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Section 1: 10-Q (10-Q)

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Table of Contents

 

 

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549


FORM 10‑Q


 

 

☒  

QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended September 30, 2018

OR

 

 

☐  

TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from                            to                           

Commission File No. 001‑38131


Esquire Financial Holdings, Inc.

(Exact Name of Registrant as Specified in Its Charter)


Maryland

    

27-5107901

(State or Other Jurisdiction of
Incorporation or Organization)

 

(I.R.S. Employer
Identification No.)

 

 

 

100 Jericho Quadrangle, Suite 100, Jericho, New York

 

11753

(Address of Principal Executive Offices)

 

(Zip Code)

 

(516) 535‑2002

(Registrant’s Telephone Number, Including Area Code)

N/A

(Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report)


Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such requirements for the past 90 days.

YES  ☒    NO  ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).

YES  ☒    NO  ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b‑2 of the Exchange Act.

 

 

 

Large accelerated filer      ☐

    

Accelerated filer                       ☐

Non-accelerated filer         ☒

 

Smaller reporting company      ☒

 

 

Emerging growth company      ☒

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☒

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b‑2 of the Exchange Act).

YES  ☐    NO  ☒

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: As of November 1, 2018, there were 7,445,723 outstanding shares of the issuer’s common stock.

 

 

 

 


 

Table of Contents

Esquire Financial Holdings, Inc.

Form 10‑Q

Table of Contents

 

    

 

    

Page

PART I. FINANCIAL INFORMATION 

 

3

 

 

 

Item 1. 

 

Financial Statements (unaudited)

 

3

 

 

 

 

 

 

 

Condensed Consolidated Statements of Financial Condition

 

3

 

 

 

 

 

 

 

Condensed Consolidated Statements of Income

 

4

 

 

 

 

 

 

 

Condensed Consolidated Statements of Comprehensive Income

 

5

 

 

 

 

 

 

 

Condensed Consolidated Statement of Changes in Stockholders’ Equity

 

6

 

 

 

 

 

 

 

Condensed Consolidated Statements of Cash Flows

 

7

 

 

 

 

 

 

 

Notes to Interim Condensed Consolidated Financial Statements

 

8

 

 

 

 

 

Item 2. 

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

22

 

 

 

 

 

Item 3. 

 

Quantitative and Qualitative Disclosures About Market Risk

 

36

 

 

 

 

 

Item 4. 

 

Controls and Procedures

 

37

 

 

 

 

 

PART II. OTHER INFORMATION 

 

38

 

 

 

Item 1. 

 

Legal Proceedings

 

38

 

 

 

 

 

Item 1A. 

 

Risk Factors

 

38

 

 

 

 

 

Item 2. 

 

Unregistered Sales of Equity Securities and Use of Proceeds

 

38

 

 

 

 

 

Item 3. 

 

Defaults Upon Senior Securities

 

38

 

 

 

 

 

Item 4. 

 

Mine Safety Disclosures

 

38

 

 

 

 

 

Item 5. 

 

Other Information

 

38

 

 

 

 

 

Item 6. 

 

Exhibits

 

39

 

 

 

 

 

 

 

SIGNATURES

 

40

 

 

 

2


 

Table of Contents

PART I – FINANCIAL INFORMATION

Item 1.Financial Statements

ESQUIRE FINANCIAL HOLDINGS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION

(Dollars in thousands, except per share data)

(Unaudited)

 

 

 

 

 

 

 

 

 

 

September 30, 

 

December 31, 

 

    

2018

    

2017

ASSETS

 

 

 

 

 

 

Cash and due from banks

 

$

1,230

 

$

471

Interest earning deposits

 

 

38,610

 

 

42,606

Total cash and cash equivalents

 

 

39,840

 

 

43,077

 

 

 

 

 

 

 

Securities available-for-sale, at fair value

 

 

147,522

 

 

128,758

Securities, restricted, at cost

 

 

2,403

 

 

2,183

 

 

 

 

 

 

 

Loans

 

 

437,883

 

 

348,978

Less: allowance for loan losses

 

 

(5,229)

 

 

(4,264)

Loans, net

 

 

432,654

 

 

344,714

Premises and equipment, net

 

 

2,616

 

 

2,546

Accrued interest receivable

 

 

4,408

 

 

2,836

Deferred tax asset

 

 

3,319

 

 

2,241

Other assets

 

 

12,841

 

 

7,202

Total assets

 

$

645,603

 

$

533,557

 

 

 

 

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

Deposits:

 

 

 

 

 

 

Demand

 

$

189,960

 

$

190,847

Savings, NOW and money market

 

 

332,016

 

 

230,715

Time

 

 

30,215

 

 

26,932

Total deposits

 

 

552,191

 

 

448,494

 

 

 

 

 

 

 

Secured borrowings

 

 

272

 

 

278

Accrued expenses and other liabilities

 

 

4,645

 

 

1,402

Total liabilities

 

$

557,108

 

$

450,174

 

 

 

 

 

 

 

Commitments and Contingencies

 

 

 —

 

 

 —

 

 

 

 

 

 

 

Stockholders’ equity:

 

 

 

 

 

 

Preferred stock, par value $0.01; authorized 2,000,000 shares; no shares issued and outstanding at September 30, 2018 and December 31, 2017

 

 

 —

 

 

 —

Common stock, par value $0.01; authorized 15,000,000 shares; issued and outstanding 7,445,723 shares at September 30, 2018 and 7,326,536 shares at December 31, 2017

 

 

74

 

 

73

Additional paid-in capital

 

 

88,341

 

 

86,660

Retained earnings (deficit)

 

 

3,901

 

 

(1,960)

Accumulated other comprehensive loss

 

 

(3,821)

 

 

(1,390)

Total stockholders’ equity

 

 

88,495

 

 

83,383

Total liabilities and stockholders’ equity

 

$

645,603

 

$

533,557

 

See accompanying condensed notes to interim condensed consolidated financial statements.

3


 

Table of Contents

ESQUIRE FINANCIAL HOLDINGS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(Dollars in thousands, except per share data)

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the Three Months

 

For the Nine Months

 

 

Ended September 30, 

 

Ended September 30, 

 

    

2018

    

2017

    

2018

    

2017

Interest income:

 

 

 

 

 

 

 

 

 

 

 

 

Loans

 

$

6,432

 

$

4,630

 

$

17,378

 

$

12,519

Securities

 

 

1,035

 

 

631

 

 

2,906

 

 

1,809

Interest earning deposits and other

 

 

153

 

 

93

 

 

470

 

 

214

Total interest income

 

 

7,620

 

 

5,354

 

 

20,754

 

 

14,542

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense:

 

 

 

 

 

 

 

 

 

 

 

 

Savings, NOW and money market deposits

 

 

291

 

 

101

 

 

580

 

 

316

Time deposits

 

 

41

 

 

22

 

 

140

 

 

70

Borrowings

 

 

12

 

 

 5

 

 

21

 

 

16

Total interest expense

 

 

344

 

 

128

 

 

741

 

 

402

 

 

 

 

 

 

 

 

 

 

 

 

 

Net interest income

 

 

7,276

 

 

5,226

 

 

20,013

 

 

14,140

Provision for loan losses

 

 

450

 

 

275

 

 

975

 

 

725

Net interest income after provision for loan losses

 

 

6,826

 

 

4,951

 

 

19,038

 

 

13,415

 

 

 

 

 

 

 

 

 

 

 

 

 

Non-interest income:

 

 

 

 

 

 

 

 

 

 

 

 

Merchant processing income

 

 

1,300

 

 

797

 

 

3,532

 

 

2,467

Customer related fees and service charges

 

 

500

 

 

548

 

 

2,322

 

 

1,442

Total non-interest income

 

 

1,800

 

 

1,345

 

 

5,854

 

 

3,909

 

 

 

 

 

 

 

 

 

 

 

 

 

Non-interest expense:

 

 

 

 

 

 

 

 

 

 

 

 

Employee compensation and benefits

 

 

4,161

 

 

2,466

 

 

10,230

 

 

7,180

Occupancy and equipment, net

 

 

429

 

 

393

 

 

1,287

 

 

1,155

Professional and consulting services

 

 

547

 

 

548

 

 

1,859

 

 

1,453

FDIC and regulatory assessments

 

 

79

 

 

73

 

 

235

 

 

220

Advertising and marketing

 

 

146

 

 

134

 

 

442

 

 

340

Travel and business relations

 

 

116

 

 

92

 

 

384

 

 

320

Data processing

 

 

485

 

 

466

 

 

1,415

 

 

1,245

Other operating expenses

 

 

367

 

 

253

 

 

1,039

 

 

705

Total non-interest expense

 

 

6,330

 

 

4,425

 

 

16,891

 

 

12,618

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income before income taxes

 

 

2,296

 

 

1,871

 

 

8,001

 

 

4,706

Income tax expense

 

 

614

 

 

730

 

 

2,140

 

 

1,723

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

$

1,682

 

$

1,141

 

$

5,861

 

$

2,983

 

 

 

 

 

 

 

 

 

 

 

 

 

Earnings per common share

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

0.23

 

$

0.16

 

$

0.80

 

$

0.51

Diluted

 

$

0.22

 

$

0.16

 

$

0.76

 

$

0.51

 

See accompanying condensed notes to interim condensed consolidated financial statements

4


 

Table of Contents

ESQUIRE FINANCIAL HOLDINGS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Dollars in thousands)

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the Three Months

 

For the Nine Months

 

 

Ended September 30, 

 

Ended September 30, 

 

    

2018

    

2017

    

2018

    

2017

Net income

 

$

1,682

 

$

1,141

 

$

5,861

 

$

2,983

Other comprehensive (loss) income:

 

 

 

 

 

 

 

 

 

 

 

 

Unrealized (losses) gains arising during the period on securities available for sale

 

 

(776)

 

 

(1)

 

 

(3,347)

 

 

623

Reclassification adjustment for net gains included in net income

 

 

 —

 

 

 —

 

 

 —

 

 

 —

Tax effect

 

 

212

 

 

 5

 

 

916

 

 

(243)

Total other comprehensive (loss) income

 

 

(564)

 

 

 4

 

 

(2,431)

 

 

380

Total comprehensive income

 

$

1,118

 

$

1,145

 

$

3,430

 

$

3,363

 

See accompanying condensed notes to interim condensed consolidated financial statements.

5


 

Table of Contents

ESQUIRE FINANCIAL HOLDINGS, INC.

CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY

(Dollars in thousands)

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Additional

 

Retained

 

other

 

Total

 

 

Preferred

 

Common

 

Preferred

 

Common

 

paid in

 

earnings

 

comprehensive

 

stockholders'

 

    

shares

    

shares

    

stock

    

stock

    

capital

    

(deficit)

    

loss

    

equity

Balance at January 1, 2018

 

 —

 

7,326,536

 

$

 —

 

$

73

 

$

86,660

 

$

(1,960)

 

$

(1,390)

 

$

83,383

Net income

 

 —

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

5,861

 

 

 —

 

 

5,861

Other comprehensive loss

 

 —

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

(2,431)

 

 

(2,431)

Exercise of stock options, net of repurchases

 

 —

 

42,687

 

 

 —

 

 

 1

 

 

377

 

 

 —

 

 

 —

 

 

378

Restricted stock grants

 

 —

 

76,500

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

Stock compensation expense

 

 —

 

 —

 

 

 —

 

 

 —

 

 

1,304

 

 

 —

 

 

 —

 

 

1,304

Balance at September 30, 2018

 

 —

 

7,445,723

 

$

 —

 

$

74

 

$

88,341

 

$

3,901

 

$

(3,821)

 

$

88,495

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Additional

 

 

 

 

other

 

Total

 

 

Preferred

 

Common

 

Preferred

 

Common

 

paid in

 

Retained

 

comprehensive

 

stockholders'

 

 

shares

    

shares

    

stock

    

stock

    

capital

    

deficit

    

loss

    

equity

Balance at January 1, 2017

 

66,985

 

5,002,950

 

$

 1

 

$

50

 

$

58,845

 

$

(5,826)

 

$

(884)

 

$

52,186

Net income

 

 —

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

2,983

 

 

 —

 

 

2,983

Other comprehensive income

 

 —

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

380

 

 

380

Conversion of preferred stock

 

(66,985)

 

66,985

 

 

(1)

 

 

 1

 

 

 —

 

 

 —

 

 

 —

 

 

 —

Exercise of stock options, net of repurchases

 

 —

 

101,941

 

 

 —

 

 

 1

 

 

941

 

 

 —

 

 

 —

 

 

942

Issuance of common stock, net of issuance costs

 

 —

 

2,154,660

 

 

 —

 

 

21

 

 

26,320

 

 

 —

 

 

 —

 

 

26,341

Stock compensation expense

 

 —

 

 —

 

 

 —

 

 

 —

 

 

421

 

 

 —

 

 

 —

 

 

421

Balance at September 30, 2017

 

 —

 

7,326,536

 

$

 —

 

$

73

 

$

86,527

 

$

(2,843)

 

$

(504)

 

$

83,253

 

See accompanying condensed notes to interim condensed consolidated financial statements.

6


 

Table of Contents

ESQUIRE FINANCIAL HOLDINGS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Dollars in thousands)

(Unaudited)

 

 

 

 

 

 

 

 

 

For the Nine Months Ended September 30, 

 

    

2018

    

2017

Cash flows from operating activities:

 

 

 

 

 

 

Net income

 

$

5,861

 

$

2,983

Adjustments to reconcile net income to net cash used in operating activities:

 

 

 

 

 

 

Net cash used in operating activities:

 

 

 

 

 

 

Provision for loan losses

 

 

975

 

 

725

Depreciation

 

 

304

 

 

308

Stock compensation expense

 

 

1,304

 

 

421

Net amortization:

 

 

 

 

 

 

Securities

 

 

339

 

 

296

Loans

 

 

296

 

 

470

Changes in other assets and liabilities:

 

 

 

 

 

 

Accrued interest receivable

 

 

(1,572)

 

 

(656)

Deferred tax asset

 

 

(162)

 

 

413

Other assets

 

 

(3,229)

 

 

(2,803)

Accrued expenses and other liabilities

 

 

3,243

 

 

833

Net cash provided by operating activities

 

 

7,359

 

 

2,990

 

 

 

 

 

 

 

Cash flows from investing activities:

 

 

 

 

 

 

Net change in loans

 

 

(89,211)

 

 

(50,616)

Purchases of securities available for sale

 

 

(40,844)

 

 

(31,446)

Principal repayments on securities available for sale

 

 

18,394

 

 

16,602

Purchase of securities, restricted

 

 

(220)

 

 

(234)

Investment in equity security without readily determinable fair value

 

 

(2,410)

 

 

 —

Purchases of premises and equipment

 

 

(374)

 

 

(168)

Net cash used in investing activities

 

 

(114,665)

 

 

(65,862)

 

 

 

 

 

 

 

Cash flows from financing activities:

 

 

 

 

 

 

Net increase in deposits

 

 

103,697

 

 

24,133

Decrease in secured borrowings

 

 

(6)

 

 

(91)

Exercise of stock options

 

 

378

 

 

942

Proceeds from the issuance of common stock, net of issuance costs

 

 

 —

 

 

26,341

Net cash provided by financing activities

 

 

104,069

 

 

51,325

 

 

 

 

 

 

 

Decrease in cash and cash equivalents

 

 

(3,237)

 

 

(11,547)

 

 

 

 

 

 

 

Cash and cash equivalents at beginning of the period

 

 

43,077

 

 

42,993

 

 

 

 

 

 

 

Cash and cash equivalents at end of the period

 

$

39,840

 

$

31,446

 

 

 

 

 

 

 

Supplemental disclosures of cash flow information:

 

 

 

 

 

 

Cash paid during the period for:

 

 

 

 

 

 

Interest

 

$

730

 

$

398

Taxes

 

 

1,955

 

 

2,330

 

See accompanying condensed notes to interim condensed consolidated financial statements.

7


 

Table of Contents

ESQUIRE FINANCIAL HOLDINGS, INC.

NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except per share data)

(Unaudited)

NOTE 1 — Basis of Presentation

The interim consolidated financial statements include the accounts of Esquire Financial Holdings, Inc. and its wholly owned subsidiary, Esquire Bank, N.A. These entities are collectively referred to as “the Company.” All significant intercompany accounts and transactions have been eliminated in consolidation.

The accompanying unaudited interim condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial information. In the opinion of management, the interim statements reflect all adjustments necessary for a fair presentation of the financial position, results of operations and cash flows of the Company on a consolidated basis and all such adjustments are recurring in nature. These financial statements and the accompanying notes should be read in conjunction with the Company’s audited financial statements for the years ended December 31, 2017 and 2016. Operating results for the three and nine months ended September 30, 2018 are not necessarily indicative of the results that may be expected for the year ending December 31, 2018 or any other period.

Subsequent Events

The Company has evaluated subsequent events for recognition and disclosure through the date of issuance.

Equity Security Without Readily Determinable Fair Value

In April of 2018, the Company completed its $2,410 investment for a 4.95% interest in Litify LLC, a technology solution to automate and manage a law firm’s business and cases. As Litify LLC is a private company, the investment does not have a readily determinable fair value. At September 30, 2018, the investment’s carrying amount remains at its original cost basis of $2,410 and is grouped with other assets on the balance sheet. Based on a qualitative assessment, we have noted no significant adverse changes which would indicate the asset is impaired as of September 30, 2018.

Secured Borrowing

The Company had a secured borrowing of $272 and $278 as of September 30, 2018 and December 31, 2017, respectively, relating to certain loan participations sold by the Company that did not qualify for sales treatment.

Preferred Stock

In December of 2014, an investor executed the purchase of 157,985 shares of 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 does not have a maturity date and is not convertible by the holder, but is convertible on a one for one basis into shares of common stock by us under certain circumstances. In addition, the preferred stock does not have a liquidation preference. Preferred shares have equal rights to receive dividends when dividends are declared on common stock, and thus are considered participating securities.

In June of 2016, the Company and the preferred shareholder agreed to perform an exchange of 91,000 shares of 0.00% of Series B non-voting preferred shares for 91,000 voting common shares, par value $0.01.

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In July of 2017, the Company and the preferred shareholder agreed to perform an exchange of 66,985 shares of 0.00% of Series B non-voting preferred shares for 66,985 voting common shares, par value $0.01. As of September 30, 2018 and December 31, 2017, there are no preferred shares outstanding.

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 are now such matters that will have a material effect on the consolidated financial statements.

Reclassifications

Some items in the prior year financial statements were reclassified to conform to the current period presentation. Reclassifications had no effect on prior year net income or stockholders’ equity.

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 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 below for additional information related to revenue generated from contracts with customers.

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:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended September 30, 

 

Nine Months Ended September 30, 

 

    

2018

    

2017

    

2018

    

2017

Non-interest income

 

 

 

 

 

 

 

 

 

 

 

 

Customer related fees and service charges

 

 

 

 

 

 

 

 

 

 

 

 

Administrative service income

 

$

425

 

$

459

 

$

2,077

 

$

1,044

Merchant processing income

 

 

 

 

 

 

 

 

 

 

 

 

Merchant services income

 

 

1,214

 

 

725

 

 

3,284

 

 

2,252

ACH income

 

 

86

 

 

72

 

 

248

 

 

215

Other

 

 

75

 

 

89

 

 

245

 

 

398

Total non-interest income

 

$

1,800

 

$

1,345

 

$

5,854

 

$

3,909

 

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 our relationships with qualified settlement funds (QSFs), which are plaintiffs’ funds from settled class action lawsuits. Our

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performance obligations with the QSFs are outlined in the master settlement agreements (MSAs), essentially court orders, and are limited to ensuring funds are invested into safe investment vehicles such as U.S. treasuries, FDIC insured CDs and money market funds. 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 essentially acquiring, clearing and settling credit and debit transactions on behalf of the ISO’s merchants. The Company only recognizes revenue once a month, once it summarizes and computes all revenue and expenses applicable to each ISO. By this juncture, it has satisfied its performance obligation.

·

ACH income – We provide ACH services for various commercial customers. Contracts are entered into with third parties that need 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 ACHs on behalf of the customers as an originating depository financial institution. 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 when we send a bill to the commercial customer based on the total volume of transactions processed that month.

·

Other – The other category includes revenue from service charges on deposit accounts, debit card interchange fees, which are within scope of ASC 606, revenue is recognized as performance obligations are satisfied.

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. The ASU was effective on January 1, 2018. Adoption of this standard did not have a material effect on the Company’s operating results or financial condition. However, the Company did enhance its computation of fair value of loans (as disclosed in Note 6) to comply with the exit price notion as required by the ASU.

On February 25, 2016, the FASB completed its Leases project by issuing ASU No. 2016‑02, “Leases (Topic 842).” The new guidance affects any organization that enters into a lease, or sublease, with some specified exemptions. Under the new guidance, a lessee will be required to recognize assets and liabilities for leases with lease terms of more than 12 months. Consistent with current GAAP, the recognition, measurement, and presentation of expenses and cash flows arising from a lease by a lessee primarily will depend on its classification as a finance or operating lease. However, unlike current GAAP, which requires only capital leases to be recognized on the balance sheet, the new ASU will require both types of leases to be recognized on the balance sheet. The ASU will also require expanded disclosures. The ASU on leases will take effect for fiscal years beginning after December 15, 2018, and for interim periods within those fiscal years. The Company is currently evaluating the impact of ASU 2016-02 on the consolidated financial statements. Based on leases outstanding at September 30, 2018, the Company does not expect the updates to have a material impact on the income statement, but does anticipate the adoption of ASU 2016-02 will result in an increase in the Company’s Consolidated Balance Sheets as a result of recognizing right-of-use assets and lease liabilities.

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 beginning after December 15, 2019, including interim periods within those fiscal years. The

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Company plans to adopt ASU 2016-13 in the first quarter of 2020 using the require modified retrospective method with a cumulative effect adjustment as of the beginning of the reporting period. The Company is currently gathering data and  finalizing the selection of a vendor to assist with the implementation of this standard.

 

NOTE 2 — 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:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gross

 

Gross

 

 

 

 

Amortized

 

Unrealized

 

Unrealized

 

Fair

 

    

Cost

    

Gains

    

Losses

    

Value

September 30, 2018

 

 

 

 

 

 

 

 

 

 

 

 

Mortgage-backed securities – agency

 

$

26,282

 

$

 —

 

$

(988)

 

$

25,294

Collateralized mortgage obligations (CMO’s) – agency

 

 

126,502

 

 

 —

 

 

(4,274)

 

 

122,228

Total available-for-sale

 

$

152,784

 

$

 —

 

$

(5,262)

 

$

147,522

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2017

 

 

 

 

 

 

 

 

 

 

 

 

Mortgage-backed securities - agency

 

$

20,082

 

$

12

 

$

(291)

 

$

19,803

Collateralized mortgage obligations (CMO's) - agency

 

 

110,590

 

 

13

 

 

(1,648)

 

 

108,955

Total available-for-sale

 

$

130,672

 

$

25

 

$

(1,939)

 

$

128,758

 

The amortized cost and fair value of debt securities are shown by contractual maturity. Expected maturities may differ from contractual maturities if borrowers have the right to call or prepay obligations with or without call or prepayment penalties. We have no securities due at a single maturity. Securities not due at a single maturity date are shown below.

 

 

 

 

 

 

 

 

 

September 30, 2018

 

    

Amortized Cost

    

Fair Value

Mortgage-backed securities – agency

 

$

26,282

 

$

25,294

CMO’s – agency

 

 

126,502

 

 

122,228

Total

 

$

152,784

 

$

147,522

 

Mortgage-backed securities include 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).

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 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.

There were no sales or calls of securities for the three and nine months ended September 30, 2018 and 2017.

At September 30, 2018, securities having a fair value of $130,288 were pledged to the Federal Home Loan Bank of New York (FHLB) for borrowing capacity totaling $123,318. At December 31, 2017, securities having a fair

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value of approximately $108,955 were pledged to the FHLB for borrowing capacity totaling $103,351. At September 30, 2018 and December 31, 2017, the Company had no outstanding FHLB advances.

At September 30, 2018, securities having a fair value of $17,234 were pledged to the Federal Reserve Bank of New York (FRB) for borrowing capacity totaling $16,584. At December 31, 2017, securities having a fair value of approximately $19,803 were pledged to the FRB for borrowing capacity totaling $19,370. At September 30, 2018 and December 31, 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:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Less Than 12 Months

 

12 Months or Longer

 

Total

 

    

Fair
Value

    

Gross
Unrealized
Losses

    

Fair
Value

    

Gross
Unrealized
Losses

    

Fair
Value

    

Gross
Unrealized
Losses

September 30, 2018

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Mortgage-backed securities – agency

 

$

9,531

 

$

(172)

 

$

15,763

 

$

(816)

 

$

25,294

 

$

(988)

CMO’s – agency

 

 

78,511

 

 

(1,906)