Esquire Financial Holdings, Inc. - Quarter Report: 2017 September (Form 10-Q)

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, 2017

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 x

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post such files).

YES x 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	x
(Do not check if a smaller reporting company)		Emerging growth company	x

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. x

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

YES ¨ NO x

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, 2017, there were 7,326,536 outstanding shares of the issuer’s common stock.

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 Statements of Changes in Stockholders’ Equity	6

	Condensed Consolidated Statements of Cash Flows	7

	Notes to Interim Condensed Consolidated Financial Statements	9

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	36

PART II. OTHER INFORMATION		36

Item 1.	Legal Proceedings	36

Item 1A.	Risk Factors	36

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	36

Item 3.	Defaults Upon Senior Securities	37

Item 4.	Mine Safety Disclosures	37

Item 5.	Other Information	37

Item 6.	Exhibits	37

	SIGNATURES	38

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,
	2017			2016
ASSETS
Cash and due from banks	$	771		$	437
Interest earning deposits		30,675			42,556
Total cash and cash equivalents		31,446			42,993

Securities available-for-sale, at fair value		107,816			92,645
Securities, restricted, at cost		1,883			1,649

Loans		328,670			278,578
Less: allowance for loan losses		(4,084	)		(3,413	)
Loans, net		324,586			275,165

Premises and equipment, net		2,627			2,767
Accrued interest receivable		2,197			1,541
Deferred tax asset		2,452			3,108
Other assets		7,768			4,965
Total assets	$	480,775		$	424,833

LIABILITIES AND STOCKHOLDERS’ EQUITY
Deposits:
Demand	$	136,196		$	124,990
Savings, NOW and money market		231,303			221,843
Time		27,422			23,955
Total deposits		394,921			370,788

Secured borrowings		280			371
Accrued expenses and other liabilities		2,321			1,488
Total liabilities		397,522			372,647

Commitments and Contingencies		-			-

Stockholders’ equity:
Preferred Stock, par value $0.01; authorized 2,000,000 shares; issued and outstanding 0 shares at September 30, 2017 and 66,985 shares (non-voting) at December 31, 2016		-			1
Common stock, par value $0.01; authorized 15,000,000 shares; issued and outstanding 7,326,536 shares at September 30, 2017, and 5,002,950 shares at December 31, 2016		73			50
Additional paid-in capital		86,527			58,845
Retained deficit		(2,843	)		(5,826	)
Accumulated other comprehensive loss		(504	)		(884	)
Total stockholders’ equity		83,253			52,186
Total liabilities and stockholders’ equity	$	480,775		$	424,833

See accompanying condensed notes to interim condensed consolidated financial statements.

ESQUIRE FINANCIAL HOLDINGS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(Dollars in thousands, except per share data)

(Unaudited)

	For the Three Months Ended September 30,				For the Nine Months Ended September 30,
	2017		2016		2017		2016
Interest income:
Loans	$	4,630	$	3,539	$	12,519	$	10,210
Securities		631		498		1,809		1,465
Interest earning deposits and other		93		39		214		104
Total interest income		5,354		4,076		14,542		11,779
Interest expense:
Savings, NOW and money market deposits		101		111		316		307
Time deposits		22		23		70		48
Borrowings		5		6		16		19
Total interest expense		128		140		402		374

Net interest income		5,226		3,936		14,140		11,405
Provision for loan losses		275		180		725		455
Net interest income after provision for loan losses		4,951		3,756		13,415		10,950

Non-interest income:
Customer related fees and service charges		548		283		1,442		761
Merchant processing income		797		774		2,467		2,320
Net gains on sales of available-for-sale securities		-		-		-		6
Total non-interest income		1,345		1,057		3,909		3,087

Non-interest expense:
Employee compensation and benefits		2,466		2,114		7,180		6,061
Occupancy and equipment, net		393		359		1,155		912
Professional and consulting services		548		393		1,453		1,305
FDIC assessment		42		37		126		118
Advertising and marketing		134		90		340		333
Travel and business relations		92		95		320		266
OCC assessments		31		27		94		81
Data processing		466		302		1,245		981
Other operating expenses		253		203		705		506
Total non-interest expense		4,425		3,620		12,618		10,563

Net income before income taxes		1,871		1,193		4,706		3,474
Income tax expense		730		453		1,723		1,343

Net income	$	1,141	$	740	$	2,983	$	2,131

Earnings per common share
Basic	$	0.16	$	0.15	$	0.51	$	0.42
Diluted	$	0.16	$	0.14	$	0.51	$	0.42

See accompanying condensed notes to interim condensed consolidated financial statements

ESQUIRE FINANCIAL HOLDINGS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Dollars in thousands)

(Unaudited)

	For the Three Months Ended September 30,						For the Nine Months Ended September 30,
	2017			2016			2017			2016
Net income	$	1,141		$	740		$	2,983		$	2,131
Other comprehensive income:
Unrealized holding gains (losses) arising during the period on securities available for sale		(1	)		(358	)		623			1,836
Reclassification adjustment for net gains included in net income		-			-			-			(6	)
Tax effect		5			140			(243	)		(713	)
Total other comprehensive income (loss)		4			(218	)		380			1,117
Total comprehensive income	$	1,145		$	522		$	3,363		$	3,248

See accompanying condensed notes to interim condensed consolidated financial statements.

ESQUIRE FINANCIAL HOLDINGS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

(Dollars in thousands)

(Unaudited)

	Preferred shares			Common shares		Preferred stock			Common stock		Additional paid in capital		Retained deficit			Accumulated other comprehensive loss			Total stockholders' 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 share settlement		-			101,941		-			1		941		-			-			942
Issuance of common stock, net of issuance costs		-			2,154,660		-			21		26,320		-			-			26,341
Options 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.

ESQUIRE FINANCIAL HOLDINGS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Dollars in thousands)

(Unaudited)

	For the Nine Months Ended September 30,
	2017			2016
Cash flows from operating activities:
Net income	$	2,983		$	2,131
Adjustments to reconcile net income to
Net cash provided by operating activities:
Provision for loan losses		725			455
Net gains on sales of available-for-sale securities		-			(6	)
Depreciation		308			136
Stock options expense		421			249
Net amortization:
Securities		296			215
Loans		470			325
Changes in other assets and liabilities:
Accrued interest receivable		(656	)		(138	)
Deferred tax asset		413			(1,051	)
Other assets		(2,803	)		(1,275	)
Accrued expenses and other liabilities		833			12
Net cash provided by operating activities		2,990			1,053

Cash flows from investing activities:
Net change in loans		(50,616	)		(43,567	)
Purchases of securities available for sale		(31,446	)		(23,066	)
Proceeds of sales of securities available for sale		-			4,068
Principal repayments on securities available for sale		16,602			8,402
Purchases of securities, restricted		(234	)		(200	)
Other assets		-			1,249
Purchases of premises and equipment		(168	)		(2,145	)
Net cash used in investing activities		(65,862	)		(55,259	)

Cash flows from financing activities:
Net increase in deposits		24,133			51,629
Decrease in secured borrowings		(91	)		(8	)
Exercise of stock options		942			-
Proceeds from issuance of common stock		26,341			1
Net cash provided by financing activities		51,325			51,622

Decrease in cash and cash equivalents		(11,547	)		(2,584	)

Cash and cash equivalents at beginning of the period		42,993			33,154

Cash and cash equivalents at end of the period	$	31,446		$	30,570

(Continued)

ESQUIRE FINANCIAL HOLDINGS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Dollars in thousands)

(Unaudited)

	For the Nine Months Ended
	September 30,
	2017		2016
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest	$	398	$	373
Income taxes		2,330		111

See accompanying condensed notes to interim condensed consolidated financial statements.

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, 2016 and 2015. Operating results for the three and nine months ended September 30, 2017 are not necessarily indicative of the results that may be expected for the year ending December 31, 2017 or any other period.

Subsequent Events

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

Secured Borrowing

The Company had a secured borrowing of $280 and $371 as of September 30, 2017 and December 31, 2016, respectively, relating to certain loan participations sold by the Company that did not qualify for sales treatment.

Preferred Stock

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, 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.

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. In August 2016, the (Financial Accounting Standards Board FASB) deferred the effective date of the ASU by one year which means ASU 2014-09 will be effective for the Company on January 1, 2018. Management has identified the revenue streams that are in scope, which includes merchants processing income and other categories of noninterest income. We are in process of establishing a control structure to manage the implementation of the ASU with respect to new revenue streams. We are in process of evaluating the impact of the ASU with respect to financial statement disclosures. We do not expect the ASU to have a significant impact on our operating results or financial condition.

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 will be effective for public business entities in beginning after December 15, 2017, including interim periods within those fiscal years. Adoption of this standard is not expected to have a material effect on the Company’s operating results or financial condition.

On February 25, 2016, the FASB completed its Leases project by issuing ASU No. 2017-02, “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 and 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 the ASU on its financial condition and results of operations.

In March 2016, the FASB issued ASU 2016-09, Compensation—Stock Compensation (Topic 718): “Improvements to Employee Share-Based Payment Accounting.” This update includes multiple provisions intended to simplify various aspects of the accounting for share-based payments. For public companies, the amendments in this update are effective for annual periods beginning after December 15, 2016, and interim periods within those annual periods. Adoption of this standard in the first quarter of 2017 did not have a material effect on the Company’s operating results or financial condition.

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 Company is currently gathering data and building a roadmap for the implementation of the 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:

	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value

September 30, 2017
Mortgage-backed securities - agency	$	20,747	$	19	$	(233	)	$	20,533
Collateralized mortgage obligations (CMO's) - agency		87,895		176		(788	)		87,283
Total available-for-sale	$	108,642	$	195	$	(1,021	)	$	107,816

December 31, 2016
Mortgage-backed securities - agency	$	16,417	$	12	$	(417	)	$	16,012
Collateralized mortgage obligations (CMO's) - agency		77,677		56		(1,100	)		76,633
Total available-for-sale	$	94,094	$	68	$	(1,517	)	$	92,645

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. Securities not due at a single maturity date are shown separately. We have no securities due at a single maturity.

	September 30, 2017
	Amortized Cost		Fair Value
Mortgage-backed securities - agency	$	20,747	$	20,533
CMO's - agency		87,895		87,283
Total	$	108,642	$	107,816

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 2017 and 2016 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 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.

The proceeds from sales and calls of securities and the associated gains and losses are listed below for the periods indicated:

	For the three months ended,				For the nine months ended,
	September 30,				September 30,
	2017		2016		2017		2016

Proceeds	$	-	$	-	$	-	$	4,068
Gross gains		-		-		-		6
Gross losses		-		-		-		-

The tax provision related to the realized gain was $2 for the nine months ended September 30, 2016.

At September 30, 2017, securities having a fair value of $87,283 were pledged to the Federal Home Loan Bank of New York (FHLB) for borrowing capacity totaling $82,978. At December 31, 2016, securities having a fair value of approximately $76,633 were pledged to the FHLB for borrowing capacity totaling $72,837. At September 30, 2017 and December 31, 2016, the Company had no outstanding FHLB advances.

At September 30, 2017, securities having a fair value of $20,533 were pledged to the Federal Reserve Bank of New York (FRB) for borrowing capacity totaling $20,151. At December 31, 2016, securities having a fair value of approximately $16,012 were pledged to the FRB for borrowing capacity totaling $15,580. At September 30, 2017 and December 31, 2016, 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, 2017
Mortgage-backed securities - agency	$	17,236	$	(217	)	$	1,487	$	(16	)	$	18,723	$	(233	)
CMO's - Agency		46,173		(615	)		9,108		(173	)		55,281		(788	)
Total temporarily impaired securities	$	63,409	$	(832	)	$	10,595	$	(189	)	$	74,004	$	(1,021	)

December 31, 2016
Mortgage-backed securities - agency	$	13,936	$	(417	)	$	-	$	-		$	13,936	$	(417	)
CMO's - Agency		50,269		(859	)		5,973		(241	)		56,242		(1,100	)
Total temporarily impaired securities	$	64,205	$	(1,276	)	$	5,973	$	(241	)	$	70,178	$	(1,517	)

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 debt 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. Management evaluates securities for OTTI at least on a quarterly basis, and more frequently when economic or market conditions warrant such an evaluation.

At September 30, 2017, securities in unrealized loss positions were issuances from government sponsored entities. Due to the decline in fair value attributable to changes in interest rates, 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 September 30, 2017.

No impairment charges were recorded for the three and nine months ended September 30, 2017 and 2016.

NOTE 3 — Loans

The composition of loans by class is summarized as follows:

	September 30, 2017			% of Total			December 31, 2016			% of Total
1-4 family residential	$	51,625			16	%	$	49,597			18	%
Commercial		125,581			38	%		106,064			38	%
Multifamily		93,246			29	%		83,410			30	%
Commercial real estate		22,500			7	%		22,198			8	%
Construction		4,480			1	%		5,610			2	%
Consumer		30,047			9	%		10,571			4	%
Total Loans		327,479			100	%		277,450			100	%

Deferred costs and unearned premiums, net		1,191						1,128
Allowance for loan losses		(4,084	)					(3,413	)
Net loans	$	324,586					$	275,165

The following tables present the activity in the allowance for loan losses by class for the three months ending September 30, 2017 and 2016:

	1-4 Family							Commercial
	Residential		Commercial			Multifamily		Real Estate			Construction			Consumer			Total
September 30, 2017
Allowance for loan losses:
Beginning balance	$	358	$	2,154		$	664	$	226		$	109		$	312		$	3,823
Provision for loan losses		25		71			13		14			3			149			275
Recoveries		-		-			-		-			-			-			-
Loans charged-off		-		(14	)		-		-			-			-			(14	)

Total ending allowance balance	$	383	$	2,211		$	677	$	240		$	112		$	461		$	4,084

September 30, 2016
Allowance for loan losses:
Beginning balance	$	319	$	1,735		$	552	$	218		$	164		$	112		$	3,100
Provision (credit) for loan losses		35		122			93		(52	)		(23	)		5			180
Recoveries		-		-			-		-			-			-			-
Loans charged-off		-		-			-		-			-			(7	)		(7	)

Total ending allowance balance	$	354	$	1,857		$	645	$	166		$	141		$	110		$	3,273

The following tables present the activity in the allowance for loan losses by class for the nine months ending September 30, 2017 and 2016:

	1-4 Family							Commercial
	Residential		Commercial			Multifamily		Real Estate			Construction			Consumer			Total
September 30, 2017
Allowance for loan losses:
Beginning balance	$	360	$	1,934		$	621	$	238		$	141		$	119		$	3,413
Provision (credit) for loan losses		23		291			56		2			(29	)		382			725
Recoveries		-		-			-		-			-			-			-
Loans charged-off		-		(14	)		-		-			-			(40	)		(54	)

Total ending allowance balance	$	383	$	2,211		$	677	$	240		$	112		$	461		$	4,084

September 30, 2016
Allowance for loan losses:
Beginning balance	$	213	$	1,536		$	533	$	230		$	134		$	153		$	2,799
Provision (credit) for loan losses		141		295			112		(64	)		7			(36	)		455
Recoveries		-		26			-		-			-			-			26
Loans charged-off		-		-			-		-			-			(7	)		(7	)

Total ending allowance balance	$	354	$	1,857		$	645	$	166		$	141		$	110		$	3,273

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 September 30, 2017 and December 31, 2016:

	1-4 Family						Commercial
	Residential		Commercial		Multifamily		Real Estate		Construction		Consumer		Total
September 30, 2017
Allowance for loan losses:
Ending allowance balance attributable to loans:
Individually evaluated for impairment	$	-	$	-	$	-	$	-	$	-	$	-	$	-
Collectively evaluated for impairment		383		2,211		677		240		112		461		4,084

Total ending allowance balance	$	383	$	2,211	$	677	$	240	$	112	$	461	$	4,084

	1-4 Family						Commercial
	Residential		Commercial		Multifamily		Real Estate		Construction		Consumer		Total
Loans:
Loans individually evaluated for impairment	$	-	$	-	$	-	$	-	$	-	$	-	$	-
Loans collectively evaluated for impairment		51,625		125,581		93,246		22,500		4,480		30,047		327,479

Total ending loans balance	$	51,625	$	125,581	$	93,246	$	22,500	$	4,480	$	30,047	$	327,479

Recorded investment is not adjusted for accrued interest and deferred costs due to immateriality.

	1-4 Family						Commercial
	Residential		Commercial		Multifamily		Real Estate		Construction		Consumer		Total
December 31, 2016
Allowance for loan losses:
Ending allowance balance attributable to loans:
Individually evaluated for impairment	$	-	$	-	$	-	$	-	$	-	$	-	$	-
Collectively evaluated for impairment		360		1,934		621		238		141		119		3,413

Total ending allowance balance	$	360	$	1,934	$	621	$	238	$	141	$	119	$	3,413

Loans:
Loans individually evaluated for impairment	$	-	$	-	$	-	$	-	$	-	$	-	$	-
Loans collectively evaluated for impairment		49,597		106,064		83,410		22,198		5,610		10,571		277,450

Total ending loans balance	$	49,597	$	106,064	$	83,410	$	22,198	$	5,610	$	10,571	$	277,450

Non-Performing Loans

Non-performing loans include loans 90 days past due and still accruing and non-accrual loans. At September 30, 2017 and December 31, 2016, 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 September 30, 2017 and December 31, 2016:

	30-59 Days Past Due		60-89 Days Past Due		Greater than 90 Days Past Due		Total Past Due		Loans Not Past Due		Total
September 30, 2017
1-4 family residential	$	-	$	-	$	-	$	-	$	51,625	$	51,625
Commercial		-		-		-		-		125,581		125,581
Multifamily		-		-		-		-		93,246		93,246
Commercial real estate		-		-		-		-		22,500		22,500
Construction		-		-		-		-		4,480		4,480
Consumer		-		-		-		-		30,047		30,047
Total	$	-	$	-	$	-	$	-	$	327,479	$	327,479

	30-59 Days Past Due		60-89 Days Past Due		Greater than 90 Days Past Due		Total Past Due		Loans Not Past Due		Total
December 31, 2016
1-4 family residential	$	203	$	-	$	-	$	203	$	49,394	$	49,597
Commercial		-		-		-		-		106,064		106,064
Multifamily		-		-		-		-		83,410		83,410
Commercial real estate		-		-		-		-		22,198		22,198
Construction		-		-		-		-		5,610		5,610
Consumer		-		-		-		-		10,571		10,571
Total	$	203	$	-	$	-	$	203	$	277,247	$	277,450

Credit Quality Indicators

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 deserve 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 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
September 30, 2017
1-4 family residential	$	51,625	$	-	$	-	$	-
Commercial		117,931		7,650		-		-
Multifamily		93,246		-		-		-
Commercial real estate		22,500		-		-		-
Construction		4,480		-		-		-
Consumer		30,047		-		-		-
Total	$	319,829	$	7,650	$	-	$	-

	Pass		Special Mention		Substandard		Doubtful
December 31, 2016
1-4 family residential	$	49,597	$	-	$	-	$	-
Commercial		105,777		287		-		-
Multifamily		83,410		-		-		-
Commercial real estate		22,198		-		-		-
Construction		5,610		-		-		-
Consumer		10,571		-		-		-
Total	$	277,163	$	287	$	-	$	-

The Company considers the performance of the loan portfolio and its impact on the allowance for loan losses. For 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 September 30, 2017 and December 31, 2016. Furthermore, there were no loan modifications during the three and nine months ended September 30, 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.

NOTE 4 — Share-Based Payment Plans

Stock Option Plan

The Company issues incentive and non-statutory stock options (”options”) to certain employees and directors pursuant to its equity incentive plans, which have been approved by the stockholders. Options to purchase common stock are recommended by the Compensation Committee of the Board of Directors, which are then approved by the full Board.

At September 30, 2017, there are options outstanding from two plans, the 2007 Stock Option Plan (“the 2007 Plan”) and the 2011 Stock Compensation Plan (“the 2011 Plan”). The 2007 Plan allowed for a maximum of 270,000 shares of common stock to be issued. The 2007 Plan expired in May of 2017. The 2011 Plan allows for 754,607 shares to be issued, of which 750,545 have been issued as of September 30, 2017.

Under the Stock Option 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 on five annual installments (20% per annum) and have ten year contractual terms. All options provide for accelerated vesting upon a change in control (as defined in the two plans). Stock options exercised result in the issuance of new shares.

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.

There were no stock options granted during the three and nine months ended September 30, 2017. The fair value of options granted during the three and nine months ended September 30, 2016 was determined using the following weighted average assumptions as of the grant date:

	Three months ended			Nine months ended
	September 30, 2016			September 30, 2016
Risk-Free Interest Rate		1.43	%		1.44	%
Expected Term		84 months			84 months
Expected Stock Price Volatility		24.1	%		24.1	%
Dividend Yield		0.0	%		0.0	%

Weighted Average Fair Value	$	3.61		$	3.61

The following table presents a summary of the activity related to options as of September 30, 2017:

						Weighted
				Weighted		Average
				Average		Remaining
				Exercise		Contractual
	Options			Price		Life (Years)
September 30, 2017
Outstanding at beginning of year		1,024,045		$	12.13

Granted		-			-
Exercised		(132,120	)		10.61
Forfeited		(11,000	)		11.36

Outstanding at period end		880,925		$	12.36		7.40
Vested or expected to vest		880,925		$	12.36		7.40
Exercisable at period end		352,480		$	12.16		5.91

The Company recognized compensation expense related to options of $133 and $97 for the three months ended September 30, 2017 and 2016, respectively. The Company recognized compensation expense related to options of $421 and $249 for the nine months ended September 30, 2017 and 2016, respectively. At September 30, 2017, unrecognized compensation cost related to non-vested options was approximately $1,749 and is expected to be recognized over a weighted average period of 3.36 years. The intrinsic value for outstanding options and options vested or expected to vest was $3,151, and was $1,296 for exercisable options, at September 30, 2017.

NOTE 5 — Earnings per 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. Our preferred shares are considered participating securities. The factors used in the earnings per share computation follow:

	Three months ended				Nine months ended
	September 30,				September 30,
	2017		2016		2017		2016
Basic
Net income available to common shareholders	$	1,141	$	740	$	2,983	$	2,131
Less: Earnings allocated to preferred stock		3		10		27		53
Net income allocated to common shareholders	$	1,138	$	730	$	2,956	$	2,078
Weighted average common shares outstanding		7,212,603		5,002,950		5,771,627		4,943,783
Basic earnings per common share	$	0.16	$	0.15	$	0.51	$	0.42

Diluted
Net income allocated to common shareholders for basic earnings per share	$	1,138	$	730	$	2,956	$	2,078
Weighted average shares outstanding for basic earnings per common share		7,212,603		5,002,950		5,771,627		4,943,783
Add: Dilutive effects of assumed exercises of stock options		56,913		35,281		38,183		35,281
Average shares and dilutive potential common shares		7,269,516		5,038,231		5,809,810		4,979,064
Diluted earnings per common share	$	0.16	$	0.14	$	0.51	$	0.42

Stock options not considered in computing diluted earnings per share because they were anti-dilutive		298,181		790,095		707,397		790,095

NOTE 6 — 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).

Assets and liabilities measured at fair value on a recurring basis are summarized below:

	Fair Value Measurements Using
	Quoted Prices In Active Markets For Identical Assets		Significant Other Observable Inputs		Significant Unobservable Inputs
	(Level 1)		(Level 2)		(Level 3)
September 30, 2017
Assets
Available-for-sale securities
Mortgage-backed securities - agency	$	-	$	20,533	$	-
CMO's - agency		-	$	87,283		-
Total	$	-	$	107,816	$	-

December 31, 2016
Assets
Available-for-sale securities
Mortgage-backed securities - agency	$	-	$	16,012	$	-
CMO's - agency		-		76,633		-
Total	$	-	$	92,645	$	-

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 September 30, 2017 and December 31, 2016.

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:

Cash and Due from Banks and Interest Earning Deposits: Carrying amounts approximate fair value, since these instruments are either payable on demand or have short-term maturities. Cash on hand and non-interest due from bank accounts are Level 1 and interest bearing deposits are Level 2.

Securities Available-for-Sale: The fair values for securities available for sale are determined by quoted market prices, 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 (Level 2 inputs).

Securities, Restricted: It is not practical to determine the fair value of FHLB and FRB stock due to restrictions placed on its transferability.

Loans: The estimated fair values of real estate mortgage loans and other loans receivable are based on discounted cash flow calculations that use available market benchmarks when establishing discount factors for the types of loans resulting in a Level 3 classification. Exceptions may be made for adjustable rate loans (with resets of one year or less), which would be discounted straight to their rate index plus or minus an appropriate spread. The method utilized to determine fair value does not represent exit price.

Accrued Interest Receivable and Payable: For these short-term instruments, the carrying amount is a reasonable estimate of the fair value resulting in a Level 2 or 3 classification.

Deposits: The estimated fair value of certificates of deposits are based on discounted cash flow calculations that use a replacement cost of funds approach to establishing discount rates for certificates of deposits maturities resulting in a Level 2 classification. Stated value is fair value for all other deposits resulting in a Level 1 classification.

Secured Borrowings: Borrowings represent secured borrowings and carrying value is a reasonable estimate of fair value resulting in a Level 2 classification.

Off-Balance-Sheet Liabilities: The fair value of off-balance-sheet commitments to extend credit is estimated using fees currently charged to enter into similar agreements. The fair value is immaterial as of September 30, 2017 and 2016.

The following tables presents the carrying amounts and fair values of the Company’s financial instruments:

			Fair Value Measurement at September 30, 2017, Using:
	Carrying
	Value		(Level 1)		(Level 2)		(Level 3)		Total
Financial Assets:
Cash and due from banks	$	771	$	771	$	-	$	-	$	771
Interest earning deposits		30,675		-		30,675		-		30,675
Securities available for sale		107,816		-		107,816		-		107,816
Securities, restricted		1,883		N/A		N/A		N/A		N/A
Loans, net of allowance		324,586		-		-		325,264		325,264
Accrued interest receivable		2,197		-		260		1,937		2,197

Financial Liabilities:
Certificates of deposit		27,422		-		27,373		-		27,373
Demand and other deposits		367,499		367,499		-		-		367,499
Secured borrowings		280		-		280		-		280
Accrued interest payable		7		-		7		-		7

			Fair Value Measurement at December 31, 2016, Using:
	Carrying
	Value		(Level 1)		(Level 2)		(Level 3)		Total
Financial Assets:
Cash and due from banks	$	437	$	437	$	-	$	-	$	437
Interest earning deposits		42,556		-		42,556		-		42,556
Securities available for sale		92,645		-		92,645		-		92,645
Securities, restricted		1,649		N/A		N/A		N/A		N/A
Loans, net of allowance		275,165		-		-		277,620		277,620
Accrued interest receivable		1,541		-		201		1,340		1,541

Financial Liabilities:
Certificates of deposit		23,955		-		23,930		-		23,930
Demand and other deposits		346,833		346,833		-		-		346,833
Secured borrowings		371		-		371		-		371
Accrued interest payable		3		-		3		-		3

NOTE 7 — Accumulated Other Comprehensive (Loss) Income

The following is changes in accumulated other comprehensive (loss) income by component, net of tax for the three and nine months ended September 30, 2017 and 2016:

	Three months ended						Nine months ended
	September 30,						September 30,
	2017			2016			2017			2016
Unrealized Losses on Available for Sale Securities
Beginning balance	$	(508	)	$	901		$	(884	)	$	(434	)
Other comprehensive income (loss) before reclassifications		4			(218	)		380			1,121
Amounts reclassified from accumulated other comprehensive income		-			-			-			(4	)
Net current period other comprehensive income (loss)		4			(218	)		380			1,117
Ending balance	$	(504	)	$	683		$	(504	)	$	683

The following represents the reclassifications out of accumulated other comprehensive (loss) income for the three and nine months ended September 30, 2017, and 2016:

										Affected Line in
										the
	Three months ended				Nine months ended					Consolidated
	September 30,				September 30,					Statements of
	2017		2016		2017		2016			Income
Realized gain on securities sales	$	-	$	-	$	-	$	6		Net gains on securities available for sale
Income tax expense		-		-		-		(2	)	Income tax expense
Total reclassifications, net of tax	$	-	$	-	$	-	$	4

Item 2.

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

General

Management’s discussion and analysis of financial condition and results of operations at September 30, 2017 and December 31, 2016 and for the three and nine months ended September 30, 2017 and 2016 is intended to assist in understanding the financial condition and results of operations of Esquire Financial Holdings, Inc. The information contained in this section should be read in conjunction with the unaudited financial statements and the notes thereto appearing in Part I, Item 1, of this quarterly report on Form 10-Q.

Cautionary Note Regarding Forward-Looking Statements

This quarterly report contains forward-looking statements, which can be identified by the use of words such as “may,” “might,” “should,” “could,” “predict,” “potential,” “believe,” “expect,” “attribute,” “continue,” “will,” “anticipate,” “seek,” “estimate,” “intend,” “plan,” “projection,” “goal,” “target,” “outlook,” “aim,” “would,” “annualized” and “outlook,” or the negative version of those words or other comparable words or phrases of a future or forward-looking nature. These forward-looking statements include, but are not limited to:

statements of our goals, intentions and expectations;

statements regarding our business plans, prospects, growth and operating strategies;

statements regarding the quality of our loan and investment portfolios; and

estimates of our risks and future costs and benefits.

These forward-looking statements are based on our current beliefs and expectations and are inherently subject to significant business, economic and competitive uncertainties and contingencies, many of which are beyond our control. In addition, these forward-looking statements are subject to assumptions with respect to future business strategies and decisions that are subject to change. We are under no duty to and do not take any obligation to update any forward-looking statements after the date of this quarterly report.

The following factors, among others, could cause actual results to differ materially from the anticipated results or other expectations expressed in the forward-looking statements:

our ability to manage our operations under the current economic conditions nationally and in our market area;

adverse changes in the financial industry, securities, credit and national local real estate markets (including real estate values);

risks related to a high concentration of loans secured by real estate located in our market area;

risks related to a high concentration of loans and deposits dependent upon the legal and “litigation” market;

the impact of any potential strategic transactions;

our ability to enter new markets successfully and capitalize on growth opportunities;

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, 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;

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 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 Wall Street Reform and Consumer Protection Act and the Jumpstart Our Business Startups Act (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;

the costs and effects of legal, compliance and regulatory actions, changes and developments, including the initiation and resolution of legal proceedings, regulatory or other governmental inquiries or investigations, and/or the results of regulatory examinations and reviews;

the ability of key third-party service providers to perform their obligations to us; and

other economic, competitive, governmental, regulatory and operational factors affecting our operations, pricing, products and services described elsewhere in this Quarterly Report on Form 10-Q.

The foregoing factors should not be construed as exhaustive and should be read in conjunction with other cautionary statements that are included in this Quarterly Report on Form 10-Q. If one or more events related to these or other risks or uncertainties materialize, or if our underlying assumptions prove to be incorrect, actual results may differ materially from what we anticipate. Accordingly, you should not place undue reliance on any such forward-looking statements. Any forward-looking statement speaks only as of the date on which it is made, and we do not undertake any obligation to publicly update or review any forward-looking statement, whether as a result of new information, future developments or otherwise. New risks and uncertainties arise from time to time, and it is not possible for us to predict those events or how they may affect us. In addition, we cannot assess the impact of each factor on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements.

Summary of Significant Accounting Policies

A summary of our accounting policies is described in Note 1 to the audited consolidated financial statements included in our registration statement on Form S-1. Critical accounting estimates are necessary in the application of certain accounting policies and procedures and are particularly susceptible to significant change. Critical accounting policies are defined as those involving significant judgments and assumptions by management that could have a material impact on the carrying value of certain assets or on income under different assumptions or conditions. Management believes that the most critical accounting policies, which involve the most complex or subjective decisions or assessments, are as follows:

Allowance for Loan Losses. 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 trouble 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.

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 off. The remainder of the loan portfolio is comprised of commercial and consumer loans, which also include commercial Attorney-Related loans and consumer Attorney-Related 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 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.

Although we are still evaluating the JOBS Act, we may take advantage of some of the reduced regulatory and reporting requirements that are available to us so long as we qualify as an emerging growth company, including, but not limited to, not being required to comply with the auditor attestation requirements of Section 404(b) of the Sarbanes-Oxley Act, reduced disclosure obligations regarding executive compensation, and exemptions from the requirements of holding non-binding advisory votes on executive compensation and golden parachute payments.

Overview

We are a bank holding company headquartered in Jericho, New York and registered under the Bank Holding Company Act of 1956, as amended. Through our wholly owned bank subsidiary, Esquire Bank, National Association (“Esquire Bank” or the “Bank”), we are a full service commercial bank dedicated to serving the financial needs of the 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).

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. A complete set of Risk factors are described in the Registration Statement on Form S-1 (File No. 333-218372) declared effective by the Securities and Exchange Commission on June 26, 2017.

Comparison of Financial Condition at September 30, 2017 and December 31, 2016

Assets. Our total assets were $480.8 million at September 30, 2017, an increase of $56.0 million, or 13.2%, from $424.8 million at December 31, 2016. The increase was primarily due to an increase in loans of $49.4 million, or 23.9% annualized, and an increase in securities of $15.2 million, or 16.4%, partially offset by a decrease in cash and cash equivalents of $11.5 million, or 26.9%.

Cash and Cash Equivalents. Cash and cash equivalents decreased $11.5 million, or 26.9%, to $31.4 million at September 30, 2017 from $43.0 million at December 31, 2016. The decrease in cash and cash equivalents resulted from increases in loans and securities, partially offset by cash received as a result of our IPO and increases in deposits.

Loan Portfolio Analysis. At September 30, 2017, net loans were $324.6 million, or 67.5% of total assets, compared to $275.2 million, or 64.8% of total assets, at December 31, 2016. Commercial loans increased $19.5 million, or 18.4%, to $125.6 million at September 30, 2017 from $106.1 million at December 31, 2016. Multifamily loans increased $9.8 million, or 11.8%, to $93.2 million at September 30, 2017 from $83.4 million at December 31, 2016. Consumer loans increased $19.5, or 184.2%, to $30.0 million at September 30, 2017 from $10.6 million at December 31, 2016. 1 – 4 family residential loans increased $2.0 million, or 4.1%, to $51.6 million at September 30, 2017 from $49.6 million at December 31, 2016. Construction loans decreased by $1.1 million, or 20.1%, to $4.5 million at September 30, 2017 from $5.6 million at December 31, 2016. Commercial real estate loans increased by $302,000, or 1.4%, to $22.5 million at September 30, 2017 from $22.2 million at December 31, 2016.

The following table sets forth the composition of our Attorney-Related loan portfolio by type of loan as of the dates indicated:

	September 30, 2017					December 31, 2016
	Amount		% of Total			Amount		% of Total
	(Dollars in thousands)
Attorney-Related Loans
Commercial Attorney-Related:
Working capital lines of credit	$	78,301		56.5	%	$	63,251		63.5	%
Case cost lines of credit		23,387		16.9			21,132		21.2
Term loans		12,567		9.1			9,675		9.7
Post-settlement commercial and other commercial attorney-related loans		20		0.0			894		0.9
Total Commercial Attorney-Related		114,275		82.5	%		94,952		95.3	%
Consumer Attorney-Related:
Post-settlement consumer loans		22,894		16.5	%		3,078		3.1	%
Structured settlement loans		1,443		1.0			1,632		1.6
Total Consumer Attorney-Related		24,337		17.5	%		4,710		4.7	%
Total Attorney-Related Loans	$	138,612		100.0	%	$	99,662		100.0	%

The majority of the growth in the portfolio from December 31, 2016 was in our Attorney-Related loans. At September 30, 2017, our Attorney-Related Loans, which include commercial and consumer lending to attorneys, law firms and plaintiffs/claimants, totaled $138.6 million, or 42.3% of our total loan portfolio, compared to $99.7 million at December 31, 2016. At September 30, 2017, 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, totaled $114.3 million, or 82.5% of our total attorney-related loan portfolio and 34.9% of our total loan portfolio, compared to $95.0 million Commercial Attorney-Related Loans at December 31, 2016. As of September 30, 2017, our Consumer Attorney-Related Loans, which consist of post-settlement consumer loans and structured settlement loans, totaled $24.3 million, or 17.5% of our total Attorney-Related Loan portfolio and 7.4% of our total loan portfolio, compared to $4.7 million Consumer Attorney-Related Loans at December 31, 2016.

Allowance for Loan Losses. At September 30, 2017 the allowance for loan losses was $4.1 million or 1.24% of total loans compared to $3.4 million or 1.23% of total loans as of December 31, 2016. Loans rated special mention increased to $7.7 million from $287,000 at December 31, 2016. The increase primarily relates to the downgrade of one commercial attorney related relationship totaling $6.8 million. The downgrade was a result of an anticipated temporary shortfall of the firm’s current cash flow position. The loans are current and remain well collateralized with a loan to net fee value of 16.8%. Overall, asset quality continues to be strong. At September 30, 2017 and December 31, 2016, the Company had no impaired loans, troubled-debt restructurings, or loans rated substandard or doubtful.

Securities. Securities available for sale increased $15.2 million, or 16.4%, to $107.8 million at September 30, 2017 from $92.6 million at December 31, 2016. The increase in securities was due to prudent deployment of funds into interest earning assets in accordance with our liquidity policy and asset/liability management program.

Funding. Total deposits increased $24.1 million, or 8.7% annualized, to $394.9 million at September 30, 2017 from $370.8 million at December 31, 2016. 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 $367.5 million at September 30, 2017, or 93.1% of total deposits at that date, compared to $346.8 million at December 31, 2016.

At September 30, 2017, we had the ability to borrow a total of $83.0 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 $20.2 million. At September 30, 2017, we also had a $3.5 million and $4.0 million line of credit with Atlantic Community Bankers’ Bank and Zions Bank, respectively. No amounts were outstanding on any of the aforementioned lines of credit at September 30, 2017 or December 31, 2016.

Total stockholders’ equity increased $31.1 million, or 59.5%, to $83.3 million at September 30, 2017, from $52.2 million at December 31, 2016. The increase was primarily due to our successful IPO. The Company sold 2,154,580 newly issued shares of common stock at $14.00 per share. The offering resulted in net proceeds to the Company of $26.3 million after deducting underwriting discount and offering related expenses.

Average Balance Sheets

The following tables present average balance sheet information, interest income, interest expense and the corresponding average yields earned and rates paid for periods indicated. The average balances are daily averages and, for loans, include both performing and nonperforming balances. Interest income on loans includes the effects of discount accretion and net deferred loan origination costs accounted for as yield adjustments. No tax-equivalent yield adjustments were made, as the effect thereof was not material.

	For the Three Months Ended September 30,
	2017							2016
	(Dollars in thousands)
INTEREST EARNING ASSETS	Average Balance		Interest		Average Yield/Rate			Average Balance		Interest		Average Yield/Rate
Loans	$	315,005	$	4,630		5.83	%	$	252,563	$	3,539		5.57	%
Securities, includes restricted stock		108,168		631		2.31	%		89,422		498		2.22	%
Interest earning cash		34,471		93		1.07	%		35,001		39		0.44	%
Total interest earning assets		457,644		5,354		4.64	%		376,986		4,076		4.30	%

NON-INTEREST EARNING ASSETS
Cash and due from banks		537							599
Other assets		7,711							8,788

TOTAL AVERAGE ASSETS	$	465,892						$	386,373

INTEREST-BEARING LIABILITIES

Savings, NOW, Money Markets	$	212,535		101		0.19	%	$	209,182		111		0.21	%
Time deposits		27,430		22		0.32	%		19,412		23		0.47	%
Total deposits		239,965		123		0.20	%		228,594		134		0.23	%
Secured borrowings		284		5		6.98	%		377		6		6.33	%
Total interest-bearing liabilities		240,249		128		0.21	%		228,971		140		0.24	%

NON-INTEREST BEARING LIABILITIES
Demand deposits		142,086							103,920
Other liabilities		2,192							1,026
Total non-interest bearing liabilities		144,278							104,946
Stockholders’ equity		81,365							52,456

TOTAL AVERAGE LIABILITIES AND EQUITY	$	465,892						$	386,373
Net interest spread			$	5,226		4.43	%			$	3,936		4.06	%

Net interest margin						4.53	%						4.15	%

	For the Nine Months Ended September 30,
	2017							2016
	(Dollars in thousands)
INTEREST EARNING ASSETS	Average Balance		Interest		Average Yield/Rate			Average Balance		Interest		Average Yield/Rate
Loans	$	294,725	$	12,519		5.68	%	$	238,836	$	10,210		5.71	%
Securities, includes restricted stock		103,792		1,809		2.33	%		84,806		1,465		2.31	%
Interest earning cash		33,840		214		0.85	%		33,615		104		0.41	%
Total interest earning assets		432,357		14,542		4.50	%		357,257		11,779		4.40	%

NON-INTEREST EARNING ASSETS
Cash and due from banks		544							551
Other assets		7,646							9,098

TOTAL AVERAGE ASSETS	$	440,547						$	366,906

INTEREST-BEARING LIABILITIES

Savings, NOW, Money Markets	$	217,717		316		0.19	%	$	199,436		307		0.21	%
Time deposits		23,289		70		0.40	%		14,706		48		0.44	%
Total deposits		241,006		386		0.21	%		214,142		355		0.22	%
Secured borrowings		304		16		7.04	%		379		19		6.70	%
Total interest-bearing liabilities		241,310		402		0.22	%		214,521		374		0.23	%

NON-INTEREST BEARING LIABILITIES
Demand deposits		134,533							99,187
Other liabilities		1,730							1,007
Total non-interest bearing liabilities		136,263							100,194
Stockholders’ equity		62,974							52,191

TOTAL AVERAGE LIABILITIES AND EQUITY	$	440,547						$	366,906
Net interest spread			$	14,140		4.27	%			$	11,405		4.17	%

Net interest margin						4.37	%						4.26	%

Rate/Volume Analysis

The following table presents the dollar amount of changes in interest income and interest expense for major components of interest earning assets and interest bearing liabilities for the periods indicated. The table distinguishes between: (1) changes attributable to volume (changes in volume multiplied by the prior period’s rate); (2) changes attributable to rate (change in rate multiplied by the prior year’s volume); and (3) total increase (decrease) (the sum of the previous columns). Changes attributable to both volume and rate are allocated ratably between the volume and rate categories.

	For the Three Months Ended September 30, 2017 vs. 2016									For the Nine Months Ended September 30, 2017 vs. 2016
	Increase (Decrease) due to						Total Increase			Increase (Decrease) due to						Total Increase
	Volume			Rate			(Decrease)			Volume			Rate			(Decrease)
	(Dollars in thousands)
Interest earned on:
Loans	$	920		$	171		$	1,091		$	2,365		$	(56	)	$	2,309
Securities, includes restricted stock		110			23			133			329			15			344
Interest earning cash		(1	)		55			54			1			109			110
Total interest income		1,029			249			1,278			2,695			68			2,763

Interest paid on:
Savings, NOW, Money Markets		2			(12	)		(10	)		27			(18	)		9
Time deposits		8			(9	)		(1	)		26			(4	)		22
Total deposits		10			(21	)		(11	)		53			(22	)		31
Secured borrowings		(2	)		1			(1	)		(4	)		1			(3	)
Total interest expense		8			(20	)		(12	)		49			(21	)		28
Change in net interest income	$	1,021		$	269		$	1,290		$	2,646		$	89		$	2,735

Comparison of Operating Results for the Three Months Ended September 30, 2017 and 2016

General. Net income increased $401,000, or 54.2%, to $1.1 million for the three months ended September 30, 2017 from $740,000 for the three months ended September 30, 2016. The increase resulted from a $1.3 million increase in net interest income and a $288,000 increase in non-interest income, which were partially offset by a $805,000 increase in non-interest expense.

Interest Income. Interest income increased $1.3 million, or 31.4%, to $5.4 million for the three months ended September 30, 2017 from $4.1 million for the three months ended September 30, 2016. This was primarily attributable to an increase in loan interest income, which increased $1.1 million, or 30.8%, to $4.6 million for the three months ended September 30, 2017 from $3.5 million for the three months ended September 30, 2016.

The increase in interest income on loans was due to an increase in average loans during the quarter of $62.4 million or 24.7% as well as a 26 basis point increase in the average rate of loans. Securities interest income also increased due to an increase in the average balance of securities during the quarter of $18.7 million or 21.0% and a 9 basis point increase in the average rate of securities when compared to the third quarter of 2016.

Interest Expense. Interest expense decreased $12,000, or 8.6%, to $128,000 for the three months ended September 30, 2017 from $140,000 for the three months ended September 30, 2016. The average rate we paid on interest bearing deposits decreased to 0.20% for the three months ended September 30, 2017 compared to 0.23% for the three months ended September 30, 2016.

Net Interest Income. Net interest income increased $1.3 million, or 32.8%, to $5.2 million for the three months ended September 30, 2017 from $3.9 million for the three months ended September 30, 2016. Our net interest rate spread increased 37 basis points to 4.43% for the three months ended September 30, 2017 from 4.06% for the three months ended September 30, 2016, while our net interest margin increased 38 basis points to 4.53% for the three months ended September 30, 2017 from 4.15% for the three months ended September 30, 2016. The increase in net interest margin was due to a 34 basis point increase in the average yield earned on interest earning assets, primarily driven by an increase in loan yields due to growth in our higher yielding consumer post-settlement and commercial loan categories.

Provision for Loan Losses. Our provision for loan losses was $275,000 for the three months ended September 30, 2017 compared to $180,000 for the three months ended September 30, 2016. The provisions recorded resulted in an allowance for loan losses of $4.1 million, or 1.24% of total loans at September 30, 2017, compared to $3.3 million, or 1.22% of total loans at September 30, 2016. The higher provision is reflective of loan growth experienced in the Company’s higher yielding commercial and consumer loan categories. As of September 30, 2017 the Company had no delinquent loans or non-performing assets.

Noninterest Income. Noninterest income information is as follows:

	For the Three Months Ended September 30,				Change
	2017		2016		Amount		Percent
	(Dollars in thousands)
Noninterest income
Customer related fees and service charges	$	548	$	283	$	265		93.6	%
Merchant processing income		797		774		23		3.0
Gains of sales of securities		-		-		NA		NA
Total noninterest income	$	1,345	$	1,057	$	288		27.2	%

Merchant processing income increased primarily due to increases in the number of ISOs and average monthly volumes. Customer related fees and charges have also increased primarily due to increases in sweep fee income on off-balance sheet funds as a result of rising rates.

Noninterest Expense. Noninterest expense information is as follows:

	For the Three Months Ended September 30,				Change
	2017		2016		Amount			Percent
	(Dollars in thousands)
Noninterest expense
Employee compensation and benefits	$	2,466	$	2,114	$	352			16.7	%
Occupancy and equipment		393		359		34			9.5
Professional and consulting services		548		393		155			39.4
FDIC assessment		42		37		5			13.5
Advertising and marketing		134		90		44			48.9
Travel and business relations		92		95		(3	)		(3.2	)
OCC assessments		31		27		4			14.8
Data processing		466		302		164			54.3
Other operating expenses		253		203		50			24.6
Total noninterest expense	$	4,425	$	3,620	$	805			22.2	%

Employee compensation and benefits increased due to the Company’s continued growth and related hiring efforts as well as increases in current salaries. The increase in professional and consulting services was due primarily to additional costs related to being 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 income tax expense of $730,000 for the three months ended September 30, 2017, reflecting an effective tax rate of 39.0%, compared to $453,000, or 38.0%, for the three months ended September 30, 2016.

Comparison of Operating Results for the Nine Months Ended September 30, 2017 and 2016

General. Net income increased $852,000, or 40.0%, to $3.0 million for the nine months ended September 30, 2017 from $2.1 million for the nine months ended September 30, 2016. The increase resulted from a $2.7 million increase in net interest income and a $822,000 increase in non-interest income, which were partially offset by a $2.1 million increase in non-interest expense.

Interest Income. Interest income increased $2.8 million, or 23.5%, to $14.5 million for the nine months ended September 30, 2017 from $11.8 million for the nine months ended September 30, 2016. This was primarily attributable to an increase in loans interest income, which increased $2.3 million, or 22.6%, to $12.5 million for the nine months ended September 30, 2017 from $10.2 million for the nine months ended September 30, 2016.

The increase in interest income on loans was due to an increase in average loans during first nine months of $55.9 million or 23.4%. Securities interest income also increased due to an increase in the average balance of securities during the nine months of $19.0 million or 22.4% when compared to the first nine months of 2016.

Interest Expense. Interest expense increased $28,000, or 7.5%, to $402,000 for the nine months ended September 30, 2017 from $374,000 for the nine months ended September 30, 2016. The average rate we paid on interest bearing deposits remained stable at 0.21% for the nine months ended September 30, 2017 compared to 0.22% for the nine months ended September 30, 2016.

Net Interest Income. Net interest income increased $2.7 million, or 24.0%, to $14.1 million for the nine months ended September 30, 2017 from $11.4 million for the nine months ended September 30, 2016. Our net interest rate spread increased 10 basis points to 4.27% for the nine months ended September 30, 2017 from 4.17% for the nine months ended September 30, 2016. Our net interest margin increased 11 basis points to 4.37% for the nine months ended September 30, 2017 from 4.26% for the nine months ended September 30, 2016. The increase in net interest margin was due to a 10 basis point increase in the average yield earned on interest earning assets, primarily driven by an increase in the average balance of loans.

Provision for Loan Losses. Our provision for loan losses was $725,000 for the nine months ended September 30, 2017 compared to $455,000 for the nine months ended September 30, 2016. The higher provision is reflective of loan growth experienced in the Company’s higher yielding commercial and consumer loan categories. As of September 30, 2017 the Company had no delinquent loans or non-performing assets. Charge-offs totaled $54,000 for the nine months ended September 30, 2017.

Noninterest Income. Noninterest income information is as follows:

	For the Nine Months Ended September 30,				Change
	2017		2016		Amount			Percent
	(Dollars in thousands)
Noninterest income
Customer related fees and service charges	$	1,442	$	761	$	681			89.5	%
Merchant processing income		2,467		2,320		147			6.3
Gains of sales of securities		-		6		(6	)		(100.0	)
Total noninterest income	$	3,909	$	3,087	$	822			26.6	%

Noninterest Expense. Noninterest expense information is as follows:

	For the Nine Months Ended September 30,				Change
	2017		2016		Amount		Percent
	(Dollars in thousands)
Noninterest expense
Employee compensation and benefits	$	7,180	$	6,061	$	1,119		18.5	%
Occupancy and equipment		1,155		912		243		26.6
Professional and consulting services		1,453		1,305		148		11.3
FDIC assessment		126		118		8		6.8
Advertising and marketing		340		333		7		2.1
Travel and business relations		320		266		54		20.3
OCC assessments		94		81		13		16.0
Data processing		1,245		981		264		26.9
Other operating expenses		705		506		199		39.3
Total noninterest expense	$	12,618	$	10,563	$	2,055		19.5	%

Employee compensation and benefits increased due to the Company’s continued growth and related hiring efforts as well as increases in current salaries. The increase in occupancy and equipment costs was due to the consolidation of administrative offices, executive offices, and employees into the Company’s new corporate headquarters. Other operating expenses increased primarily due to hiring related costs and increases in dues and subscriptions. The increase in data processing costs was due to investments in technology to support our future growth initiatives.

Income Tax Expense. We recorded income tax expense of $1.7 million for the nine months ended September 30, 2017, reflecting an effective tax rate of 36.6%, compared to $1.3 million, or 38.7%, for the nine months ended September 30, 2016. The decline in the effective tax rate was a result of tax benefits realized with respect to the exercise of stock options by certain employees and directors during the second quarter of 2017.

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 a twelve-month period. The tables below demonstrate that we are asset-sensitive in a rising interest rate environment.

		At September 30, 2017
Changes in Interest Rates (Basis Points)		Estimated 12- Months Net Interest Income		Change
		(Dollars in thousands)
	400	$	27,539		5,126
	300		26,112		3,699
	200		24,767		2,354
	100		23,555		1,142
	0		22,413		-
	-100		20,317		(2,096	)
	-200		19,025		(3,388	)

Economic Value of Equity Simulation. We also analyze our sensitivity to changes in interest rates through an economic value of equity (“EVE”) model. EVE represents the present value of the expected cash flows from our assets less the present value of the expected cash flows arising from our liabilities adjusted for the value of off-balance sheet contracts. EVE attempts to quantify our economic value using a discounted cash flow methodology. We estimate what our EVE would be as of a specific date. We then calculate what EVE would be as of the same date throughout a series of interest rate scenarios representing immediate and permanent, parallel shifts in the yield curve. We currently calculate EVE under the assumptions that interest rates increase 100, 200, 300 and 400 basis points from current market rates, and under the assumption that interest rates decrease 100 and 200 basis points from current market rates.

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 at September 30, 2017.

		At September 30, 2017
Changes in Interest Rates (Basis Points)		Economic Value of Equity		Change
		(Dollars in thousands)
	400	$	96,647		7,797
	300		94,967		6,117
	200		93,177		4,327
	100		91,532		2,682
	0		88,850		-
	-100		80,844		(8,006	)
	-200		68,745		(20,105	)

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 September 30, 2017, cash and cash equivalents totaled $31.4 million. Securities classified as available-for-sale, which provide additional sources of liquidity, totaled $107.8 million at September 30, 2017.

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.

At September 30, 2017, we had $6.6 million in loan commitments outstanding, which include $600,000 in standby letters of credit at September 30, 2017.

Certificates of deposit due within one year of September 30, 2017 totaled $24.7 million, or 6.2% of total deposits. At September 30, 2017, total certificates of deposit were $27.4 million or 6.9% of total deposits.

Our primary investing activities are the origination, and to a lesser extent purchase, of loans and the purchase of securities. During the nine months ended September 30, 2017, we originated or purchased $110.0 million of loans and $31.4 million of securities. During the nine months ended September 30, 2016, we originated or purchased $70.0 million of loans and purchased $23.1 million of securities.

Financing activities consist primarily of activity in deposit accounts. We experienced an increase in total deposits of $24.1 million from December 31, 2016. We generate deposits from law firms, other local businesses, and individuals through client referrals and other relationships and through our retail presence. We believe we have a very stable core deposit base due primarily to the litigation market strategy as we strongly encourage and are generally successful in having law firm borrowers maintain their entire banking relationship with us. The high level of transaction accounts is expected to be maintained. We have established deposit concentration thresholds to avoid the possibility of dependence on any single depositor base for funds. Since inception, we have not had the need to borrow significantly from the Federal Home Loan Bank of New York. We have been able to use the cash generated from the increases in deposits to fund loan growth in recent periods.

Esquire Bank, National Association is subject to various regulatory capital requirements administered by Office of the Comptroller of the Currency (the “OCC”), and the Federal Deposit Insurance Corporation. At September 30, 2017, Esquire Bank exceeded all applicable regulatory capital requirements, and was considered “well capitalized” under regulatory guidelines.

The net proceeds from the stock offering has significantly increased our liquidity and capital resources. Over time, the initial level of liquidity will be reduced as net proceeds from the stock offering are used to support the growth in Esquire Bank’s loan portfolio, including the possibility of making larger loans due to the increased lending limits, to finance potential strategic acquisitions to the extent such opportunities arise and for other general corporate purposes, which could include other growth initiatives. Our financial condition and results of operations will be enhanced by the net proceeds from the stock offering, resulting in increased net interest earning assets and net interest income. However, due to the increase in equity resulting from the net proceeds raised in the stock offering, as well as other factors associated with the stock offering, our return on equity has been adversely affected following the stock offering.

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 September 30, 2017, Esquire Bank was classified as “well capitalized.”

On November 2, 2012, the OCC notified Esquire Bank that it had established minimum capital ratios for Esquire Bank requiring Esquire Bank to maintain, commencing December 1, 2012, a Tier 1 leverage capital ratio of 9.0%, a Tier 1 risk-based capital ratio of 11.0% and a total risk-based capital to risk-weighted assets ratio of 13.0%.

The following table presents our capital ratios as of the indicated dates for Esquire Bank.

	“Well Capitalized”			For Capital Adequacy Purposes Minimum Capital with Conservation Buffer			Actual At September 30, 2017
Tier 1 Leverage Ratio
Bank		5.00	%		4.00	%		13.64	%

Tier 1 Risk-based Capital Ratio
Bank		8.00	%		7.25	%		18.22	%

Total Risk-based Capital Ratio
Bank		10.00	%		9.25	%		18.22	%

Common Equity Tier 1 Capital Ratio
Bank		6.50	%		5.75	%		19.41	%

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.

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 September 30, 2017.

Contractual Maturities as of September 30, 2017
	Due in One Year or Less		Due After One Year Through Three Years		Due After Three Years Through Five Years		Due After Five Years		Total
	(Dollars in thousands)
Operating lease obligations	$	502	$	838	$	843	$	1,902	$	4,085
Time deposits		24,660		2,762		-		-		27,422
Total	$	25,162	$	3,600	$	843	$	1,902	$	31,507

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 balance sheets. 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.

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

The information required by this item is included in Item 2 of this quarterly report under “Management of Market Risk.”

Item 4.

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 the 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 September 30, 2017. Based on that evaluation, the Company’s management, including the Principal Executive Officer and the Principal Financial Officer, concluded that the Registrant’s disclosure controls and procedures were effective.

During the quarter ended September 30, 2017, there have been no changes in the Company’s internal controls over financial reporting that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART II – OTHER INFORMATION

Item 1.

Legal Proceedings

We are not involved in any pending legal proceedings as a defendant other than routine legal proceedings occurring in the ordinary course of business. At September 30, 2017, we were not involved in any legal proceedings the outcome of which would be material to our financial condition or results of operations.

Item 1A.

Risk Factors

A smaller reporting company is not required to provide information relating to this item.

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

Not applicable

Item 3.

Defaults Upon Senior Securities

None.

Item 4.

Mine Safety Disclosures

Not applicable.

Item 5.

Other Information

None.

Item 6.

Exhibits

Exhibit
Number		Description

3.1		Articles of Incorporation of Esquire Financial Holdings, Inc. (1)

3.2		Articles Supplementary of Series B Non-Voting Preferred Stock of Esquire Financial Holdings, Inc. (2)

3.3		Amended and Restated Bylaws of Esquire Financial Holdings, Inc. (3)

31.1		Certification of Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

31.2		Certification of Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

32		Written Statement of Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

101.0		The following materials for the quarter ended September 30, 2017, formatted in XBRL (Extensible Business Reporting Language): (i) Balance Sheets, (ii) Statements of Income, (iii) Statements of Comprehensive Income, (iv) Statements of Cash Flows, and (v) Notes to Financial Statements.

(1)

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.

(2)

Incorporated by reference to Exhibit 3.2 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.

(3)

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.

SIGNATURES

Pursuant to the requirements 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.

	ESQUIRE FINANCIAL HOLDINGS, INC.

Date: November 14, 2017	/s/ Andrew C. Sagliocca
	Andrew C. Sagliocca
	President and Chief Executive Officer

Date: November 14, 2017	/s/ Eric S. Bader
	Eric S. Bader
	Executive Vice President, Chief Financial Officer and Treasurer