banks and non-bank financial services companies in the markets in which we
operate as demonstrated by comparing our performance metrics for the years ended 2018 and 2017.
For the year ended December 31, 2018 as compared to 2017:
• Our net income increased 139.7% to $8.7 million or $1.13 per diluted common share.
• We had a net interest margin of 4.73%, an increase from 4.43%, primarily driven by a low cost of funds of 0.23%
on our deposits.
• Our loans increased 34.1%, or $119.1 million, to $468.1 million, with no non-performing loans and solid asset
quality metrics.
3
• Our noninterest income increased 42.4% to $7.9 million, which represented 22.1% of our total revenue (net
interest income plus noninterest income) at December 31, 2018, primarily driven by our merchant services
platform.
• As of December 31, 2018, our total assets, loans, deposits and stockholders’ equity totaled $663.9 million,
$468.1 million, $568.4 million and $92.8 million, respectively.
On June 30, 2017, we closed our initial public offering (“IPO”) and our stock now trades on the NASDAQ Capital
Markets, under the symbol “ESQ”. The aggregate net proceeds to the Company from its initial public offering, including
the over-allotment shares that closed on July 20, 2017, after deducting the underwriting discount and estimated offering
expenses, was approximately $26.3 million. We have deployed the net proceeds of the offering to support the growth in
Esquire Bank’s loan portfolio, including making larger loans due to our increased legal lending limit and for other general
corporate purposes, which could include other growth initiatives.
We remain true to our commitment to serve the litigation community and our commercial customers through our
tailored and innovative products and solutions. Our relationships within the litigation community are a key contributor to
our loan growth, strong loan yields, and low cost core deposits. The litigation community represented more than 60% of
our deposit base at December 31, 2018. In addition to our lending activities, we have also remained steadfast in growing
our merchant services platform. We provide dynamic and flexible merchant services solutions to small business owners.
Our merchant services platform has grown to approximately 28,000 small businesses at December 31, 2018, which
generated most of our noninterest income which represented 22.1% of our revenue for the year ended December 31, 2018.
We believe merchant services represents a significant opportunity for future growth in fee income, core deposits and
enhanced lending opportunities.
Our low cost core deposits (total deposits, excluding time deposits), representing our primary funding source for loan
growth, totaled $548.0 million at December 31, 2018, resulting in a total cost of deposits of 0.23%. These stable low cost
funds are driven by our attorney operating and escrow deposits. We intend to continue to prudently manage growth in
deposits, utilizing customer sweep programs for our mass tort and class action business banking programs. We do not have
traditional “brick and mortar” branches to support our deposit growth. Instead, we rely on our robust attorney network to
gather deposits and our customers utilize on-line cash management technology to manage their operating and escrow
accounts as well as their business banking needs across the country.
Market Area
We define the market area for our legal community products as law firms practicing within the United States, United
States territories and United States commonwealths, and we serve the litigation industry on a nationwide basis. For
traditional community banking products and services, our primary market area is the New York metropolitan area,
specifically Nassau and New York (Manhattan) Counties in New York and secondarily throughout the state of New York.
As a Visa and MasterCard member, we provide merchant services for small businesses located throughout the United
States through relationships with third party ISOs.
We have established our niche in the litigation market through the strategic development of a business model that
understands our market’s unique needs and provides access to our target customers. We have designed unique, value added
products and services for our current and potential customers and created a distribution network with direct access to the
market through the experience and networks of our Board, Advisory Board, attorney stockholders and certain members of
management. A number of our directors, Advisory Board members and original investors are well-known, influential
market figures and active members of some of the leading litigation law firms in the nation and national and state bar
associations as well as other industry leading companies such as plaintiff financing and structured settlement services. In
addition, we have established informal affiliations or relationships with key industry organizations such as New York State
Trial Lawyers Association, Consumer Attorneys of California, Florida Justice Association, and a number of other state
trial attorney associations. Through our current law firm clients and other relationships, we believe we have access to
thousands of trial attorneys.
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Our traditional community banking market area has a diversified economy typical of most urban population centers,
with the majority of employment provided by services, wholesale/retail trade, finance/insurance/real estate (“FIRE”) and
construction. As of June 30, 2018 (the latest date for which information is available), New York County’s $993.1 billion
deposit market was much larger than the $72.8 billion deposit market in Nassau County.
Competition
The bank and non-bank financial services industries in our markets and surrounding areas is highly competitive. We
compete with a wide range of regional and national banks located in our market areas as well as non-bank commercial
finance companies on a nationwide basis. We experience competition in both lending and attracting funds as well as
merchant processing services from commercial banks, savings associations, credit unions, consumer finance companies,
pension trusts, mutual funds, insurance companies, mortgage bankers and brokers, brokerage and investment banking
firms, non-bank lenders, government agencies and certain other non-financial institutions. Many of these competitors have
more assets, capital and lending limits, and resources than we do and may be able to conduct more intensive and broader-
based promotional efforts to reach both commercial and individual customers. Competition for deposit products can
depend heavily on pricing because of the ease with which customers can transfer deposits from one institution to another.
Competition for Attorney-Related Loans is derived primarily from eight to ten nationally-oriented financial companies
that specialize in this market. Some of these companies are focused exclusively on loans to law firms, while others offer
loans to plaintiffs as well. While some overlap exists between the litigation market loan products offered by Esquire Bank
and these companies (primarily lines of credit, case-cost and post-settlement commercial loans), there are a number of
critical differences that management believes give Esquire Bank a competitive advantage:
• Esquire Bank can offer more competitive rates on loans compared to specialty finance companies because its cost
of funds is much lower than the funding costs for these non-bank competitors;
•
•
the non-bank companies are not able to offer deposit products or business services such as remote deposit capture
or letters of credit, or debit cards; and
non-banks cannot offer products uniformly across the country because they are not national banks.
Lending Activities
Our strategy is to maintain a loan portfolio that is broadly diversified by type and location. Within this general strategy,
we intend to focus our growth in Attorney-Related Loans, which include commercial and consumer lending to attorneys,
law firms and plaintiffs/claimants where we have expertise and market insights. As of December 31, 2018, these product
lines in aggregate totaled $211.4 million (or 45.2% of our loan portfolio). As of December 31, 2018, our commercial
Attorney-Related Loans, which consist of working capital lines of credit, case cost lines of credit, term loans and post-
settlement commercial and other commercial attorney-related loans (“Commercial Attorney-Related Loans”), totaled
$176.6 million, or 83.6% of our total attorney-related loan portfolio and 37.8% of our loan portfolio. As of December 31,
2018, our consumer Attorney-Related Loans, which consist of post-settlement consumer loans and structured settlement
loans (“Consumer Attorney-Related Loans”), totaled $34.7 million, or 16.4% of our total Attorney-Related Loan portfolio
and 7.4% of our loan portfolio. With respect to our Attorney-Related Loan portfolio, we seek out customers on a
nationwide basis.
At December 31, 2018, approximately 43.5% of the Commercial Attorney-Related Loans outstanding had been
extended to customers in New York followed by 15.1% extended to customers in Texas. Our current Loan Policy limits
the percentage of out-of-state loans to 25% per loan type in any one state other than New York.
As of December 31, 2018, our total real estate loans, which consist of 1 – 4 family residential loans, commercial real
estate loans, multifamily loans and construction loans, totaled $231.6 million (or 49.6% of our loan portfolio). The majority
of our real estate secured loans are in the areas surrounding the New York metropolitan area. We anticipate continuing to
focus on the commercial and personal credit needs of businesses and individuals in these markets.
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The following is a discussion of our major types of lending activity:
Commercial Loans and Lines of Credit (“Commercial”). Commercial loans are originated to local small to mid-size
businesses to provide short-term financing for inventory, receivables, the purchase of supplies, or other operating needs
arising during the normal course of business and loans made to our qualified merchant customers. In addition, specialized
and tailored commercial loans are offered to attorneys and law firms nationally. At December 31, 2018, commercial loans
(excluding Commercial Attorney-Related Loans of $176.6 million) totaled $15.2 million (or 3.2% of total loans). All
commercial loans are originated internally and totaled $191.8 million (or 41.1% of our total loans) at December 31, 2018.
Commercial Attorney-Related Loans. The following is a summary of the specialized commercial loan products we
offer to meet the needs of the litigation community. Commercial Attorney-Related Loans are made to attorneys and law
firms and the outstanding loan balances are included in the loan balance for commercial loans as noted above. A unique
aspect of our underwriting involves advances of loan proceeds against a “borrowing base,” which typically consists of the
inventory of litigation cases for the firm. We complement this with traditional commercial underwriting. See “— Credit
Risk Management” below. Generally, the maximum amount a customer may borrow at any time is fixed as a percentage
of the borrowing base outstanding at any time.
• Working Capital Lines of Credit (“WC LOC”). WC LOCs are unsecured business lines of credit offered to law
firms for general corporate purposes, including meeting cash flow needs, advertising, financing the purchase of
fixed assets, or other reasons. The balance of such loans was $112.7 million at December 31, 2018 (or 53.3% of
total Attorney-Related Loans).
• Case Cost Lines of Credit. Case Cost Lines of Credit (“Case Cost LOC”) are unsecured business lines of credit
that are tied to the costs of contingency cases and totaled $37.1 million at December 31, 2018 (or 17.6% of total
Attorney-Related Loans). Contingency case costs include court filing fees, investigative costs, expert witness
fees, deposition costs, and other costs. Recovery of case costs is derived from gross settlement proceeds from the
settled case. In our experience, an average case can take two to four years to litigate and law firms are prevented
from charging their clients any interest for the out-of-pocket litigation costs, which amounts to an interest-free
loan provided to the client. Thus, instead of using the law firm’s cash flow, law firms use Case Cost LOCs to
finance litigation cash flows because the finance charges can be charged against the settlement proceeds. Case
Cost LOCs are not contingent loans, meaning that their repayment is not dependent on a favorable case settlement.
In the event of an unfavorable outcome for the borrower, the loans are repaid from the cash flows of the law firm.
• Term Loans. Term loans are short-term unsecured business loans originated to law firms for general corporate
purposes. These loans are offered to law firms at the same terms as those offered to other types of businesses.
Term loans to law firms totaled $26.9 million at December 31, 2018 (or 12.7% of total Attorney-Related Loans).
• Post-Settlement Commercial and Other Commercial Attorney-Related Loans. Post-settlement commercial loans
are bridge loans secured by proceeds from non-appealable, settled cases. Other commercial attorney-related loans
consist of both secured and unsecured loans to law firms and attorneys. At December 31, 2018 there were no
post-settlement commercial loans outstanding.
Consumer Loans. Consumer loans are primarily post-settlement consumer and structured settlement loans made to
plaintiffs and claimants as described below. Consumer loans are also originated to individuals for debt consolidation, home
repairs, home improvement or other consumer purchases. Consumer loans are both secured and unsecured. At
December 31, 2018, total consumer loans (excluding Consumer Attorney-Related Loans of $34.7 million) totaled $9.0
million (or 1.9% of total loans).
The following is a summary of the specialized Consumer Attorney-Related Loan products we offer to meet the needs
of the litigation market. Consumer Attorney-Related Loans, which consist of post-settlement consumer and structured
6
settlement loans, are consumer loans made to individual plaintiffs/claimants and the outstanding loan balances are included
in the loan balance for consumer loans as noted above.
• Post-Settlement Consumer Loans. Post-settlement consumer loans are generally bridge loans to individuals
secured by proceeds from settled cases. These loans generally meet the “life needs” of claimants in various
litigation matters due to the delay between the time of settlement and actual payment of the settlement. These
delays are primarily due to various administrative matters in the case. The balance of post-settlement consumer
loans to individuals was $33.6 million at December 31, 2018. Loans related to the National Football League
Concussion Case (“NFL”) represented $27.9 million or 83.2% of our total post-settlement loans as of
December 31, 2018.
•
Structured Settlement Loans. Structured settlement loans are structured such that the annuity provider (a highly
rated insurance company) is directed by the court, at the request of the borrower, to deposit the borrower’s
payments into an account designated by us. Loan payments are then automatically deducted from the annuity
payment. At December 31, 2018, structured loans in our loan portfolio totaled $1.1 million.
Real Estate Loans. The majority of our real estate secured loans are in the areas surrounding the New York
metropolitan area.
Multifamily. Multifamily loans are the largest component of the real estate loan portfolio and totaled $136.5 million
(or 29.2% of total loans) at December 31, 2018. The multifamily loan portfolio consists of loans secured by apartment
buildings and mixed-use buildings (predominantly residential income producing) in our primary market area. We originate
and purchase multifamily loans. Whether originated or purchased, all loans are independently underwritten by Esquire
Bank utilizing the same underwriting criteria and approved by the Directors Loan Committee or in accordance with our
Board established approval authorities.
1 – 4 Family Residential. Mortgage loans are primarily secured by 1 – 4 family cash flowing investment properties
($56.0 million as of December 31, 2018) in our market area. The residential mortgage loan portfolio includes 1 – 4 family
income producing investment properties, primary and secondary owner occupied residences, investor coops and condos.
The majority of residential mortgages are originated internally, although we do purchase residential mortgages from time
to time. Purchased loans are subject to all the asset quality and documentary precautions normally used when originating
a loan.
Commercial Real Estate (“CRE”). CRE loans totaled $33.1 million (or 7.1% of total loans) at December 31, 2018
and consisted primarily of loans secured by mixed use properties (58.1% of the CRE portfolio), hospitality properties
(32.6% of the CRE portfolio) and warehouses (4.7% of the CRE portfolio), with the remainder comprised of condo
associations and office/retail properties. Owner-occupied loans represented 7.1% of the CRE portfolio at December 31,
2018. We both originate and purchase CRE loans. All loans are independently underwritten by us utilizing the same
underwriting criteria, and approved by the Directors Loan Committee.
Construction Loans. Construction loans are originated on an opportunistic basis and totaled $5.9 million (or 1.3% of
total loans) at December 31, 2018.
Merchant Services Activities
We provide merchant services as an acquiring bank through the third-party or ISO business model in which we process
credit and debit card transactions on behalf of merchants. This model is designed to shift some of the risk from merchant
losses resulting from chargebacks, fraud, non-compliance issues or even insolvency to the ISO. In an ISO model, the bank
and the ISO jointly enter into the merchant agreement with each merchant. We believe this model provides an added layer
of protection against losses from merchants since losses that are not absorbed by a merchant would be the liability of the
ISO payable from reserves posted by the ISO or other funds the bank owes to the ISO. Even with this recourse, Esquire
Bank is ultimately liable for losses from actions of merchants and those of ISOs. To date, Esquire Bank has not incurred
any losses from its merchant services activities.
7
We entered into the merchant processing business as an acquiring bank in 2012 in an effort to increase our noninterest
income revenue and to provide cross selling opportunities for other business banking products and services. For the year
ended December 31, 2018, merchant processing revenues were approximately $5.0 million and represented most of our
noninterest income, which was 22.1% of our total revenue and represented an increase of 42.4% over full year 2017. At
December 31, 2018, we had 25 active ISOs, servicing approximately 28,000 merchants, and for the year ended
December 31, 2018, we processed $7.2 billion in card volume. We intend to continue to expand our merchant processing
business.
Under the ISO model, Esquire Bank and the ISO determine the appropriate amount of merchant reserves, which is
generally based on the nature of the merchant’s business, its chargeback and refund history, processing volumes and the
merchant’s financial health. The ISO performs an underwriting and risk management review, although Esquire Bank itself
also reviews and underwrites every application and performs separate risk monitoring and management to ensure
conformance with Esquire Bank’s internal underwriting policies. As of December 31, 2018, we had contractual
arrangements with three payment processors or clearing agents, TSYS, JetPay, and TriSource, which are utilized by
Esquire Bank and our ISOs to authorize, process and obtain settlement for card transactions.
We have implemented a comprehensive risk mitigation program for our merchant services business which includes
detailed policies and procedures applicable to both ISOs and merchants pertaining to due diligence, risk and underwriting
and Bank Secrecy Act compliance, among other things. Our Merchant Acquiring and Risk Policy establishes authorities
and guidelines for the Bank to acquire merchant servicing arrangements with ISOs, agent banks, direct merchants and
through merchant portfolio acquisitions. Such guidelines include initial and ongoing due diligence requirements and
approval authorities. All merchants, regardless of how the merchant is acquired, must meet our Merchant
Credit/Underwriting Policy requirements. In addition, credit approval requirements and authorities for approving
merchants and ISOs are clearly defined in our Merchant Acquiring and Risk Policy.
Our Merchant Acquiring and Risk Policy establishes stringent requirements related to the due diligence conducted
initially and on an ongoing basis, requirements for the ISO contract, our responsibilities and the ISO’s responsibilities in
connection with the sponsorship and other matters. In the event of a potential loss and in accordance with the terms of the
ISO Merchant Agreement, we can take the following actions to collect: charge the merchant account; charge the merchant
reserve account; charge the ISO reserve account; deduct from the ISO monthly residual on an ongoing basis until fully
recovered; and may, if utilized recover through chargeback insurance.
In exchange for the liabilities and costs assumed by ISOs, we receive reduced revenue on our merchant servicing
portfolio as compared to direct merchant service providers that do not obtain such indemnification and administrative
support. For the year ended December 31, 2018, we received a blended rate of approximately seven basis points for
merchant processing, compared to direct merchant service providers that may receive two to three times that rate for a
portfolio with similar risk characteristics. However, we believe that our acquiring bank ISO business model represents less
risk for Esquire Bank.
Deposit Funding
Deposits are our primary source of funds to support our earning assets and growth. We offer depository products,
including checking, savings, money market and certificates of deposit with a variety of rates. Deposits are insured by the
FDIC up to statutory limits. Our unique low cost core deposit model is primarily driven by escrow and operating accounts
from law firms and other litigation settlements on a national basis, representing more than 60% of the $568.4 million in
total deposits at December 31, 2018. Our core deposits (excluding time deposits) represent 96.4% of our total deposits at
December 31, 2018. Our total cost of deposits is 0.23% at December 31, 2018, anchored by our noninterest bearing
demand deposits and attorney escrow funds representing 37.4% and 38.9%, respectively, of total deposits. We require
deposit balances associated with our commercial loan arrangements and cash management relationships maintained by
our commercial lending. We do not use a traditional “brick and mortar” branch network to support our deposit growth and
have only one branch, located in Garden City, New York. The vast majority of our customers utilize our on-line cash
management technology to manage their operating and escrow accounts across the country.
Deposits have traditionally been our primary source of funds for use in lending and investment activities and we do
not utilize borrowings as a significant funding source. Besides generating deposits from law firms and litigation
8
settlements, we also generate deposits from our merchant services platform and other local businesses, individuals through
client referrals and other relationships and through our single retail branch. We believe we have a very stable core deposit
base due primarily to the litigation market strategy as we strongly encourage and are successful in having law firm
borrowers maintain their operating and escrow banking relationship with us. Our low cost of funds is due to our deposit
composition consisting of approximately 96.4% in transaction accounts at December 31, 2018. Our deposit strategy
primarily focuses on developing borrowing and other service orientated relationships with customers rather than competing
with other institutions on rate. We have established deposit concentration thresholds to avoid the possibility of dependence
on any single depositor base for funds.
Credit Risk Management
We control credit risk both through disciplined underwriting of each transaction, as well as active credit management
processes and procedures to manage risk and minimize loss throughout the life of a transaction. We seek to maintain a
broadly diversified loan portfolio in terms of type of customer, type of loan product, geographic area and industries in
which our business customers are engaged. We have developed tailored underwriting criteria and credit management
processes for each of the various loan product types we offer our customers.
Underwriting. In evaluating each potential loan relationship, we adhere to a disciplined underwriting evaluation
process including but not limited to the following:
•
•
•
understanding the customer’s financial condition and ability to repay the loan;
verifying that the primary and secondary sources of repayment are adequate in relation to the amount and structure
of the loan;
observing appropriate loan to value guidelines for collateral secured loans;
• maintaining our targeted levels of diversification for the loan portfolio, both as to type of borrower and geographic
location of collateral; and
•
ensuring that each loan is properly documented with perfected liens on collateral.
Commercial Loans. These loans are typically made on the basis of the borrower’s ability to make repayments from
the cash flow of the borrower’s business and the collateral securing these loans may fluctuate in value. Our commercial
loans are originated based on the identified cash flow of the borrower and on the underlying collateral provided by the
borrower. Most often, this collateral consists of the case inventory of the law firm (borrowing base) and, to a lesser extent,
accounts receivable or equipment.
• Commercial Attorney-Related Loans (working capital lines of credit, case cost lines of credit, and term
loans). We perform the underwriting criteria typical for commercial business loans (generally, but not limited to
three years of tax returns, three years of financial data, cash flows, partner guarantees, partner personal financials
and credit history, background checks, etc.). We also review the firm’s case inventory to ascertain the value of
their future receivables. Typically, at least three years of successful experience in plaintiff practice are required.
Working capital lines of credit and case cost lines of credit are floating rate, prime-based loans. The proceeds of
a Case Cost loan can only be used against case expenses. These loans are subject to a general security agreement
evidenced by UCC-1 filing on all assets of the borrower, including but not limited to case inventory, accounts
receivable, fixtures and deposits where applicable. A key component of the underwriting process is an evaluation
of the pending cases of an applicant law firm to determine the probability and amount of future settlements. These
loans are based on a borrowing base that was developed by us whereby a law firm’s case inventory is segmented
into various stages and evaluated.
Consumer Loans. Consumer loans primarily consist of our Consumer Attorney-Related Loans, which include
post-settlement consumer loans and structured settlement loans. Other consumer loans originated to individuals for debt
9
consolidation, home repairs, home improvement or other consumer purchases, are generally dependent on the credit quality
of the individual borrower and may be secured or unsecured. To ensure the value of the settlement amount and likelihood
and timeframe of payout, we require an executed settlement agreement or an affidavit of attorney attesting to the existence
of an accepted offer. Post-settlement consumer loans are generally for one year terms with extensions granted based on
acceptable supporting documentation regarding case status and viability, at Esquire Bank’s discretion. Structured
settlement loans are generally for terms of three, five or seven years. As the settlements are court ordered, the risks of
settlements being renegotiated after we have made the loans are minimal.
• Post-Settlement Consumer Loans. Post-settlement consumer loans are fully-secured by the proceeds from the
settlement and are generated from our internal sales force or from third party brokers. An executed settlement
agreement is a prerequisite for such loans, and the loan-to-value (“LTV”) ratio is generally limited to 50% of the
net settlement amount due to the borrower.
•
Structured Settlement Loans. Structured settlement loans are structured such that the annuity provider (a highly
rated insurance company) is directed by the court, at the request of the borrower, to deposit the borrower’s
payments into an account designated by us. Loan payments are then automatically deducted from the annuity
payment.
1 – 4 Family Residential Loans. Residential mortgage loans are originated or purchased for both primary and
secondary residences, generally with fixed rates and 30-year or 15-year terms. Adjustable-rate mortgages (“ARMs”) are
purchased or originated as 1 year ARMs, 5/1 ARMs, or 7/1 ARMs. We perform an extensive credit history review for each
borrower. Second homes or investment properties are subject to additional requirements. Debt-to-income (“DTI”) and debt
service coverage, if applicable, ratios generally conform to industry standards for conforming loans. Flood insurance, title
insurance and fire/hazard insurance are mandatory for all applications, as appropriate.
Commercial Real Estate and Multifamily Loans. Loans secured by commercial and multifamily real estate generally
have larger balances and involve a greater degree of risk than 1 – 4 family residential mortgage loans. Of primary concern
in commercial and multifamily real estate lending is the borrower’s creditworthiness and the feasibility and cash flow
potential of the project. Payments on loans secured by income properties often depend on successful operation and
management of the properties. As a result, repayment of such loans may be subject to a greater extent than 1-4 family
residential real estate loans, to adverse conditions in the real estate market or the economy.
In approving a commercial or multifamily real estate loan, we consider and review a global cash flow analysis of the
borrower and consider the net operating income of the property, the borrower’s expertise, credit history and profitability
and the value of the underlying property. Maximum LTV ratios are 80% of appraised value and we generally require that
the properties securing these real estate loans have minimum debt service ratios (the ratio of earnings before debt service
to debt service) of 115%. Loan terms are fifteen years or less with the option to extend another five years and amortization
is based on a 25 – 30 year schedule or less. An environmental phase one report is obtained when the possibility exists that
hazardous materials may have existed on the site, or the site may have been impacted by adjoining properties that handled
hazardous materials. To monitor cash flows on income properties, we require borrowers and loan guarantors, if any, to
provide annual financial statements on commercial and multifamily real estate loans.
Construction Loans. Construction lending involves additional risks when compared with permanent 1-4 family
residential lending because funds are advanced upon the security of the project, which is of uncertain value prior to its
completion. This type of lending also typically involves higher loan principal amounts and is often concentrated with a
small number of builders. In addition, generally during the term of a construction loan, interest may be funded by the
borrower or disbursed from an interest reserve set aside from the construction loan budget. These loans often involve the
disbursement of substantial funds with repayment substantially dependent on the success of the ultimate project and the
ability of the borrower to sell or lease the property or obtain permanent take-out financing, rather than the ability of the
borrower or guarantor to repay principal and interest. Our construction loans are based upon estimates of costs and values
associated with the completed project. Underwriting is focused on the borrowers’ financial strength, credit history and
demonstrated ability to produce a quality product and effectively market and manage their operations.
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Loan Approval Authority. Our lending activities follow written, non-discriminatory, underwriting standards and loan
origination procedures established by our Board of Directors and management. We have established several levels of
lending authority that have been delegated by the Board of Directors to the Directors Loan Committee, the Chief Lending
Officer and other personnel in accordance with the Lending Authority in the Loan Policy. Authority limits are based on
the total exposure of the borrower and are conditioned on the loan conforming to the policies contained in the Loan Policy.
Any Loan Policy exceptions are fully disclosed to the approving authority.
Loans to One Borrower. In accordance with loans-to-one-borrower regulations, the Bank is generally limited to
lending no more than 15% of its unimpaired capital and unimpaired surplus to any one borrower or borrowing entity. This
limit may be increased by an additional 10% for loans secured by readily marketable collateral having a market value, as
determined by reliable and continuously available price quotations, at least equal to the amount of funds outstanding. To
qualify for this additional 10% the bank must perfect a security interest in the collateral and the collateral must have a
market value at all times of at least 100% of the loan amount that exceeds the 15% general limit. At December 31, 2018,
our regulatory limit on loans-to-one borrower was $13.6 million.
Management understands the importance of concentration risk and continuously monitors to ensure that portfolio risk
is balanced between such factors as loan type, industry, geography, collateral, structure, maturity and risk rating, among
other things. Our Loan Policy establishes detailed concentration limits and sub limits by loan type and geography.
Ongoing Credit Risk Management. In addition to the tailored underwriting process described above, we perform
ongoing risk monitoring and review processes for all credit exposures. Although we grade and classify our loans internally,
we have an independent third party professional firm perform regular loan reviews to confirm loan classifications. We
strive to identify potential problem loans early in an effort to aggressively seek resolution of these situations before the
loans create a loss, record any necessary charge-offs promptly and maintain adequate allowance levels for probable loan
losses incurred in the loan portfolio.
In general, whenever a particular loan or overall borrower relationship is downgraded to pass-watch or substandard
based on one or more standard loan grading factors, our credit officers engage in active evaluation of the asset to determine
the appropriate resolution strategy. Management regularly reviews the status of the watch list and classified assets portfolio
as well as the larger credits in the portfolio.
In addition to our general credit risk management processes, we employ additional risk management processes and
procedures for our commercial loans to law firms. We require borrowing base updates at least annually and also engage
in active review and monitoring of the borrowing base collateral itself, including field audits.
Investments
We manage our investments primarily for liquidity purposes, with a secondary focus on returns. All of our debt
securities are classified as available-for-sale and can be used to collateralize Federal Home Loan Bank of New York
(FHLB) borrowings, FRB borrowings, public funds deposits or other borrowings. At December 31, 2018, our securities
had a fair value of $145.7 million, and consisted primarily of U.S. Government Agency collateralized mortgage
obligations and mortgage-backed securities.
Our investment objectives are primarily to provide and maintain liquidity, establish an acceptable level of interest rate
risk, to provide a use of funds when demand for loans is weak and to generate a favorable return. Our board of directors
has the overall responsibility for the investment portfolio, including approval of our investment policy. The Asset Liability
Committee (ALCO) and management are responsible for implementation of the investment policy and monitoring our
investment performance. The Board of Directors reviews the status of our investment portfolio monthly.
We are required to maintain an investment in FHLB stock, which investment is based primarily on the level of our
FHLB borrowings. Additionally, we are required to maintain an investment in Federal Reserve Bank of New York stock
equal to six percent of our capital and surplus. While we have the authority under applicable law to invest in derivative
instruments, we had no investments in derivative instruments at December 31, 2018.
11
Borrowings
We maintain diverse funding sources including borrowing lines at the FHLB, two financial institutions and the Federal
Reserve Bank discount window. Although we do not utilize borrowings as a significant funding source, we have from time
to time utilized advances from the FHLB to supplement our supply of investable funds. The FHLB functions as a central
reserve bank providing credit for its member financial institutions. As a member, we are required to own capital stock in
the FHLB and are authorized to apply for advances on the security of such stock and certain of our whole first mortgage
loans and other assets (principally securities which are obligations of, or guaranteed by, the United States), provided certain
standards related to creditworthiness have been met. Advances are made under several different programs, each having its
own interest rate and range of maturities. Depending on the program, limitations on the amount of advances are based
either on a fixed percentage of an institution’s net worth or on the Federal Home Loan Bank’s assessment of the
institution’s creditworthiness. As of December 31, 2018, we had $115.0 million of available borrowing capacity with the
FHLB. We also had an available line of credit with the Federal Reserve Bank of New York discount window of $24.2
million. The other borrowing lines are maintained primarily for contingency funding sources. No amounts were
outstanding on any of the aforementioned lines as of December 31, 2018.
Personnel
As of December 31, 2018, we had 74 full-time employees, none of whom are represented by a collective bargaining
unit. We believe we have a good working relationship with our employees.
Subsidiaries
Esquire Bank, National Association is the sole subsidiary of Esquire Financial Holdings, Inc. and there are no
subsidiaries of Esquire Bank, National Association.
Supervision and Regulation
General
Esquire Bank is a national bank organized under the laws of the United States of America and its deposits are insured
to applicable limits by the Deposit Insurance Fund (the “DIF”). The lending, investment, deposit-taking, and other business
authority of Esquire Bank is governed primarily by federal law and regulations and Esquire Bank is prohibited from
engaging in any operations not authorized by such laws and regulations. Esquire Bank is subject to extensive regulation,
supervision and examination by, and the enforcement authority of, the Office of the Comptroller of the Currency (the
“OCC”), and to a lesser extent by the FDIC, as its deposit insurer, as well as by the FRB. Esquire Bank is also subject to
federal financial consumer protection and fair lending laws and regulations of the Consumer Financial Protection Bureau,
though the OCC is responsible for examining and supervising the bank’s compliance with these laws. The regulatory
structure establishes a comprehensive framework of activities in which a national bank may engage and is primarily
intended for the protection of depositors, customers and the DIF. The regulatory structure gives the regulatory agencies
extensive discretion in connection with their supervisory and enforcement activities and examination policies, including
policies with respect to the classification of assets and the establishment of adequate loan loss reserves for regulatory
purposes.
Esquire Financial Holdings, Inc. is a bank holding company, due to its control of Esquire Bank, and is therefore subject
to the requirements of the BHC Act and regulation and supervision by the FRB. The Company files reports with and is
subject to periodic examination by the FRB.
Any change in the applicable laws and regulations, whether by the OCC, the FDIC, the FRB or through legislation,
could have a material adverse impact on Esquire Bank and the Company and their operations and the Company’s
stockholders.
The Dodd-Frank Act made extensive changes in the regulation of insured depository institutions. Among other things,
the Dodd-Frank Act (i) created the Consumer Financial Protection Bureau as an independent bureau to assume
12
responsibility for the implementation of the federal financial consumer protection and fair lending laws and regulations, a
function previously assigned to prudential regulators; (although institutions of less than $10 billion in assets, such as
Esquire Bank, continue to be examined for compliance with consumer protection and fair lending laws and regulations by,
and be subject to the primary enforcement authority of their primary federal bank regulator rather than the Consumer
Financial Protection Bureau); (ii) directed changes in the way that institutions are assessed for deposit insurance;
(iii) mandated the revision of regulatory capital requirements; (iv) codified the FRB’s long-standing policy that a bank
holding company must serve as a source of financial and managerial strength for its subsidiary banks; (v) required
regulations requiring originators of certain securitized loans to retain a percentage of the risk for the transferred loans;
(vi) stipulated regulatory rate-setting for certain debit card interchange fees; (vii) repealed restrictions on the payment of
interest on commercial demand deposits; (viii) enacted the so-called Volcker Rule, which general prohibits banking
organizations from engaging in proprietary trading and from investing in, sponsoring or having certain relationships with
hedge funds and (ix) contained a number of reforms related to mortgage originations.
Many of the provisions of the Dodd-Frank Act had delayed effective dates and/or required the issuance of
implementing regulations. However, the Dodd-Frank Act has, and will likely continue to cause increased regulatory
burden, compliance costs and interest expense for the Company and Esquire Bank.
What follows is a summary of some of the laws and regulations applicable to Esquire Bank and Esquire Financial
Holdings. The summary is not intended to be exhaustive and is qualified in its entirety by reference to the actual laws and
regulations.
Esquire Bank, National Association
Loans and Investments
National banks have authority to originate and purchase any type of loan, including commercial, commercial real
estate, 1-4 family residential mortgages or consumer loans. Aggregate loans by a national bank to any single borrower or
group of related borrowers are generally limited to 15% of Esquire Bank’s capital and surplus, plus an additional 10% if
secured by specified readily marketable collateral.
Federal law and OCC regulations limit Esquire Bank’s investment authority. Generally, a national bank is prohibited
from investing in corporate equity securities for its own account other than companies through which the bank conducts
its business. Under OCC regulations, a national bank may invest in investment securities up to specified limits depending
upon the type of security. “Investment securities” are generally defined as marketable obligations that are investment grade
and not predominantly speculative in nature. The OCC classifies investment securities into five different types and,
depending on its type, a national bank may have the authority to deal in and underwrite the security. The OCC has also
permitted national banks to purchase certain noninvestment grade securities that can be reclassified and underwritten as
loans.
Lending Standards
The federal banking agencies adopted uniform regulations prescribing standards for extensions of credit that are
secured by liens or interests in real estate or made for the purpose of financing permanent improvements to real estate.
Under these regulations, all insured depository institutions, such as Esquire Bank, must adopt and maintain written policies
establishing appropriate limits and standards for extensions of credit that are secured by liens or interests in real estate or
are made for the purpose of financing permanent improvements to real estate. These policies must establish loan portfolio
diversification standards, prudent underwriting standards (including loan-to-value limits) that are clear and measurable,
loan administration procedures, and documentation, approval and reporting requirements. The real estate lending policies
must reflect consideration of the federal bank regulators’ Interagency Guidelines for Real Estate Lending Policies that
have been adopted.
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Federal Deposit Insurance
Deposit accounts at Esquire Bank are insured by the FDIC’s Deposit Insurance Fund (“DIF”). Effective July 22, 2010,
the Dodd-Frank Act permanently raised the deposit insurance available on all deposit accounts to $250,000 with a
retroactive effective date of January 1, 2008.
Under the FDIC’s risk-based assessment system, insured institutions were assigned a risk category based on
supervisory evaluations, regulatory capital levels and certain other factors. An institution’s rate depended upon the
category to which it is assigned, and certain adjustments specified by FDIC regulations. Institutions deemed less risky pay
FDIC assessments. The Dodd-Frank Act required the FDIC to revise its procedures to base its assessments upon each
insured institution’s total assets less tangible equity instead of deposits. The FDIC finalized a rule, effective April 1, 2011,
that set the assessment range at 2.5 to 45 basis points of total assets less tangible equity. Effective July 1, 2016, the FDIC
adopted changes that eliminated the risk categories and base assessments for most banks on financial measures and
supervisory ratings derived from statistical modeling estimating the probability of failure over three years. In conjunction
with the DIF reserve ratio achieving 1.15%, the assessment range (inclusive of possible adjustments) was also reduced for
most banks to 1.5 basis points to 30 basis points of total assets less tangible equity. The Dodd-Frank Act specified that
institutions with greater than $10 billion of assets be required to bear the burden of raising the DIF reserve ratio from
1.15% to 1.35%. Such institutions were subject to a surcharge beginning July 1, 2016 to that end. The FDIC announced
that the 1.35% reserve ratio had been met as of September 30, 2018. Institutions of less than $10 billion of assets, such as
Esquire Bank, will receive a credit for the portion of their assessments that contributed to the growth in the reserve ratio
from 1.15% to 1.35%, effective when the ratio reaches 1.38%.
The FDIC may adjust its assessment scale uniformly, except that no adjustment can deviate more than two basis points
from the base scale without notice and comment. No insured institution may pay a dividend if in default of the federal
deposit insurance assessment.
The FDIC may terminate deposit insurance upon a finding that an institution has engaged in unsafe or unsound
practices, is in an unsafe or unsound condition to continue operations or has violated any applicable law, regulation, rule,
order or condition imposed by the FDIC. We do not know of any practice, condition or violation that might lead to
termination of Esquire Bank’s deposit insurance.
In addition to the FDIC assessments, the Financing Corporation (FICO) is authorized to impose and collect, through
the FDIC as collection agent, assessments for anticipated payments, issuance costs and custodial fees on bonds issued by
the FICO in the 1980s to recapitalize the now defunct Federal Savings and Loan Insurance Corporation. The final bonds
issued by the FICO are due to mature in September 2019.
Capitalization
Federal regulations require FDIC insured depository institutions, including national banks, to meet several minimum
capital standards: a common equity Tier 1 capital to risk-based assets ratio, a Tier 1 capital to risk-based assets ratio, a
total capital to risk-based assets and a Tier 1 capital to total assets leverage ratio. The existing capital requirements were
effective January 1, 2015 and are the result of a final rule implementing regulatory amendments based on
recommendations of the Basel Committee on Banking Supervision and certain requirements of the Dodd-Frank Act.
The capital standards require the maintenance of common equity Tier 1 capital, Tier 1 capital and total capital to
risk-weighted assets of at least 4.5%, 6% and 8%, respectively, and a leverage ratio of at least 4% Tier 1 capital. Common
equity Tier 1 capital is generally defined as common stockholders’ equity and retained earnings. Tier 1 capital is generally
defined as common equity Tier 1 and Additional Tier 1 capital. Additional Tier 1 capital generally includes certain
noncumulative perpetual preferred stock and related surplus and minority interests in equity accounts of consolidated
subsidiaries. Total capital includes Tier 1 capital (common equity Tier 1 capital plus Additional Tier 1 capital) and Tier 2
capital. Tier 2 capital is comprised of capital instruments and related surplus meeting specified requirements, and may
include cumulative preferred stock and long-term perpetual preferred stock, mandatory convertible securities, intermediate
preferred stock and subordinated debt. Also included in Tier 2 capital is the allowance for loan and lease losses limited to
a maximum of 1.25% of risk-weighted assets and, for institutions that have exercised an opt-out election regarding the
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treatment of Accumulated Other Comprehensive Income (“AOCI”), up to 45% of net unrealized gains on available-for-sale
equity securities with readily determinable fair market values. Institutions that have not exercised the AOCI opt-out have
AOCI
losses on
available-for-sale-securities). We exercised the opt-out election regarding the treatment of AOCI. Calculation of all types
of regulatory capital is subject to deductions and adjustments specified in the regulations.
into common equity Tier 1 capital
(including unrealized gains and
incorporated
In determining the amount of risk-weighted assets for purposes of calculating risk-based capital ratios, a bank’s assets,
including certain off-balance sheet assets (e.g., recourse obligations, direct credit substitutes, residual interests), are
multiplied by a risk weight factor assigned by the regulations based on perceived risks inherent in the type of asset. Higher
levels of capital are required for asset categories believed to present greater risk. For example, a risk weight of 0% is
assigned to cash and U.S. government securities, a risk weight of 50% is generally assigned to prudently underwritten first
lien 1 – 4 family residential mortgages, a risk weight of 100% is assigned to commercial and consumer loans, a risk weight
of 150% is assigned to certain past due loans and a risk weight of between 0% to 600% is assigned to permissible equity
interests, depending on certain specified factors.
In addition to establishing the minimum regulatory capital requirements, the regulations limit capital distributions and
certain discretionary bonus payments to management if the institution does not hold a “capital conservation buffer”
consisting of 2.5% of common equity Tier 1 capital to risk-weighted assets above the amount necessary to meet its
minimum risk-based capital requirements. The capital conservation buffer requirement was phased in beginning January 1,
2016 at 0.625% of risk-weighted assets and increased each year until fully implemented at 2.5% on January 1, 2019.
Legislation enacted in 2018 requires the federal banking agencies, including the Federal Reserve, to establish a
“community bank leverage ratio” of between 8-10% of average total consolidated assets for qualifying institutions with
less than $10 billion of assets. Banks meeting the specified requirement and electing to follow the alternative framework
would be deemed to comply with the regulatory capital requirements, including the risk-based requirements. The federal
agencies issued a proposed rule in November 2018 that would set the community bank leverage ratio at 9%.
Safety and Soundness Standards
Each federal banking agency, including the OCC, has adopted guidelines establishing general standards relating to
internal controls, information and internal audit systems, loan documentation, credit underwriting, interest rate exposure,
asset growth, asset quality, earnings, compensation, fees and benefits and information security standards. In general, the
guidelines require appropriate systems and practices to identify and manage the risks and exposures specified in the
guidelines. The guidelines prohibit excessive compensation as an unsafe and unsound practice and describe compensation
as excessive when the amounts paid are unreasonable or disproportionate to the services performed by an executive officer,
employee, director, or principal stockholder. The FDIC also has issued guidance on risks banks may face from third party
relationships (e.g. relationships under which the third party provides services to the bank). The guidance generally requires
the bank to perform adequate due diligence on the third party, appropriately document the relationship, and perform
adequate oversight and auditing, in order to the limit the risks to the bank.
Prompt Corrective Regulatory Action
Federal law requires that federal bank regulatory authorities take “prompt corrective action” with respect to
institutions that do not meet minimum capital requirements. For these purposes, the statute establishes five capital tiers:
well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized and critically undercapitalized.
National banks that have insufficient capital are subject to certain mandatory and discretionary supervisory measures.
For example, a bank that is “undercapitalized” (i.e. fails to comply with any regulatory capital requirement) is subject to
growth limitations and is required to submit a capital restoration plan; a holding company that controls such a bank is
required to guarantee that the bank complies with the restoration plan. A “significantly undercapitalized” bank is subject
to additional restrictions. National banks deemed by the OCC to be “critically undercapitalized” are subject to the
appointment of a receiver or conservator.
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The final rule that increased regulatory capital standards also adjusted the prompt corrective action tiers as of
January 1, 2015 to conform to the new capital standards. The various categories now incorporate the newly adopted
common equity Tier 1 capital requirement, an increase in the Tier 1 to risk-based assets requirement and other changes.
Under the revised prompt corrective action requirements, insured depository institutions are required to meet the following
in order to qualify as “well capitalized:” (1) a common equity Tier 1 risk-based capital ratio of 6.5% (new standard); (2) a
Tier 1 risk-based capital ratio of 8% (increased from 6%); (3) a total risk-based capital ratio of 10% (unchanged) and (4) a
Tier 1 leverage ratio of 5% (unchanged). Pursuant to the proposed rule referenced earlier, an institution that meets the
“community bank leverage ratio” and elects that regulatory capital framework would be considered “well capitalized.”
Dividends
Under federal law and applicable regulations, a national bank may generally declare a cash dividend, without approval
from the OCC, in an amount equal to its year-to-date net income plus the prior two years’ net income that is still available
for cash dividend. Cash dividends exceeding those amounts require application to and approval by the OCC. To pay a cash
dividend, a national bank must also maintain an adequate capital conservation buffer under the capital rules discussed
above.
Transactions with Affiliates and Insiders
Sections 23A and 23B of the Federal Reserve Act govern transactions between a national bank and its affiliates, which
includes the Company. The FRB has adopted Regulation W, which implements and interprets Sections 23A and 23B, in
part by codifying prior FRB interpretations.
An affiliate of a bank is any company or entity that controls, is controlled by or is under common control with the
bank. A subsidiary of a bank that is not also a depository institution or a “financial subsidiary” under federal law is not
treated as an affiliate of the bank for the purposes of Sections 23A and 23B; however, the OCC has the discretion to treat
subsidiaries of a bank as affiliates on a case-by-case basis. Section 23A limits the extent to which a bank or its subsidiaries
may engage in “covered transactions” with any one affiliate to 10% of the bank’s capital stock and surplus. There is an
aggregate limit of 20% of the bank’s capital stock and surplus for such transactions with all affiliates. The term “covered
transaction” includes, among other things, the making of a loan to an affiliate, a purchase of assets from an affiliate, the
issuance of a guarantee on behalf of an affiliate and the acceptance of securities of an affiliate as collateral for a loan. All
such transactions are required to be on terms and conditions that are consistent with safe and sound banking practices and
no transaction may involve the acquisition of any “low quality asset” from an affiliate. Certain covered transactions, such
as loans to or guarantees on behalf of an affiliate, must be secured by collateral in amounts ranging from 100 to 130 percent
of the loan amount, depending upon the type of collateral. In addition, Section 23B requires that any covered transaction
(and specified other transactions) between a bank and an affiliate must be on terms and conditions that are substantially
the same, or at least as favorable, to the bank, as those that would be provided to a non-affiliate.
A bank’s loans to its executive officers, directors, any owner of more than 10% of its stock (each, an “insider”) and
certain entities affiliated with any such person (an insider’s “related interest”) are subject to the conditions and limitations
imposed by Section 22(h) of the Federal Reserve Act and the FRB’s Regulation O. The aggregate amount of a bank’s
loans to any insider and the insider’s related interests may not exceed the loans-to-one-borrower limit applicable to national
banks. Aggregate loans by a bank to its insiders and insiders’ related interests may not exceed the bank’s unimpaired
capital and unimpaired surplus. With certain exceptions, such as education loans and certain 1-4 family residential
mortgages a bank’s loans to its executive officers, may not exceed the greater of $25,000 or 2.5% of the bank’s unimpaired
capital and unimpaired surplus, but in no event more than $100,000. Regulation O also requires that any loan to an insider
or a related interest of an insider be approved in advance by a majority of the board of directors of the bank, with any
interested director not participating in the voting, if the loan, when aggregated with any existing loans to that insider or
the insider’s related interests, would exceed the lesser or $500,000 or 5% of the bank’s unimpaired capital and surplus.
Generally, such loans must be made on substantially the same terms as, and follow credit underwriting procedures that are
no less stringent than, those that are prevailing at the time for comparable transactions with other persons and must not
present more than a normal risk of collectability. An exception is made for extensions of credit made pursuant to a benefit
or compensation plan of a bank that is widely available to employees of the bank and that does not give any preference to
insiders of the bank over other employees of the bank.
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Enforcement
The OCC has extensive enforcement authority over national banks to correct unsafe or unsound practices and
violations of law or regulation. Such authority includes the issuance of cease and desist orders, assessment of civil money
penalties and removal of officers and directors. The OCC may also appoint conservator or receiver for a national bank
under specified circumstances, such as where (i) the bank’s assets are less than its obligations to creditors, (ii) the bank is
likely to be unable to pay its obligations or meet depositors’ demands in the normal course of business or (iii) a substantial
dissipation of bank assets or earnings has occurred due to a violation of law of regulation or unsafe or unsound practices.
Federal Reserve System
Under FRB regulations, Esquire Bank is required to maintain reserves at the Federal Reserve Bank against its
transaction accounts, including checking and NOW accounts. The regulations currently require that reserves of 3% be
maintained against aggregate transaction accounts over $16.3 million and 10% against that portion of total transaction
accounts in excess of $124.2 million. The first $16.3 million of otherwise reservable balances are exempted from the
reserve requirements. The Bank is in compliance with these requirements. The requirements are adjusted annually by the
FRB.
Examinations and Assessments
Esquire Bank is required to file periodic reports with and is subject to periodic examination by the OCC. Federal
regulations generally require periodic on-site examinations for all depository institutions. Esquire Bank is required to pay
an annual assessment to the OCC to fund the agency’s operations.
Community Reinvestment Act and Fair Lending Laws
Under the CRA, Esquire Bank has a continuing and affirmative obligation consistent with its safe and sound operation
to help meet the credit needs of its entire community, including low and moderate income neighborhoods. The CRA does
not establish specific lending requirements or programs for financial institutions nor does it limit an institution’s discretion
to develop the types of products and services that it believes are best suited to its particular community. The CRA requires
the OCC to assess its record of meeting the credit needs of its community and to take that record into account in its
evaluation of certain applications by Esquire Bank. For example, the regulations specify that a bank’s CRA performance
will be considered in its expansion (e.g., branching or merger) proposals and may be the basis for approving, denying or
conditioning the approval of an application. As of the date of its most recent OCC evaluation, Esquire Bank was rated
“satisfactory” with respect to its CRA compliance.
USA PATRIOT Act and Money Laundering
Esquire Bank is subject to the federal Bank Secrecy Act (the “BSA”), which incorporates several laws, including the
Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of
2001, or the USA PATRIOT Act and related regulations. The USA PATRIOT Act gives the federal government powers
to address money laundering and terrorist threats through enhanced domestic security measures, expanded surveillance
powers, increased information sharing, and broadened anti-money laundering requirements. By way of amendments to the
Bank Secrecy Act, Title III of the USA PATRIOT Act implemented measures intended to encourage information sharing
among bank regulatory agencies and law enforcement bodies. Further, certain provisions of Title III impose affirmative
obligations on a broad range of financial institutions, including banks, thrifts, brokers, dealers, credit unions, money
transfer agents and parties registered under the Commodity Exchange Act.
Among other things, Title III of the USA PATRIOT Act and the related regulations require:
• Establishment of anti-money laundering compliance programs that includes policies, procedures, and internal
controls; the appointment of an anti-money laundering compliance officer; a training program; and independent
testing;
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• Filing of certain reports to FinCEN and law enforcement that are designated to assist in the detection and
prevention of money laundering and terrorist financing activities;
• Establishment of a program specifying procedures for obtaining and maintaining certain records from customers
seeking to open new accounts, including verifying the identity of customers;
•
In certain circumstances, compliance with enhanced due diligence policies, procedures and controls designed to
detect and report money-laundering, terrorist financing and other suspicious activity;
• Monitoring account activity for suspicious transactions; and
• A heightened level of review for certain high risk customers or accounts.
The USA PATRIOT Act also includes prohibitions on correspondent accounts for foreign shell banks and requires
compliance with record keeping obligations with respect to correspondent accounts of foreign banks.
The bank regulatory agencies have increased the regulatory scrutiny of the Bank Secrecy Act and anti-money
laundering programs maintained by financial institutions. Significant penalties and fines, as well as other supervisory
orders may be imposed on a financial institution for non-compliance with these requirements. In addition, the federal bank
regulatory agencies must consider the effectiveness of financial institutions engaging in a merger transaction in combating
money laundering activities.
Esquire Bank has adopted policies and procedures to comply with these requirements.
Privacy Laws
Esquire Bank is subject to a variety of federal and state privacy laws, which govern the collection, safeguarding,
sharing and use of customer information. For example, the Gramm-Leach-Bliley Act requires all financial institutions
offering financial products or services to retail customers to provide such customers with the financial institution’s privacy
policy and provide such customers the opportunity to “opt out” of the sharing of certain personal financial information
with unaffiliated third parties. It also requires banks to safeguard personal information of consumer customers. Some state
laws also protect the privacy of information of state residents and require adequate security for such data.
Merchant Services
Esquire Bank is also subject to the rules of Visa, MasterCard and other payment networks in which it participates. If
Esquire Bank fails to comply with such rules, the networks could impose fines or require us to stop providing merchant
services for cards under such network’s brand or routed through such network.
Other Regulations
Esquire Bank’s operations are also subject to federal laws applicable to credit transactions, such as:
• The Truth-In-Lending Act, governing disclosures of credit terms to consumer borrowers;
• The Real Estate Settlement Procedures Act, requiring that borrowers for mortgage loans for 1 – 4 family
residential real estate receive various disclosures, including good faith estimates of settlement costs, lender
servicing and escrow account practices, and prohibiting certain practices that increase the cost of settlement
services;
• The Home Mortgage Disclosure Act, requiring financial institutions to provide information to enable the public
and public officials to determine whether a financial institution is fulfilling its obligation to help meet the housing
needs of the community it serves;
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• The Equal Credit Opportunity Act and other fair lending laws, prohibiting discrimination on the basis of race,
religion, sex and other prohibited factors in extending credit;
• The Fair Credit Reporting Act, governing the use of credit reports on consumers and the provision of information
to credit reporting agencies;
• Unfair or Deceptive Acts or Practices laws and regulations;
• The Fair Debt Collection Act, governing the manner in which consumer debts may be collected by collection
agencies; and
• The rules and regulations of the various federal agencies charged with the responsibility of implementing such
federal laws.
The operations of Esquire Bank are further subject to the:
• The Truth in Savings Act, which specifies disclosure requirements with respect to deposit accounts;
• The Right to Financial Privacy Act, which imposes a duty to maintain confidentiality of consumer financial
records and prescribes procedures for complying with administrative subpoenas of financial records;
• The Electronic Funds Transfer Act and Regulation E promulgated thereunder, which govern automatic deposits
to and withdrawals from deposit accounts and customers’ rights and liabilities arising from the use of automated
teller machines and other electronic banking services; and
• The Check Clearing for the 21st Century Act (also known as “Check 21”), which gives “substitute checks,” such
as digital check images and copies made from that image, the same legal standing as the original paper check.
Holding Company Regulation
The Company, as a bank holding company controlling Esquire Bank, is subject to regulation and supervision by the
FRB under the BHCA. The Company is periodically examined by, required to submit reports to the FRB and is required
to comply with the FRB’s rules and regulations. Among other things, the FRB has authority to restrict activities by a bank
holding company that are deemed to pose a serious risk to the subsidiary bank. The FRB has historically imposed
consolidated capital adequacy guidelines for bank holding structured similar, but not identical, to those of the OCC for
national banks. The Dodd-Frank Act directed the FRB to issue consolidated capital requirements for depository institution
holding companies that are no less stringent, both quantitatively and in terms of components of capital, than those
applicable to institutions themselves. The previously discussed final rule regarding regulatory capital requirements
implemented the Dodd-Frank Act as to bank holding company capital standards. Consolidated regulatory capital
requirements identical to those applicable to the subsidiary banks applied to bank holding companies as of January 1, 2015.
However, the FRB exempts from the consolidated capital requirements bank holding companies that are below a specified
asset size, unless otherwise directed in specific cases. Legislation in 2018 raised the asset threshold for the exemption
from $1 billion to $3 billion. Consequently, the Company is not currently subject to the consolidated holding company
capital requirements.
The policy of the FRB is that a bank holding company must serve as a source of financial and managerial strength to
its subsidiary banks by providing capital and other support in times of distress. The Dodd-Frank Act codified the source
of strength policy.
Under the prompt corrective action provisions of federal law, a bank holding company parent of an undercapitalized
subsidiary bank is required to guarantee, within specified limits, the capital restoration plan that is required of an
undercapitalized bank. If an undercapitalized bank fails to file an acceptable capital restoration plan or fails to implement
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an accepted plan, the FRB may prohibit the bank holding company parent of the undercapitalized bank from paying
dividends or making any other capital distribution.
As a bank holding company, the Company is required to obtain the prior approval of the FRB to acquire more than
5% of a class of voting securities of any additional bank or bank holding company or to acquire all or substantially all, the
assets of any additional bank or bank holding company. In evaluating acquisition application, the FRB evaluates factors
such as the financial condition, management resources and future prospects of the parties, the convenience and needs of
the communities involved and competitive factors. In addition, bank holding companies may generally only engage in
activities that are closely related to banking as determined by the FRB. Bank holding companies that meet certain criteria
may opt to become a financial holding company and thereby engage in a broader array of financial activities.
FRB policy is that a bank holding company should pay cash dividends only to the extent that the company’s net
income for the past two years is sufficient to fund the dividends and the prospective rate of earnings retention is consistent
with the company’s capital needs, asset quality and overall financial condition. In addition, FRB guidance sets forth the
supervisory expectation that bank holding companies will inform and consult with Federal Reserve Bank staff in advance
of issuing a cash dividend that exceeds earnings for the quarter and should inform the Federal Reserve Bank and should
eliminate, defer or significantly reduce dividends if (i) net income available to stockholders for the past four quarters, net
of dividends previously paid during that period, is not sufficient to fully fund the dividends, (ii) prospective rate of earnings
retention is not consistent with the bank holding company’s capital needs and overall current and prospective financial
condition, or (iii) the bank holding company will not meet, or is in danger of not meeting, its minimum regulatory capital
adequacy ratios.
A bank holding company is required to give the FRB prior written notice of any repurchase or redemption of its
outstanding equity securities if the gross consideration for repurchase or redemption, when combined with the net
consideration paid for all such repurchases or redemptions during the preceding 12 months, will be equal to 10% or more
of the company’s consolidated net worth. The FRB may disapprove such a repurchase or redemption if it determines that
the proposal would constitute an unsafe and unsound practice or violate a law or regulation. Such notice and approval is
not required for a bank holding company that meets certain qualitative criteria. However, FRB guidance generally provides
for bank holding company consultation with Federal Reserve Bank staff prior to engaging in a repurchase or redemption
of a bank holding company’s stock, regardless of whether a formal written notice is required. Moreover, the Federal
Reserve staff is interpreting the capital regulations as requiring a bank holding company to secure Federal Reserve approval
prior to redeeming or repurchasing any capital stock that is included in regulatory capital.
The above FRB requirements may restrict a bank holding company’s ability to pay dividends to stockholders or
engage in repurchases or redemptions of its shares.
Acquisition of Control of the Company. Under the Change in Bank Control Act, no person may acquire control of a
bank holding company such as the Company unless the FRB has been prior written notice and has not issued a notice
disapproving the proposed acquisition. In evaluating such notices, the FRB takes into consideration such factors as the
financial resources, competence, experience and integrity of the acquirer, the future prospects the bank holding company
involved and its subsidiary bank and the competitive effects of the acquisition. Control, as defined under federal law,
means ownership, control of or holding irrevocable proxies representing more than 25% of any class of voting stock,
control in any manner of the election of a majority of the company’s directors, or a determination by the regulator that the
acquiror has the power to direct, or directly or indirectly to exercise a controlling influence over, the management or
policies of the institution. Acquisition of more than 10% of any class of a bank holding company’s voting stock constitutes
a rebuttable presumption of control under the regulations under certain circumstances including where, is the case with the
Company, the issuer has registered securities under Section 12 of the Securities Exchange Act of 1934.
Federal Securities Laws
Esquire Financial Holdings, Inc.’s common stock is registered with the Securities and Exchange Commission.
Consequently, Esquire Financial Holdings, Inc. is subject to the information, proxy solicitation, insider trading and other
restrictions and requirements of the SEC under the Securities Exchange Act of 1934.
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Emerging Growth Company Status
The Jumpstart Our Business Startups Act (the “JOBS Act”), which was enacted in April 2012, has made numerous
changes to the federal securities laws to facilitate access to capital markets. Under the JOBS Act, a company with total
annual gross revenues of less than $1.07 billion during its most recently completed fiscal year qualifies as an “emerging
growth company.” Esquire Financial Holdings, Inc. qualifies as an emerging growth company under the JOBS Act.
An “emerging growth company” may choose not to hold stockholder votes to approve annual executive compensation
(more frequently referred to as “say-on-pay” votes) or executive compensation payable in connection with a merger (more
frequently referred to as “say-on-golden parachute” votes). An emerging growth company also is not subject to the
requirement that its auditors attest to the effectiveness of the company’s internal control over financial reporting, and can
provide scaled disclosure regarding executive compensation. Finally, an emerging growth company may elect to comply
with new or amended accounting pronouncements in the same manner as a private company, but must make such election
when the company is first required to file a registration statement. Such an election is irrevocable during the period a
company is an emerging growth company. Esquire Financial Holdings, Inc. has elected to comply with new or amended
accounting pronouncements in the same manner as a public company.
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).
Sarbanes-Oxley Act of 2002
The Sarbanes-Oxley Act of 2002 is intended to improve corporate responsibility, to provide for enhanced penalties
for accounting and auditing improprieties at publicly traded companies and to protect investors by improving the accuracy
and reliability of corporate disclosures pursuant to the securities laws. We have policies, procedures and systems designed
to comply with these regulations, and we review and document such policies, procedures and systems to ensure continued
compliance with these regulations.
ITEM 1A. Risk Factors
The material risks that management believes affect the Company are described below. You should carefully consider
the risks as described below, together with all of the information included herein. The risks described below are not the
only risks the Company faces. Additional risks not presently known also may have a material adverse effect on the
Company’s results of operations and financial condition.
Risks Related to Our Business
We have a limited operating history and have recently experienced significant growth, which makes it difficult to
forecast our revenue and evaluate our business and future prospects.
We have only been in existence since 2006, and in 2016, 2017 and 2018, we experienced significant growth following
our initial public offering, a capital raise and the conversion from a savings and loan holding company with a savings bank
subsidiary to a bank holding company with a national bank subsidiary. As a result of our limited operating history and
recent accelerated growth, in particular in our merchant services business, our ability to forecast our future results of
operations and plan for and model future growth is limited and subject to a number of uncertainties. We have encountered
and will continue to encounter risks and uncertainties frequently experienced by growing companies in the financial
services industry, such as the risks and uncertainties described herein. Accordingly, we may be unable to prepare accurate
internal financial forecasts and our results of operations in future reporting periods may be below the expectations of
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investors. If we do not address these risks successfully, our results of operations could differ materially from our estimates
and forecasts or the expectations of our stockholders, causing our business to suffer and our stock price to decline.
Because we intend to continue to increase our commercial loans, our credit risk may increase.
At December 31, 2018, our commercial loans totaled $191.8 million, or 41.1% of our total loans, including
$176.6 million of Commercial Attorney-Related Loans, which represented 92.1% of our commercial loans. We intend to
increase our originations of commercial loans, including our Commercial Attorney-Related Loans, which consist of
working capital lines of credit, case cost lines of credit, term loans to law firms, and post-settlement commercial and other
commercial attorney-related loans. These loans generally have more risk than 1 – 4 family residential mortgage loans and
commercial loans secured by real estate. Since repayment of commercial loans, including our Commercial Attorney-
Related Loans, depends on the successful receipt of settlement proceeds or the successful management and operation of
the borrower’s businesses, repayment of such loans can be affected by adverse court decisions and adverse conditions in
the local and national economy. Commercial Attorney-Related Loans present unique credit risks in that attorney or law
firm revenues can be volatile depending on the number of cases, the timing of court decisions and the timing of the overall
judicial process. In our experience, an average case can take two to four years to litigate. Determining the value of an
attorney’s or law firm’s case inventory (borrowing base) is also inherently an imprecise exercise. Though repayment of
case lines is not dependent on a favorable case settlement, unfavorable outcomes can ultimately impact the cash flows of
the borrower. An adverse development with respect to one loan or one Commercial Attorney-Related Loan credit
relationship can expose us to significantly greater risk of loss compared to an adverse development with respect to a 1 – 4
family residential mortgage loan or a commercial real estate loan.
Because we plan to continue to increase our originations of these loans, commercial loans generally have a larger
average size as compared with other loans such as 1-4 family residential loans, and the collateral for commercial loans is
generally less readily-marketable, losses incurred on a small number of commercial loans could have a disproportionate
and material adverse impact on our financial condition and results of operations.
A substantial portion of our business is dependent on the prospects of the legal industry and changes in the legal
industry may adversely affect our growth and profitability.
We depend on our relationships within the legal community and our products and services tailored to the legal industry
account for a significant source of our revenue. As we intend to focus our growth on our Attorney-Related Loan products,
changes in the legal industry, including a significant decrease in the number of litigation cases in the United States, reform
of the tort industry that reduces the ability of plaintiffs to bring cases or reduces the damages plaintiffs can receive, or a
significant increase in the unemployment rate for attorneys, could, individually or in the aggregate, have a material adverse
effect on our profitability, financial condition and growth of our business.
A substantial portion of our loan portfolio consists of multifamily real estate loans and commercial real estate loans,
which have a higher degree of risk than other types of loans.
At December 31, 2018, we had $136.5 million of multifamily loans and $33.1 million of commercial real estate loans.
Multifamily and commercial real estate loans represented 36.3% of our total loan portfolio at December 31, 2018.
Multifamily and commercial real estate loans are often larger and involve greater risks than other types of lending. Because
payments on such loans are often dependent on the successful operation or development of the property or business
involved, repayment of such loans is often more sensitive than other types of loans to adverse conditions in the real estate
market or the general business climate and economy. Accordingly, a downturn in the real estate market and a challenging
business and economic environment may increase our risk related to multifamily and commercial real estate loans. Unlike
1-4 family residential mortgage loans, which generally are made on the basis of the borrower’s ability to make repayment
from their employment and other income and which are secured by real property whose value tends to be more easily
ascertainable, multifamily and commercial real estate loans typically are made on the basis of the borrower’s ability to
make repayment from the cash flow of the commercial venture. If the cash flow from business operations is reduced, the
borrower’s ability to repay the loan may be impaired. Due to the larger average size of each multifamily and commercial
real estate loan as compared with other loans such as 1-4 family residential loans, as well as collateral that is generally less
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readily-marketable, losses incurred on a small number of multifamily and commercial real estate loans could have a
material adverse impact on our financial condition and results of operations.
We expect to increase our originations of consumer loans, including post-settlement consumer and structured
settlement loans, and such loans generally carry greater risk than loans secured by owner-occupied, 1 – 4 family real
estate, and these risks will increase as we continue to increase originations of these types of loans.
At December 31, 2018, our consumer loans totaled $43.7 million, or 9.3% of our total loan portfolio, of which
$33.6 million, or 76.9%, were post-settlement consumer loans and $1.1 million, or 2.6%, were structured settlement loans.
Consumer loans typically have shorter terms, lower balances, higher yields and higher risks of default than 1 – 4 family
residential loans. Consumer loan collections are dependent on the borrower’s continuing financial stability and are
therefore more likely to be affected by adverse personal circumstances, such as a loss of employment or unexpected
medical costs. While our Consumer Attorney-Related Loans, which consist of post-settlement consumer and structured
settlement loans, are typically well secured by the settlement amount, we can still be exposed to the financial stability of
the borrower as a result of unforeseen rulings or administrative legal anomalies with a particular borrower’s settlement
that eliminate or greatly reduce their settlement amount. Additionally, we have a concentration in NFL loans which totaled
$27.9 million or 83.2% of our total post-settlement loans. Furthermore, the application of various federal and state laws,
including bankruptcy and insolvency laws, may limit our ability to recover on such loans. As we increase our originations
of consumer loans, it may become necessary to increase our provision for loan losses in the event our losses on these loans
increase, which would reduce our profits.
Potential fraud by our post settlement consumer loan customers who are claimants or others related to the NFL
Concussion Settlement Program could increase our actual loan losses which would decrease earnings.
On December 10, 2018, the United States District Court for the Eastern District of Pennsylvania appointed a special
investigator in the NFL Concussion Injury Litigation (Case No. 12-md-2323) to ensure the integrity of the NFL
Concussion Settlement Program, the efficient processing of valid claims, and impose appropriate sanctions if wrongdoing
is found which was in response to allegations of fraudulent claims. We believe that the additional administration process
will extend the duration of our assets longer than originally anticipated when originated which may increase our credit
risk. Although, we have not encountered any such wrongdoing within our portfolio, if it is determined that any of our
NFL loan customers or others committed fraud when filing their application to the NFL Concussion Settlement Program
or to Esquire Bank for the related loan, we may experience credit losses, which could have an adverse effect on our
operating results. We have ceased the NFL loan origination program as of December 2017 and our total NFL consumer
loan exposure as of December 31, 2018 is approximately $23.0 million.
As a business operating in the financial services industry, our business and operations may be adversely affected in
numerous and complex ways by weak economic conditions.
Our business and operations, which primarily consist of lending money to customers in the form of loans, borrowing
money from customers in the form of deposits and investing in securities, are sensitive to general business and economic
conditions in the United States. If the U.S. economy weakens, our growth and profitability from our lending, deposit and
investment operations could be constrained. Uncertainty about the federal fiscal policymaking process, the medium and
long-term fiscal outlook of the federal government, and future tax rates is a concern for businesses, consumers and
investors in the United States. In addition, economic conditions in foreign countries could affect the stability of global
financial markets, which could hinder U.S. economic growth. Weak economic conditions are characterized by deflation,
fluctuations in debt and equity capital markets, a lack of liquidity and/or depressed prices in the secondary market for
mortgage loans, increased delinquencies on mortgage, consumer and commercial loans, 1-4 family residential and
commercial real estate price declines and lower home sales and commercial activity. The current economic environment
is also characterized by interest rates at historically low levels, which impacts our ability to attract deposits and to generate
attractive earnings through our investment portfolio. All of these factors are detrimental to our business, and the interplay
between these factors can be complex and unpredictable. Our business is also significantly affected by monetary and
related policies of the U.S. federal government and its agencies. Changes in any of these policies are influenced by
macroeconomic conditions and other factors that are beyond our control. Adverse economic conditions and government
23
policy responses to such conditions could have a material adverse effect on our business, financial condition, results of
operations and prospects.
A substantial majority of our loans and operations are in New York, and therefore our business is particularly
vulnerable to a downturn in the New York City economy.
Unlike larger financial institutions that are more geographically diversified, a large portion of our business is
concentrated primarily in the state of New York, and in New York City in particular. As of December 31, 2018, 67.5% of
our loan portfolio was in New York and our loan portfolio had concentrations of 55.0% in New York City. If the local
economy, and particularly the real estate market, declines, the rates of delinquencies, defaults, foreclosures, bankruptcies
and losses in our loan portfolio would likely increase. As a result of this lack of diversification in our loan portfolio, a
downturn in the local economy generally and real estate market specifically could significantly reduce our profitability
and growth and adversely affect our financial condition.
Interest rate shifts may reduce net interest income and otherwise negatively impact our financial condition and results
of operations.
The majority of our banking assets are monetary in nature and subject to risk from changes in interest rates. Like most
financial institutions, our earnings and cash flows depend to a great extent upon the level of our net interest income, or the
difference between the interest income we earn on loans, investments and other interest earning assets, and the interest we
pay on interest bearing liabilities, such as deposits and borrowings. Changes in interest rates can increase or decrease our
net interest income, because different types of assets and liabilities may react differently, and at different times, to market
interest rate changes.
When interest bearing liabilities mature or reprice more quickly, or to a greater degree than interest earning assets in
a period, an increase in interest rates could reduce net interest income. Similarly, when interest earning assets mature or
reprice more quickly, or to a greater degree than interest bearing liabilities, falling interest rates could reduce net interest
income. Additionally, an increase in interest rates may, among other things, reduce the demand for loans and our ability
to originate loans and decrease loan repayment rates. A decrease in the general level of interest rates may affect us through,
among other things, increased prepayments on our loan portfolio and increased competition for deposits. Accordingly,
changes in the level of market interest rates affect our net yield on interest earning assets, loan origination volume and our
overall results. Although our asset-liability management strategy is designed to control and mitigate exposure to the risks
related to changes in market interest rates, those rates are affected by many factors outside of our control, including
governmental monetary policies, inflation, deflation, recession, changes in unemployment, the money supply, international
disorder and instability in domestic and foreign financial markets.
Our small size makes it more difficult for us to compete.
Our small size makes it more difficult to compete with other financial institutions which are generally larger and can
more easily afford to invest in the marketing and technologies needed to attract and retain customers. Because our principal
source of income is the net interest income we earn on our loans and investments after deducting interest paid on deposits
and other sources of funds, our ability to generate the revenues needed to cover our expenses and finance such investments
is limited by the size of our loan and investment portfolios. In addition, we compete with many larger financial institutions
and other financial companies who operate in the merchant services business. Accordingly, we are not always able to offer
new products and services as quickly as our competitors. As a smaller institution, we are also disproportionately affected
by the continually increasing costs of compliance with new banking and other regulations.
We may not be able to grow, and if we do we may have difficulty managing that growth.
Our business strategy is to continue to grow our assets and expand our operations, including through potential strategic
acquisitions. Our ability to grow depends, in part, upon our ability to expand our market share, successfully attract core
deposits, and to identify loan and investment opportunities as well as opportunities to generate fee-based income. We can
provide no assurance that we will be successful in increasing the volume of our loans and deposits at acceptable levels and
upon terms acceptable to us. We also can provide no assurance that we will be successful in expanding our operations
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organically or through strategic acquisition while managing the costs and implementation risks associated with this growth
strategy.
We expect to continue to experience growth in the number of our employees and customers and the scope of our
operations. Our success will depend upon the ability of our officers and key employees to continue to implement and
improve our operational and other systems, to manage multiple, concurrent customer relationships, and to hire, train and
manage our employees. In the event that we are unable to perform all these tasks and meet these challenges effectively,
including continuing to attract core deposits, our operations, and consequently our earnings, could be adversely impacted.
We rely heavily on our management team, our board of directors and our advisory board members and our business
could be adversely affected by the unexpected loss of one or more of our officers or directors.
We are led by a management team with substantial experience in the markets that we serve and the financial products
that we offer. Our operating strategy focuses on providing products and services through long-term relationship managers.
Additionally, we rely heavily on our directors’ and our advisory board members’ extensive business and personal contacts
and relationships to help establish and maintain our customer base. Accordingly, our success depends in large part on the
performance of our key officers and directors, as well as on our ability to attract, motivate and retain highly qualified
senior and middle management. Competition for employees is intense, and the process of identifying key personnel with
the combination of skills and attributes required to execute our business plan may be lengthy. We may not be successful
in retaining our key employees or directors and the unexpected loss of services of one or more of our officers or directors
could have a material adverse effect on our business because of their skills, knowledge of our market and financial
products, years of industry experience, long-term business and customer relationships and the difficulty of finding
qualified replacement personnel. If the services of any of our key personnel should become unavailable for any reason, we
may not be able to identify and hire qualified persons on terms acceptable to us, which could have an adverse effect on
our business, financial condition and results of operations. On August 10, 2018, our Executive Chairman, Dennis Shields,
passed away. Through appropriate succession planning and leadership of our Board of Directors and executive
management team, the operations of the Company were not impacted.
Our merchants or ISOs may be unable to satisfy obligations for which we may ultimately be liable.
We are subject to the risk of our merchants or ISOs being unable to satisfy obligations for which we may ultimately
be liable. If we are unable to collect amounts due from a merchant or ISO because of insolvency or other reasons, we may
bear the loss for those full amounts. We manage our credit risk and attempt to mitigate our risk by obtaining cash reserves,
both from merchants and ISOs, and through other contractual remedies. It is possible, however, that a default on such
obligations by one or more of our ISOs or merchants, could, individually or in the aggregate, have a material adverse effect
on our business, financial condition and results of operations.
Fraud by merchants or others could have a material adverse effect on our business and financial condition.
We may be subject to liability for fraudulent transactions initiated by merchants or others. Examples of such fraud
include when a merchant or other party knowingly uses a stolen or counterfeit card to make a transaction, or if a merchant
intentionally fails to deliver the merchandise or services sold in an otherwise valid transaction. Criminals are using
increasingly sophisticated methods to engage in illegal activities such as counterfeiting and fraud. It is possible that
incidents of fraud could increase in the future. Failure to effectively manage risk and prevent fraud would increase our
chargeback liability or other liability. Increases in chargebacks or other liability could have a material adverse effect on
our business, financial condition, and results of operations.
Changes in card network rules or standards could adversely affect our business.
In order to provide our merchant services, we are members of the Visa and MasterCard networks. As such, we are
subject to card network rules that could subject us or our ISOs and merchants to a variety of fines or penalties that may be
assessed on us, our ISOs, and our merchants. The termination of our membership, or the revocation of registration of any
of our ISOs, or any changes in card network rules or standards could increase the cost of operating our merchant servicer
25
business or limit our ability to provide merchant services to or through our customers, and could have a material adverse
effect on our business, financial condition and results of operations.
Changes in card network fees could impact our operations.
From time to time, the card networks increase the fees (known as interchange fees) that they charge to acquirers and
we charge to our merchants. It is possible that competitive pressures will result in us absorbing a portion of such increases
in the future, which would increase our costs, reduce our profit margin and adversely affect our business and financial
condition. In addition, the card networks require certain capital requirements. An increase in the required capital level
would further limit our use of capital for other purposes.
We are subject to certain operational risks, including, but not limited to, customer or employee fraud and data
processing system failures and errors.
Employee errors and employee and customer misconduct could subject us to financial losses or regulatory sanctions
and seriously harm our reputation. Misconduct by our employees could include hiding unauthorized activities from us,
improper or unauthorized activities on behalf of our customers or improper use of confidential information. It is not always
possible to prevent employee errors and misconduct, and the precautions we take to prevent and detect this activity may
not be effective in all cases. Employee errors could also subject us to financial claims for negligence.
We maintain a system of internal controls and insurance coverage to mitigate against operational risks, including data
processing system failures and errors and customer or employee fraud. If our internal controls fail to prevent or detect an
occurrence, or if any resulting loss is not insured or exceeds applicable insurance limits, it could have a material adverse
effect on our business, financial condition and results of operations.
If the allowance for loan losses is not sufficient to cover actual loan losses, earnings could decrease.
Loan customers may not repay their loans according to the terms of their loans, and the collateral securing the payment
of their loans may be insufficient to assure repayment. We may experience significant credit losses, which could have a
material adverse effect on our operating results. Various assumptions and judgments about the collectability of the loan
portfolio are made, including the creditworthiness of borrowers and the value of the real estate and other assets serving as
collateral for the repayment of many loans. In determining the amount of the allowance for loan losses, management
reviews the loans and the loss and delinquency experience and evaluates economic conditions.
At December 31, 2018, our allowance for loan losses as a percentage of total loans, net of unearned income, was
1.20%. The determination of the appropriate level of allowance is subject to judgment and requires us to make significant
estimates of current credit risks and future trends, all of which are subject to material changes. If assumptions prove to be
incorrect, the allowance for loan losses may not cover probable incurred losses in the loan portfolio at the date of the
financial statements. Significant additions to the allowance would materially decrease net income. Non-performing loans
may increase and non-performing or delinquent loans may adversely affect future performance. We had no non-performing
loans at December 31, 2018. In addition, federal and state regulators periodically review the allowance for loan losses and
may require an increase in the allowance for loan losses or recognize further loan charge-offs. Any significant increase in
our allowance for loan losses or loan charge-offs as required by these regulatory agencies could have a material adverse
effect on our results of operations and financial condition.
The FASB has adopted a new accounting standard that will be effective for our first fiscal year after December 15,
2019. This standard, referred to as Current Expected Credit Loss, or CECL, will require financial institutions to determine
periodic estimates of lifetime expected credit losses on loans, and recognize the expected credit losses as allowances for
loan losses. This will change the current method of providing allowances for loan losses that are probable, which may
require us to increase our allowance for loan losses and increase the data we would need to collect and review to determine
the appropriate level of the allowance for loan losses.
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Bank regulators periodically review our allowance for loan losses and may require an increase to the provision for
loan losses or further loan charge-offs. Any increase in our allowance for loan losses or loan charge-offs as required by
these regulatory authorities may have a material adverse effect on our results of operations or financial condition.
Our loan portfolio is unseasoned.
With a growing and generally unseasoned loan portfolio, our credit risk may continue to increase and our future
performance could be adversely affected. While we believe we have underwriting standards designed to manage normal
lending risks, it is difficult to assess the future performance of our loan portfolio due to the recent origination of many of
these loans. As a result, it is difficult to predict whether any of our loans will become non-performing or delinquent loans,
or whether we will have any non-performing or delinquent loans that will adversely affect our future performance. At
December 31, 2018, the average age of our loans was 4.62 years, 2.98 years, 3.39 years, 2.11 years, 3.13 years and
1.62 years for our 1 – 4 family residential loans, multifamily loans, commercial real estate loans, construction loans,
commercial loans and consumer loans, respectively. At December 31, 2018, the average age of our loan portfolio was
2.66 years.
Changes in the valuation of our securities portfolio could hurt our profits and reduce our stockholders’ equity.
Our debt securities portfolio may be impacted by fluctuations in market value, potentially reducing accumulated other
comprehensive income and/or earnings. Fluctuations in market value may be caused by changes in market interest rates,
lower market prices for securities and limited investor demand. Management evaluates securities for other-than-temporary
impairment on a quarterly basis, with more frequent evaluation for selected issues. In analyzing a debt issuer’s financial
condition, management considers whether the securities are issued by the federal government or its agencies, whether
downgrades by bond rating agencies have occurred, industry analysts’ reports and, to a lesser extent given the relatively
insignificant levels of depreciation in our debt portfolio, spread differentials between the effective rates on instruments in
the portfolio compared to risk-free rates. In analyzing an equity issuer’s financial condition, management considers
industry analysts’ reports, financial performance and projected target prices of investment analysts within a one-year time
frame. If this evaluation shows impairment to the actual or projected cash flows associated with one or more securities, a
potential loss to earnings may occur. Changes in interest rates can also have an adverse effect on our financial condition,
as our available-for-sale securities are reported at their estimated fair value, and therefore are impacted by fluctuations in
interest rates. We increase or decrease our stockholders’ equity by the amount of change in the estimated fair value of the
available-for-sale securities, net of taxes. Declines in market value could result in other-than-temporary impairments of
these assets, which would lead to accounting charges that could have a material adverse effect on our net income and
capital levels. Refer to “Management’s Discussion and Analysis of Financial Condition and Results of Operations —
Securities Portfolio.”
We may not be able to adequately measure and limit the credit risk associated with our loan portfolio, which could
adversely affect our profitability.
As a part of the products and services that we offer, we make commercial and commercial real estate loans. The
principal economic risk associated with each class of loans is the creditworthiness of the borrower, which is affected by
the strength of the relevant business market segment, local market conditions, and general economic conditions. Additional
factors related to the credit quality of commercial loans include the quality of the management of the business and the
borrower’s ability both to properly evaluate changes in the supply and demand characteristics affecting their market for
products and services, and to effectively respond to those changes. Additional factors related to the credit quality of
commercial real estate loans include tenant vacancy rates and the quality of management of the property. A failure to
effectively measure and limit the credit risk associated with our loan portfolio could have an adverse effect on our business,
financial condition, and results of operations.
Changes in economic conditions could cause an increase in delinquencies and nonperforming assets, including loan
charge-offs, which could depress our net income and growth.
Our loan portfolio includes many real estate secured loans, demand for which may decrease during economic
downturns as a result of, among other things, an increase in unemployment, a decrease in real estate values and, a slowdown
27
in housing. If we see negative economic conditions develop in the United States as a whole or our New York market, we
could experience higher delinquencies and loan charge-offs, which would reduce our net income and adversely affect our
financial condition. Furthermore, to the extent that real estate collateral is obtained through foreclosure, the costs of holding
and marketing the real estate collateral, as well as the ultimate values obtained from disposition, could reduce our earnings
and adversely affect our financial condition.
We operate in a highly competitive industry and face significant competition from other financial institutions and
financial services providers, which may decrease our growth or profits.
Consumer and commercial banking as well as merchant services are highly competitive industries. Our market area
contains not only a large number of community and regional banks, but also a significant presence of the country’s largest
commercial banks. We compete with other state and national financial institutions, as well as savings and loan associations,
savings banks, and credit unions, for deposits and loans. In addition, we compete with financial intermediaries, such as
consumer finance companies, specialty finance companies, commercial finance companies, mortgage banking companies,
insurance companies, securities firms, mutual funds, and several government agencies, as well as major retailers, all
actively engaged in providing various types of loans and other financial services, including merchant services. Competition
for Attorney-Related Loans is derived primarily from eight to ten nationally-oriented financial companies that specialize
in this market. Some of these companies are focused exclusively on loans to law firms, while others offer loans to plaintiffs
as well. We also face significant competition from many larger institutions, including large commercial banks and third
party processors that operate in the merchant services business, and our ability to grow that portion of our business depends
on us being able to continue to attract and retain ISOs and merchants. Some of these competitors may have a long history
of successful operations nationally as well as in our market area and greater ties to businesses or the legal community and
more expansive banking relationships, as well as more established depositor bases, fewer regulatory constraints, and lower
cost structures than we do. Competitors with greater resources may possess an advantage through their ability to maintain
numerous banking locations in more convenient sites, to conduct more extensive promotional and advertising campaigns,
or to operate a more developed technology platform. Due to their size, many competitors may offer a broader range of
products and services, as well as better pricing for certain products and services than we can offer. For example, in the
current low interest rate environment, competitors with lower costs of capital may solicit our customers to refinance their
loans with a lower interest rate. Further, increased competition among financial services companies due to the recent
consolidation of certain competing financial institutions may adversely affect our ability to market our products and
services. Technology has lowered barriers to entry and made it possible for banks and specifically finance companies to
compete in our market area and for non-banks to offer products and services traditionally provided by banks.
The financial services industry could become even more competitive as a result of legislative, regulatory, and
technological changes and continued consolidation. Banks, securities firms, and insurance companies can merge under the
umbrella of a financial holding company, which can offer virtually any type of financial service, including banking,
securities underwriting, insurance (both agency and underwriting), and merchant banking.
Our ability to compete successfully depends on a number of factors, including:
•
•
•
•
•
•
our ability to develop, maintain, and build upon long-term customer relationships based on quality service and
high ethical standards;
our ability to attract and retain qualified employees to operate our business effectively;
our ability to expand our market position;
the scope, relevance, and pricing of products and services that we offer to meet customer needs and demands;
the rate at which we introduce new products and services relative to our competitors;
customer satisfaction with our level of service; and
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•
industry and general economic trends.
Failure to perform in any of these areas could significantly weaken our competitive position, which could adversely
affect our growth and profitability, which, in turn, could harm our business, financial condition, and results of operations.
A lack of liquidity could adversely affect our financial condition and results of operations.
Liquidity is essential to our business. We rely on our ability to generate deposits and effectively manage the repayment
and maturity schedules of our loans to ensure that we have adequate liquidity to fund our operations. An inability to raise
funds through deposits, borrowings, the sale of loans and other sources could have a substantial negative effect on our
liquidity. Our most important source of funds is deposits. Deposit balances can decrease when customers perceive
alternative investments as providing a better risk/return tradeoff. If customers move money out of bank deposits and into
other investments such as money market funds, we would lose a relatively low-cost source of funds, increasing our funding
costs and reducing our net interest income and net income.
Other primary sources of funds consist of cash flows from operations, maturities and sales of investment securities,
and proceeds from the issuance and sale of our equity securities to investors. Additional liquidity is provided by the ability
to borrow from the Federal Home Loan Bank of New York. We also may borrow funds from third-party lenders, such as
other financial institutions. Our access to funding sources in amounts adequate to finance or capitalize our activities, or on
terms that are acceptable to us, could be impaired by factors that affect us directly or the financial services industry or
economy in general, such as disruptions in the financial markets or negative views and expectations about the prospects
for the financial services industry. Our access to funding sources could also be affected by a decrease in the level of our
business activity as a result of a downturn in our markets or by one or more adverse regulatory actions against us.
Any decline in available funding could adversely impact our ability to originate loans, invest in securities, meet our
expenses, or to fulfill obligations such as repaying our borrowings or meeting deposit withdrawal demands, any of which
could have a material adverse impact on our liquidity, business, financial condition and results of operations.
Our ten largest deposit clients account for 23.5% of our total deposits.
As of December 31, 2018, our ten largest bank depositors accounted for, in the aggregate, 23.5% of our total deposits.
As a result, a material decrease in the volume of those deposits by a relatively small number of our depositors could reduce
our liquidity, in which event it could became necessary for us to replace those deposits with higher-cost deposits or FHLB
borrowings, which would adversely affect our net interest income and, therefore, our results of operations.
As a bank holding company, the sources of funds available to us are limited.
Any future constraints on liquidity at the holding company level could impair our ability to declare and pay dividends
or repurchase our common stock. In some instances, notice to, or approval from, the FRB may be required prior to our
declaration or payment of dividends or repurchase of common stock. Further, our operations are primarily conducted by
our subsidiary, Esquire Bank, which is subject to significant regulation. Federal banking laws restrict the payment of
dividends by banks to their holding companies, and Esquire Bank will be subject to these restrictions in paying dividends
to us. Because our ability to receive dividends or loans from Esquire Bank is restricted, our ability to pay dividends to our
stockholders and repurchase our common stock is also restricted.
Additionally, the right of a bank holding company to participate in the assets of its subsidiary bank in the event of a
bank-level liquidation or reorganization is subject to the claims of the bank’s creditors, including depositors, which take
priority, except to the extent that the holding company may be a creditor with a recognized claim.
Our ability to maintain our reputation is critical to the success of our business, and the failure to do so may materially
adversely affect our performance.
We are a community bank, and our reputation is one of the most valuable components of our business. As such, we
strive to conduct our business in a manner that enhances our reputation. This is done, in part, by recruiting, hiring, and
29
retaining employees who share our core values of being an integral part of the communities we serve, delivering superior
service to our customers, and caring about our customers and associates. If our reputation is negatively affected, by the
actions of our employees or otherwise, our business and, therefore, our operating results may be materially adversely
affected. Further, negative public opinion can expose us to litigation and regulatory action as we seek to implement our
growth strategy, which would adversely affect our business, financial condition and results of operations.
We have lower lending limits and different lending risks than certain of our larger, more diversified competitors.
We are a community banking institution that provides banking services to the local communities in the market areas
in which we operate. Our ability to diversify our economic risks is limited by our own local markets and economies. We
lend primarily to individuals and to small to medium-sized businesses, which may expose us to greater lending risks than
those of banks that lend to larger, better-capitalized businesses with longer operating histories. In addition, our legally
mandated lending limits are lower than those of certain of our competitors that have more capital than we do. As a result
of our size, at December 31, 2018, our legal lending limit was $13.6 million. Our lower lending limits may discourage
borrowers with lending needs that exceed our limits from doing business with us. We may try to serve such borrowers by
selling loan participations to other financial institutions; however, this strategy may not succeed.
We face risks related to our operational, technological and organizational infrastructure.
Our ability to grow and compete is dependent on our ability to build or acquire the necessary operational and
technological infrastructure and to manage the cost of that infrastructure as we expand. Similar to other large corporations,
operational risk can manifest itself in many ways, such as errors related to failed or inadequate processes, faulty or disabled
computer systems, fraud by employees or outside persons and exposure to external events. As discussed below, we are
dependent on our operational infrastructure to help manage these risks. In addition, we are heavily dependent on the
strength and capability of our technology systems which we use both to interface with our customers and to manage our
internal financial and other systems. Our ability to develop and deliver new products that meet the needs of our existing
customers and attract new ones depends on the functionality of our technology systems. Additionally, our ability to run
our business in compliance with applicable laws and regulations is dependent on these infrastructures.
We continuously monitor our operational and technological capabilities and make modifications and improvements
when we believe it will be cost effective to do so. In some instances, we may build and maintain these capabilities
ourselves. We also outsource some of these functions to third parties. Specifically, we depend on third parties to provide
our core systems processing, essential web hosting and other internet systems, deposit processing and other processing
services. In connection with our merchant services business, we (and our ISOs) rely on various third parties to provide
processing and clearing and settlement services to us in connection with card transactions. If these third-party service
providers experience difficulties, fail to comply with banking regulations or terminate their services and we are unable to
replace them with other service providers, our operations could be interrupted. If an interruption were to continue for a
significant period of time, our business, financial condition and results of operations could be adversely affected, perhaps
materially. Even if we are able to replace them, it may be at a higher cost to us, which could adversely affect our business,
financial condition and results of operations. We also face risk from the integration of new infrastructure platforms and/or
new third party providers of such platforms into its existing businesses.
A failure in our operational systems or infrastructure, or those of third parties, could impair our liquidity, disrupt our
businesses, result in the unauthorized disclosure of confidential information, damage our reputation and cause
financial losses.
Our business, and in particular, our merchant services business, is partially dependent on our ability to process and
monitor, on a daily basis, a large number of transactions, many of which are highly complex, across numerous and diverse
markets. These transactions, as well as the information technology services we provide to clients, often must adhere to
client-specific guidelines, as well as legal and regulatory standards. Due to the breadth of our client base and our
geographical reach, developing and maintaining our operational systems and infrastructure is challenging, particularly as
a result of rapidly evolving legal and regulatory requirements and technological shifts. Our financial, accounting, data
processing or other operating systems and facilities, and, as discussed above, those the third-party service providers upon
which we depend, may fail to operate properly or become disabled as a result of events that are wholly or partially beyond
30
our control, such as a spike in transaction volume, cyber-attack or other unforeseen catastrophic events, which may
adversely affect our ability to process these transactions or provide services.
The occurrence of fraudulent activity, breaches or failures of our information security controls or cybersecurity-related
incidents could have a material adverse effect on our business, financial condition and results of operations.
Our operations rely on the secure processing, storage and transmission of confidential and other sensitive business
and consumer information on our computer systems and networks, as well as those of our ISOs and processors. Under the
card network rules and various federal and state laws, we are responsible for safeguarding such information. Although we
take protective measures to maintain the confidentiality, integrity and availability of information across all geographic and
product lines, and endeavor to modify these protective measures as circumstances warrant, the nature of the threats
continues to evolve. As a result, our computer systems, software and networks are vulnerable to unauthorized access, loss
or destruction of data (including confidential client information), account takeovers, unavailability of service, computer
viruses or other malicious code, cyber-attacks and other events that could have an adverse security impact. Despite the
defensive measures we take to manage our internal technological and operational infrastructure, these threats have in the
past and may in the future originate externally from third parties such as foreign governments, organized crime and other
hackers, and outsource or infrastructure-support providers and application developers, or may originate internally from
within our organization. Given the increasingly high volume of our transactions, certain errors may be repeated or
compounded before they can be discovered and rectified. In addition, security breaches or failures could result in the bank
incurring liability to ISOs, members of the card network and card issuers in relation to our merchant banking business.
In particular, information pertaining to us and our customers is maintained, and transactions are executed, on the
networks and systems of us, our customers and certain of our third-party partners, such as our online banking or reporting
systems, ISO’s customers and merchants who are part of our merchant banking business. The secure maintenance and
transmission of confidential information, as well as execution of transactions over these systems, are essential to protect
us and our customers against fraud and security breaches and to maintain our clients’ confidence. Breaches of information
security also may occur, and in infrequent cases have occurred, through intentional or unintentional acts by those having
access or gaining access to our systems or our customers’ or counterparties’ confidential information, including employees.
In addition, increases in criminal activity levels and sophistication, advances in computer capabilities, new discoveries,
vulnerabilities in third-party technologies (including browsers and operating systems) or other developments could result
in a compromise or breach of the technology, processes and controls that we use to prevent fraudulent transactions and to
protect data about us, our customers and underlying transactions, as well as the technology used by our customers to access
our systems. We cannot be certain that the security measures we or our ISOs or processors have in place to protect this
sensitive data will be successful or sufficient to protect against all current and emerging threats designed to breach our
systems or those of our ISOs or processors. Although we have developed, and continue to invest in, systems and processes
that are designed to detect and prevent security breaches and cyber-attacks and periodically test our security, a breach of
our systems, or those of our ISOs or processors, could result in losses to us or our customers; loss of business and/or
customers; damage to our reputation; the incurrence of additional expenses (including the cost of notification to consumers,
credit monitoring and forensics, and fees and fines imposed by the card networks); disruption to our business; our inability
to grow our online services or other businesses; additional regulatory scrutiny or penalties; or our exposure to civil
litigation and possible financial liability — any of which could have a material adverse effect on our business, financial
condition and results of operations.
If our enterprise risk management framework is not effective at mitigating risk and loss to us, we could suffer
unexpected losses and our results of operations could be materially adversely affected.
Our enterprise risk management framework seeks to achieve an appropriate balance between risk and return, which
is critical to optimizing stockholder value. We have established processes and procedures intended to identify, measure,
monitor, report and analyze the types of risk to which we are subject, including credit, liquidity, operational, regulatory
compliance and reputational. However, as with any risk management framework, there are inherent limitations to our risk
management strategies as there may exist, or develop in the future, risks that we have not appropriately anticipated or
identified. If our risk management framework proves ineffective, we could suffer unexpected losses and our business and
results of operations could be materially adversely affected.
31
Changes in accounting standards could materially impact our financial statements.
From time to time, the Financial Accounting Standards Board or the SEC may change the financial accounting and
reporting standards that govern the preparation of our financial statements. Such changes may result in us being subject to
new or changing accounting and reporting standards. In addition, the bodies that interpret the accounting standards (such
as banking regulators, outside auditors or management) may change their interpretations or positions on how these
standards should be applied. These changes may be beyond our control, can be hard to predict, and can materially impact
how we record and report our financial condition and results of operations. In some cases, we could be required to apply
a new or revised standard retrospectively, or apply an existing standard differently, also retrospectively, in each case
resulting in our needing to revise or restate prior period financial statements.
Risks Related to Our Industry and Regulation
Our business, financial condition, results of operations and future prospects could be adversely affected by the highly
regulated environment and the laws and regulations that govern our operations, corporate governance, executive
compensation and accounting principles, or changes in any of them.
As a bank holding company, we are subject to extensive examination, supervision and comprehensive regulation by
various federal and state agencies that govern almost all aspects of our operations. These laws and regulations are not
intended to protect our stockholders. Rather, these laws and regulations are intended to protect customers, depositors, the
DIF and the overall financial stability of the U.S. These laws and regulations, among other matters, prescribe minimum
capital requirements, impose limitations on the business activities in which we can engage, limit the dividend or
distributions that Esquire Bank can pay to us, restrict the ability of institutions to guarantee our debt, and impose certain
specific accounting requirements on us that may be more restrictive and may result in greater or earlier charges to earnings
or reductions in our capital than generally accepted accounting principles would require. Compliance with these laws and
regulations is difficult and costly, and changes to these laws and regulations often impose additional compliance costs.
Our failure to comply with these laws and regulations, even if the failure follows good faith effort or reflects a difference
in interpretation, could subject us to restrictions on our business activities, fines and other penalties, any of which could
adversely affect our results of operations, capital base and the price of our securities. Further, any new laws, rules and
regulations could make compliance more difficult or expensive.
Likewise, the Company operates in an environment that imposes income taxes on its operations at both the federal
and state levels to varying degrees. Strategies and operating routines have been implemented to minimize the impact of
these taxes. Consequently, any change in tax legislation could significantly alter the effectiveness of these strategies.
The net deferred tax asset reported on the Company’s balance sheet generally represents the tax benefit of future
deductions from taxable income for items that have already been recognized for financial reporting purposes. The bulk of
these deferred tax assets consists of deferred loan loss deductions, deferred compensation deductions and unrealized losses
on available-for-sale securities. The net deferred tax asset is measured by applying currently-enacted income tax rates to
the accounting period during which the tax benefit is expected to be realized.
Federal regulators periodically examine our business, and we may be required to remediate adverse examination
findings.
The FRB, the OCC and the FDIC, periodically examine our business, including our compliance with laws and
regulations. If, as a result of an examination, a federal banking agency were to determine that our financial condition,
capital resources, asset quality, earnings prospects, management, liquidity or other aspects of any of our operations had
become unsatisfactory, or that we were in violation of any law or regulation, it may take a number of different remedial
actions as it deems appropriate. These actions include the power to enjoin “unsafe or unsound” practices, to require
affirmative action to correct any conditions resulting from any violation or practice, to issue an administrative order that
can be judicially enforced, to direct an increase in our capital, to restrict our growth, to assess civil monetary penalties
against our officers or directors, to remove officers and directors and, if it is concluded that such conditions cannot be
corrected or there is an imminent risk of loss to depositors, to terminate our deposit insurance and place us into receivership
32
or conservatorship. If we become subject to any regulatory actions, it could have a material adverse effect on our business,
results of operations, financial condition and growth prospects.
We are subject to the Community Reinvestment Act and fair lending laws, and failure to comply with these laws could
lead to material penalties.
The Community Reinvestment Act (“CRA”), the Equal Credit Opportunity Act, the Fair Housing Act and other fair
lending laws and regulations impose nondiscriminatory lending requirements on financial institutions. The Consumer
Financial Protection Bureau, the United States Department of Justice and other federal agencies are responsible for
enforcing these laws and regulations. A successful challenge to an institution’s performance under the CRA or fair lending
laws and regulations could result in a wide variety of sanctions, including the required payment of damages and civil
money penalties, injunctive relief, imposition of restrictions on mergers and acquisitions activity and restrictions on
expansion activity. Private parties may also have the ability to challenge an institution’s performance under fair lending
laws in private class action litigation.
FDIC deposit insurance assessments may continue to materially increase in the future, which would have an adverse
effect on earnings.
As a member institution of the FDIC, our subsidiary, Esquire Bank, is assessed a quarterly deposit insurance premium.
Failed banks nationwide have significantly depleted the insurance fund and reduced the ratio of reserves to insured
deposits. The FDIC has adopted a Deposit Insurance Fund Restoration Plan, which requires the FDIC’s DIF to attain a
1.35% reserve ratio by September 30, 2020, however, the FDIC is directed to “offset the effect” of the increased reserve
ratio for insured depository institutions with total consolidated assets of less than $10 billion. As a result of this
requirement, Esquire Bank could be required to pay significantly higher premiums or additional special assessments that
would adversely affect its earnings, thereby reducing the availability of funds to pay dividends.
Monetary policies and regulations of the Federal Reserve could adversely affect our business, financial condition and
results of operations.
In addition to being affected by general economic conditions, our earnings and growth are affected by the policies of
the FRB. An important function of the FRB is to regulate the money supply and credit conditions. Among the instruments
used by the FRB to implement these objectives are open market purchases and sales of U.S. government securities,
adjustments of the discount rate and changes in banks’ reserve requirements against bank deposits. These instruments are
used in varying combinations to influence overall economic growth and the distribution of credit, bank loans, investments
and deposits. Their use also affects interest rates charged on loans or paid on deposits.
The monetary policies and regulations of the FRB have had a significant effect on the operating results of commercial
banks in the past and are expected to continue to do so in the future. The effects of such policies upon our business,
financial condition and results of operations cannot be predicted.
We face a risk of noncompliance and enforcement action with the Bank Secrecy Act and other anti-money laundering
statutes and regulations.
The Bank Secrecy Act, the USA Patriot Act and other laws and regulations require financial institutions, among other
duties, to institute and maintain an effective anti-money laundering program and to file reports such as suspicious activity
reports and currency transaction reports. We are required to comply with these and other anti-money laundering
requirements. The federal banking agencies and Financial Crimes Enforcement Network are authorized to impose
significant civil money penalties for violations of those requirements and have recently engaged in coordinated
enforcement efforts against banks and other financial services providers with the U.S. Department of Justice, Drug
Enforcement Administration and Internal Revenue Service. We are also subject to increased scrutiny of compliance with
the rules enforced by the Office of Foreign Assets Control. If our policies, procedures and systems are deemed deficient,
we would be subject to liability, including fines and regulatory actions, which may include restrictions on our ability to
pay dividends and the necessity to obtain regulatory approvals to proceed with certain aspects of our business plan,
including our acquisition plans.
33
Failure to maintain and implement adequate programs to combat money laundering and terrorist financing could also
have serious reputational consequences for us. Any of these results could have a material adverse effect on our business,
financial condition, results of operations and growth prospects.
The FRB may require us to commit capital resources to support Esquire Bank.
As a matter of policy, the FRB expects a bank holding company to act as a source of financial and managerial strength
to a subsidiary bank and to commit resources to support such subsidiary bank. The Dodd-Frank Act codified the FRB’s
policy on serving as a source of financial strength. Under the “source of strength” doctrine, the FRB may require a bank
holding company to make capital injections into a troubled subsidiary bank and may charge the bank holding company
with engaging in unsafe and unsound practices for failure to commit resources to a subsidiary bank. A capital injection
may be required at times when the holding company may not have the resources to provide it and therefore may be required
to borrow the funds or raise capital. Any loans by a holding company to its subsidiary banks are subordinate in right of
payment to deposits and to certain other indebtedness of such subsidiary bank. In the event of a bank holding company’s
bankruptcy, the bankruptcy trustee will assume any commitment by the holding company to a federal bank regulatory
agency to maintain the capital of a subsidiary bank. Moreover, bankruptcy law provides that claims based on any such
commitment will be entitled to a priority of payment over the claims of the institution’s general unsecured creditors,
including the holders of its note obligations. Thus, any borrowing that must be done by the Company to make a required
capital injection becomes more difficult and expensive and could have an adverse effect on our business, financial
condition and results of operations.
We could be adversely affected by the soundness of other financial institutions and other third parties we rely on.
Financial services institutions are interrelated as a result of trading, clearing, counterparty or other relationships. We
have exposure to many different industries and counterparties, and routinely execute transactions with counterparties in
the financial services industry, including commercial banks, brokers and dealers, investment banks and other institutional
customers. Many of these transactions expose us to credit risk in the event of a default by a counterparty or client. In
addition, our credit risk may be exacerbated when our collateral cannot be foreclosed upon or is liquidated at prices not
sufficient to recover the full amount of the credit or derivative exposure due. Furthermore, successful operation of our
merchant services business depends on the soundness of ISOs, third party processors, clearing agents and others that we
rely on to conduct our merchant business. Any losses resulting from such third parties could adversely affect our business,
financial condition and results of operations.
We depend on the accuracy and completeness of information about customers and counterparties.
In deciding whether to extend credit or enter into other transactions with our existing and potential customers and
counterparties, we may rely on information furnished to us by or on behalf of our existing and potential customers and
counterparties, including financial statements and other financial information. We also may rely on representations of our
existing and potential customers and counterparties as to the accuracy and completeness of that information and, with
respect to financial statements, on reports of independent auditors. In deciding whether to extend credit, we may rely upon
our existing and potential customers’ representations that their respective financial statements conform to U.S. generally
accepted accounting principles, or GAAP, and present fairly, in all material respects, the financial condition, results of
operations and cash flows of the customer. We also may rely on customer and counterparty representations and
certifications, or other auditors’ reports, with respect to the business and financial condition of our existing and potential
customers and counterparties. Our financial condition, results of operations, financial reporting and reputation could be
negatively affected if we rely on materially misleading, false, incomplete, inaccurate or fraudulent information provided
by us by or on behalf of our existing or potential customers or counterparties.
Our accounting estimates and risk management processes and controls rely on analytical and forecasting techniques
and models and assumptions, which may not accurately predict future events.
Our accounting policies and methods are fundamental to how we record and report our financial condition and results
of operations. Our management must exercise judgment in selecting and applying many of these accounting policies and
methods so they comply with GAAP and reflect management’s judgment of the most appropriate manner to report our
34
financial condition and results. In some cases, management must select the accounting policy or method to apply from two
or more alternatives, any of which may be reasonable under the circumstances, yet which may result in our reporting
materially different results than would have been reported under a different alternative.
Certain accounting policies are critical to presenting our financial condition and results of operations. They require
management to make difficult, subjective or complex judgments about matters that are uncertain. Materially different
amounts could be reported under different conditions or using different assumptions or estimates. These critical accounting
policies include the allowance for loan losses and income taxes. Because of the uncertainty of estimates involved in these
matters, we may be required to do one or more of the following: significantly increase the allowance for loan losses or
sustain loan losses that are significantly higher than the reserve provided; reduce the carrying value of an asset measured
at fair value; or significantly increase our accrued tax liability. Any of these could have a material adverse effect on our
business, financial condition or results of operations. See “Item 7 — Management’s Discussion and Analysis of Financial
Condition and Results of Operations”.
Our internal controls, disclosure controls, processes and procedures, and corporate governance policies and procedures
are based in part on certain assumptions and can provide only reasonable (not absolute) assurances that the objectives of
the system are met. Any failure or circumvention of our controls, processes and procedures or failure to comply with
regulations related to controls, processes and procedures could necessitate changes in those controls, processes and
procedures, which may increase our compliance costs, divert management attention from our business or subject us to
regulatory actions and increased regulatory scrutiny. Any of these could have a material adverse effect on our business,
financial condition or results of operations.
ITEM 1B. Unresolved Staff Comments
None.
ITEM 2. Properties
At December 31, 2018, we conducted business through our corporate headquarters in Jericho, New York (Nassau
County), one full service branch in Garden City, New York, and one administrative office in Boca Raton, Florida. All the
current locations and our new headquarters are leased properties. At December 31, 2018, the total net book value of our
leasehold improvements, furniture, fixtures and equipment was approximately $2.7 million.
In March 2019, we closed our Garden City, New York branch and opened our Jericho, New York branch. We have
no current plans to expand our branch network as we believe we are positioned to further develop our primary markets
through the use of technology with limited traditional branch offices.
ITEM 3. 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 December 31, 2018, 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 4. Mine Safety Disclosures
Not applicable.
35
PART II
ITEM 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity
Securities
Our shares of common stock are traded on the NASDAQ Capital Market under the symbol “ESQ”. The approximate
number of holders of record of Esquire Financial Holding, Inc.’s common stock as of February 26, 2019 was 929. The
Company’s common stock began trading on the NASDAQ Capital Market on June 27, 2017.
We have not historically declared or paid cash dividends on our common stock and we do not expect to pay cash
dividends on our common stock for the foreseeable future. Instead, we anticipate that all of our future earnings will be
retained to support our operations and to finance the growth and development of our business. Any future determination
to pay cash dividends on our common stock will be made by our board of directors and will depend on a number of factors,
including:
•
•
•
•
•
•
•
•
•
our historical and projected financial condition, liquidity and results of operations;
our capital levels and requirements;
statutory and regulatory prohibitions and other limitations;
any contractual restriction on our ability to pay cash dividends, including pursuant to the terms of any of our
credit agreements or other borrowing arrangements;
our business strategy;
tax considerations;
any acquisitions or potential acquisitions that we may examine;
general economic conditions; and
other factors deemed relevant by our board of directors.
In July, 2017, we issued 66,985 shares of common stock to CJA Private Equity Financial Restructuring Master Fund
I, LP in exchange for 66,985 shares of Series B Non-Voting Preferred Stock. No underwriter or placement agent was
involved in the issuance of these securities, and no underwriting discounts or commissions were paid. The securities were
issued under an exemption from registration pursuant to Section 4(a)(2) of the Securities Act as a transaction by an issuer
not involving any public offering.
36
The following table summarizes information as of December 31, 2018 relating to equity compensation plans of the
Company pursuant to which grants of options, restricted stock awards or other rights to acquire shares may be granted
from time to time.
Number of securities
Number of securities
to be issued upon
exercise of
Weighted-average
exercise price of
remaining available for
future issuance under
equity compensation
Plan Category
Equity Compensation Plans Approved by Security
outstanding options, outstanding options, plans (excluding securities
reflected in column (a))
warrants and rights warrants and rights
(c)
(b)
(a)
Holders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
919,175 $
13.39
Equity Compensation Plans Not Approved by
Security Holders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total Equity Compensation Plans . . . . . . . . . . . . . . . . .
—
919,175 $
—
13.39
54,562
—
54,562
In October 2018, we filed a shelf registration statement on Form S-3 with the United States Securities and Exchange
Commission (the “SEC). While the Company has no current plans to issue securities under the new registration statement,
the Company believes it will provide more timely and efficient access to the capital markets if the Company decides to
issue securities in the future. The Company also believes the registration statement will provide increased financial
flexibility and streamline the offering process for general corporate purposes and possible strategic and other opportunities
that may require additional capital. Under the registration statement, the Company may from time to time issue various
types of securities, including common stock, preferred stock, debt securities, depositary shares, warrants, purchase
contracts, units and subscription rights, or any combination of such securities, up to an aggregate amount of $75.0 million,
through one or more methods of distribution. The terms of any offering under the registration statement will be established
at the time of such offering and will be made solely by means of a prospectus and an accompanying prospectus supplement
relating to that offering.
In January 2019, the board of directors approved a stock repurchase program which authorized the repurchase of up
to 300,000 shares of its common stock, or approximately 4.0% of its outstanding shares. There is no expiration for the
stock repurchase plan. No shares have been repurchased as of February 28, 2019.
ITEM 6. Selected Financial Data
The following information is derived in part from the consolidated financial statements of Esquire Financial
Holdings, Inc. For additional information, reference is made to “Item 7 — Management’s Discussion and Analysis of
37
Financial Condition and Results of Operations” and the Consolidated Financial Statements of Esquire Financial
Holdings, Inc. and related notes included elsewhere in this Annual Report.
2018
At or For the Years Ended December 31,
2016
(Dollars in thousands, except share and per share data)
2017
2015
2014
Balance Sheet Data:
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 663,899
30,562
Cash and cash equivalents . . . . . . . . . . . . . . . . . .
145,698
Securities available-for-sale . . . . . . . . . . . . . . . . .
462,472
Loans, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2,583
Securities, restricted, at cost . . . . . . . . . . . . . . . . .
568,421
Deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
89
Secured borrowings . . . . . . . . . . . . . . . . . . . . . . . .
92,774
Total stockholders’ equity . . . . . . . . . . . . . . . . . .
Income Statement Data:
Interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 28,951
1,212
Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . .
27,739
Net interest income . . . . . . . . . . . . . . . . . . . . . . .
1,375
Provision for loan losses . . . . . . . . . . . . . . . . . . . .
Net interest income after provision for loan
$ 533,557
43,077
128,758
344,714
2,183
448,494
278
83,383
$ 424,833
42,993
92,645
275,165
1,649
370,788
371
52,186
$ 352,650
33,154
84,239
221,720
1,430
301,687
381
49,425
$ 330,690
71,891
70,925
170,512
237
290,774
391
38,542
$ 20,394
538
19,856
905
$ 16,168
511
15,657
595
$ 12,451
457
11,994
930
$ 10,714
466
10,248
300
26,364
losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
7,855
Noninterest income . . . . . . . . . . . . . . . . . . . . . . . .
22,295
Noninterest expense . . . . . . . . . . . . . . . . . . . . . . .
11,924
Income before income tax expense . . . . . . . . . . .
3,190
Income tax expense . . . . . . . . . . . . . . . . . . . . . . . .
8,734
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Less: Preferred stock dividends . . . . . . . . . . . . . .
—
Net income available to common stockholders . . $ 8,734
18,951
5,516
17,433
7,034
3,390
3,644
—
$ 3,644
15,062
4,125
14,599
4,588
1,766
2,822
—
2,822
$
11,064
2,943
12,171
1,836
664
1,172
—
1,172
$
9,948
1,765
11,262
451
410
41
—
41
$
Per Share Data:
Earnings per common share:
Basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
1.18
1.13
Book value per common share(1) . . . . . . . . . . . . . $ 12.32
Tangible book value per common share(2) . . . . . . $ 12.32
0.59
$
$
0.58
$ 11.38
$ 11.38
$
$
$
$
0.56
0.55
10.29
10.29
$
$
$
$
0.25
0.25
9.72
9.72
$
$
$
$
0.01
0.01
8.98
8.98
Selected Performance Ratios:
Return on average assets . . . . . . . . . . . . . . . . . . . .
Return on average common equity . . . . . . . . . . .
Interest rate spread . . . . . . . . . . . . . . . . . . . . . . . .
Net interest margin . . . . . . . . . . . . . . . . . . . . . . . .
Efficiency ratio(3) . . . . . . . . . . . . . . . . . . . . . . . . . .
Average interest earning assets to average
interest bearing liabilities . . . . . . . . . . . . . . . . . .
Average equity to average assets . . . . . . . . . . . . .
1.45 %
10.12 %
4.56 %
4.73 %
59.34 %
0.80 %
5.38 %
4.33 %
4.43 %
68.71 %
0.74 %
5.48 %
4.15 %
4.25 %
73.82 %
0.36 %
2.77 %
3.64 %
3.74 %
81.48 %
0.01 %
0.13 %
3.76 %
3.86 %
94.94 %
182.23 % 181.75 % 167.13 % 170.76 % 154.28 %
11.31 %
14.93 %
13.42 %
14.37 %
13.87 %
38
2018
At or For the Years Ended December 31,
2016
2017
2015
2014
Asset Quality Ratios:
Allowance for loan losses to total loans . . . . . . . . . . . . . . . . . . . . . . .
Allowance for loan losses to nonperforming loans(4) . . . . . . . . . . . . . N/A
Net charge-offs (recoveries) to average outstanding loans . . . . . . . . .
Nonperforming loans to total loans(4) . . . . . . . . . . . . . . . . . . . . . . . . . .
Nonperforming loans to total assets(4) . . . . . . . . . . . . . . . . . . . . . . . . .
Nonperforming assets to total assets(5) . . . . . . . . . . . . . . . . . . . . . . . . .
N/A
1.20 % 1.22 % 1.23 % 1.25 % 1.25 %
N/A
0.00 % 0.02 % (0.01)% 0.16 % 0.00 %
0.00 % 0.00 % 0.00 % 0.00 % 0.00 %
0.00 % 0.00 % 0.00 % 0.00 % 0.00 %
0.00 % 0.00 % 0.00 % 0.00 % 0.00 %
N/A
N/A
Capital Ratios (Esquire Bank):
Total capital to risk weighted assets. . . . . . . . . . . . . . . . . . . . . . . . . . . 18.70 % 18.47 % 17.25 % 17.06 % 18.54 %
Tier 1 capital to risk weighted assets . . . . . . . . . . . . . . . . . . . . . . . . . . 17.54 % 17.32 % 16.09 % 15.91 % 17.40 %
Tier 1 common equity to risk weighted assets(6) . . . . . . . . . . . . . . . . . 17.54 % 17.32 % 16.09 % 15.91 % N/A
Tier 1 Leverage capital ratio . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13.26 % 12.82 % 11.63 % 11.90 % 10.06 %
Other:
Number of offices . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Number of full-time equivalent employees . . . . . . . . . . . . . . . . . . . . .
3
74
3
61
3
52
3
43
3
42
(1) For purposes of computing book value per common share, book value equals total common stockholders’ equity divided by total
number of shares of common stock outstanding. Total common stockholders’ equity equals total stockholders’ equity, less preferred
equity. Preferred equity was $0, $0, $720, $1,697 and $1,842 at December 31, 2018, 2017, 2016, 2015 and 2014, respectively.
(2) The Company had no intangible assets as of the dates indicated. Thus, tangible book value per common share is the same as book
value per common share for each of the periods indicated.
(3) See “Non-GAAP Financial Measure Reconciliation” below for the computation of the efficiency ratio.
(4) Nonperforming loans include non-accrual loans, loans past due 90 days and still accruing interest and loans modified under troubled
debt restructurings.
(5) Nonperforming assets include nonperforming loans, other real estate owned and other foreclosed assets.
(6) Tier 1 common equity to risk-weighted assets ratio is required under the Basel III Final Rules which became effective for Esquire
Bank on January 1, 2015. Accordingly, this ratio is shown as not applicable (“N/A”) for periods prior to January 1, 2015.
Non-GAAP Financial Measure Reconciliation
The efficiency ratio is a non-GAAP measure of expense control relative to recurring revenue. We calculate the
efficiency ratio by dividing total noninterest expenses excluding non-recurring items by the sum of total net interest income
and total noninterest income as determined under GAAP, but excluding net gains on securities from this calculation and
other non-recurring income sources, if applicable, which we refer to below as recurring revenue. We believe that this
provides one reasonable measure of recurring expenses relative to recurring revenue.
We believe that this non-GAAP financial measure provides information that is important to investors and that is useful
in understanding our financial position, results and ratios. However, this non-GAAP financial measure is supplemental
39
and is not a substitute for an analysis based on GAAP measures. As other companies may use different calculations for
this measure, this presentation may not be comparable to other similarly titled measures by other companies.
At December 31,
2018
2017
2016
2015
2014
(Dollars in thousands)
Efficiency Ratio
Net interest income . . . . . . . . . . . . . . . . . . . . . . . . . $
Noninterest income . . . . . . . . . . . . . . . . . . . . . . . . .
Less net gains on sales of securities . . . . . . . . . . . .
Recurring revenue . . . . . . . . . . . . . . . . . . . . . . . . . $
27,739 $
7,855
—
35,594 $
19,856 $
5,516
—
25,372 $
15,657 $
4,125
6
19,776 $
11,994 $
2,943
—
14,937 $
10,248
1,765
151
11,862
Total noninterest expense . . . . . . . . . . . . . . . . . . . . $
Less: compensation charge(1) . . . . . . . . . . . . . . . . .
Recurring noninterest expense . . . . . . . . . . . . . . . $
22,295 $
1,173
21,122 $
17,433 $
—
17,433 $
14,599 $
—
14,599 $
12,171 $
—
12,171 $
11,262
—
11,262
Efficiency ratio . . . . . . . . . . . . . . . . . . . . . . . . . . . .
59.34 %
68.71 %
73.82 %
81.48 %
94.94 %
(1) Figure represents a $1.2 million one-time charge (pretax) related to the passing of the Company’s former Executive Chairman,
Dennis Shields in August 2018.
ITEM 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
This discussion and analysis reflects our financial statements and other relevant statistical data, and is intended to
enhance your understanding of our financial condition and results of operations. The information in this section has been
derived from the financial statements, which appear elsewhere in this Annual Report. You should read the information in
this section in conjunction with the other business and financial information provided in this annual report.
Overview
We are a bank holding company headquartered in Jericho, New York and registered under the BHC Act. Through our
wholly owned bank subsidiary, Esquire Bank, National Association, we are a full service commercial bank dedicated to
serving the financial needs of the legal and small business communities on a national basis, as well as commercial and
retail customers in the New York metropolitan market. We offer tailored products and solutions to the legal community
and their clients as well as dynamic and flexible merchant services 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 provisions for loan losses, non-interest income and non-interest expense. Non-interest
income currently consists primarily of merchant processing income and customer related fees and charges. Non-interest
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.
Critical Accounting Policies
A summary of our accounting policies is described in Note 1 to the Consolidated Financial Statements included in
this 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
40
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. The allowance for loan losses is a valuation allowance for probable incurred credit
losses. The allowance for loan losses is increased by provisions for loan losses charged to income. Losses are charged to
the allowance when all or a portion of a loan is deemed to be uncollectible. Subsequent recoveries of loans previously
charged off are credited to the allowance for loan losses when realized. Management estimates the allowance balance
required using past loan loss experience, the nature and volume of the portfolio, information about specific borrower
situations and estimated collateral values, economic conditions and other factors. Allocations of the allowance may be
made for specific loans, but the entire allowance is available for any loan that, in management’s judgment, should be
charged off.
The allowance consists of specific and general components. The specific component relates to loans that are
individually classified as impaired when, based on current information and events, it is probable that we will be unable to
collect all amounts due according to the contractual terms of the loan agreement. Loans for which the terms have been
modified resulting in a concession, and for which the borrower is experiencing financial difficulties, are considered
troubled debt restructurings and classified as impaired.
Factors considered by management in determining impairment include payment status, collateral value, and the
probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment
delays and payment shortfalls generally are not classified as impaired. Management determines the significance of
payment delays and payment shortfalls on case-by-case basis, taking into consideration all of the circumstances
surrounding the loan and the borrower, including the length of the delay, the reason for the delay, the borrower’s prior
payment record, and the amount of the shortfall in relation to the principal and interest owed.
All loans, except for consumer loans, are individually evaluated for impairment. If a loan is impaired, a portion of the
allowance is allocated as a specific allowance. The measurement of an impaired loan is based on (i) the present value of
expected future cash flows discounted at the loan’s effective interest rate, (ii) the loan’s observable market price or (iii) the
fair value of the collateral if the loan is collateral dependent.
Troubled debt restructurings are separately identified for impairment disclosures and are measured at the present value
of estimated future cash flows using the loan’s effective rate at inception. If a troubled debt restructuring is considered to
be a collateral dependent loan, the loan is reported, net, at the fair value of the collateral. For troubled debt restructurings
that subsequently default, we determine the amount of reserve in accordance with the accounting policy for the allowance
for loan losses.
The general component is based on historical loss experience adjusted for current factors. The historical loss
experience is determined by portfolio segment and is based on the actual loss history experienced by the company. This
actual loss experience is supplemented with other economic factors based on the risks present for each portfolio segment.
These economic factors include consideration of the following: levels of and trends in delinquencies and impaired loans;
levels of and trends in charge-offs and recoveries; trends in volume and terms of loans; effects of any changes in risk
selection and underwriting standards; other changes in lending policies, procedures, and practices; experience, ability, and
depth of lending management and other relevant staff; national and local economic trends and conditions; industry
conditions; and effects of changes in credit concentrations. The determination of the economic factors is a qualitative
assessment that involves significant management judgment.
We have identified the following loan segments: Commercial Real Estate, Multifamily, Construction, Commercial,
1 – 4 Family Residential and Consumer. The risks associated with a concentration in real estate loans include potential
losses from fluctuating values of land and improved properties. Commercial Real Estate and Multifamily loans are
expected to be repaid from the cash flow of the underlying property so the collective amount of rents must be sufficient to
cover all operating expenses, property management and maintenance, taxes and debt service. Increases in vacancy rates,
interest rates or other changes in general economic conditions can all have an impact on the borrower and their ability to
repay the loan. Construction loans are considered riskier than commercial financing on improved and established
commercial real estate. The risk of potential loss increases if the original cost estimates or time to complete are significantly
41
off. The remainder of the loan portfolio is comprised of commercial and consumer loans. The primary risks associated
with the commercial loans are the cash flow of the business, the experience and quality of the borrowers’ management,
the business climate, and the impact of economic factors. The primary risks associated with 1-4 family residential real
estate and consumer loans relate to the borrower, such as the risk of a borrower’s unemployment as a result of deteriorating
economic conditions or the amount and nature of a borrower’s other existing indebtedness, and the value of the collateral
securing the loan if the bank must take possession of the collateral.
Although management uses available information to recognize losses on loans, because of uncertainties associated
with local economic conditions, collateral values and future cash flows on impaired loans, it is reasonably possible that a
material change could occur in the allowance for loan losses in the near term. However, the amount of the change that is
reasonably possible cannot be estimated. The evaluation of the adequacy of loan collateral is often based upon estimates
and appraisals. Because of changing economic conditions, the valuations determined from such estimates and appraisals
may also change. Accordingly, we may ultimately incur losses that vary from management’s current estimates.
Adjustments to the allowance for loan losses will be reported in the period such adjustments become known or can be
reasonably estimated. All loan losses are charged to the allowance for loan losses when the loss actually occurs or when
the collectability of the principal is unlikely. Recoveries are credited to the allowance at the time of recovery.
Income Taxes. Income taxes are provided for under the asset and liability method. Deferred tax assets and liabilities
are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts
of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted
rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered
or settled. The effect on deferred taxes of a change in tax rates is recognized in income in the period the change occurs.
Deferred tax assets are reduced, through a valuation allowance, if necessary, by the amount of such benefits that are not
expected to be realized based on current available evidence.
A tax position is recognized as a benefit only if it is “more likely than not” that the tax position would be sustained in
a tax examination, with a tax examination being presumed to occur. The amount recognized is the largest amount of tax
benefit that is greater than 50% likely of being realized on examination. For tax positions not meeting the “more likely
than not” test, no tax benefit is recorded. The Company recognizes interest and/or penalties related to income tax matters
in income tax expense.
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.
Discussion and Analysis of Financial Condition for the Years Ended December 31, 2018 and 2017
Assets. Our total assets were $663.9 million at December 31, 2018, an increase of $130.3 million from
$533.6 million at December 31, 2017. The increase was primarily due to growth in our loan and securities portfolio.
Loan Portfolio Analysis. At December 31, 2018, net loans were $462.5 million, or 69.7% of total assets, compared
to $344.7 million, or 64.6% of total assets, at December 31, 2017. Commercial loans increased $55.4 million, or 40.6%,
to $191.8 million at December 31, 2018 from $136.4 million at December 31, 2017. Multifamily loans increased
$38.1 million, or 38.7%, to $136.5 million at December 31, 2018 from $98.4 million at December 31, 2017. Consumer
loans increased $11.8 million or 37.0%, to $43.7 million at December 31, 2018 from $31.9 million at December 31, 2017.
1-4 family residential loans increased $4.5 million, or 8.7%, to $56.0 million at December 31, 2018 from $51.6 million at
42
December 31, 2017. Construction loans increased $874,000, or 17.3%, to $5.9 million at December 31, 2018 from
$5.0 million at December 31, 2017. Commercial real estate loans increased $8.4 million, or 33.9%, to $33.1 million at
December 31, 2018 from $24.8 million at December 31, 2017.
Loan Portfolio Composition. The following table sets forth the composition of our loan portfolio by type of loan at
the dates indicated.
Real estate:
2018
Amount
Percent
At December 31,
2017
Amount
(Dollars in thousands)
Percent
2016
Amount
Percent
1 – 4 family residential . . . . . . . . . . . $
Multifamily . . . . . . . . . . . . . . . . . . . .
Commercial real estate . . . . . . . . . . .
Construction . . . . . . . . . . . . . . . . . . .
Total real estate. . . . . . . . . . . . . . . .
Commercial . . . . . . . . . . . . . . . . . . . . .
Consumer . . . . . . . . . . . . . . . . . . . . . . .
56,043
136,537
33,145
5,921
231,646
191,828
43,675
Total Loans . . . . . . . . . . . . . . . . . . $ 467,149
(5,629)
Allowance for loan losses . . . . . . . . . .
Deferred loan costs and unearned
12.00 % $
29.23
7.10
1.26
49.59
41.06
9.35
51,556
98,432
24,761
5,047
179,796
136,412
31,881
100.00 % $ 348,089
(4,264)
14.81 % $
28.28
7.11
1.45
51.65
39.19
9.16
49,597
83,410
22,198
5,610
160,815
106,064
10,571
100.00 % $ 277,450
(3,413)
17.88 %
30.06
8.00
2.02
57.96
38.23
3.81
100.00 %
premiums, net . . . . . . . . . . . . . . . . . .
952
Loans, net . . . . . . . . . . . . . . . . . . . . . . . $ 462,472
889
$ 344,714
1,128
$ 275,165
At December 31,
2015
2014
Amount
Percent
Amount
Percent
(Dollars in thousands)
Real estate:
1 – 4 family residential . . . . . . . . . . . . . . . . . . . . . . .
Multifamily . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Commercial real estate . . . . . . . . . . . . . . . . . . . . . . .
Construction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total real estate. . . . . . . . . . . . . . . . . . . . . . . . . . . .
Commercial . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consumer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total Loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Allowance for loan losses . . . . . . . . . . . . . . . . . . . . . .
Deferred loan costs and unearnerd premiums, net . .
Loans, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
$
$
28,531
71,184
21,272
5,297
126,284
83,563
13,556
223,403
(2,799)
1,116
221,720
12.77 % $
31.86
9.52
2.38
56.53
37.40
6.07
100.00 % $
$
23,072
58,578
13,776
1,105
96,531
65,643
9,556
171,730
(2,165)
947
170,512
13.44 %
34.11
8.02
0.64
56.21
38.22
5.57
100.00 %
43
The following table sets forth the composition of our Attorney-Related Loan portfolio by type of loan at the dates
indicated.
December 31, 2018
December 31, 2017
December 31, 2016
Amount
Percent Amount
Percent Amount Percent
(Dollars in thousands)
Attorney-Related Loans
Commercial Attorney-Related:
Working capital lines of credit . . . . . . . . . . . . . $ 112,742
37,054
Case cost lines of credit . . . . . . . . . . . . . . . . . . .
Term loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
26,851
Post-settlement commercial and other
53.3 % $ 96,070
24,446
17.6
7,082
12.7
62.1 % $ 63,251
21,132
15.8
9,675
4.6
63.5 %
21.2
9.7
commercial attorney-related loans . . . . . . . . .
Total Commercial Attorney-Related . . . . . . . . . . .
Consumer Attorney-Related:
—
176,647
—
83.6
68
127,666
0.0
82.5
894
94,952
0.9
95.3
33,576
Post-settlement consumer loans . . . . . . . . . . . .
1,137
Structured settlement loans . . . . . . . . . . . . . . . .
Total Consumer Attorney-Related . . . . . . . . . . . . .
34,713
Total Attorney-Related Loans . . . . . . . . . . . . . . . . $ 211,360
15.9
0.5
16.4
25,731
1,421
27,152
100.0 % $ 154,818
16.6
0.9
17.5
3,078
1,632
4,710
100.0 % $ 99,662
3.1
1.6
4.7
100.0 %
The majority of the growth in the portfolio from December 31, 2017 was in our Attorney-Related loans. At
December 31, 2018, our Attorney-Related Loans, which include commercial and consumer lending to attorneys, law firms
and plaintiffs/claimants, totaled $211.4 million, or 45.2% of our total loan portfolio, compared to $154.8 million at
December 31, 2017.
Loan Maturity. The following table sets forth certain information at December 31, 2018 regarding the contractual
maturity of our loan portfolio. Demand loans, loans having no stated repayment schedule or maturity, and overdraft loans
are reported as being due in one year or less. The table does not include any estimate of prepayments that could
significantly shorten the average life of all loans and may cause our actual repayment experience to differ from that shown
below.
December 31, 2018
Amounts due in:
1 – 4 Family
Residential Multifamily Real Estate Construction Commercial Consumer Total
Commercial
(In thousands)
5,921 $ 155,060 $ 21,156 $ 218,799
187,468
51,821
9,061
5,921 $ 191,828 $ 43,675 $ 467,149
34,768
2,000
—
22,391
128
—
—
—
—
One year or less . . . . . . . . . . . . . $ 13,391 $ 22,156 $
More than one to five years . . .
More than five to ten years . . . .
More than ten years . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . $ 56,043 $ 136,537 $ 33,145 $
71,222
36,892
6,267
24,937
6,652
441
34,150
6,149
2,353
1,115 $
44
The following table sets forth fixed and adjustable-rate loans at December 31, 2018 that are contractually due after
December 31, 2019.
Real estate
Fixed
Due After December 31, 2019
Adjustable
(In thousands)
Total
1 – 4 family residential . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 38,530 $ 4,122 $ 42,652
114,381
Multifamily . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
32,030
Commercial real estate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
—
Construction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
36,768
Commercial . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consumer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
22,519
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 170,378 $ 77,972 $ 248,350
91,371
17,868
—
290
22,319
23,010
14,162
—
36,478
200
At December 31, 2018, $31.5 million, or 13.1% of our adjustable interest rate loans were at their interest rate floor.
Delinquent Loans. The following tables set forth our loan delinquencies, including non-accrual loans, by type and
amount at the dates indicated.
At December 31, 2018
At December 31, 2017
At December 31, 2016
30 – 59 60 – 89 90 Days 30 – 59 60 –89 90 Days 30 – 59 60 – 89 90 Days
or More
Days
Past
Due
Days
Past
Due
or More
Past
Due
Days
Past
Due
or More
Past
Due
Days
Past
Due
Days
Past
Due
Past
Due
1 – 4 family residential . . . . . . $
Multifamily . . . . . . . . . . . . . . .
Commercial real estate . . . . . .
Construction . . . . . . . . . . . . . . .
Commercial . . . . . . . . . . . . . . .
Consumer . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . $
— $
—
—
—
—
—
— $
— $
—
—
—
—
40
40 $
— $
—
—
—
—
—
— $
Days
Past
Due
(Dollars in thousands)
— $
—
—
—
—
—
— $
— $
—
—
—
—
—
— $
— $ 203 $
—
—
—
—
—
— $ 203 $
—
—
—
—
—
— $
—
—
—
—
—
— $
—
—
—
—
—
—
—
At December 31, 2015
At December 31, 2014
30 – 59
Days
Past
Due
60 – 89
Days
Past
Due
90 Days 30 – 59
Days
Past
Due
or More
Past
Due
60 – 89
Days
Past
Due
90 Days
or More
Past
Due
1 – 4 family residential . . . . . . . . . . . . . . . . . . . . . . . . $
Multifamily . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Commercial real estate . . . . . . . . . . . . . . . . . . . . . . . .
Construction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Commercial . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consumer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
— $
—
—
—
—
—
— $
Non-performing Assets.
(Dollars in thousands)
— $
—
—
—
—
—
— $
— $
—
—
—
2,100
—
— $
—
—
—
—
—
— $ 2,100 $
— $
—
—
—
—
—
— $
—
—
—
—
—
—
—
Non-performing assets include loans that are 90 or more days past due or on non-accrual status, including troubled
debt restructurings on non-accrual status, and real estate and other loan collateral acquired through foreclosure and
repossession. Troubled debt restructurings include loans for economic or legal reasons related to the borrower’s financial
difficulties, for which we grant a concession to the borrower that we would not consider otherwise. Loans 90 days or
greater past due may remain on an accrual basis if adequately collateralized and in the process of collection. At
December 31, 2018, we did not have any accruing loans past due 90 days or greater or troubled debt restructurings. For
non-accrual
45
loans, interest previously accrued but not collected is reversed and charged against income at the time a loan is placed on
non-accrual status. Loans are returned to accrual status when all the principal and interest amounts contractually due are
brought current and future payments are reasonably assured.
Real estate that we acquire as a result of foreclosure or by deed-in-lieu of foreclosure is classified as foreclosed real
estate until it is sold. When property is acquired, it is initially recorded at the fair value less costs to sell at the date of
foreclosure, establishing a new cost basis. Holding costs and declines in fair value after acquisition of the property result
in charges against income. We have not had any foreclosed assets for the periods presented.
The following table sets forth information regarding our non-performing assets at the dates indicated.
Non-accrual loans:
1 – 4 family residential . . . . . . . . . . . . . . . . . . . . . $
Multifamily . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Commercial real estate . . . . . . . . . . . . . . . . . . . . .
Construction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Commercial . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consumer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total non-accrual loans . . . . . . . . . . . . . . . . . . . . . $
Other real estate owned . . . . . . . . . . . . . . . . . . . . .
Loans past due 90 days and still accruing . . . . . .
Troubled debt restructurings . . . . . . . . . . . . . . . . .
Total nonperforming assets. . . . . . . . . . . . . . . . . . $
2018
2017
At December 31,
2016
(Dollars in thousands)
2015
2014
—
—
—
—
—
—
—
—
—
—
—
$
$
$
—
—
—
—
—
—
—
—
—
—
—
$
$
$
—
—
—
—
—
—
—
—
—
—
—
$
$
$
—
—
—
—
—
—
—
—
—
—
—
$
$
$
—
—
—
—
—
—
—
—
—
—
—
Total loans(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 468,101
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 663,899
Total non-accrual loans to total loans . . . . . . . . .
Total non-performing assets to total assets . . . . .
— %
— %
$ 348,978
$ 533,557
$ 278,578
$ 424,833
$ 224,519
$ 352,650
$ 172,677
$ 330,690
— %
— %
— %
— %
— %
— %
— %
— %
(1) Loans are presented before the allowance for loan losses and include net deferred costs and unearned premiums.
Allowance for Loan Losses.
Please see “— Critical Accounting Policies — Allowance for Loan Losses” for additional discussion of our allowance
policy.
The allowance for loan losses is maintained at levels considered adequate by management to provide for probable
loan losses inherent in the loan portfolio as of the Consolidated Statements of Financial Condition reporting dates. The
allowance for loan losses is based on management’s assessment of various factors affecting the loan portfolio, including
portfolio composition, delinquent and non-accrual loans, national and local business conditions and loss experience and
an overall evaluation of the quality of the underlying collateral.
46
The following table sets forth activity in our allowance for loan losses for the periods indicated.
2018
2017
For the years ended December 31,
2016
(Dollars in thousands)
2015
2014
Allowance at beginning of year . . . . . . . . . . . . . . $ 4,264
1,375
Provision for loan losses . . . . . . . . . . . . . . . . . . . .
$
3,413
905
$
2,799
595
$ 2,165
930
$ 1,865
300
Charge-offs:
1 – 4 family residential . . . . . . . . . . . . . . . . . . . .
Multifamily . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Commercial real estate . . . . . . . . . . . . . . . . . . . .
Construction . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Commercial . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consumer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total charge-offs . . . . . . . . . . . . . . . . . . . . . . . . .
—
—
—
—
—
10
10
—
—
—
—
14
40
54
—
—
—
—
—
7
7
—
—
—
—
296
—
296
—
—
—
—
—
—
—
Recoveries:
1 – 4 family residential . . . . . . . . . . . . . . . . . . . .
Multifamily . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Commercial real estate . . . . . . . . . . . . . . . . . . . .
Construction . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Commercial . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consumer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total recoveries . . . . . . . . . . . . . . . . . . . . . . . . . .
—
—
—
—
—
—
—
Allowance at end of year . . . . . . . . . . . . . . . . . . . $ 5,629
—
Nonperforming loans at end of period . . . . . . . . . $
Total loans outstanding at end of period(1) . . . . . . $ 468,101
Average loans outstanding during the period(1) . . $ 398,614
Allowance for loan losses to non-performing
—
—
—
—
—
—
—
4,264
$
—
$
$ 348,978
$ 305,339
—
—
—
—
26
—
26
3,413
$
—
$
$ 278,578
$ 248,068
—
—
—
—
—
—
—
$ 2,799
—
$
$ 224,519
$ 187,317
—
—
—
—
—
—
—
$ 2,165
—
$
$ 172,677
$ 147,330
loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
N/A
N/A
N/A
N/A
N/A
Allowance for loan losses to total loans at end
of the period(1) . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net charge-offs to average loans outstanding
1.20 %
1.22 %
1.23 %
1.25 %
1.25 %
during the period . . . . . . . . . . . . . . . . . . . . . . . .
0.00 %
0.02 %
(0.01)%
0.16 %
— %
(1) Loans are presented before the allowance for loan losses and include net deferred costs and unearned premiums.
47
Allocation of Allowance for Loan Losses. The following tables set forth the allowance for loan losses allocated by
loan category. The allowance for loan losses allocated to each category is not necessarily indicative of future losses in any
particular category and does not restrict the use of the allowance to absorb losses in other categories.
2018
Percent of
Loans in
Each
At December 31,
2017
Percent of
Loans in
Each
2016
Percent of
Loans in
Each
Allowance Category to Allowance Category Allowance Category
for Loan
Losses
Total
Loans
for Loan
Losses
to Total
Loans
(Dollars in thousands)
for Loan
Losses
to Total
Loans
1 – 4 family residential . . . . . . . . . . . . . . . . . . . . . . $
Multifamily . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Commercial real estate . . . . . . . . . . . . . . . . . . . . . .
Construction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Commercial . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consumer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
407
952
357
149
3,110
654
Total allocated allowance . . . . . . . . . . . . . . . . . . . $ 5,629
12.00 % $
29.23
7.10
1.26
41.06
9.35
14.81 % $
28.28
7.11
1.45
39.19
9.16
100.00 % $ 4,264 100.00 % $ 3,413 100.00 %
382
713
266
127
2,272
504
360
621
238
141
1,934
119
17.88 %
30.06
8.00
2.02
38.23
3.81
At December 31,
2015
Percent of
Loans in
Each
2014
Percent of
Loans in
Each
Allowance Category to Allowance Category
for Loan
Losses
1 – 4 family residential . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Multifamily . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Commercial real estate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Construction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Commercial . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consumer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
213
533
230
134
1,536
153
Total allocated allowance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 2,799
for Loan
Total
Loans
Losses
(Dollars in thousands)
to Total
Loans
12.77 % $
31.86
9.52
2.38
37.40
6.07
162
528
97
27
1,222
129
13.44 %
34.11
8.02
0.65
38.22
5.56
100.00 % $ 2,165 100.00 %
The allowance for loan losses as a percentage of loans was 1.20% and 1.22% as of December 31, 2018 and 2017,
respectively. Loans rated special mention decreased to $9.2 million as of December 31, 2018 from $9.8 million at
December 31, 2017. In addition, the Company had one performing substandard loan of $180,000 at December 31, 2018.
The decline in the allowance as a percentage of loans is due to seasoning of the loan portfolio with continued minimal
losses and improvements in the experience and depth of lending management.
The allowance consists of general and allocated components. The general component relates to pools of non-impaired
loans and is based on historical loss experience adjusted for qualitative factors. The allocated component relates to loans
that are classified as impaired, whereby an allowance is established when the discounted cash flows, collateral value or
observable market price of the impaired loan is lower than the carrying value of that loan.
A loan is considered impaired when, based on current information and events, it is probable that we will be unable to
collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement.
Factors considered by us in determining impairment include payment status, collateral value, and the probability of
collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and
payment shortfalls generally are not classified as impaired. We determine the significance of payment delays and payment
shortfalls on case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower,
including the length of the delay, the reasons for the delay, the borrower’s prior payment record, and the amount of the
shortfall in relation to the principal and interest owed. The measurement of an impaired loan is based on (i) the present
48
value of expected future cash flows discounted at the loan’s effective interest rate, (ii) the loan’s observable market price
or (iii) the fair value of the collateral if the loan is collateral dependent.
We had no impaired loans at December 31, 2018 and December 31, 2017.
All loans except for consumer loans are individually evaluated for impairment.
Troubled debt restructurings are separately identified for impairment disclosures and are measured at the present value
of estimated future cash flows using the loan’s effective rate at inception. If a troubled debt restructuring is considered to
be a collateral dependent loan, the loan is reported, net, at the fair value of the collateral. For troubled debt restructurings
that subsequently default, we determine the amount of reserve in accordance with the accounting policy for the allowance
for loan losses.
Interest income on mortgage and commercial loans is discontinued at the time the loan is 90 days delinquent unless
the loan is well-secured and in process of collection. Consumer loans are typically charged off no later than 120 days past
due. Past due status is based on the contractual terms of the loan. In all cases, loans are placed on non-accrual or charged-
off at an earlier date if collection of principal or interest is considered doubtful. Non-accrual loans and loans past due
90 days still on accrual include both smaller balance homogeneous loans that are collectively evaluated for impairment
and individually classified impaired loans. A loan is moved to non-accrual status in accordance with our loan policy,
typically after 90 days of non-payment.
All interest accrued but not received for loans placed on non-accrual is reversed against interest income. Interest
received on such loans is accounted for on the cash-basis or cost-recovery method, until qualifying for return to accrual.
Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and
future payments are reasonably assured.
Although we believe that we use the best information available to establish the allowance for loan losses, future
adjustments to the allowance for loan losses may be necessary and our results of operations could be adversely affected if
circumstances differ substantially from the assumptions used in making the determinations. Furthermore, while we believe
we have established our allowance for loan losses in conformity with generally accepted accounting principles in the
United States of America, there can be no assurance that regulators, in reviewing our loan portfolio, will not require us to
increase our allowance for loan losses. In addition, because future events affecting borrowers and collateral cannot be
predicted with certainty, there can be no assurance that the existing allowance for loan losses is adequate or that increases
will not be necessary should the quality of any loans deteriorate as a result of the factors discussed above. Any material
increase in the allowance for loan losses may adversely affect our financial condition and results of operations.
Debt Securities Portfolio
The following table sets forth the amortized cost and estimated fair value of our available-for-sale securities portfolio
at the dates indicated.
2018
At December 31,
2017
Amortized
Cost
Fair
Value
Amortized
Cost
Fair
Value
2016
Amortized
Cost
Fair
Value
Government agency debentures . . . . . . . $
Mortgage backed securities-agency . . . .
Collateralized mortgage obligations-
— $
— $
(In thousands)
— $
— $
27,384
26,675
20,082
19,803
16,417
— $
—
16,012
agency . . . . . . . . . . . . . . . . . . . . . . . . . .
76,633
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 149,297 $ 145,698 $ 130,672 $ 128,758 $ 94,094 $ 92,645
121,913
119,023
110,590
108,955
77,677
At December 31, 2018 and December 31, 2017, we had no investments in a single company or entity, other than
government and government agency securities, which had an aggregate book value in excess of 10% of our equity.
49
We review 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), we consider 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 we
have 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 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. We evaluate securities for OTTI
at least on a quarterly basis, and more frequently when economic or market conditions warrant such an evaluation.
At December 31, 2018 and December 31, 2017, securities in unrealized loss positions were issuances from
government sponsored entities. The decline in fair value is attributable to changes in interest rates and illiquidity, not credit
quality and because we do not have the intent to sell the securities and it is likely that we will not be required to sell the
securities before their anticipated recovery, we do not consider the securities to be other-than-temporarily impaired at
December 31, 2018 and 2017.
No impairment charges were recorded for the years ended December 31, 2018, 2017 and 2016.
Portfolio Maturities and Yields. The composition and maturities of the investment securities portfolio at
December 31, 2018, are summarized in the following table. Maturities are based on the final contractual payment dates
and do not reflect the impact of prepayments or early redemptions that may occur. No tax-equivalent yield adjustments
have been made, as the amount of tax free interest earning assets is immaterial.
More Than One Year More Than Five Years
At December 31, 2018
One Year or Less
Weighted
Book Average
Value
Yield
through Five Years
Weighted
Average
Book
Value
Yield
Through Ten Years More Than Ten Years
Weighted
Average
Yield
Weighted
Average
Book
Value
Book
Value
Yield
Total
Book
Value
Weighted
Average
Yield
Government agency
debentures. . . . . . . . . . $ —
— % $
—
— % $
—
— % $
—
— % $
—
— %
Mortgage backed
securities-agency . . . .
—
—
—
—
6,560
2.69
20,824
2.61
27,384
2.63
Collateralized mortgage
obligations-agency . . .
—
—
—
—
—
—
121,913
2.55
121,913
2.55
(Dollars in thousands)
Total securities
available-for-sale . . . . $ —
— % $
—
— % $ 6,560
2.69 % $ 142,737
2.29 % $ 149,297
2.56 %
Deposits
Total deposits increased $119.9 million, or 26.7%, to $568.4 million at December 31, 2018 from $448.5 million at
December 31, 2017. 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 $548.0 million at December 31, 2018, or 96.4% of
total deposits at that date.
50
The following tables set forth the distribution of average deposits by account type at the dates indicated.
Demand . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 188,911
293,936
Savings, NOW and Money Market . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Time . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
27,014
Total deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 509,861
For the Year Ended December 31, 2018
Average
Rate
Average
Balance
Percent
(Dollars in thousands)
37.05 %
57.65 %
5.30 %
100.00 %
0.00 %
0.31 %
1.02 %
0.23 %
For the Years Ended December 31,
2017
Average
Balance
Percent
Average Average
Balance
(Dollars in thousands)
Rate
2016
Average
Percent
Rate
32.29 % 0.00 %
Demand . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 139,674
62.47 % 0.20 %
221,997
Savings, NOW and Money Market . . . . . . . . . . . .
Time . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
5.24 % 0.42 %
24,299
Total deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 385,970 100.00 % 0.19 % $ 325,262 100.00 % 0.15 %
36.19 % 0.00 % $ 105,036
57.52 % 0.19 % 203,185
6.29 % 0.38 % 17,041
As of December 31, 2018, the aggregate amount of all our certificates of deposit in amounts greater than or equal to
$100,000 was approximately $18.1 million. The following table sets forth the maturity of these certificates as of
December 31, 2018.
At
December 31, 2018
(In thousands)
Maturing period:
Three months or less . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Over three months through six months . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Over six months through twelve months . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Over twelve months . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total certificates greater than or equal to $100,000 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
$
1,397
200
15,748
733
18,078
Borrowings
At December 31, 2018, we had the ability to borrow a total of $115.0 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
$24.2 million. At December 31, 2018, we also had lines of credit with two other financial institutions totaling $7.5 million.
No amounts were outstanding on any of the aforementioned lines as of December 31, 2018.
Stockholders’ Equity
Total stockholders’ equity increased $9.4 million, or 11.3%, to $92.8 million at December 31, 2018, from
$83.4 million at December 31, 2017. The increase for the year ended December 31, 2018 was primarily due to the increase
in net income and amortization of share based compensation offset by unrealized losses on our available-for-sale portfolio.
Average Balance Sheets and Related Yields and Rates
The following tables present average balance sheet information, interest income, interest expense and the
corresponding average yields earned and rates paid for the years ended December 31, 2018, 2017 and 2016. The average
balances are daily averages and, for loans, include both performing and nonperforming balances. Interest income on loans
51
includes the effects of discount accretion and net deferred loan origination costs accounted for as yield adjustments. No
tax-equivalent adjustments have been made.
2018
For the Years Ended December 31,
2017
2016
Average
Balance
Average Average
Average Average
Average
Interest Yield/Rate
Balance
Interest Yield/Rate
Balance
Interest Yield/Rate
(Dollars in thousands)
INTEREST EARNING
ASSETS
Loans . . . . . . . . . . . . . . $ 398,614 $ 24,375
Securities, includes
6.11 % $ 305,339 $ 17,554
5.75 % $ 248,068 $ 14,071
5.67 %
restricted stock . . . . . .
Interest earning cash . . .
Total interest earning
150,668
36,898
3,945
631
2.62 % 108,497
34,346
1.71 %
2,549
291
2.35 %
0.85 %
87,830
32,849
1,964
133
2.24 %
0.40 %
assets . . . . . . . . . . . . .
586,180
28,951
4.94 % 448,182
20,394
4.55 %
368,747
16,168
4.38 %
NON-INTEREST
EARNING ASSETS .
14,233
TOTAL AVERAGE
ASSETS . . . . . . . . . . $ 600,413
INTEREST-BEARING
LIABILITIES
Savings, NOW, Money
8,132
10,650
$ 456,314
$ 379,397
Markets . . . . . . . . . . . $ 293,936 $
Time deposits . . . . . . . .
Total deposits . . . . . . . .
Short-term borrowings .
Secured borrowings . . . .
Total interest-bearing
27,014
320,950
478
246
908
275
1,183
12
17
0.31 % $ 221,997 $
1.02 %
24,299
0.37 % 246,296
2.51 %
2
296
6.91 %
424
93
517
—
21
0.19 % $ 203,185 $
0.38 %
0.21 %
— %
7.09 %
17,041
220,226
29
376
414
72
486
—
25
0.20 %
0.42 %
0.22 %
— %
6.65 %
liabilities . . . . . . . . . .
321,674
1,212
0.38 %
246,594
538
0.22 %
220,631
511
0.23 %
NON-INTEREST
BEARING
LIABILITIES
Demand deposits . . . . . .
Other liabilities . . . . . . .
Total non-interest bearing
liabilities . . . . . . . . . .
Stockholders' equity . . .
188,911
3,536
192,447
86,292
TOTAL AVG.
LIABILITIES AND
EQUITY . . . . . . . . . . $ 600,413
139,674
1,908
141,582
68,138
105,036
1,094
106,130
52,636
$ 456,314
$ 379,397
Net interest income . . . .
Net interest spread . . . . .
Net interest margin . . . .
$ 27,739
$ 19,856
$ 15,657
4.56 %
4.73 %
4.33 %
4.43 %
4.15 %
4.25 %
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
52
previous columns). Changes attributable to both volume and rate are allocated ratably between the volume and rate
categories.
For the Years Ended
December 31,
2018 vs. 2017
Increase
(Decrease) due to
Volume Rate
Total
Increase
(Decrease)
(Dollars in thousands)
Interest earned on:
Loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 5,645 $ 1,176 $ 6,821
1,396
Securities, includes restricted stock . . . . . . . . . . . . . . . . . . . . . . . .
340
Interest earning cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
8,557
Total interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,078
23
6,746
318
317
1,811
Interest paid on:
484
Savings, NOW, Money Markets . . . . . . . . . . . . . . . . . . . . . . . . . .
182
Time deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
666
Total deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
12
Short-term borrowings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(4)
Secured borrowings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
674
Change in net interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 6,559 $ 1,324 $ 7,883
317
171
488
—
(1)
487
167
11
178
12
(3)
187
For the Years Ended
December 31,
2017 vs. 2016
Increase
(Decrease) due to
Total
Increase
Volume Rate (Decrease)
(Dollars in thousands)
Interest earned on:
Loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 3,290 $ 193 $ 3,483
Securities, includes restricted stock . . . . . . . . . . . . . . . . . . . . . . . . .
585
Interest earning cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
158
Total interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
4,226
104
152
449
481
6
3,777
Interest paid on:
Savings, NOW, Money Markets . . . . . . . . . . . . . . . . . . . . . . . . . . .
10
Time deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
21
Total deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
31
Short-term borrowings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
—
Secured borrowings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(4)
Total interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
27
Change in net interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 3,719 $ 480 $ 4,199
(27)
(7)
(34)
—
3
(31)
37
28
65
—
(7)
58
Results of Operations for the Years Ended December 31, 2018 and 2017
General. Net income increased $5.1 million or 139.7%, to $8.7 million for the year ended December 31, 2018 from
$3.6 million for the year ended December 31, 2017. The increase resulted from a $7.9 million increase in net interest
income and a $2.3 million increase in noninterest income, which were partially offset by a $4.9 million increase in
noninterest expense.
53
Interest Income. Interest income increased $8.6 million or 42.0%, to $29.0 million for the year ended December 31,
2018 from $20.4 million for the year ended December 31, 2017. This was attributable to an increase in the average balance
of loans, which increased $93.3 million, or 30.5%, to $398.6 million for the year ended December 31, 2018 from
$305.3 million for the year ended December 31, 2017.
Interest Expense. Interest expense increased $674,000, or 125.3%, to $1.2 million for the year ended December 31,
2018 from $538,000 for the year ended December 31, 2017, primarily attributable to an increase in average balance of
interest-bearing deposits and an increase in average rate. Interest rates we paid on interest bearing deposits increased 16
basis points to 0.37% for the year ended December 31, 2018 from 0.21% for the year ended December 31, 2017. Our
average balance of interest bearing deposits increased $74.7 million, or 30.3%, to $321.0 million for the year ended
December 31, 2018 from $246.3 million for the year ended December 31, 2017.
Net Interest Income. Net interest income increased $7.9 million, or 39.7%, to $27.7 million for the year ended
December 31, 2018 from $19.9 million for the year ended December 31, 2017. Our net interest margin widened 30 basis
points to 4.73% for the year ended December 31, 2018 from 4.43% for the year ended December 31, 2017. Our net interest
spread increased 23 basis points to 4.56% for the year ended December 31, 2018 from 4.33% for the year ended
December 31, 2017.
Provision for Loan Losses. Our provision for loan losses was $1.4 million for the year ended December 31, 2018
compared to $905,000 for the year ended December 31, 2017. The increase from prior year was primarily related to growth
in the loan portfolio. The provisions recorded resulted in an allowance for loan losses of $5.6 million, or 1.20% of total
loans at December 31, 2018, compared to $4.3 million, or 1.22% of total loans at December 31, 2017.
Noninterest Income. Noninterest income information is as follows:
For the Years Ended
December 31,
2018
2017
Change
Amount Percent
Noninterest income
Merchant processing income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 4,961 $ 3,322 $ 1,639
700
Customer related fees and service charges . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 7,855 $ 5,516 $ 2,339
Total noninterest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2,894
2,194
49.3 %
31.9
42.4 %
(Dollars in thousands)
Merchant processing income increased due to growth in our platform with average monthly volumes increasing 87.6%
to $596.7 million for 2018 compared to $318.1 million for 2017. Customer related fees and charges have increased due to
increases 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.
54
Noninterest Expense. Noninterest expense information is as follows:
For the Years Ended
December 31,
2018
2017
Change
Amount Percent
(Dollars in thousands)
Noninterest expense
Employee compensation and benefits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 13,039 $ 10,072 $ 2,967
179
Occupancy and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
687
Professional and consulting services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
65
FDIC and regulatory assessments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
39
Advertising and marketing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
76
Travel and business relations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
187
Data processing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
662
Other operating expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total noninterest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 22,295 $ 17,433 $ 4,862
1,557
1,902
256
485
428
1,709
1,024
1,736
2,589
321
524
504
1,896
1,686
29.5 %
11.5
36.1
25.4
8.0
17.8
10.9
64.6
27.9 %
Employee compensation and benefits increased for the year ended December 31, 2018 from the year ended
December 31, 2017 primarily due to a one-time compensation related charge of $1.2 million for the passing of our
Executive Chairman, new hires to support continued growth and technology efforts and increases in base salary and bonus
pay. The increase in professional and consulting services was due primarily to the filing of our shelf registration statement
and costs associated with the introduction of new products and services as we continue to grow. The increase in other
expenses was due primarily to increases in employee search firm fees for new hires and other costs associated with being
a public company.
Income Tax Expense. We recorded an income tax expense of $3.2 million for the year ended December 31, 2018,
reflecting an effective tax rate of 26.8%, compared to $3.4 million, or 48.2%, for the year ended December 31, 2017. The
decrease was driven by the December 2017 Tax Cuts and Jobs Act which adversely effected the effective tax rate in 2017
due to the re-measurement of the net deferred tax asset resulting in additional tax expense of $683,000.
Results of Operations for the Years Ended December 31, 2017 and 2016
General. Net income increased $822,000, or 29.1%, to $3.6 million for the year ended December 31, 2017 from
$2.8 million for the year ended December 31, 2016. The increase resulted from a $4.2 million increase in net interest
income and a $1.4 million increase in noninterest income, which were partially offset by a $2.8 million increase in
noninterest expense.
Interest Income. Interest income increased $4.2 million or 26.1%, to $20.4 million for the year ended December 31,
2017 from $16.2 million for the year ended December 31, 2016. This was attributable to an increase in the average balance
of loans, which increased $57.3 million, or 23.1%, to $305.3 million for the year ended December 31, 2017 from $248.1
million for the year ended December 31, 2016.
Interest Expense. Interest expense increased $27,000, or 5.3%, to $538,000 for the year ended December 31, 2017
from $511,000 for the year ended December 31, 2016, caused by an increase in average-interest bearing deposits. The
average rate we paid on interest bearing deposits decreased 1 basis point to 0.21% for the year ended December 31, 2017
from 0.22% for the year ended December 31, 2016. Our average balance of interest bearing deposits increased
$26.1 million, or 11.8%, to $246.3 million for the year ended December 31, 2017 from $220.2 million for the year ended
December 31, 2016.
Net Interest Income. Net interest income increased $4.2 million, or 26.8%, to $19.9 million for the year ended
December 31, 2017 from $15.7 million for the year ended December 31, 2016.
Our net interest margin and net interest spread each increased 18 basis points to 4.43% and 4.33%, respectively for
the year ended December 31, 2017 from 4.25% and 4.15%, respectively for the year ended December 31, 2016. The
55
increase in the net interest margin was primarily due to a 17 basis point increase in the average yield we earned on interest
earning assets. This increase was largely due to growth in higher yielding loans and the impact of rising rates.
Provision for Loan Losses. Our provision for loan losses was $905,000 for the year ended December 31, 2017
compared to $595,000 for the year ended December 31, 2016. The provisions recorded resulted in an allowance for loan
losses of $4.3 million, or 1.22% of total loans at December 31, 2017, compared to $3.4 million, or 1.23% of total loans at
December 31, 2016.
Noninterest Income. Noninterest income information is as follows:
For the Years Ended
December 31,
Change
2017
2016
Amount Percent
(Dollars in thousands)
Noninterest income
Merchant processing income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 3,322 $ 3,080 $
Customer related fees and service charges . . . . . . . . . . . . . . . . . . . . . . . . . . .
Gains of sales of securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
242
1,155
(6)
Total noninterest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 5,516 $ 4,125 $ 1,391
2,194
—
1,039
6
7.9 %
111.2
(100.0)
33.7 %
Merchant processing income increased significantly due to significant growth in our business. Average monthly
volumes increased to $318.1 million for 2017 compared to $302.8 million for 2016. Customer related fees and charges
have increased due to increases in administrative service income on off-balance sheet funds as a result of rising rates and
higher balances.
Noninterest Expense. Noninterest expense information is as follows:
For the Years Ended
December 31,
2017
2016
Change
Amount Percent
(Dollars in thousands)
Noninterest expense
Employee compensation and benefits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 10,072 $ 8,244 $ 1,828
(47)
Occupancy and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
260
Professional and consulting services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
45
FDIC and regulatory assessments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
55
Advertising and marketing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
104
Travel and business relations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
340
Data processing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
249
Other operating expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total noninterest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 17,433 $ 14,599 $ 2,834
1,557
1,902
256
485
428
1,709
1,024
1,604
1,642
211
430
324
1,369
775
22.2 %
(2.9)
15.8
21.3
12.8
32.1
24.8
32.1
19.4 %
Employee compensation and benefits increased for the year ended December 31, 2017 from the year ended
December 31, 2016 primarily due to increases in the number of employees, increases in incentive compensation and salary
increases. The increase in professional and consulting services was due primarily to additional costs related to becoming
a public company. The increase in data processing costs was due to investments in technology to support our future growth
initiatives.
Income Tax Expense. We recorded an income tax expense of $3.4 million for the year ended December 31, 2017,
reflecting an effective tax rate of 48.2%, compared to $1.8 million, or 38.5%, for the year ended December 31, 2016. The
increase was driven by the December 2017 Tax Cuts and Jobs Act which adversely effected the effective tax rate in 2017
due to the re-measurement of the net deferred tax asset resulting in additional tax expense of $683,000.
56
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.
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 twelve-month periods
beginning December 31, 2018 and 2017. The tables below demonstrate that we are asset-sensitive in a rising interest rate
environment.
At December 31,
2018
2017
Changes in
Interest Rates
(Basis Points)
Estimated
12-Months
Net Interest
Income
Estimated
12-Months
Net Interest
Income
(Dollars in thousands)
Change
Change
400 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 41,391
39,084
300 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
37,008
200 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
35,119
100 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
33,419
0 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
30,963
-100 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
28,016
-200 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
7,972 $ 31,412
29,386
5,665
27,513
3,589
26,040
1,700
24,704
—
22,347
(2,456)
20,527
(5,403)
6,708
4,682
2,809
1,336
—
(2,357)
(4,177)
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
57
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 as of December 31, 2018 and 2017.
Changes in
Interest Rates
(Basis Points)
At December 31,
2018
2017
Economic
Economic
Value of
Equity
Value of
Change Equity
(Dollars in thousands)
Change
400 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 140,870
138,761
300 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
137,005
200 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
135,923
100 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
134,359
0 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
125,997
(100) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
111,682
(200) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
6,511 $ 108,330
106,190
4,402
103,804
2,646
101,889
1,564
98,812
—
89,975
(8,362)
76,118
(22,677)
9,518
7,378
4,992
3,077
—
(8,837)
(22,694)
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 December 31, 2018 and December 31, 2017, cash
and cash equivalents totaled $30.6 million and $43.1 million, respectively.
At December 31, 2018, through pledging of our securities, we had the ability to borrow a total of $115.0 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 $24.2 million. At December 31, 2018, we also had 7.5 million in aggregated unsecured lines of credit
with unaffiliated correspondent banks. No amounts were outstanding on any of the aforementioned lines as of
December 31, 2018.
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.
58
Esquire Bank, National Association is subject to various regulatory capital requirements administered by Office of
the Comptroller of the Currency, and the Federal Deposit Insurance Corporation. At December 31, 2018 and December 31,
2017, Esquire Bank exceeded all applicable regulatory capital requirements, and was considered “well capitalized” under
regulatory guidelines. See Note 13 of the Notes to the Consolidated Financial Statements for additional information.
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. At December 31, 2018, Esquire Bank was classified as well-
capitalized.
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 December 31, 2018
Total Risk-based Capital Ratio
Bank . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Tier 1 Risk-based Capital Ratio
Bank . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Common Equity Tier 1 Capital Ratio
Bank . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Tier 1 Leverage Ratio
Bank . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
10.00 %
9.88 %
18.70 %
8.00 %
7.88 %
17.54 %
6.50 %
6.38 %
17.54 %
5.00 %
4.00 %
13.26 %
For Capital Adequacy
Purposes
Minimum Capital with
Actual
“Well Capitalized”
Conservation Buffer At December 31, 2017
Total Risk-based Capital Ratio
Bank . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Tier 1 Risk-based Capital Ratio
Bank . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Common Equity Tier 1 Capital Ratio
Bank . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Tier 1 Leverage Ratio
Bank . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
10.00 %
9.25 %
18.47 %
8.00 %
7.25 %
17.32 %
6.50 %
5.75 %
17.32 %
5.00 %
4.00 %
12.82 %
Basel III revised the capital adequacy requirements and the Prompt Corrective Action Framework effective January 1,
2015 for Esquire Bank. When fully phased in on January 1, 2019, the Basel Rules will require Esquire Bank to maintain a
2.5% “capital conservation buffer” on top of the minimum risk-weighted asset ratios. The capital conservation buffer is
designed to absorb losses during periods of economic stress. Banking institutions with a (i) CET1 to risk-weighted assets,
(ii) Tier 1 capital to risk-weighted assets or (iii) total capital to risk-weighted assets above the respective minimum but
below the capital conservation buffer will face constraints on dividends, equity repurchases and discretionary bonus
payments to executive officers based on the amount of the shortfall. The implementation of the capital conservation buffer
began on January 1, 2016 at the 0.625% level and will increase by 0.625% on each subsequent January 1, until it reaches
2.5% on January 1, 2019.
59
Contractual Obligations and Off-Balance Sheet Arrangements
Contractual Obligations. In the ordinary course of our operations, we enter into certain contractual obligations. The
following table presents our contractual obligations as of December 31, 2018.
Contractual Maturities as of December 31, 2018
Due in One
Year or
Less
Due After
One Year
Through
Three Years
Due After
Three Years
Through
Five Years
(In thousands)
Due After
Five Years Total
Operating lease obligations . . . . . . . . . . . . . . . . . . . . . . . . $
Time deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 19,639 $
19,111
528 $
1,028 $
1,306
2,334 $
1,059 $
—
1,059 $
1,698 $
—
4,313
20,417
1,698 $ 24,730
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.
For further information, see Note 11 of the Notes to the Consolidated Financial Statements.
Effect of Inflation and Changing Prices
The Consolidated Financial Statements and related financial data included in this annual report have been prepared in
accordance with generally accepted accounting principles in the United States of America, which require the measurement
of financial position and operating results in terms of historical dollars without considering the change in the relative
purchasing power of money over time due to inflation. The primary impact of inflation on our operations is reflected in
increased operating costs. Unlike most industrial companies, virtually all the assets and liabilities of a financial institution
are monetary in nature. As a result, interest rates generally have a more significant impact on a financial institution’s
performance than do general levels of inflation. Interest rates do not necessarily move in the same direction or to the same
extent as the prices of goods and services.
ITEM 7A. Quantitative and Qualitative Disclosures About Market Risk
The quantitative and qualitative disclosures about market risk are included under the section of this Annual Report
entitled “Item 7 — Management’s Discussion and Analysis of Financial Condition and Results of Operations —
Management of Market Risk.”
60
ITEM 8. Financial Statements and Supplementary Data
Crowe LLP
Independent Member Crowe Global
Report of Independent Registered Public Accounting Firm
Shareholders and the Board of Directors of
Esquire Financial Holdings, Inc.
Jericho, New York
Opinion on the Financial Statements
We have audited the accompanying consolidated statements of financial condition of Esquire Financial Holdings, Inc.
(the "Company") as of December 31, 2018 and 2017, the related consolidated statements of income, comprehensive
income, changes in stockholders’ equity, and cash flows for each of the three years in the period ended December 31,
2018, and the related notes (collectively referred to as the "financial statements"). In our opinion, the financial statements
present fairly, in all material respects, the financial position of the Company as of December 31, 2018 and 2017, and the
results of its operations and its cash flows for each of the three years in the period ended December 31, 2018, in conformity
with accounting principles generally accepted in the United States of America.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an
opinion on the Company's financial statements based on our audits. We are a public accounting firm registered with the
Public Company Accounting Oversight Board (United States) ("PCAOB") and are required to be independent with respect
to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities
and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement,
whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its
internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal
control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company's
internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the financial statements,
whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining,
on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included
evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall
presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
We have served as the Company’s auditor since 2006.
Livingston, New Jersey
March 14, 2019
/s/ Crowe LLP
61
ESQUIRE FINANCIAL HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(Dollars in thousands, except per share data)
ASSETS
Cash and due from banks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Interest earning deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
At December 31,
2018
2017
659 $
29,903
30,562
471
42,606
43,077
Securities available-for-sale, at fair value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Securities, restricted, at cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
145,698
2,583
128,758
2,183
Loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Less: allowance for loan losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Loans, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Premises and equipment, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accrued interest receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred tax asset, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
468,101
(5,629)
462,472
2,694
3,855
3,072
12,963
663,899 $
348,978
(4,264)
344,714
2,546
2,836
2,241
7,202
533,557
LIABILITIES AND STOCKHOLDERS’ EQUITY
Deposits:
Demand . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Savings, NOW and money market . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Time . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
212,721 $
335,283
20,417
568,421
190,847
230,715
26,932
448,494
Secured borrowings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accrued expenses and other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
89
2,615
571,125 $
278
1,402
450,174
Commitments and Contingencies (Note 11) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
—
—
Stockholders’ equity:
Preferred stock, par value $0.01; authorized 2,000,000 shares; no shares issued and
outstanding at December 31, 2018 and December 31, 2017 . . . . . . . . . . . . . . . . . . . . . . .
—
—
Common stock, par value $0.01; authorized 15,000,000 shares; issued and outstanding
7,532,723 shares at December 31, 2018 and 7,326,536 shares at December 31, 2017 . .
Additional paid-in capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Retained earnings (deficit) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accumulated other comprehensive loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total stockholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total liabilities and stockholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
75
88,539
6,774
(2,614)
92,774
663,899 $
73
86,660
(1,960)
(1,390)
83,383
533,557
See accompanying notes to consolidated financial statements.
62
ESQUIRE FINANCIAL HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF INCOME
(Dollars in thousands, except per share data)
For the Years Ended December 31,
2016
2017
2018
Interest income:
Loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 24,375 $ 17,554 $ 14,071
1,964
Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest earning deposits and other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
133
16,168
Total interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2,549
291
20,394
3,945
631
28,951
Interest expense:
Savings, NOW and money market deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Time deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Borrowings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
908
275
29
1,212
424
93
21
538
414
72
25
511
Net interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Provision for loan losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net interest income after provision for loan losses . . . . . . . . . . . . . . . . . . . . . . . . . . .
27,739
1,375
26,364
19,856
905
18,951
15,657
595
15,062
Non-interest income:
Merchant processing income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Customer related fees and service charges . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net gains on securities available-for-sale . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total non-interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
4,961
2,894
—
7,855
3,322
2,194
—
5,516
3,080
1,039
6
4,125
Non-interest expense:
Employee compensation and benefits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Occupancy and equipment, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Professional and consulting services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
FDIC and regulatory assessments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Advertising and marketing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Travel and business relations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Data processing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other operating expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total non-interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
13,039
1,736
2,589
321
524
504
1,896
1,686
22,295
10,072
1,557
1,902
256
485
428
1,709
1,024
17,433
8,244
1,604
1,642
211
430
324
1,369
775
14,599
Net income before income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income tax expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
11,924
3,190
7,034
3,390
4,588
1,766
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 8,734 $ 3,644 $ 2,822
Earnings per common share
Basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
1.18 $
1.13 $
0.59 $
0.58 $
0.56
0.55
See accompanying notes to consolidated financial statements.
63
ESQUIRE FINANCIAL HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Dollars in thousands)
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 8,734 $ 3,644 $ 2,822
Other comprehensive loss:
For the Years Ended December 31,
2018
2017
2016
Unrealized losses arising during the period on securities available-for-sale . . . . .
Reclassification adjustment for net gains included in net income . . . . . . . . . . . . . .
Tax effect . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total other comprehensive loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(738)
6
282
(450)
Total comprehensive income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 7,510 $ 3,360 $ 2,372
(1,685)
—
461
(1,224)
(465)
—
181
(284)
See accompanying notes to consolidated financial statements.
64
ESQUIRE FINANCIAL HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
(Dollars in thousands)
Preferred Common Preferred Common
shares
shares
stock
stock
Additional Retained
Accumulated
other
earnings comprehensive stockholders'
loss
equity
Total
Balance at January 1, 2016 . . . . 157,985 4,911,870 $
—
Net income . . . . . . . . . . . . . . . . .
—
Other comprehensive loss . . . . . .
91,000
Conversion of preferred stock . . .
80
Issuance of common stock . . . . . .
Stock compensation expense . . . .
—
Balance at December 31, 2016 . .
Net income . . . . . . . . . . . . . . . . .
Other comprehensive loss . . . . . .
Conversion of preferred stock . . .
Exercise of stock options, net of
—
—
(91,000)
—
—
—
—
66,985
—
—
(66,985)
66,985 5,002,950 $
repurchases . . . . . . . . . . . . . . .
—
101,941
Issuance of common stock, net
of issuance costs . . . . . . . . . . .
Stock compensation expense . . . .
Reclassification due to adoption
of ASU 2018-02 . . . . . . . . . . .
Balance at December 31, 2017 . .
Net income . . . . . . . . . . . . . . . . .
Other comprehensive loss . . . . . .
Exercise of stock options, net of
repurchases . . . . . . . . . . . . . . .
Restricted stock grants . . . . . . . . .
Stock compensation expense . . . .
Balance at December 31, 2018 . .
— 2,154,660
—
—
—
—
— 7,326,536 $
—
—
—
—
42,687
163,500
—
—
—
—
— 7,532,723 $
2 $
—
—
(1)
—
—
1 $
—
—
(1)
—
—
—
—
— $
—
—
—
—
—
— $
paid-in
capital
58,456 $
—
—
—
1
388
58,845 $
—
—
—
(deficit)
(8,648) $
2,822
—
—
—
—
(5,826) $
3,644
—
—
49 $
—
—
1
—
—
50 $
—
—
1
1
941
—
21
—
26,320
554
—
—
—
73 $
—
—
—
2
—
75 $
—
86,660 $
—
—
222
(1,960) $
8,734
—
378
(2)
1,503
88,539 $
—
—
—
6,774 $
(434) $
—
(450)
—
—
—
(884) $
—
(284)
—
—
—
—
(222)
(1,390) $
—
(1,224)
—
—
—
(2,614) $
49,425
2,822
(450)
—
1
388
52,186
3,644
(284)
—
942
26,341
554
—
83,383
8,734
(1,224)
378
—
1,503
92,774
See accompanying notes to consolidated financial statements.
65
ESQUIRE FINANCIAL HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
Cash flows from operating activities:
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Adjustments to reconcile net income to net cash used in operating activities:
Net cash used in operating activities:
Provision for loan losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net gains on securities available-for-sale . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Depreciation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Stock compensation expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred tax (benefit) expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net amortization:
Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Changes in other assets and liabilities:
Accrued interest receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accrued expenses and other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Write-offs related to offices closed . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net cash provided by operating activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash flows from investing activities:
Net change in loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Purchases of securities available-for-sale . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Proceeds of sales of securities available-for-sale . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Principal repayments on securities available-for-sale . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Purchase of securities, restricted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Redemption of securities, restricted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Purchase of equity investment without readily determinable fair value . . . . . . . . . . . . . . . . . . . . . . . .
Other assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Purchases of premises and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net cash used in investing activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash flows from financing activities:
Net increase in deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Decrease in secured borrowings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Exercise of stock options . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Proceeds from the issuance of common stock, net of issuance costs . . . . . . . . . . . . . . . . . . . . . . . . . .
Net cash provided by financing activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
For the Years Ended December 31,
2016
2017
2018
$
8,734
$
3,644
$
2,822
1,375
—
421
1,503
(370)
446
476
(1,019)
(3,351)
1,213
—
9,428
(119,609)
(42,482)
—
23,411
(400)
—
(2,410)
—
(569)
(142,059)
119,927
(189)
378
—
120,116
905
—
411
554
1,048
403
632
(1,295)
(2,309)
(14)
—
3,979
(71,086)
(58,503)
—
21,522
(534)
—
—
—
(190)
(108,791)
77,706
(93)
942
26,341
104,896
595
(6)
166
388
1,521
344
421
(123)
(202)
172
221
6,319
(54,461)
(30,235)
4,068
16,691
(453)
234
—
1,250
(2,666)
(65,572)
69,101
(10)
—
1
69,092
(Decrease) increase in cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(12,515)
84
9,839
Cash and cash equivalents at beginning of the period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
43,077
42,993
33,154
Cash and cash equivalents at end of the period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
30,562
$
43,077
$
42,993
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
1,203
2,675
$
535
2,630
$
Noncash disclosures:
Exchange of preferred stock for common stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
—
1
508
234
1
See accompanying notes to consolidated financial statements.
66
ESQUIRE FINANCIAL HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2018 and 2017
(Dollars in thousands, except per share data)
NOTE 1 — Business and Summary of Significant Accounting Policies
Business
Esquire Financial Holdings, Inc. (the “Company”) is a bank holding company incorporated in Maryland and
headquartered in Jericho, New York, with one branch office in Garden City, New York and an administrative office in
Boca Raton, Florida. Its wholly-owned subsidiary, Esquire Bank, National Association (the “Bank”), is a full service
commercial bank dedicated to serving the financial needs of the legal industry and small businesses nationally, as well as
commercial and retail customers in the New York metropolitan area.
The Bank offers tailored products and solutions to the legal community and their clients as well as dynamic and
flexible merchant services solutions to small business owners. Banking products offered for businesses and consumers
include checking, savings, money market and time deposits; a wide range of commercial and consumer loans, as well as
customary banking services. These activities, primarily anchored by our legal community focus, generate a stable source
of low cost core deposits and a diverse asset base to support our overall operations.
The Bank operates a merchant services platform through third party Independent Sales Organizations (“ISOs”). As
an acquiring bank, fees are charged to merchants for the settlement of credit card, debit card and ACH transactions. The
Bank’s revenue from these operational services is presented as merchant processing income on the Consolidated Statement
of Income.
The Consolidated Financial Statements include Esquire Financial Holdings, Inc. and its wholly owned subsidiary,
Esquire Bank, N.A. and are referred to as “the Company.” Intercompany transactions and balances are eliminated in
consolidation.
Common Stock
On June 30, 2017, we completed our initial public offering (“IPO”) and sold 1,800,000 shares of common stock. We
received aggregate net proceeds of approximately $21,741, after deducting underwriting discount and other offering
related expenses. On July 20, 2017 we sold 354,580 additional shares of common stock at the public offering price of
$14.00 per share pursuant to the underwriter’s over-allotment options. The net proceeds of the additional shares after
deducting the underwriting discount and other offering related expenses was approximately $4,600.
Preferred Stock
In December of 2014, the Company issued 157,985 0.00% Series B Non-Voting Preferred shares at a price of $12.50
per share for proceeds, net of offering costs, of approximately $1,800. The preferred stock did not have a maturity date
and was not convertible by the holder, but was convertible on a one for one basis into common stock by us under certain
circumstances. In addition, the preferred stock did not have a liquidation preference and had equal rights to receive
dividends when dividends are declared on common stock, and thus were considered participating securities. These shares
were later exchanged for 157,985 shares of common stock, par value $0.01. As of December 31, 2017 and 2018, there are
no preferred shares outstanding.
Dividend Restriction
Banking regulations require maintaining certain capital levels and may limit the dividends paid by the bank to the
holding company or by the holding company to shareholders.
67
ESQUIRE FINANCIAL HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2018 and 2017
(Dollars in thousands, except per share data)
Basis of Presentation and Use of Estimates
The accounting and financial reporting policies are in conformity with U.S. generally accepted accounting principles
(GAAP). The preparation of financial statements requires that management make estimates and assumptions that affect
the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of income and expenses during the reporting period. Such estimates are subject to
change in the future as additional information becomes available or previously existing circumstances are modified. Actual
results could differ from those estimates.
Statement of Cash Flows
For purposes of the accompanying statements of cash flows, cash and cash equivalents are defined as the amounts
included in the Consolidated Statements of Financial Condition under the captions “Cash and cash equivalents”, with
contractual maturities of less than 90 days. Net cash flows are reported for customer loan and deposit transactions.
Debt Securities
All securities are classified as available-for-sale and carried at fair value. Unrealized gains and losses on these
securities are reported, net of applicable taxes, as a separate component of accumulated other comprehensive loss, a
component of stockholders’ equity.
Interest income on securities, including amortization of premiums and accretion of discounts, is recognized using the
level yield method without anticipating prepayments (except for mortgage-backed securities where prepayments are
anticipated) over the lives of the individual securities. Realized gains and losses on sales of securities are computed using
the specific identification method.
Loans
Loans that management has the intent and ability to hold for the foreseeable future until maturity or payoff are stated
at the principal amount outstanding, net of deferred loan fees and costs for originated loans and net of unamortized
premiums or discounts for purchased loans. Interest income is recognized using the level yield method. Net deferred loan
fees, origination costs, unamortized premiums or discounts are recognized in interest income over the loan term as a yield
adjustment.
Non-Accrual
Interest income on mortgage and commercial loans is discontinued at the time the loan is 90 days delinquent unless
the loan is well-secured and in process of collection. Consumer loans are typically charged off no later than 120 days past
due. Past due status is based on the contractual terms of the loan. In all cases, loans are placed on non-accrual or charged-
off at an earlier date if collection of principal or interest is considered doubtful. Non-accrual loans and loans past due
90 days still on accrual include both smaller balance homogeneous loans that are collectively evaluated for impairment
and individually classified impaired loans. A loan is moved to non-accrual status in accordance with the Company’s policy,
typically after 90 days of non-payment.
All interest accrued but not received for loans placed on non-accrual is reversed against interest income. Interest
received on such loans is accounted for on the cash-basis or cost-recovery method, until qualifying for return to accrual.
Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and
future payments are reasonably assured.
68
ESQUIRE FINANCIAL HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2018 and 2017
(Dollars in thousands, except per share data)
Provision and Allowance for Loan Losses
The allowance for loan losses is a valuation allowance for probable incurred credit losses. The allowance for loan
losses is increased by provisions for loan losses charged to income. Losses are charged to the allowance when all or a
portion of a loan is deemed to be uncollectible. Subsequent recoveries of loans previously charged off are credited to the
allowance for loan losses when realized. Management estimates the allowance balance required using past loan loss
experience, the nature and volume of the portfolio, information about specific borrower situations and estimated collateral
values, economic conditions and other factors. Allocations of the allowance may be made for specific loans, but the entire
allowance is available for any loan that, in management’s judgment, should be charged off.
The allowance consists of specific and general components. The specific component relates to loans that are
individually classified as impaired when, based on current information and events, it is probable that the Company will be
unable to collect all amounts due according to the contractual terms of the loan agreement.
Factors considered by management in determining impairment include payment status, collateral value, and the
probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment
delays and payment shortfalls generally are not classified as impaired. Management determines the significance of
payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances
surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior
payment record, and the amount of the shortfall in relation to the principal and interest owed.
All loans, except for consumer loans, are individually evaluated for impairment. If a loan is impaired, a portion of the
allowance is allocated as a specific allowance. The measurement of an impaired loan is based on (i) the present value of
expected future cash flows discounted at the loan’s effective interest rate, (ii) the loan’s observable market price or (iii) the
fair value of the collateral if the loan is collateral dependent.
Loans for which the terms have been modified resulting in a concession, and for which the borrower is experiencing
financial difficulties, are considered troubled debt restructurings and classified as impaired. Troubled debt restructurings
are separately identified for impairment disclosures and are measured at the present value of estimated future cash flows
using the loan’s effective rate at inception. If a troubled debt restructuring is considered to be a collateral dependent loan,
the loan is reported, net, at the fair value of the collateral. For troubled debt restructurings that subsequently default, the
Company determines the amount of reserve in accordance with the accounting policy for the allowance for loan losses.
The general component is based on historical loss experience adjusted for current factors. The historical loss
experience is determined by portfolio segment and is based on the actual loss history experienced by the Company. This
actual loss experience is supplemented with other economic factors based on the risks present for each portfolio segment.
These economic factors include consideration of the following: levels of and trends in delinquencies and impaired loans;
levels of and trends in charge-offs and recoveries; trends in volume and terms of loans; effects of any changes in risk
selection and underwriting standards; other changes in lending policies, procedures, and practices; experience, ability, and
depth of lending management and other relevant staff; national and local economic trends and conditions; industry
conditions; and effects of changes in credit concentrations. The determination of the economic factors is a qualitative
assessment that involves significant management judgment.
Management has identified the following loan segments: Commercial Real Estate, Multifamily, Construction,
Commercial, 1 – 4 Family Residential and Consumer. The risks associated with a concentration in real estate loans include
potential losses from fluctuating values of land and improved properties. Commercial Real Estate and Multifamily loans
are expected to be repaid from the cash flow of the underlying property so the collective amount of rents must be sufficient
to cover all operating expenses, property management and maintenance, taxes and debt service. Increases in vacancy rates,
69
ESQUIRE FINANCIAL HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2018 and 2017
(Dollars in thousands, except per share data)
interest rates or other changes in general economic conditions can all have an impact on the borrower and their ability to
repay the loan. Construction loans are considered riskier than commercial financing on improved and established
commercial real estate. The risk of potential loss increases if the original cost estimates or time to complete are significantly
off. The remainder of the loan portfolio is comprised of commercial and consumer loans. The primary risks associated
with the commercial loans is the cash flow of the business, the experience and quality of the borrowers’ management, the
business climate, and the impact of economic factors. The primary risks associated with 1 – 4 Family Residential and
Consumer loans relate to the borrower, such as the risk of a borrower’s unemployment as a result of deteriorating economic
conditions or the amount and nature of a borrower’s other existing indebtedness, and the value of the collateral securing
the loan if the Bank must take possession of the collateral.
Premises and Equipment
Premises and equipment, including leasehold improvements, are stated at cost, net of accumulated depreciation and
amortization. Equipment, which includes furniture and fixtures, are depreciated over the assets’ estimated useful lives
using the straight-line method (three to ten years). Amortization of leasehold improvements is recognized on a straight-
line basis over the lesser of the expected lease term or the estimated useful life of the asset. Costs incurred to improve or
extend the life of existing assets are capitalized. Repairs and maintenance are charged to expense.
Internal-Use Software
Implementation costs with respect to internal-use software is capitalized once the project stage is complete. Project
stage includes determining the performance requirements, strategic decisions related to allocation of resources,
determining the technology needed to achieve performance requirements, selection of vendors, and other items. Costs
during the project stage are expensed as incurred. Once the internal-use software is placed into operation, capitalized
software costs are amortized using the straight-line method over 3-5 years.
Securities, Restricted, at Cost
The Bank is a member of the Federal Home Loan Bank (FHLB) system and the Federal Reserve Bank of New York
(FRB), and Atlantic Central Banker’s Bank where members are required to own a certain number of shares of stock in
order to conduct business with these institutions. FHLB stock holdings are based on the level of mortgage related assets,
borrowings and other factors while FRB stock holding levels are capital based. These equity investments are carried at
cost and classified as restricted securities which are periodically evaluated for impairment based on the ultimate recovery
of par value. Dividends from these equity investments are reported as interest income on the Consolidated Statements of
Income.
Loan Commitments
The Company enters into commitments to extend credit to customers to meet their financing needs which are in the
form of lines of credit, letters of credit, and loan funding commitments. The face amount of these financial instruments
represents the exposure to loss before considering customer collateral or ability to repay. Such financial instruments are
recorded on balance sheet at cost when funded and presented as loans on the Consolidated Statements of Financial
Condition.
Equity Investment Without Readily Determinable Fair Value
In April 2018, the Company purchased a 4.95% interest in Litify LLC, a technology solution to automate and manage
a law firm’s business and cases, for a cost of $2,410. As Litify LLC is a private company, the investment does not have
70
ESQUIRE FINANCIAL HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2018 and 2017
(Dollars in thousands, except per share data)
a readily determinable fair value and management has elected to determine the recorded carrying amount based on its cost
adjusted for observable price changes less impairment. At December 31, 2018, the investment’s carrying amount was
$2,410. Based on our evaluation, we noted no significant adverse changes which would indicate the asset is impaired or
any observable price changes as of December 31, 2018. The investment is presented within other assets on the
Consolidated Statement of Financial Condition.
Transfers of Financial Assets
Transfers of financial assets are accounted for as sales, when control over the assets has been relinquished. Control
over transferred assets is deemed to be surrendered when the assets have been isolated from the Company, the transferee
obtains the right (free of conditions that constrain it from taking advantage of that right) to pledge or exchange the
transferred assets, and the Company does not maintain effective control over the transferred assets through an agreement
to repurchase them before their maturity.
Income Taxes
Income taxes are provided for under the asset and liability method. Deferred tax assets and liabilities are recognized
for the future tax consequences attributable to differences between the financial statement carrying amounts of existing
assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted rates
expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or
settled. The effect on deferred taxes of a change in tax rates is recognized in income in the period the change occurs.
Deferred tax assets are reduced, through a valuation allowance, if necessary, by the amount of such benefits that are not
expected to be realized based on current available evidence.
A tax position is recognized as a benefit only if it is “more likely than not” that the tax position would be sustained in
a tax examination, with a tax examination being presumed to occur. The amount recognized is the largest amount of tax
benefit that is greater than 50% likely of being realized on examination. For tax positions not meeting the “more likely
than not” test, no tax benefit is recorded. The Company recognizes interest and/or penalties related to income tax matters
in income tax expense on the Consolidated Statements of Income.
Earnings per Common Share
Basic earnings per common share is net earnings allocated to common stock divided by the weighted average number
of common shares outstanding during the period. Any outstanding preferred shares are considered participating securities
for computation of basic earnings per common share. Diluted earnings per common share include the dilutive effect of
additional potential common shares issuable under stock options and restricted stock awards.
Share-Based Payment
Share based payment guidance requires the Company to recognize the grant-date fair value of stock options and other
equity-based compensation issued to employees and non-employees in the statements of income. A Black-Scholes model
is utilized to estimate the fair value of stock options. Compensation cost for stock options are recognized as non-interest
expense in the statement of income on a straight-line basis over the vesting period of each stock option grant. Compensation
cost for stock options includes the impact of an estimated forfeiture rate.
Compensation expense for restricted stock awards is based on the fair value of the award on the measurement date,
which is the date of grant, and the expense is recognized ratably over the service period of the award.
71
ESQUIRE FINANCIAL HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2018 and 2017
(Dollars in thousands, except per share data)
At December 31, 2018, no equity-based compensation had vesting conditions linked to the performance of the
Company or market conditions.
Segment Reporting
The Company’s operations are exclusively in the financial services industry and include the provision of traditional
banking services. Management evaluates the performance of the Company based on only one business segment, that of
community banking. In the opinion of management, the Company does not have any other reportable segments as defined
by Accounting Standards Codification (ASC) Topic 280, “Disclosure about Segments of an Enterprise and Related
Information.”
Restrictions on Cash
Cash on hand or on deposit with the FRB is required to meet regulatory reserve and clearing requirements.
Reclassifications
Some items in the prior year financial statements were reclassified to conform to the current presentation. The
reclassifications are immaterial and had no effect on prior year net income or stockholders’ equity.
Comprehensive Income
Comprehensive income consists of net income and other comprehensive loss which includes unrealized gains and
losses on securities available-for-sale.
Fair Value of Financial Instruments
Fair values of financial instruments are estimated using relevant market information and other assumptions, as more
fully disclosed in a separate note. Fair value estimates involve uncertainties and matters of significant judgment regarding
interest rates, credit risk, prepayments, and other factors, especially in the absence of broad markets for particular items.
Changes in assumptions or in market conditions could significantly affect the estimates.
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.
New Accounting Pronouncements
Accounting Standards Update (ASU) 2014-09, “Revenue from Contracts with Customers (Topic 606)” implements a
common revenue standard that clarifies the principles for recognizing revenue. The core principle of ASU 2014-09 is that
an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that
reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. To achieve
that core principle, an entity should apply the following steps: (i) identify the contract(s) with a customer, (ii) identify the
performance obligations in the contract, (iii) determine the transaction price, (iv) allocate the transaction price to the
performance obligations in the contract and (v) recognize revenue when (or as) the entity satisfies a performance
obligation. Topic 606 was effective for the Company on January 1, 2018. The Company has applied ASU 2014-09 using
72
ESQUIRE FINANCIAL HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2018 and 2017
(Dollars in thousands, except per share data)
the modified retrospective approach to all existing contracts with customers covered under the scope of the standard. The
adoption of this ASU was not significant to the Company and had no material effect on how the Company recognizes
revenue nor did it result in a cumulative effect adjustment or any presentation changes to the Consolidated Financial
Statements. See Note 7 for additional information related to revenue generated from contracts with customers.
On January 5, 2016, the FASB issued ASU 2016-01, “Financial Instruments — Overall: Recognition and
Measurement of Financial Assets and Financial Liabilities” (the ASU). Under this ASU, the current GAAP model is
changed in the areas of accounting for equity investments, financial liabilities under the fair value option, and the
presentation and disclosure requirements for financial instruments. In addition, the FASB clarified guidance related to the
valuation allowance assessment when recognizing deferred tax assets resulting from unrealized losses on available-for-
sale debt securities. This standard was adopted on January 1, 2018 which had no impact on the Company’s operating
results or financial condition. However, the Company did enhance its computation of fair value of loans disclosure to
comply with the exit price notion as well as implemented the other disclosure requirements as required by the ASU.
On February 25, 2016, the FASB established Topic 842, Leases, by issuing Accounting Standards Update (ASU)
No. 2016-02, which requires lessees to recognize leases on-balance sheet and disclose key information about leasing
arrangements. Topic 842 was subsequently amended by ASU No. 2018-01, Land Easement Practical Expedient for
Transition to Topic 842; ASU No. 2018-10, Codification Improvements to Topic 842, Leases; and ASU No. 2018-11,
Targeted Improvements. The new standard establishes a right-of-use model (ROU) that requires a lessee to recognize a
ROU asset and lease liability on the balance sheet for all leases with a term longer than 12 months. Leases will be classified
as finance or operating, with classification affecting the pattern and classification of expense recognition in the income
statement.
The new standard is effective for us on January 1, 2019. A modified retrospective transition approach is required,
applying the new standard to all leases existing at the date of initial application. An entity may choose to use either (1) its
effective date or (2) the beginning of the earliest comparative period presented in the financial statements as its date of
initial application. We expect to adopt the new standard on January 1, 2019 and use the effective date as our date of initial
application. Consequently, financial information will not be updated and the disclosures required under the new standard
will not be provided for dates and periods before January 1, 2019.
The new standard provides a number of optional practical expedients in transition. We expect to elect the ‘package of
practical expedients’, which permits us not to reassess under the new standard our prior conclusions about lease
identification, lease classification and initial direct costs. We do not expect to elect the use-of-hindsight or the practical
expedient pertaining to land easements; the latter not being applicable to us.
On adoption, we expect to recognize additional lease liabilities of approximately $3,100 with corresponding ROU
assets of the same amount.
The new standard also provides practical expedients for an entity’s ongoing accounting. We currently expect to elect
the short-term lease recognition exemption for all leases that qualify. This means, for those leases that qualify, we will not
recognize ROU assets or lease liabilities, and this includes not recognizing ROU assets or lease liabilities for existing
short-term leases of those assets in transition.
On June 16, 2016, the FASB issued Accounting Standards Update No. 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, held-
to-maturity (HTM) debt securities and certain other contracts. This ASU will be effective for the Company in fiscal years
73
ESQUIRE FINANCIAL HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2018 and 2017
(Dollars in thousands, except per share data)
beginning after December 15, 2019, including interim periods within those fiscal years. The Company plans to adopt ASU
2016-13 in the first quarter of 2020 using the required modified retrospective method with a cumulative effect adjustment
as of the beginning of the reporting period. The Company is currently gathering data and has selected a vendor to assist
with the implementation of this standard.
Subsequent Events
In January 2019, the board of directors approved a stock repurchase program which authorized the repurchase of up
to 300,000 shares of its common stock, or approximately 4.0% of its outstanding shares. There is no expiration for the
stock repurchase plan. There have been no shares repurchased as of February 28, 2019.
NOTE 2 — Debt Securities
Available-for-Sale Securities
The amortized cost, gross unrealized gains and losses and estimated fair value of securities available-for-sale were as
follows at December 31:
Gross
Gross
Amortized Unrealized Unrealized
Gains
Losses
Cost
Fair
Value
December 31, 2018
Mortgage-backed securities – agency . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 27,384 $
Collateralized mortgage obligations (CMO’s) – agency . . . . . . . . . . . . . .
Total available-for-sale . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 149,297 $
121,913
(724) $ 26,675
15 $
32
119,023
47 $ (3,646) $ 145,698
(2,922)
December 31, 2017
Mortgage-backed securities – agency . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 20,082 $
Collateralized mortgage obligations (CMO’s) – agency . . . . . . . . . . . . . .
Total available-for-sale . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 130,672 $
110,590
(291) $ 19,803
12 $
13
108,955
25 $ (1,939) $ 128,758
(1,648)
Mortgage-backed securities included all residential pass-through certificates guaranteed by FHLMC, FNMA, or
GNMA and the CMO’s are backed by government agency pass-through certificates. The 2018 and 2017 pass-through
certificates are fixed rate instruments. CMO’s, by virtue of the underlying residential collateral or structure, are fixed rate
current pay sequentials or planned amortization classes (PAC’s). 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.
When purchasing investment securities, the Company’s overall interest-rate risk profile is considered as well as the
adequacy of expected returns relative to risks assumed, including prepayments. In continuously managing the investment
securities portfolio, management occasionally sells investment securities in response to, or in anticipation of, changes in
interest rates and spreads, actual or anticipated prepayments, liquidity needs and credit risk associated with a particular
security.
74
ESQUIRE FINANCIAL HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2018 and 2017
(Dollars in thousands, except per share data)
The proceeds from sales and calls of securities and the associated gains and losses are listed below:
Proceeds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ — $
Gross gains . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Gross losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
—
—
2018
2017
2016
— $ 4,068
6
—
—
—
The tax provision related to the gross gains was $2 for 2016.
At December 31, 2018, securities having a fair value of $120,673 were pledged to the FHLB for borrowing capacity
totaling $114,963. At December 31, 2017, securities having a fair value of $108,955 were pledged to the FHLB for
borrowing capacity totaling $103,351. At December 31, 2018 and 2017, the Company had no outstanding FHLB advances.
At December 31, 2018, securities having a fair value of $25,025 were pledged to the FRB of New York for borrowing
capacity totaling $24,177. At December 31, 2017, securities having a fair value of $19,803 were pledged to FRB of New
York for borrowing capacity totaling $19,370. At December 31, 2018 and 2017, the Company had no outstanding FRB
borrowings.
The following table provides the gross unrealized losses and fair value, aggregated by investment category and length
of time the individual securities have been in a continuous unrealized loss position, as of December 31:
Less Than 12 Months
Fair
Value
Gross
Unrealized
Losses
12 Months or Longer
Gross
Unrealized
Losses
Fair
Value
Total
Fair
Value
Gross
Unrealized
Losses
December 31, 2018
Mortgage-backed securities – agency . . . . . . . . . . $ 9,528 $
CMO’s – agency . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total temporarily impaired securities . . . . . . . . . . $ 28,712 $
19,184
(99) $ 15,497 $
(73)
(724)
(2,922)
(172) $ 101,272 $ (3,474) $ 129,984 $ (3,646)
(625) $ 25,025 $
104,959
(2,849)
85,775
Less Than 12 Months
12 Months or Longer
Total
Gross
Unrealized
Losses
Fair Value
Gross
Unrealized
Losses
Fair Value
Fair Value
Gross
Unrealized
Losses
December 31, 2017
Mortgage-backed securities – agency . . . . . . . . . . . $ 5,766 $
CMO’s – agency . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total temporarily impaired securities . . . . . . . . . . . $ 80,822 $
75,056
(26) $ 12,312 $
(291)
(265) $ 18,078 $
(685)
(1,648)
(963)
(711) $ 41,160 $ (1,228) $ 121,982 $ (1,939)
103,904
28,848
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 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
75
ESQUIRE FINANCIAL HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2018 and 2017
(Dollars in thousands, except per share data)
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 December 31, 2018, securities in unrealized loss positions were issuances from government sponsored entities.
Due to the decline in fair value attributable to changes in interest rates and illiquidity, 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
December 31, 2018.
No impairment charges were recorded in 2018, 2017 and 2016.
NOTE 3 — Loans
The composition of loans by class is summarized as follows at December 31:
1 – 4 family residential . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Commercial . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Multifamily . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Commercial real estate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Construction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consumer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total Loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2018
56,043
191,828
136,537
33,145
5,921
43,675
467,149
$
2017
51,556
136,412
98,432
24,761
5,047
31,881
348,089
952
Deferred costs and unearned premiums, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Allowance for loan losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(5,629)
Loans, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 462,472
889
(4,264)
$ 344,714
76
ESQUIRE FINANCIAL HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2018 and 2017
(Dollars in thousands, except per share data)
The following tables present the activity in the allowance for loan losses by class for the years ending December 31,
2018, 2017 and 2016:
December 31, 2018
Allowance for loan losses:
1-4 Family
Residential Commercial Multifamily Real Estate Construction Consumer Total
Commercial
Beginning balance . . . . . . . . . . . . . $
Provision for loan losses . . . . . . . . .
Recoveries . . . . . . . . . . . . . . . . . . . .
Loans charged-off . . . . . . . . . . . . . .
Total ending allowance balance . . . $
382 $
25
—
—
407 $
2,272 $
838
—
—
3,110 $
713 $
239
—
—
952 $
266 $
91
—
—
357 $
127 $
22
—
—
149 $
504 $ 4,264
1,375
160
—
—
(10)
(10)
654 $ 5,629
December 31, 2017
Allowance for loan losses:
Beginning balance . . . . . . . . . . . . . $
Provision (credit) for loan losses . .
Recoveries . . . . . . . . . . . . . . . . . . . .
Loans charged-off . . . . . . . . . . . . . .
Total ending allowance balance . . . $
360 $
22
—
—
382 $
1,934 $
352
—
(14)
2,272 $
621 $
92
—
—
713 $
238 $
28
—
—
266 $
141 $
(14)
—
—
127 $
119 $ 3,413
905
425
—
—
(40)
(54)
504 $ 4,264
December 31, 2016
Allowance for loan losses:
Beginning balance . . . . . . . . . . . . . $
Provision (credit) for loan losses . .
Recoveries . . . . . . . . . . . . . . . . . . . .
Loans charged-off . . . . . . . . . . . . . .
Total ending allowance balance . . . $
213 $
147
—
—
360 $
1,536 $
372
26
—
1,934 $
533 $
88
—
—
621 $
230 $
8
—
—
238 $
134 $
7
—
—
141 $
153 $ 2,799
595
(27)
26
—
(7)
(7)
119 $ 3,413
77
ESQUIRE FINANCIAL HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2018 and 2017
(Dollars in thousands, except per share data)
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 December 31, 2018 and 2017:
1 – 4 Family
Residential Commercial Multifamily Real Estate Construction Consumer
Commercial
Total
December 31, 2018
Allowance for loan losses:
Ending allowance balance
attributable to loans:
Individually evaluated for
impairment . . . . . . . . . . . . . . . . . $
— $
— $
— $
— $
— $
— $
—
Collectively evaluated for
impairment . . . . . . . . . . . . . . . . .
407
3,110
952
357
149
654
5,629
Total ending allowance balance . . . $
407 $
3,110 $
952 $
357 $
149 $
654 $ 5,629
Loans:
Loans individually evaluated for
impairment . . . . . . . . . . . . . . . . . . $
— $
— $
— $
— $
— $
— $
—
Loans collectively evaluated for
impairment . . . . . . . . . . . . . . . . . . 56,043 191,828 136,537 33,145
5,921 43,675 467,149
Total ending loans balance . . . . . . . $ 56,043 $ 191,828 $ 136,537 $ 33,145 $
5,921 $ 43,675 $ 467,149
Recorded investment is not adjusted for accrued interest, unearned premiums or deferred costs.
1 – 4 Family
Residential Commercial Multifamily Real Estate Construction Consumer
Commercial
Total
December 31, 2017
Allowance for loan losses:
Ending allowance Balance
attributable to loans:
Individually evaluated for
impairment . . . . . . . . . . . . . . . . . $
— $
— $
— $
— $
— $
— $
—
Collectively evaluated for
impairment . . . . . . . . . . . . . . . . .
382
2,272
713
266
127
504
4,264
Total ending allowance balance . . . $
382 $
2,272 $
713 $
266 $
127 $
504 $
4,264
Loans:
Loans individually evaluated for
impairment . . . . . . . . . . . . . . . . . . $
— $
— $
— $
— $
— $
— $
—
Loans collectively evaluated for
impairment . . . . . . . . . . . . . . . . . . 51,556 136,412 98,432 24,761
5,047 31,881 348,089
Total ending loans balance . . . . . . . $ 51,556 $ 136,412 $ 98,432 $ 24,761 $
5,047 $ 31,881 $ 348,089
78
ESQUIRE FINANCIAL HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2018 and 2017
(Dollars in thousands, except per share data)
Non-Performing Loans
Non-performing loans include loans 90 days past due and still accruing and non-accrual loans. At December 31, 2018
and 2017, none of the Company’s loans met these conditions.
The following tables present the aging of the recorded investment in past due loans by class of loans as of
December 31, 2018 and 2017:
30-59
Days
60-89
Days
Greater than
90 Days
Past Due Past Due Past Due
Total
Loans Not
Past Due Past Due
Total
December 31, 2018
1 – 4 family residential . . . . . . . . . . . . . . $
Commercial . . . . . . . . . . . . . . . . . . . . . . .
Multifamily . . . . . . . . . . . . . . . . . . . . . . .
Commercial real estate . . . . . . . . . . . . . .
Construction . . . . . . . . . . . . . . . . . . . . . . .
Consumer . . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
— $
—
—
—
—
—
— $
— $
—
—
—
—
40
40 $
— $
—
—
—
—
—
— $
56,043 $
191,828
136,537
33,145
5,921
43,635
56,043
— $
191,828
—
136,537
—
33,145
—
5,921
—
40
43,675
40 $ 467,109 $ 467,149
30-59
Days
60-89
Days
Greater
than 90
Days
Past Due Past Due Past Due
Total
Loans Not
Past Due Past Due
Total
December 31, 2017
1 – 4 family residential . . . . . . . . . . . . . . $
Commercial . . . . . . . . . . . . . . . . . . . . . . .
Multifamily . . . . . . . . . . . . . . . . . . . . . . .
Commercial real estate . . . . . . . . . . . . . .
Construction . . . . . . . . . . . . . . . . . . . . . . .
Consumer . . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Credit Quality Indicators
— $
—
—
—
—
—
— $
— $
—
—
—
—
—
— $
— $
—
—
—
—
—
— $
51,556 $
136,412
98,432
24,761
5,047
31,881
— $
51,556
—
136,412
—
98,432
—
24,761
—
5,047
31,881
—
— $ 348,089 $ 348,089
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
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
79
ESQUIRE FINANCIAL HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2018 and 2017
(Dollars in thousands, except per share data)
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
December 31, 2018
1 – 4 family residential . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 56,043 $
Commercial . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Multifamily . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Commercial real estate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Construction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consumer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 457,803 $
182,482
136,537
33,145
5,921
43,675
— $
9,166
—
—
—
—
9,166 $
— $
180
—
—
—
—
180 $
—
—
—
—
—
—
—
Pass
Special Mention Substandard Doubtful
December 31, 2017
1 – 4 family residential . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 51,556 $
Commercial . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Multifamily . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Commercial real estate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Construction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consumer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 338,254 $
126,577
98,432
24,761
5,047
31,881
— $
9,835
—
—
—
—
9,835 $
— $
—
—
—
—
—
— $
—
—
—
—
—
—
—
The Company considers the performance of the loan portfolio and its impact on the allowance for loan losses. For 1-4
family residential 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 no loans identified as troubled debt restructurings at December 31, 2018 and 2017. Furthermore,
there were no loan modifications during 2018, 2017 and 2016 that were troubled debt restructurings. In order to determine
whether 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. This evaluation is
performed under the Company’s internal underwriting policy.
Related Party Loans
Loans to related parties include loans to directors, their related companies and executive officers of the Company.
80
ESQUIRE FINANCIAL HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2018 and 2017
(Dollars in thousands, except per share data)
Loans to principal officers, directors, and their affiliates during 2018 were as follows:
Beginning balance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
New advances . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Repayments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Ending balance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
6,388
3,690
(1,614)
8,464
NOTE 4 — Premises and Equipment
The following is a summary of premises and equipment at December 31:
Leasehold improvements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,614 $ 1,614
2,889
Equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
12
Construction in progress . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
4,515
Less: accumulated depreciation and amortization . . . . . . . . . . . . . . . . . . .
1,969
Total premises and equipment, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 2,694 $ 2,546
2,975
479
5,068
2,374
2018
2017
Depreciation and amortization of premises and equipment, reflected as a component of occupancy and equipment, net
in the statements of income, was $421, $411 and $166 for the periods ended December 31, 2018, 2017 and 2016,
respectively.
NOTE 5 — Deposits
As of December 31, 2018, deposits of $568,421, was comprised of core deposit relationships of $548,004 and
certificates of deposit of $20,417. Core deposits are defined as all deposits except certificates of deposits which include
demand, savings, NOW, and money market deposit accounts. Our non-interest bearing demand deposits are presented as
demand deposits and all core interest bearing deposits are presented as savings, NOW and money market deposits on the
Consolidated Statements of Financial Condition. Certificates of deposit are presented as time deposits on the Consolidated
Statements of Financial Condition.
The contractual maturities of certificates of deposit as of December 31, 2018, are as follows:
2019 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 19,111
2020 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,306
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 20,417
Total
As of December 31, 2018 and 2017, certificates of deposits greater than $250 were $15,281 and $1,008, respectively.
Deposits from principal officers, directors, and their affiliates at year-end 2018 and 2017 were $6,191 and $2,125,
respectively.
81
ESQUIRE FINANCIAL HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2018 and 2017
(Dollars in thousands, except per share data)
NOTE 6 — Borrowings
The Company had a secured borrowing of $89 and $278 as of December 31, 2018 and 2017, respectively, relating to
certain loan participations sold by the Company that did not qualify for sales treatment.
At December 31, 2018 and 2017, we had the ability to borrow a total of $114,963 and $103,351, respectively, 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 $24,177 and $19,370 at December 31, 2018 and 2017, respectively. At December 31, 2018 and
2017, we also had lines of credit with two other financial institutions totaling $7,500. No amounts were outstanding on
any of the aforementioned lines as of December 31, 2018 and 2017.
NOTE 7 — Noninterest Income
The majority of the Company’s revenue-generating transactions are not subject to ASC 606, including revenue
generated from financial instruments, such as loans, letters of credit, and investment securities. Descriptions of revenue-
generating activities that are within the scope of ASC 606, and are presented in the accompanying Consolidated Statements
of Income as components of noninterest income, are as follows:
Non-interest income
Customer related fees and service charges
Administrative service income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
2,528 $
1,723
Merchant processing income
Merchant services income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
ACH income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total non-interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
4,620
341
366
7,855 $
3,032
290
471
5,516
For the Years Ended
December 31,
2018
2017
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.
• Administrative service income – Administrative service income is derived 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.
• Merchant services income – We provide merchant services as an acquiring bank through the third-party or
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.
82
ESQUIRE FINANCIAL HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2018 and 2017
(Dollars in thousands, except per share data)
• 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 ACH’s 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.
• Other – The other category includes revenue from service charges on deposit accounts, debit card interchange
fees, and certain loan related fees where revenue is recognized as performance obligations are satisfied.
NOTE 8 — Income Taxes
The following summarizes components of income tax expense for the years ended December 31:
2018
2017
2016
Current
Federal expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 2,761 $ 1,955 $ 147
State and city expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
98
Total current tax expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
245
387
2,342
799
3,560
Deferred
Federal (benefit) expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
State and city (benefit) expense . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total deferred tax (benefit) expense . . . . . . . . . . . . . . . . . . . . . . . .
1,474
47
1,521
Income tax expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 3,190 $ 3,390 $ 1,766
444
604
1,048
(257)
(113)
(370)
The following is a reconciliation of the Company’s statutory federal income tax rate of 21% for 2018, 35% for 2017
and 34% for 2016 to its effective tax rate at December 31:
2018
2017
2016
Federal tax expense at statutory rate . . . . . . . . . . . . . . . . . . . . . . . . $ 2,504 $ 2,462 $ 1,560
97
State and local income taxes, net of federal income tax benefit . .
71
Incentive stock options . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
—
Stock-based compensation excess tax benefit . . . . . . . . . . . . . . . . .
—
Change to deferred tax as a result of tax reform . . . . . . . . . . . . . . .
38
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income tax expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 3,190 $ 3,390 $ 1,766
200
117
(85)
683
13
608
33
(60)
—
105
83
ESQUIRE FINANCIAL HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2018 and 2017
(Dollars in thousands, except per share data)
The following summarizes the components of the Company’s deferred tax assets and deferred tax liabilities at
December 31:
Deferred tax assets:
2018
2017
Net operating loss carry forwards . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Pre-opening costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Stock based compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Allowance for loan loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Fixed assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Unrealized loss on securities available-for-sale . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total deferred tax assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
237 $
70
505
1,509
—
985
—
3,306
429
92
130
1,044
27
524
145
2,391
Deferred tax liabilities:
Fixed assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred rent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred loan fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total deferred tax liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
—
(37)
(113)
(150)
Deferred tax asset, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 3,072 $ 2,241
(64)
(48)
(122)
(234)
The Company has New York state and city net operating loss carryforwards of $5,369 and $404, respectively, as of
December 31, 2018. The net operating losses are available to reduce future taxable income and begin to expire in 2026.
Realization of deferred tax assets is dependent upon the generation of future taxable income. A valuation allowance
is provided when it is more likely than not that some portion of the deferred tax asset will not be realized. Based on its
evaluation, the Company has determined that it is more likely than not that the deferred tax asset as of December 31, 2018
and 2017, will be realized.
On December 22, 2017, H.R.1 commonly known as the Tax Cuts and Jobs Act was signed into law. Among other
things, the act reduced our corporate federal tax rate from 35% to 21% effective January 1, 2018. As a result we were
required to remeasure, through income tax expense, our deferred tax assets and liabilities using the enacted rates. The
remeasurement of our net deferred tax asset resulted in additional income tax expense of $683 for the year ended
December 31, 2017.
The Company does not have any unrecognized tax benefits at December 31, 2018 and 2017, and does not expect this
to increase in the next twelve months. There were no interest and penalties recorded in the consolidated statement of
income for the years ended December 31, 2018, 2017 and 2016. The Company is subject to U.S. federal income tax as
well as income tax of the state of New York, New York City and Florida. The Company is no longer subject to examination
by taxing authorities for years before 2015.
NOTE 9 — Employee Benefits
401(k) Plan
A savings plan is maintained under section 401(k) of the Internal Revenue Code and covers substantially all current
full-time employees. Newly hired employees can elect to participate in the savings plan after completing one month of
service. In 2018 and 2017, the Company matched 100% of employee contributions up to 1% of their salary resulting in
84
ESQUIRE FINANCIAL HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2018 and 2017
(Dollars in thousands, except per share data)
total expenses of $47 and $18, respectively. The Company did not match funds in 2016 and therefore had no expense for
that year.
Share Based Payment Plans
The Company issues incentive and non-statutory 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.
The Company’s 2007 Stock Option Plan allowed for a maximum of 270,000 shares of common stock to be issued. As
of December 31, 2018, 269,500 shares have been issued. The 2007 Stock Option Plan expired in May of 2017 and no new
options can be granted from the plan.
The Company’s 2011 Stock Compensation Plan allows for a maximum of 754,607 shares of common stock to be
issued. The Company has 4,062 shares available for issuance under the 2011 Stock Compensation Plan as of December 31,
2018.
The Company’s 2017 Equity Incentive Plan allows for a maximum of 300,000 shares of common stock to be issued.
In January 2018, the Company granted 43,500 stock options and 76,500 restricted shares from the 2017 Equity Incentive
Plan related to 2017 employee, officer and director compensation. In December 2018, the Company granted 42,500 stock
options and 87,000 restricted shares from the 2017 Equity Incentive Plan related to 2018 employee, officer and director
compensation. A total of 50,500 shares remain available for grant under the 2017 Equity Incentive Plan of which 36,500
can be granted as restricted shares.
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 three or five years and have ten-year contractual terms. All options provide for
accelerated vesting upon a change in control (as defined in the plans). Restricted shares are granted at the fair value on the
date of grant and typically vest over 6 years with a third vesting after years four, five, and six. Restricted shares have the
same voting rights as common stock and nonvested restricted shareholders do not have rights to the accrued dividends
until vested.
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.
85
ESQUIRE FINANCIAL HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2018 and 2017
(Dollars in thousands, except per share data)
The fair value of options granted was determined using the following weighted-average assumptions as of grant date.
Risk-Free Interest Rate . . . . . . . . . . . . . . . . . . . . . . .
Expected Term . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 84 months
Expected Stock Price Volatility . . . . . . . . . . . . . . . .
Dividend Yield . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2.65 % N/A
N/A
20.6 % N/A
0.00 % N/A
1.44 %
84 months
24.1 %
0.0 %
2018
2017
2016
Weighted Average Fair Value . . . . . . . . . . . . . . . . . $
6.43
N/A $
3.61
The following table presents a summary of the activity related to options as of December 31, 2018:
Weighted
Average
Weighted
Average Remaining
Exercise Contractual
Life (Years)
Price
Options
December 31, 2018
Outstanding at beginning of year . . . . . . . . . . . . . . . . . . . . . . .
880,925 $ 12.36
Granted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Exercised . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Forfeited . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
87,500
(47,750)
(1,500)
21.99
10.00
19.25
Outstanding at period end . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Vested or expected to vest . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Exercisable at period end . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
919,175 $ 13.39
919,175 $ 13.39
583,811 $ 12.50
6.77
6.19
6.27
The Company recognized compensation expense related to options of $1,007, $554, and $388 for the years ended
December 31, 2018, 2017 and 2016, respectively. At December 31, 2018, unrecognized compensation cost related to non-
vested options was approximately $1,179 and is expected to be recognized over a weighted average period of 2.40 years.
The intrinsic value for outstanding options net of expected forfeitures was $7,772. The intrinsic value for exercisable
options at December 31, 2018 was $5,371. Cash received from options exercised in 2018 totaled $378 with an intrinsic
value of $463. The tax benefit of options exercised was $209.
The following table presents a summary of the activity related to restricted stock as of December 31, 2018:
December 31, 2018
Outstanding at beginning of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Granted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Vested . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Outstanding at period end . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Weighted Average
Grant Date
Fair Value
Shares
— $
163,500
(15,000)
148,500 $
—
22.26
19.25
22.56
86
ESQUIRE FINANCIAL HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2018 and 2017
(Dollars in thousands, except per share data)
The Company recognized compensation expense related to restricted stock of $496 for the year ended December 31,
2018. As of December 31, 2018, there was $3,143 of total unrecognized compensation cost related to non-vested shares
granted under the plan. The cost is expected to be recognized over a weighted-average period of 5.67 years.
NOTE 10 — Earnings per Common Share
The two-class method is used in the calculation of basic and diluted earnings per share. Under the two-class method,
earnings available to common shareholders for the period are allocated between common shareholders and participating
securities according to participation rights in undistributed earnings. The factors used in earnings per share computation
follow:
For the Years Ended December 31,
2016
2017
2018
Basic
2,822
Net income available to common shareholders . . . . . . . . . . . . . . . . . . . . . . . . . . . $
62
Less: Earnings allocated to preferred stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net income allocated to common shareholders . . . . . . . . . . . . . . . . . . . . . . . . . . . $
2,760
Weighted average common shares outstanding . . . . . . . . . . . . . . . . . . . . . . . . . . 7,374,013 6,163,549 4,958,655
0.56
Basic earnings per common share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
8,734 $
—
8,734 $
3,644 $
23
3,621 $
1.18 $
0.59 $
Diluted
Net income allocated to common shareholders for basic earnings per share . . . $
2,760
Weighted average shares outstanding for basic earnings per common share . . . 7,374,013 6,163,549 4,958,655
Add: Dilutive effects of assumed exercises of stock options . . . . . . . . . . . . . . . .
30,550
Average shares and dilutive potential common shares . . . . . . . . . . . . . . . . . . . . . 7,733,372 6,232,244 4,989,205
0.55
Diluted earnings per common share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
359,359
8,734 $
68,695
3,621 $
1.13 $
0.58 $
Stock options totaling 42,500 shares of common stock were not considered in computing diluted earnings per common
share for 2018, because they were anti-dilutive. There were no anti-dilutive shares in 2017 and 837,170 anti-dilutive shares
in 2016.
NOTE 11 — Commitments and Contingent Liabilities
Change-In-Control Arrangements
Certain key executive officers have arrangements that provide for the payment of a multiple of base salary, should a
change-in control, as defined, occur. These payments are limited under guidelines for deductibility pursuant to the Internal
Revenue Code.
Credit Related Commitments
The Company provides off-balance sheet financial products to customers in the form of commitments to extend credit
which are agreements to lend to customers in accordance with contractual provisions. These commitments usually have
fixed expiration dates or other termination clauses and may require the payment of a fee. Total commitments outstanding
do not necessarily represent future cash flow requirements as many commitments expire without being funded.
87
ESQUIRE FINANCIAL HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2018 and 2017
(Dollars in thousands, except per share data)
Each customer’s creditworthiness is evaluated prior to issuing these commitments and may require the customer to
pledge certain collateral (i.e., inventory, income-producing property) prior to the extension of credit. Fixed rate
commitments are subject to interest rate risk based on changes in prevailing rates during the commitment period. The
Company is also subject to credit risk in the event that the commitments are drawn upon and the customer is unable to
repay the obligation.
Letters of credit are irrevocable commitments issued at the request of customers. They authorize the beneficiary to
draw drafts for payment in accordance with the stated terms and conditions. Letters of credit substitute the Company’s
creditworthiness for that of the customer and are issued for a fee commensurate with the risk.
The Company can issue two types of letters of credit: commercial (documentary) letters of credit and standby letters
of credit. Commercial letters of credit are commonly issued to finance the purchase of goods and are typically short term
in nature. Standby letters of credit are issued to back financial or performance obligations of a Bank customer and are
typically issued for periods up to one year. Due to their long-term nature, standby letters of credit require adequate
collateral in the form of cash or other liquid assets. In most instances, standby letters of credit expire without being drawn
upon.
The credit risk involved in issuing letters of credit is essentially the same as extending credit facilities to comparable
customers.
For the Years Ended December 31,
2018
2017
Fixed
Variable
Rate
Rate
692 $ 4,287 $ 3,079 $ 2,634
Unused lines of credit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
—
786
Standby letters of credit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total credit related commitments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,478 $ 4,287 $ 3,630 $ 2,634
Variable
Rate
Fixed
Rate
551
—
The fixed rate loan commitments have interest rates ranging from 5.50% to 18.00% and maturities ranging from 2
months to 3 years.
Lease Commitments
At December 31, 2018, the Company was obligated under several non-cancelable leases for certain premises and
equipment. The minimum annual rental commitments, exclusive of taxes and other charges, under non-cancelable lease
agreements for premises at December 31, 2018, are summarized as follows:
2019 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
2020 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2021 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2022 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2023 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Thereafter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total lease commitments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
528
518
510
523
536
1,698
4,313
Minimum
Rentals
88
ESQUIRE FINANCIAL HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2018 and 2017
(Dollars in thousands, except per share data)
These leases contain periodic escalation clauses and all expiring leases are evaluated for extensions at renewal. Rent
expense for the years ended December 31, 2018, 2017, and 2016 amounted to $599, $501, and $573, respectively.
Litigation
The Company and its subsidiary are subject to certain pending and threatened legal actions that arise out of the normal
course of business. In the opinion of management at the present time, the resolution of any pending or threatened litigation
will not have a material adverse effect on its Consolidated Financial Statements.
NOTE 12 — 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).
89
ESQUIRE FINANCIAL HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2018 and 2017
(Dollars in thousands, except per share data)
Assets and liabilities measured at fair value on a recurring basis are summarized below:
Fair Value Measurements Using
Significant
Other
Observable
Inputs
(Level 2)
Quoted Prices
In Active
Markets For
Identical Assets
(Level 1)
Significant
Unobservable
Inputs
(Level 3)
December 31, 2018
Assets
Available-for-sale securities
Mortgage-backed securities – agency . . . . . . . . . . . . $
CMO’s – agency . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
— $ 26,675 $
—
— $ 145,698 $
119,023
December 31, 2017
Assets
Available-for-sale securities
Mortgage-backed securities – agency . . . . . . . . . . . . $
CMO’s – agency . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
— $ 19,803 $
—
— $ 128,758 $
108,955
—
—
—
—
—
—
There were no transfers between Level 1 and Level 2 during the year. There were no assets measured on a non-
recurring basis as of December 31, 2018 and 2017.
Estimated Fair Value of Financial Instruments
Fair value estimates are made at specific points in time and are based on existing on-and off-balance sheet financial
instruments. Such estimates are generally subjective in nature and dependent upon a number of significant assumptions
associated with each financial instrument or group of financial instruments, including estimates of discount rates, risks
associated with specific financial instruments, estimates of future cash flows, and relevant available market information.
Changes in assumptions could significantly affect the estimates. In addition, fair value estimates do not reflect the value
of anticipated future business, premiums or discounts that could result from offering for sale at one time the Company’s
entire holdings of a particular financial instrument, or the tax consequences of realizing gains or losses on the sale of
financial instruments.
The Company used the following method and assumptions in estimating the fair value of its financial instruments:
Securities Available-for-Sale: The fair values for securities available-for-sale are determined by quoted market prices
in active markets, if available (Level 1). For securities where quoted prices are not available, fair values are calculated
based on market prices of similar securities (Level 2), using matrix pricing. Matrix pricing is a mathematical technique
commonly used to price debt securities that are not actively traded, values debt securities without relying exclusively on
quoted prices for the specific securities but rather by relying on the securities’ relationship to other benchmark quoted
securities with observable transactions (Level 2 inputs).
90
ESQUIRE FINANCIAL HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2018 and 2017
(Dollars in thousands, except per share data)
The following table presents the carrying amounts and fair values (represents exit price) of the Company’s financial
instruments:
Fair Value Measurement at December 31, 2018, Using:
Carrying
Value
(Level 1)
(Level 2)
(Level 3)
Total
Financial Assets:
Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . $ 30,562 $
Securities available-for-sale . . . . . . . . . . . . . . . . . . . . . . . .
Securities, restricted, at cost . . . . . . . . . . . . . . . . . . . . . . . .
Loans, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accrued interest receivable . . . . . . . . . . . . . . . . . . . . . . . . .
145,698
2,583
462,472
3,855
659 $ 29,903 $
—
N/A
—
—
145,698
N/A
—
368
— $ 30,562
145,698
—
N/A
N/A
464,144
464,144
3,855
3,487
Financial Liabilities:
Time deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Demand and other deposits . . . . . . . . . . . . . . . . . . . . . . . . .
Secured borrowings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accrued interest payable . . . . . . . . . . . . . . . . . . . . . . . . . . .
20,417
548,004
89
15
—
548,004
—
—
20,377
—
89
15
—
—
—
—
20,377
548,004
89
15
Fair Value Measurement at December 31, 2017, Using:
Carrying
Value
(Level 1)
(Level 2)
(Level 3)
Total
Financial Assets:
Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . $ 43,077 $
Securities available-for-sale . . . . . . . . . . . . . . . . . . . . . . . .
Securities, restricted, at cost . . . . . . . . . . . . . . . . . . . . . . . .
Loans, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accrued interest receivable . . . . . . . . . . . . . . . . . . . . . . . . .
128,758
2,183
344,714
2,836
471 $ 42,606 $
—
N/A
—
—
128,758
N/A
—
300
— $ 43,077
128,758
—
N/A
N/A
345,540
345,540
2,836
2,536
Financial Liabilities:
Time deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Demand and other deposits . . . . . . . . . . . . . . . . . . . . . . . . .
Secured borrowings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accrued interest payable . . . . . . . . . . . . . . . . . . . . . . . . . . .
26,932
421,562
278
6
—
421,562
—
—
26,847
—
278
6
—
—
—
—
26,847
421,562
278
6
NOTE 13 — Capital
Banks are subject to regulatory capital requirements administered by federal banking agencies. Capital adequacy
guidelines and additionally for banks, prompt corrective action regulations, involve quantitative measures of assets,
liabilities and certain off-balance sheet items calculated under regulatory accounting practices. Capital amounts and
classifications are also subject to qualitative judgments by regulators. Failure to meet capital requirements can initiate
regulatory action. The final rules of implementing the Basel Committee on Banking Supervision’s capital guidelines for
U.S. Banks (Basel III rules) became effective for the Company on January 1, 2015, with full compliance with all of the
requirements being phased in over a multi-year schedule, and fully phased in by January 1, 2019. The net unrealized gain
or loss on available-for-sale securities and certain deferred tax assets are not included in computing regulatory capital.
Management believes as of December 31, 2018, the Bank met all capital adequacy requirements to which it is subject.
Prompt corrective action regulations provide five classifications: well capitalized, adequately capitalized,
undercapitalized, significantly undercapitalized and critically undercapitalized, although these terms are not used to
91
ESQUIRE FINANCIAL HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2018 and 2017
(Dollars in thousands, except per share data)
represent overall financial condition. If adequately capitalized, regulatory approval is required to accept brokered deposits.
If undercapitalized, capital distributions are limited, as is asset growth and expansion, and capital restoration plans are
required.
As of December 31, 2018, the most recent notification from the Federal Deposit Insurance Corporation categorized
the Bank as “well capitalized” under the regulatory framework for prompt corrective action. To be categorized as “well
capitalized,” the Bank must maintain minimum total risk-based, Tier 1 risk-based and Tier 1 leverage ratios as set forth in
the table below. Since that notification, there are no conditions or events that management believes have changed the
institution’s category.
To be Well
Capitalized Under
Prompt Corrective
Action Regulations*
Amount Ratio Amount Ratio Amount Ratio Amount Ratio
For Capital
Adequacy Purposes
Including Capital
Conservation Buffer(1)
Required
For Capital
Adequacy Purposes*
Actual
December 31, 2018
Total capital to risk weighted
assets . . . . . . . . . . . . . . . . . . . $ 90,958 18.70 % $ 38,920
8.00 % $ 48,042
9.88 % $ 48,650 10.00 %
Tier 1 (core) capital to risk
weighted assets . . . . . . . . . . .
85,328 17.54
29,190
6.00
38,312
7.88
38,920
8.00
Tier 1 (common) capital to
risk weighted assets . . . . . . .
85,328 17.54
21,893
4.50
31,014
6.38
31,623
6.50
Tier 1 (core) capital to
adjusted total assets . . . . . . .
85,328 13.26
25,733
4.00
25,733
4.00
32,166
5.00
December 31, 2017
Total capital to risk weighted
assets . . . . . . . . . . . . . . . . . . . $ 68,079 18.47 % $ 29,483
8.00 % $ 34,090
9.25 % $ 36,854 10.00 %
Tier 1 (core) capital to risk
weighted assets . . . . . . . . . . .
63,814 17.32
22,112
6.00
26,719
7.25
29,483
8.00
Tier 1 (common) capital to
risk weighted assets . . . . . . .
63,814 17.32
16,584
4.50
21,191
5.75
23,955
6.50
Tier 1 (core) capital to
adjusted total assets . . . . . . .
63,814 12.82
19,906
4.00
19,906
4.00
24,883
5.00
* BASEL III revised the capital adequacy requirements and the Prompt Corrective Action Framework effective
January 1, 2015 for the Bank.
(1) When fully phased in on January 1, 2019, the Basel Rules will require the Bank to maintain a 2.5% “capital
conservation buffer” on top of the minimum risk-weighted asset ratios. The capital conservation buffer is designed to
absorb losses during periods of economic stress. Banking institutions with a (i) Common Equity Tier 1 capital to risk-
weighted assets, (ii) Tier 1 capital to risk-weighted assets or (iii) total capital to risk-weighted assets above the
respective minimum but below the capital conservation buffer will face constraints on dividends, equity repurchases
and discretionary bonus payments to executive officers based on the amount of the shortfall. The implementation of
the capital conservation buffer began on January 1, 2016 at the 0.625% level and will increase by 0.625% on each
subsequent January 1, until it reaches 2.5% on January 1, 2019.
92
ESQUIRE FINANCIAL HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2018 and 2017
(Dollars in thousands, except per share data)
NOTE 14 — Parent Company Only Condensed Financial Information
Condensed financial information of Esquire Financial Holdings, Inc. follows:
CONDENSED STATEMENTS OF FINANCIAL CONDITION
At December 31,
2017
2018
ASSETS
Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 4,041 $ 19,461
62,940
Investment in banking subsidiary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
—
Loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
—
Equity investment without readily determinable fair value . . . . . . . . . . . .
1,048
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
83,449
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
82,994
1,775
2,410
1,611
92,831
LIABILITIES
Other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
57
57
66
66
STOCKHOLDERS’ EQUITY
Preferred stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Common stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Additional paid-in-capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Retained earnings (deficit) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other comprehensive loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
—
73
86,660
(1,960)
(1,390)
Total stockholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 92,774 $ 83,383
Total liabilities and equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 92,831 $ 83,449
—
75
88,539
6,774
(2,614)
CONDENSED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
For the Years Ended December 31,
2017
2016
2018
100
Interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
621
Other expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(521)
Loss before income tax and undistributed subsidiary income . .
200
Income tax benefit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Equity in undistributed subsidiary income . . . . . . . . . . . . . . . . .
3,143
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 8,734 $ 3,644 $ 2,822
Comprehensive income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 7,510 $ 3,360 $ 2,372
2,263
(2,107)
563
10,278
883
(883)
388
4,139
156 $
— $
93
ESQUIRE FINANCIAL HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2018 and 2017
(Dollars in thousands, except per share data)
CONDENSED STATEMENTS OF CASH FLOWS
Cash flows from operating activities:
For the Years Ended December 31,
2016
2017
2018
8,734 $
3,644 $ 2,822
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Adjustments:
Stock compensation expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Equity in undistributed subsidiary income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Change in other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Change in other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net cash used in operating activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash flows from investing activities
1,503
(10,278)
(563)
(9)
(613)
554
(4,139)
(388)
34
(295)
388
(3,143)
(199)
(105)
(237)
Investments in subsidiaries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net change in loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Purchase of equity investment without readily determinable fair value . . . . . . . . .
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net cash used in investing activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash flows from financing activities:
(11,000)
(1,775)
(2,410)
—
(15,185)
(12,000)
—
—
—
(12,000)
(4,000)
—
—
1,250
(2,750)
Exercise of stock options . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Proceeds from the issuance of common stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net cash provided by financing activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net change in cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Beginning cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Ending cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
378
—
378
(15,420)
19,461
—
942
1
26,341
1
27,283
(2,986)
14,988
7,459
4,473
4,041 $ 19,461 $ 4,473
NOTE 15 — Accumulated Other Comprehensive Loss
The following is changes in accumulated other comprehensive loss by component, net of tax, for the years ending
December 31, 2018, 2017, and 2016:
Unrealized Losses on Available-for-Sale Securities
Beginning balance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (1,390) $
Other comprehensive loss before reclassifications, net of tax . . . . . . . . . . . . . . . . . . $ (1,224) $
Amounts reclassified from accumulated other comprehensive income . . . . . . . . . .
Net current period other comprehensive loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Ending balance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (2,614) $ (1,390) $
(884) $
(284) $
(222)
(506)
—
(1,224)
(434)
(454)
4
(450)
(884)
For the Years Ended December 31,
2016
2017
2018
Unrealized Losses on
Available-for-Sale Securities
94
ESQUIRE FINANCIAL HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2018 and 2017
(Dollars in thousands, except per share data)
The following represents the reclassifications out of accumulated other comprehensive loss for the years ended
December 31, 2018, 2017, and 2016:
Twelve months ended
December 31,
2018 2017 2016
Affected Line in the
Consolidated Statement of Income
Realized gain on securities sales . . . . . . . . . . . . . . . . . . . . $ — $ — $ 6 Net gains on securities available-for-sale
Income tax expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total reclassifications, net of tax . . . . . . . . . . . . . . . . . . . . $ — $ — $ 4
(2) Income tax expense
—
—
95
ITEM 9.
Changes In and Disagreements With Accountants on Accounting and Financial Disclosure
None.
ITEM 9A.
Controls and Procedures
Disclosure 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 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 December 31, 2018. Based on that evaluation, the Company’s Principal
Executive Officer and Principal Financial Officer concluded that the Company’s disclosure controls and procedures were
effective as of the end of the period covered by the annual report.
Report by Management on Internal Control Over Financial Reporting
Management is responsible for establishing and maintaining an effective system of internal control over financial
reporting. The Company’s system of internal control over financial reporting is designed to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of financial statements for external purposes in
accordance with generally accepted accounting principles. There are inherent limitations in the effectiveness of any system
of internal control over financial reporting, including the possibility of human error and circumvention or overriding of
controls. Accordingly, even an effective system of internal control over financial reporting can provide only reasonable
assurance with respect to financial statement preparation. Projections of any evaluation of effectiveness to future periods
are subject to the risks that controls may become inadequate because of changes in conditions or that the degree of
compliance with the policies or procedures may deteriorate.
Management has assessed the Company’s internal control over financial reporting as of December 31, 2018. This
assessment was based on criteria for effective internal control over financial reporting described in Internal Control -
Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based
on this assessment, management believes that, as of December 31, 2018, the Company maintained effective internal
control over financial reporting based on those criteria.
Crowe LLP, the independent registered public accounting firm, audited the consolidated financial statements of the
Company included in this Annual Report on Form 10-K. Their report is included in Part II, Item 8. Financial Statements
and Supplementary Data under the heading “Report of Independent Registered Public Accounting Firm.” The Annual
Report on Form 10-K does not include an attestation report on the Company’s internal control over financial reporting
from the Company’s independent registered public accounting firm due to the transition period established by the
Securities and Exchange Commission for an Emerging Growth Company.
Changes in Internal Control Over Financial Reporting
There has been no change in the Company’s internal control over financial reporting during the quarter ended
December 31, 2018, that has materially affected, or is reasonably likely to materially affect, the Company’s internal control
over financial reporting.
ITEM 9B.
Other Information
None.
96
ITEM 10.
Directors, Executive Officers and Corporate Governance
PART III
Esquire Financial has adopted a Code of Ethics that applies to its principal executive officer, principal financial officer
and principal accounting officer or controller or persons performing similar functions. A copy of the Code is available on
Esquire Financial’s website at www.esquirebank.com under “Investor Relations — Governance Documents.”
The information contained under the section captioned “Proposal I — Election of Directors” in the Company’s
definitive Proxy Statement for the 2019 Annual Meeting of Stockholders (the “Proxy Statement”) is incorporated herein
by reference.
ITEM 11.
Executive Compensation
The information required by this item is incorporated herein by reference to the section captioned “Proposal I —
Election of Directors — Executive Officer Compensation” of the Proxy Statement.
ITEM 12.
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder
Matters
The information required by this item is incorporated herein by reference to the section captioned “Voting Securities
and Principal Holders” of the Proxy Statement.
ITEM 13.
Certain Relationships and Related Transactions, and Director Independence
The information required by this item is incorporated herein by reference to the sections captioned “Proposal I —
Election of Directors — Transactions with Certain Related Persons,” “— Board Independence” and “— Meetings and
Committees of the Board of Directors” of the Proxy Statement.
ITEM 14.
Principal Accountant Fees and Services
The information required by this item is incorporated herein by reference to the section captioned “Proposal II —
Ratification of Appointment of Independent Registered Public Accounting Firm” of the Proxy Statement.
97
ITEM 15.
Exhibits and Financial Statement Schedules
PART IV
3.1
3.3
4
10.1
10.2
10.4
10.5
10.6
10.7
10.8
10.9
Articles of Incorporation of Esquire Financial Holdings, Inc. (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)
Bylaws of Esquire Financial Holdings, Inc. (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)
Form of Common Stock Certificate of Esquire Financial Holdings, Inc. (incorporated by reference to Exhibit 4
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)
Letter Agreement regarding Investor Rights, dated December 23, 2014, between Esquire Financial
Holdings, Inc. and CJA Private Equity Financial Restructuring Master Fund I, LP (incorporated by reference
to Exhibit 10.1 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)
Registration Rights Agreement, dated December 23, 2014, between Esquire Financial Holdings, Inc. and CJA
Private Equity Financial Restructuring Master Fund I, LP (incorporated by reference to Exhibit 10.2 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)
Employment Agreement by and among Esquire Financial Holdings, Inc., Esquire Bank and Andrew C.
Sagliocca (incorporated by reference to Exhibit 10.4 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)†
Employment Agreement by and among Esquire Financial Holdings, Inc., Esquire Bank and Eric Bader
(incorporated by reference to Exhibit 10.5 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)†
Employment Agreement by and among Esquire Financial Holdings, Inc., Esquire Bank and Ari Kornhaber
(incorporated by reference to Exhibit 10.6 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)†
Esquire Bank 2007 Stock Option Plan (incorporated by reference to Exhibit 10.7 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)†
Esquire Financial Holdings, Inc. 2011 Stock Compensation Plan, as amended (incorporated by reference to
Exhibit 10.8 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)†
Esquire Financial Holdings, Inc. 2017 Equity Incentive Plan (incorporated by reference to Appendix A to the
proxy statement for the Annual Meeting of Stockholders of Esquire Financial Holdings, Inc. (File
No. 001-38131), filed by the Company with the Commission on Schedule 14A under the Exchange Act on
October 3, 2017)†
10.10
First Amendment to the Employment Agreement by and among Esquire Financial Holdings, Inc., Esquire
Bank and Eric Bader dated December 19, 2018†
21
23
Subsidiaries of Registrant
Consent of Crowe LLP
98
31.1
31.2
32
101
Certification of Chief Executive Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934,
as amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
Certification of Chief Financial Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as
amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
The following materials from the Company’s Annual Report on Form 10-K, formatted in XBRL:
(i) Consolidated Statements of Financial Condition, (ii) Consolidated Statements of Income, (iii) Consolidated
Statements of Comprehensive Income, (iv) Consolidated Statements of Changes in Stockholders’ Equity
(v) Consolidated Statements of Cash Flows and (v) Notes to the Consolidated Financial Statements
† Management contract or compensation plan or arrangement.
ITEM 16.
Form 10-K Summary
None.
99
Pursuant to the requirements of Section 13 or 15(d) 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.
SIGNATURES
Date: March 14, 2019
ESQUIRE FINANCIAL HOLDINGS, INC.
By: /s/ Andrew C. Sagliocca
Andrew C. Sagliocca
President, Chief Executive Officer and Director
(Duly Authorized Representative)
Pursuant to the requirements of the Securities Exchange of 1934, this report has been signed below by the following
persons on behalf of the Registrant and in the capacities and on the dates indicated.
Signatures
Title
Date
/s/ Andrew C. Sagliocca
Andrew C. Sagliocca
/s/ Michael Lacapria
Michael Lacapria
/s/ Anthony Coelho
Anthony Coelho
/s/ Todd Deutsch
Todd Deutsch
/s/ Marc D. Grossman
Marc D. Grossman
/s/ Russ M. Herman
Russ M. Herman
/s/ Janet Hill
Janet Hill
/s/ Robert J. Mitzman
Robert J. Mitzman
/s/ John Morgan
John Morgan
/s/ Richard T. Powers
Richard T. Powers
/s/ Jack Thompson
Jack Thompson
/s/ Kevin C. Waterhouse
Kevin C. Waterhouse
/s/ Selig Zises
Selig Zises
President and Chief Executive Officer and Director
March 14, 2019
(Principal Executive Officer)
Senior Vice President and Chief Financial Officer
(Principal Financial and Accounting Officer)
Chairman
Director
Director
Director
Director
Director
Director
Director
Director
Director
Director
100
March 14, 2019
March 14, 2019
March 14, 2019
March 14, 2019
March 14, 2019
March 14, 2019
March 14, 2019
March 14, 2019
March 14, 2019
March 14, 2019
March 14, 2019
March 14, 2019
CORPORATE INFORMATION
DIRECTORS AND EXECUTIVE OFFICERS
DIRECTORS
Anthony Coelho
Chairman of the Board
Andrew C. Sagliocca
President, Chief Executive Officer
and Director
INVESTOR INFORMATION
CORPORATE HEADQUARTERS
100 Jericho Quadrangle, Suite 100
Jericho, New York 11753
(800) 996-0213
www.esquirebank.com
SPECIAL COUNSEL
Luse Gorman, PC
5335 Wisconsin Ave., N.W., Suite 780
Washington, D.C. 20015
(202) 274-2000
TRANSFER AGENT
American Stock Transfer &
Trust Company, LLC
6201 15th Avenue
Brooklyn, New York 11219
(800) 937-5449
Todd Deutsch
Marc Grossman
Russ M. Herman
Janet Hill
Robert J. Mitzman
John Morgan
Richard T. Powers
Jack Thompson
Kevin C. Waterhouse
Selig A. Zises
EXECUTIVE OFFICERS
Andrew C. Sagliocca
President, Chief Executive Officer
and Director
Eric S. Bader
Executive Vice President, Chief Operating
Officer and Corporate Secretary
Ari P. Kornhaber
Executive Vice President, Director of Sales
Michael Lacapria
Senior Vice President, Chief Financial Officer
INDEPENDENT REGISTERED PUBLIC
ACCOUNTING FIRM
Crowe LLP
354 Eisenhower Parkway, Suite 2050
Livingston, New Jersey 07039
(973) 422-2420
ANNUAL MEETING
The Annual Meeting of the Stockholders
will be held on May 30, 2019 at 10:00 a.m.,
Eastern time, at the executive offices of
Esquire Financial Holdings, Inc. located
at 100 Jericho Quadrangle, Jericho,
New York 11753.
GENERAL INQUIRIES
A copy of our Annual Report to the SEC
may be obtained without charge by written
request of stockholders to Eric Bader or by
calling us at (800) 996-0213. The Annual
Report is also available on our website at
www.esquirebank.com. Our Code of Ethics,
Audit Committee Charter, Corporate Gov er-
nance and Nominating Committee Charter,
Compensation Committee Charter, and
Beneficial Ownership reports of our directors
and executive officers are also available on
our website.
ESQ_AR18_CV.indd 4-6
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Esquire Financial Holdings, Inc.
100 JERICHO QUADRANGLE, SUITE 100
JERICHO, NEW YORK 11753
Annual Report
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