Esquire Financial Holdings, Inc. - Quarter Report: 2021 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, 2021


☐	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)

Securities registered pursuant to Section 12(b) of the Act:

Title of each class

Trading

Symbol(s)

Name of each exchange on which registered

Common Stock, $0.01 par value

ESQ

The Nasdaq Stock Market LLC

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

YES ⌧ NO ◻

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

YES ⌧ NO ◻

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


Large accelerated filer ◻		Accelerated filer ◻
Non-accelerated filer ☒		Smaller reporting company ☒
		Emerging growth company ☒

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

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

YES ☐ NO ⌧

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: As of November 1, 2021, there were 7,847,494 outstanding shares of the issuer’s common stock.

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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	8

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	25

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	40

Item 4.	Controls and Procedures	40

PART II. OTHER INFORMATION		42

Item 1.	Legal Proceedings	42

Item 1A.	Risk Factors	42

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	43

Item 3.	Defaults Upon Senior Securities	43

Item 4.	Mine Safety Disclosures	43

Item 5.	Other Information	43

Item 6.	Exhibits	44

	SIGNATURES	45

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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,
	2021		2020
ASSETS
Cash and cash equivalents	$	138,235	$	65,185
Securities purchased under agreements to resell, at cost		50,899		51,726
Securities available-for-sale, at fair value		141,703		117,655
Securities, restricted, at cost		2,680		2,694

Loans held for investment		744,092		672,421
Less: allowance for loan losses		(8,665)		(11,402)
Loans, net of allowance		735,427		661,019
Premises and equipment, net		3,443		3,017
Accrued interest receivable		4,462		4,529
Other assets		46,421		30,889
Total assets	$	1,123,270	$	936,714

LIABILITIES AND STOCKHOLDERS’ EQUITY
Deposits:
Demand	$	416,849	$	351,692
Savings, NOW and money market		549,069		441,160
Time		11,125		11,202
Total deposits		977,043		804,054

Accrued expenses and other liabilities		9,046		6,584
Total liabilities	$	986,089	$	810,638

Commitments and contingencies		—		—

Stockholders’ equity:
Preferred stock, par value $0.01; authorized 2,000,000 shares; none issued		—		—
Common stock, par value $0.01; authorized 15,000,000 shares; 7,881,800 and 7,827,788 shares issued, respectively; and 7,847,494 and 7,793,482 shares outstanding, respectively		79		78
Additional paid-in capital		93,106		91,622
Retained earnings		44,730		33,535
Accumulated other comprehensive (loss) income		(167)		1,408
Treasury stock at cost, 34,306 and 34,306 shares, respectively		(567)		(567)
Total stockholders’ equity		137,181		126,076
Total liabilities and stockholders’ equity	$	1,123,270	$	936,714

See accompanying condensed notes to interim condensed consolidated financial statements.

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ESQUIRE FINANCIAL HOLDINGS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(Dollars in thousands, except per share data)

(Unaudited)


	For the Three Months				For the Nine Months
	Ended September 30,				Ended September 30,
	2021		2020		2021		2020
Interest income:
Loans	$	10,709	$	8,936	$	30,408	$	26,055
Securities		583		494		1,588		2,132
Securities purchased under agreements to resell		150		—		470		—
Interest earning deposits and other		51		66		134		348
Total interest income		11,493		9,496		32,600		28,535

Interest expense:
Savings, NOW and money market deposits		189		203		536		697
Time deposits		19		85		59		277
Borrowings		1		1		2		4
Total interest expense		209		289		597		978

Net interest income		11,284		9,207		32,003		27,557
Provision for loan losses		3,750		900		6,400		4,700
Net interest income after provision for loan losses		7,534		8,307		25,603		22,857

Noninterest income:
Payment processing fees		5,227		3,721		15,948		9,527
Customer related fees and service charges		81		163		292		432
Unrealized loss on loans held for sale		(384)		—		(384)		—
Total noninterest income		4,924		3,884		15,856		9,959

Noninterest expense:
Employee compensation and benefits		5,523		4,372		16,189		12,448
Occupancy and equipment		696		615		2,104		1,735
Professional and consulting services		773		845		2,352		2,382
FDIC and regulatory assessments		111		95		320		280
Advertising and marketing		289		171		936		289
Travel and business relations		105		33		212		173
Data processing		977		772		2,734		2,272
Other operating expenses		533		382		1,466		1,351
Total noninterest expense		9,007		7,285		26,313		20,930

Net income before income taxes		3,451		4,906		15,146		11,886
Income tax expense		932		1,300		3,951		3,150

Net income	$	2,519	$	3,606	$	11,195	$	8,736

Earnings per share
Basic	$	0.34	$	0.49	$	1.50	$	1.18
Diluted	$	0.32	$	0.48	$	1.42	$	1.14

See accompanying condensed notes to interim condensed consolidated financial statements

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ESQUIRE FINANCIAL HOLDINGS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Dollars in thousands)

(Unaudited)


	For the Three Months				For the Nine Months
	Ended September 30,				Ended September 30,
	2021		2020		2021		2020
Net income	$	2,519	$	3,606	$	11,195	$	8,736
Other comprehensive (loss) income:
Unrealized (losses) gains arising during the period on securities available-for-sale		(686)		(343)		(2,203)		1,772
Reclassification adjustment for net gains (losses) included in net income		—		—		—		—
Tax effect		196		97		628		(505)
Total other comprehensive (loss) income		(490)		(246)		(1,575)		1,267
Total comprehensive income	$	2,029	$	3,360	$	9,620	$	10,003

See accompanying condensed notes to interim condensed consolidated financial statements.

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ESQUIRE FINANCIAL HOLDINGS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

(Dollars in thousands)

(Unaudited)


												Accumulated
								Additional				other				Total
	Preferred	Common		Preferred		Common		paid-in		Retained		comprehensive		Treasury		stockholders'
	shares	shares		stock		stock		capital		earnings		income (loss)		stock		equity
Balance at July 1, 2021	—	7,830,704	$	—	$	79	$	92,624	$	42,211	$	323	$	(567)	$	134,670
Net income	—	—		—		—		—		2,519		—		—		2,519
Other comprehensive loss	—	—		—		—		—		—		(490)		—		(490)
Exercise of stock options, net of repurchases (18,641 shares)	—	16,790		—		—				—		—		—		—
Stock compensation expense	—	—		—		—		482		—		—		—		482
Balance at September 30, 2021	—	7,847,494	$	—	$	79	$	93,106	$	44,730	$	(167)	$	(567)	$	137,181

												Accumulated
								Additional				other				Total
	Preferred	Common		Preferred		Common		paid-in		Retained		comprehensive		Treasury		stockholders'
	shares	shares		stock		stock		capital		earnings		income		stock		equity
Balance at July 1, 2020	—	7,662,840	$	—	$	77	$	90,747	$	26,047	$	1,899	$	(567)	$	118,203
Net income	—	—		—		—		—		3,606		—		—		3,606
Other comprehensive loss	—	—		—		—		—		—		(246)		—		(246)
Stock compensation expense	—	—		—		—		383		—		—		—		383
Balance at September 30, 2020	—	7,662,840	$	—	$	77	$	91,130	$	29,653	$	1,653	$	(567)	$	121,946

												Accumulated
								Additional				other				Total
	Preferred	Common		Preferred		Common		paid-in		Retained		comprehensive		Treasury		stockholders'
	shares	shares		stock		stock		capital		earnings		income (loss)		stock		equity
Balance at January 1, 2021	—	7,793,482	$	—	$	78	$	91,622	$	33,535	$	1,408	$	(567)	$	126,076
Net income	—	—		—		—		—		11,195		—		—		11,195
Other comprehensive loss	—	—		—		—		—		—		(1,575)		—		(1,575)
Exercise of stock options, net of repurchases (59,109 shares)	—	54,012		—		1		20		—		—		—		21
Stock compensation expense	—	—		—		—		1,464		—		—		—		1,464
Balance at September 30, 2021	—	7,847,494	$	—	$	79	$	93,106	$	44,730	$	(167)	$	(567)	$	137,181

												Accumulated
								Additional				other				Total
	Preferred	Common		Preferred		Common		paid-in		Retained		comprehensive		Treasury		stockholders'
	shares	shares		stock		stock		capital		earnings		income		stock		equity
Balance at January 1, 2020	—	7,652,170	$	—	$	77	$	89,682	$	20,917	$	386	$	—	$	111,062
Net income	—	—		—		—		—		8,736		—		—		8,736
Other comprehensive income	—	—		—		—		—		—		1,267		—		1,267
Exercise of stock options, net of repurchases (20,224 shares)	—	44,976		—		—		290		—		—		—		290
Stock compensation expense	—	—		—		—		1,158		—		—		—		1,158
Purchase of common stock	—	(34,306)		—		—		—		—		—		(567)		(567)
Balance at September 30, 2020	—	7,662,840	$	—	$	77	$	91,130	$	29,653	$	1,653	$	(567)	$	121,946

See accompanying condensed notes to interim condensed consolidated financial statements.

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ESQUIRE FINANCIAL HOLDINGS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Dollars in thousands)

(Unaudited)


	For the Nine Months Ended September 30,
	2021		2020
Cash flows from operating activities:
Net income	$	11,195	$	8,736
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses		6,400		4,700
Unrealized loss on loans held for sale		384		—
Depreciation		516		424
Stock compensation expense		1,464		1,158
Net amortization (accretion):
Securities		613		742
Loans		(1,034)		(279)
Right of use asset		415		343
Software		749		420
Changes in other assets and liabilities:
Accrued interest receivable		67		(1,097)
Other assets		(543)		(1,428)
Operating lease liability		(405)		(352)
Accrued expenses and other liabilities		2,868		3,510
Net cash provided by operating activities		22,689		16,877

Cash flows from investing activities:
Net change in loans		(94,358)		(71,266)
Net change in securities purchased under agreements to resell		827		—
Purchases of securities available-for-sale		(70,478)		(6,200)
Principal repayments on securities available-for-sale		43,614		46,565
Redemption (purchase) of securities, restricted		14		(29)
Purchases of premises and equipment		(942)		(446)
Development of capitalized software		(1,325)		(1,325)
Net cash used in investing activities		(122,648)		(32,701)

Cash flows from financing activities:
Net increase in deposits		172,989		64,890
Decrease in borrowings		(1)		(2)
Exercise of stock options		21		290
Purchase of common stock		—		(567)
Net cash provided by financing activities		173,009		64,611

Increase in cash and cash equivalents		73,050		48,787

Cash and cash equivalents at beginning of the period		65,185		61,806

Cash and cash equivalents at end of the period	$	138,235	$	110,593

Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest	$	597	$	990
Taxes		5,854		4,330
Noncash transactions:
Transfer from loans held for investment to held for sale		14,584		—
Right of use asset obtained in exchange for lease liability		—		624
Securities purchased but not yet settled		—		3,337

See accompanying condensed notes to interim condensed consolidated financial statements.

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ESQUIRE FINANCIAL HOLDINGS, INC.

NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 1 — Basis of Presentation and Summary of Significant Accounting Policies

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., 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, 2020 and 2019. Operating results for the three and nine months ended September 30, 2021 are not necessarily indicative of the results that may be expected for the year ending December 31, 2021 or any other period. Certain balances in the prior year financial statements were reclassified to conform to current presentation. The reclassifications had no effect on prior year net income or stockholders’ equity.

Risks and Uncertainties

On March 11, 2020, the World Health Organization declared COVID-19, the disease caused by the novel coronavirus, a pandemic as a result of the global spread of the coronavirus illness. In response to the outbreak, federal and state authorities in the U.S. introduced various measures to try to limit or slow the spread of the virus, including travel restrictions, nonessential business closures, stay-at-home orders, and strict social distancing. The full impact of COVID-19 is unknown and rapidly evolving.

We have implemented a customer payment deferral program (principal and interest) to assist business borrowers and certain consumers that may be experiencing financial hardship due to COVID-19 related challenges. These loans will continue to accrue interest during the deferral period unless otherwise classified as nonperforming. Consistent with regulatory guidance and the provisions of the Coronavirus Aid, Relief and Economic Security Act (the “CARES Act”), borrowers that were otherwise current on loan payments that were granted COVID-19 related financial hardship payment deferrals will continue to be reported as current loans during the deferral period and not evaluated as to whether they are troubled debt restructurings (“TDR”). There were no delinquent loans upon adoption of our payment deferral program.

At September 30, 2021, there were no participants in the customer payment deferral program.

At this time, it is difficult to quantify the impact COVID-19 will have on future periods. This could cause the Company to experience a material adverse effect on our business operations, asset valuations, financial condition, and results of operations. Material adverse impacts may include all or a combination of an increase in the allowance for loan losses, valuation impairments on our investments or deferred tax assets. The Company has evaluated the impact of the effects of COVID-19 and determined that there were no material or systematic adverse impacts on the Company's third quarter 2021 Consolidated Statement of Financial Condition and Consolidated Statement of Income.

Subsequent Events

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

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Loss Contingencies

Loss contingencies, including claims and legal actions arising in the ordinary course of business, are recorded as liabilities when the likelihood of loss is probable and an amount or range of loss can be reasonably estimated. Management does not believe there now are such matters that will have a material effect on the Consolidated Financial Statements.

Loans Held for Sale

Loans transferred from investment to held for sale are accounted for at lower of cost or fair value. During the third quarter of 2021, the Company transferred its legacy NFL portfolio from loans held for investment to held for sale. As part of the transfer, the Company recorded a charge-off of $9.0 million, of which $3.0 million was provisioned for during the third quarter of 2021. Subsequent to the transfer, the Company recorded a lower of cost or fair value adjustment totaling $384 thousand, which is reflected as an unrealized loss on loans held for sale on the Consolidated Statement of Income. The carrying amount of these loans totaled $14.2 million and is included with Other assets on the Consolidated Statement of Financial Condition.

New Accounting Pronouncements

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 and certain other contracts. This ASU will be effective for the Company in fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. The Company plans to adopt ASU 2016-13 on or before January 1, 2023, using the required modified retrospective method with a cumulative effect adjustment as of the beginning of the reporting period. The Company has gathered the necessary data and continues to prepare for the implementation of this standard.

ASU 2020-04, “Reference Rate Reform (Topic 848)” (“ASU 2020-04”) provides optional expedients and exceptions for applying GAAP to loan and lease agreements, derivative contracts, and other transactions affected by the anticipated transition away from LIBOR toward new interest rate benchmarks. Subject to certain conditions, where an agreement, contract or transaction is modified in connection with the reference rate reform, the guidance permits: (i) modifications of loan agreements should be accounted for by prospectively adjusting the effective interest rate and the modification will be considered “minor” so that any existing unamortized origination fees/costs would carry forward and continue to be amortized and (ii) modifications of lease agreements should be accounted for as a continuation of the existing agreement with no reassessments of the lease classification and the discount rate or remeasurements of lease payments that otherwise would be required for modifications not accounted for as separate contracts. ASU 2020-04 also provides numerous optional expedients for derivative accounting and is effective March 12, 2020 through December 31, 2022.

We do not expect ASU 2020-04 to have a material impact on the Company’s business operations and consolidated financial statements as our variable rate loan portfolios almost exclusively utilize the prime rate as the interest rate benchmark. Further, the Company does not have any derivative contracts or apply hedge accounting.

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NOTE 2 — Debt Securities

Available-for-Sale Securities

The amortized cost, gross unrealized gains and losses and estimated fair value of securities available-for-sale were as follows:


			Gross		Gross
	Amortized		Unrealized		Unrealized		Fair
	Cost		Gains		Losses		Value

	(In thousands)
September 30, 2021
Mortgage-backed securities – agency	$	116,702	$	868	$	(1,505)	$	116,065
Collateralized mortgage obligations (CMOs) – agency		25,235		413		(10)		25,638
Total available-for-sale	$	141,937	$	1,281	$	(1,515)	$	141,703

December 31, 2020
Mortgage-backed securities – agency	$	55,212	$	1,237	$	(49)	$	56,400
Collateralized mortgage obligations (CMOs) – agency		60,474		807		(26)		61,255
Total available-for-sale	$	115,686	$	2,044	$	(75)	$	117,655

Mortgage-backed securities include all pass-through certificates guaranteed by FHLMC, FNMA, or GNMA and the CMOs are backed by government agency pass-through certificates. CMOs, by virtue of the underlying residential collateral or structure, are fixed rate current pay sequentials or planned amortization classes (PACs). As actual maturities may differ from contractual maturities because certain borrowers have the right to call or prepay certain obligations, these securities are not considered to have a single maturity date.

There were no sales or calls of securities for the three and nine months ended September 30, 2021 and 2020.

At September 30, 2021, securities having a fair value of $113.3 million were pledged to the Federal Home Loan Bank of New York (FHLB) for borrowing capacity totaling $107.7 million. At December 31, 2020, securities having a fair value of $98.6 million were pledged to the FHLB for borrowing capacity totaling $93.8 million. At September 30, 2021 and December 31, 2020, the Company had no outstanding FHLB advances.

At September 30, 2021, securities having a fair value of $28.4 million were pledged to the Federal Reserve Bank of New York (FRB) for borrowing capacity totaling $27.5 million. At December 31, 2020, securities having a fair value of $19.1 million were pledged to the FRB for borrowing capacity totaling $18.7 million. At September 30, 2021 and December 31, 2020, the Company had no outstanding FRB borrowings.

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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

	(In thousands)
September 30, 2021
Mortgage-backed securities – agency	$	90,392	$	(1,505)	$	—	$	—	$	90,392	$	(1,505)
CMOs – agency		1,153		(10)		—		—		1,153		(10)
Total temporarily impaired securities	$	91,545	$	(1,515)	$	—	$	—	$	91,545	$	(1,515)

December 31, 2020
Mortgage-backed securities - agency	$	4,807	$	(49)	$	—	$	—	$	4,807	$	(49)
CMOs - Agency		8,332		(17)		1,219		(9)		9,551		(26)
Total temporarily impaired securities	$	13,139	$	(66)	$	1,219	$	(9)	$	14,358	$	(75)

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, 2021, securities in unrealized loss positions were issuances from government sponsored entities. Due to the decline in fair value being 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, 2021.

No impairment charges were recorded for the three and nine months ended September 30, 2021 and 2020.

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NOTE 3 — Loans

The composition of loans by class is summarized as follows:


	At September 30,		At December 31,
	2021		2020

	(Dollars in thousands)
Real estate:
1 – 4 family	$	44,022	$	48,433
Multifamily		240,055		169,817
Commercial real estate		53,437		54,717
Construction		—		—
Total real estate		337,514		272,967
Commercial		398,511		358,410
Consumer		8,651		41,362
Total loans held for investment		744,676		672,739
Deferred loan fees and unearned premiums, net		(584)		(318)
Allowance for loan losses		(8,665)		(11,402)
Loans held for investment, net	$	735,427	$	661,019

At September 30, 2021 and December 31, 2020, the commercial loans balance included Small Business Administration (“SBA”) Paycheck Protection Program (“PPP”) loans of $11.7 million and $21.9 million, respectively.

The following tables present the activity in the allowance for loan losses by class for the three months ending September 30, 2021 and 2020:



							Commercial
	1‑4 Family		Commercial		Multifamily		Real Estate		Construction		Consumer		Total

	(In thousands)
September 30, 2021
Allowance for loan losses:
Beginning balance	$	312	$	5,547	$	1,418	$	603	$	—	$	6,137	$	14,017
Provision (credit) for loan losses		(3)		385		274		(4)		—		3,098		3,750
Recoveries		—		—		—		—		—		—		—
Loans charged-off		—		—		—		—		—		(9,102)		(9,102)
Total ending allowance balance	$	309	$	5,932	$	1,692	$	599	$	—	$	133	$	8,665

September 30, 2020
Allowance for loan losses:
Beginning balance	$	739	$	4,816	$	2,126	$	982	$	—	$	2,013	$	10,676
Provision (credit) for loan losses		(247)		77		(502)		(248)		—		1,820		900
Recoveries		—		—		—		—		—		—		—
Loans charged-off		—		(2)		—		—		—		(17)		(19)
Total ending allowance balance	$	492	$	4,891	$	1,624	$	734	$	—	$	3,816	$	11,557

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The following tables present the activity in the allowance for loan losses by class for the nine months ending September 30, 2021 and 2020:


							Commercial
	1‑4 Family		Commercial		Multifamily		Real Estate		Construction		Consumer		Total

	(In thousands)
September 30, 2021
Allowance for loan losses:
Beginning balance	$	342	$	5,003	$	1,278	$	597	$	—	$	4,182	$	11,402
Provision (credit) for loan losses		(33)		929		414		2		—		5,088		6,400
Recoveries		—		—		—		—		—		—		—
Loans charged-off		—		—		—		—		—		(9,137)		(9,137)
Total ending allowance balance	$	309	$	5,932	$	1,692	$	599	$	—	$	133	$	8,665

September 30, 2020
Allowance for loan losses:
Beginning balance	$	344	$	4,048	$	1,048	$	560	$	161	$	828	$	6,989
Provision (credit) for loan losses		148		845		576		174		(161)		3,118		4,700
Recoveries		—		—		—		—		—		—		—
Loans charged-off		—		(2)		—		—		—		(130)		(132)
Total ending allowance balance	$	492	$	4,891	$	1,624	$	734	$	—	$	3,816	$	11,557

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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, 2021 and December 31, 2020:


							Commercial
	1‑4 Family		Commercial		Multifamily		Real Estate		Construction		Consumer		Total

	(In thousands)
September 30, 2021
Allowance for loan losses:
Ending allowance balance attributable to loans:
Individually evaluated for impairment	$	—	$	—	$	—	$	—	$	—	$	—	$	—
Collectively evaluated for impairment		309		5,932		1,692		599		—		133		8,665

Total ending allowance balance	$	309	$	5,932	$	1,692	$	599	$	—	$	133	$	8,665

Loans:
Loans individually evaluated for impairment	$	—	$	—	$	—	$	—	$	—	$	—	$	—
Loans collectively evaluated for impairment		44,022		398,511		240,055		53,437		—		8,651		744,676

Total ending loans balance	$	44,022	$	398,511	$	240,055	$	53,437	$	—	$	8,651	$	744,676


							Commercial
	1‑4 Family		Commercial		Multifamily		Real Estate		Construction		Consumer		Total

	(In thousands)
December 31, 2020
Allowance for loan losses:
Ending allowance Balance attributable to loans:
Individually evaluated for impairment	$	—	$	—	$	—	$	—	$	—	$	—	$	—
Collectively evaluated for impairment		342		5,003		1,278		597		—		4,182		11,402

Total ending allowance balance	$	342	$	5,003	$	1,278	$	597	$	—	$	4,182	$	11,402

Loans:
Loans individually evaluated for impairment	$	—	$	—	$	—	$	—	$	—	$	2,303	$	2,303
Loans collectively evaluated for impairment		48,433		358,410		169,817		54,717		—		39,059		670,436

Total ending loans balance	$	48,433	$	358,410	$	169,817	$	54,717	$	—	$	41,362	$	672,739

Recorded investment is not adjusted for accrued interest, deferred fees and costs, and unearned premiums and discounts due to immateriality.

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The following table provides an analysis of the impaired loans by segment as of September 30, 2021 and December 31, 2020. There was no related allowance recorded on any impaired loans as of September 30, 2021 and December 31, 2020:


	September 30,				December 31,
	2021				2020
			Unpaid				Unpaid
	Recorded		Principal		Recorded		Principal
	Investment		Balance		Investment		Balance

	(In thousands)
1-4 family	$	—	$	—	$	—	$	—
Commercial		—		—		—		—
Multifamily		—		—		—		—
Commercial real estate		—		—		—		—
Construction		—		—		—		—
Consumer		—		—		2,303		2,303
Total	$	—	$	—	$	2,303	$	2,303

The following table provides an analysis of average recorded investment and interest income recognized by segment on impaired loans during the three and nine months ended September 30, 2021.


	For the three months ended September 30,								For the nine months ended September 30,
	2021				2020				2021				2020
	Average		Interest		Average		Interest		Average		Interest		Average		Interest
	Recorded		Income		Recorded		Income		Recorded		Income		Recorded		Income
	Investment		Recognized		Investment		Recognized		Investment		Recognized		Investment		Recognized

	(In thousands)
1-4 family	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—
Commercial		—		—		—		—		—		—		—		—
Multifamily		—		—		—		—		144		—		—		—
Commercial real estate		—		—		—		—		—		—		—		—
Construction		—		—		—		—		—		—		—		—
Consumer		1,703		—		1,436		—		2,054		—		1,210		—
Total	$	1,703	$	—	$	1,436	$	—	$	2,198	$	—	$	1,210	$	—

The following tables present the aging of the recorded investment in past due loans by class of loans as of September 30, 2021 and December 31, 2020:


									Total Past
	30-59		60-89		Greater than				Due &
	Days		Days		90 Days		Nonaccrual		Nonaccrual		Loans Not
	Past Due		Past Due		Past Due		Loans		Loans		Past Due		Total

	(In thousands)
September 30, 2021
1 – 4 family	$	—	$	—	$	—	$	—	$	—	$	44,022	$	44,022
Commercial		—		—		—		—		—		398,511		398,511
Multifamily		—		—		—		—		—		240,055		240,055
Commercial real estate		—		—		—		—		—		53,437		53,437
Construction		—		—		—		—		—		—		—
Consumer		8		14		—		12		34		8,617		8,651
Total	$	8	$	14	$	—	$	12	$	34	$	744,642	$	744,676

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									Total Past
	30-59		60-89		Greater than				Due &
	Days		Days		90 Days		Nonaccrual		Nonaccrual		Loans Not
	Past Due		Past Due		Past Due		Loans		Loans		Past Due		Total

	(In thousands)
December 31, 2020
1 – 4 family	$	—	$	—	$	—	$	—	$	—	$	48,433	$	48,433
Commercial		—		—		—		—		—		358,410		358,410
Multifamily		—		—		—		—		—		169,817		169,817
Commercial real estate		—		—		—		—		—		54,717		54,717
Construction		—		—		—		—		—		—		—
Consumer		26		—		—		2,303		2,329		39,033		41,362
Total	$	26	$	—	$	—	$	2,303	$	2,329	$	670,410	$	672,739

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 deserves management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan or of the institution’s credit position at some future date.

Substandard - Loans classified as substandard are inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. Loans so classified have a well-defined weakness or weaknesses 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.

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Based on the most recent analysis performed, the risk category of loans by class of loans is as follows:


	Pass		Special Mention		Substandard		Doubtful

	(In thousands)
September 30, 2021
1 – 4 family	$	41,007	$	3,015	$	—	$	—
Commercial		376,482		17,977		4,052		—
Multifamily		239,334		—		721		—
Commercial real estate		49,619		3,818		—		—
Construction		—		—		—		—
Consumer		8,651		—		—		—
Total	$	715,093	$	24,810	$	4,773	$	—


	Pass		Special Mention		Substandard		Doubtful

	(In thousands)
December 31, 2020
1 – 4 family	$	45,418	$	3,015	$	—	$	—
Commercial		358,295		—		115		—
Multifamily		169,096		721		—		—
Commercial real estate		54,717		—		—		—
Construction		—		—		—		—
Consumer		34,896		4,163		2,303		—
Total	$	662,422	$	7,899	$	2,418	$	—

The Company considers the performance of the loan portfolio and its impact on the allowance for loan losses. For smaller dollar commercial 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 TDRs at September 30, 2021 and December 31, 2020. Furthermore, there were no loans modified during the three and nine months ended September 30, 2021 and 2020 as TDRs. 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. As discussed in Note 1, the Company implemented a payment deferral program in response to the COVID-19 crisis and elected to evaluate the modified loan population under the CARES Act which allows for troubled debt restructuring categorization to be suspended. As of September 30, 2021, there were no participants in the payment deferral program.

Pledged Loans

At September 30, 2021, loans totaling $36.4 million were pledged to the Federal Home Loan Bank of New York for borrowing capacity totaling $26.1 million. At December 31, 2020, loans totaling $37.5 million were pledged to the Federal Home Loan Bank of New York for borrowing capacity totaling $28.6 million.

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NOTE 4 — Noninterest Income

Descriptions of revenue-generating activities that are within the scope of Accounting Standards Codification (ASC) 606, Revenue from Contracts with Customers, and are presented in the Consolidated Statements of Income as components of noninterest income, are as follows:


	For the Three Months Ended September 30,				For the Nine Months Ended September 30,
	2021		2020		2021		2020

	(In thousands)
Payment processing fees
Payment processing income	$	5,021	$	3,551	$	15,339	$	9,023
ACH income		206		170		609		504
Customer related fees and service charges
Administrative service income		—		41		29		140
Other		81		122		263		292
Unrealized loss on loans held for sale ⁽¹⁾		(384)		—		(384)		—
Total noninterest income	$	4,924	$	3,884	$	15,856	$	9,959

(1)

Represents a valuation adjustment on loans held for sale, not within the scope of ASC 606.

The Company has made no significant judgments in applying the revenue guidance prescribed in ASC 606 that affect the determination of the amount and timing of revenue from the above-described contracts with customers.

●

Payment processing income – We provide payment processing services as an acquiring bank through the third-party or independent sales organization (ISO) business model in which we process credit and debit card transactions on behalf of merchants. We enter into a tri-party merchant agreement, between the Company, ISO and each merchant. The Company’s performance obligation is clearing and settling credit and debit transactions on behalf of the merchants. The Company recognizes revenue monthly once it summarizes and computes all revenue and expenses applicable to each ISO, which is our performance obligation.

●

ACH income – We provide ACH services for merchants and other commercial customers. Contracts are entered into with third parties that require ACH transactions processed on behalf of their customers. Fees are variable and based on the volume of transactions within a given month. Our performance obligations are processing and settling ACHs on behalf of the customers. Our obligation is satisfied within each business day when the transactions (ACH files) are sent to the Federal Reserve Bank for clearing. Revenue is recognized based on the total volume of transactions processed that month for a given customer.

●

Administrative service income – Administrative service income is derived primarily from the management of qualified settlement funds (QSFs), which are funds from settled mass torts and class action lawsuits. Our performance obligations with the QSFs are outlined in court approved orders which includes ensuring funds are invested into safe investment vehicles such as U.S. treasuries and FDIC insured products. Our fees for placing these funds in appropriate vehicles are earned over the course of a month, representing the period over which the Company satisfies the performance obligation.

●

Other – The other category includes revenue from service charges on deposit accounts, debit card fees, and certain loan related fees where revenue is recognized as performance obligations are satisfied.

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NOTE 5 — Share-Based Payment Plans

The Company issues incentive and nonqualified stock options and restricted stock awards to certain employees and directors pursuant to its equity incentive plans, which have been approved by the stockholders. Share-based awards are granted by the Compensation Committee of the Board of Directors.

Under the plans, options are granted with an exercise price equal to the fair value of the Company’s stock at the date of the grant. Options granted vest over three or five years and have ten year contractual terms. All options provide for accelerated vesting upon a change in control (as defined in the plans). Restricted shares are granted at the fair value on the date of grant and typically vest over 6 years with a third vesting after years four, five, and six. Restricted shares have the same voting rights as common stock and nonvested restricted shareholders do not have rights to the accrued dividends until vested.

The fair value of each option award is estimated on the date of grant using a closed form option valuation (Black-Scholes) model that uses the assumptions noted in the table below. Expected volatilities are based on peer volatility. The Company uses peer data to estimate option exercise and post-vesting termination behavior. The expected term of options granted is based on peer data and represents the period of time that options granted are expected to be outstanding, which takes into account that the options are not transferable. The risk-free interest rate for the expected term of the option is based on the U.S. Treasury yield curve in effect at the time of the grant.

There were no stock options granted during the three and nine months ended September 30, 2021 and 2020.

The following table presents a summary of the activity related to options as of September 30, 2021:


				Weighted
		Weighted		Average
		Average		Remaining
		Exercise		Contractual
	Options	Price		Life (Years)
September 30, 2021
Outstanding at beginning of year	907,099	$	14.11
Granted	—		—
Exercised	(113,121)		12.72
Forfeited	(501)		23.08
Expired	(415)		25.02
Outstanding at period end	793,062	$	14.30	5.07
Vested or expected to vest	793,062	$	14.30	5.07
Exercisable at period end	709,114	$	13.43	4.63

The Company recognized compensation expense related to options of $117 thousand and $124 thousand for the three months ended September 30, 2021 and 2020, respectively. The Company recognized compensation expense related to options of $380 thousand and $387 thousand for the nine months ended September 30, 2021 and 2020, respectively. At September 30, 2021, unrecognized compensation cost related to nonvested options was approximately $562 thousand and is expected to be recognized over a weighted average period of 2.06 years. The intrinsic value for outstanding options and for options vested or expected to vest was $11.4 million and $10.8 million for exercisable options at September 30, 2021.

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Information related to stock option exercises during each period is as follows:


	For the three months ended				For the nine months ended
	September 30,				September 30,
	2021		2020		2021		2020

	(Dollars in thousands)
Intrinsic value of options exercised	$	403	$	—	$	1,275	$	878
Cash received from option exercises		—		—		21		290
Excess tax benefit from option exercises		78		—		244		77

The following table presents a summary of the activity related to restricted stock as of September 30, 2021:


		Weighted Average
		Grant Date
	Shares	Fair Value
September 30, 2021
Outstanding at beginning of year	380,750	$	22.87
Granted	—		—
Vested	—		—
Outstanding at period end	380,750	$	22.87

The Company recognized compensation expense related to restricted stock of $365 thousand and $259 thousand for the three months ended September 30, 2021 and 2020, respectively. The Company recognized compensation expense related to restricted stock of $1.1 million and $771 thousand for the nine months ended September 30, 2021 and 2020, respectively. As of September 30, 2021, there was $5.8 million of total unrecognized compensation cost related to nonvested shares granted under the plan. The cost is expected to be recognized over a weighted-average period of 4.25 years.

NOTE 6 — Earnings per Share

The factors used in the earnings per share computation follow:


	For the three months ended				For the nine months ended
	September 30,				September 30,
	2021		2020		2021		2020

	(Dollars in thousands, except per share data)
Basic
Net income	$	2,519	$	3,606	$	11,195	$	8,736
Weighted average common shares outstanding		7,460,897		7,403,840		7,445,497		7,414,264
Basic earnings per share	$	0.34	$	0.49	$	1.50	$	1.18

Diluted
Net income	$	2,519	$	3,606	$	11,195	$	8,736
Weighted average shares outstanding for basic earnings per share		7,460,897		7,403,840		7,445,497		7,414,264
Add: Dilutive effects of share based awards		487,145		172,124		448,076		225,103
Average shares and dilutive potential common shares		7,948,042		7,575,964		7,893,573		7,639,367
Diluted earnings per share	$	0.32	$	0.48	$	1.42	$	1.14

Share-based awards totaling 107,600 and 303,250 shares of common stock were not considered in computing diluted earnings per common share for the three months ended September 30, 2021 and September 30, 2020, respectively, because they were anti-dilutive. Share-based awards totaling 107,600 and 303,250 shares of common stock were not considered in computing diluted earnings per common share for the nine months ended September 30, 2021 and September 30, 2020, respectively, because they were anti-dilutive.

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NOTE 7 — Leases

The Company recognizes the present value of its operating lease payments related to its office facilities and retail branch as operating lease assets and corresponding lease liabilities on the Consolidated Statements of Financial Condition. These operating lease assets represent the Company’s right to use an underlying asset for the lease term, and the lease liability represents the Company’s obligation to make lease payments over the lease term. As these leases do not provide an implicit rate, the Company used its incremental borrowing rate, the rate of interest to borrow on a collateralized basis for a similar term, at the lease commencement date in order to determine present value.

Short-term lease payments, those leases with original terms of 12 months or less, are recognized in the Consolidated Statements of Income, on a straight-line basis over the lease term. Certain leases may include one or more options to renew. The exercise of lease renewal options is typically at the Company’s discretion and are included in the operating lease liability if it is reasonably certain that the renewal option will be exercised. Certain real estate leases may contain lease and non-lease components, such as common area maintenance charges, real estate taxes, and insurance, which are generally accounted for separately and are not included in the measurement of the lease liability since they are generally able to be segregated. The Company does not sublease any of its leased properties and does not lease properties from any related parties.

As of September 30, 2021, right of use (“ROU”) lease assets and related lease liabilities were $2.5 million and $3.1 million, respectively. As of December 31, 2020, ROU lease assets and related lease liabilities were $2.9 million and $3.5 million, respectively. ROU assets are included within other assets and related lease liabilities are included within other liabilities on the consolidated statements of financial condition.

Maturities of the Company’s operating lease liabilities at September 30, 2021 are as follows:


		Operating Lease
		Liabilities
		(In thousands)
2021	$	163
2022		643
2023		636
2024		652
2025		668
Thereafter		627
Total operating lease payments	$	3,389
Less: interest		262
Present value of operating lease liabilities	$	3,127


	As of September 30,
	2021			2020
Weighted-average remaining lease term		5.12	years		6.08	years
Weighted-average discount rate		3.05	%		3.05	%

The components of total lease cost are as follows:



	For the three months ended				For the nine months ended

	September 30,
	2021		2020		2021		2020

	(In thousands)
Operating lease cost	$	142	$	141	$	425	$	422
Short-term lease cost		—		14		13		52
Total lease cost	$	142	$	155	$	438	$	474

Cash paid for operating leases	$	161	$	173	$	503	$	431

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NOTE 8 — 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)

	(In thousands)
September 30, 2021
Assets
Available-for-sale securities
Mortgage-backed securities – agency	$	—	$	116,065	$	—
CMOs – agency		—		25,638		—
Total	$	—	$	141,703	$	—

December 31, 2020
Assets
Available-for-sale securities
Mortgage-backed securities – agency	$	—	$	56,400	$	—
CMOs – agency		—		61,255		—
Total	$	—	$	117,655	$	—

There were no transfers between Level 1 and Level 2 during the three and nine months ended September 30, 2021 and 2020.

The legacy NFL consumer loan portfolio was measured on a nonrecurring basis and assigned a Level 3 fair value of $14.2 million as of September 30, 2021, as the loans are accounted for at the lower of cost or fair value. The fair value was determined using the discounted cash flow method under the income approach where the significant unobservable inputs include the cash flows and related timing, and an approximately 8% discount rate applied which reflects the rate of return market participants would expect to earn on investments of equivalent risk. The valuation adjustment recorded during the quarter totaled $384 thousand. There were no assets or liabilities measured at fair value on a nonrecurring basis as of December 31, 2020.

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The following tables present the carrying amounts and fair values (represents exit price) of financial instruments at September 30, 2021 and December 31, 2020:


	Fair Value Measurement at September 30, 2021, Using:
	Carrying
	Value		(Level 1)		(Level 2)		(Level 3)		Total

	(In thousands)
Financial Assets:
Cash and cash equivalents	$	138,235	$	1,129	$	137,106	$	—	$	138,235
Securities purchased under agreements to resell, at cost		50,899		—		—		50,899		50,899
Securities available-for-sale		141,703		—		141,703		—		141,703
Securities, restricted, at cost		2,680		N/A		N/A		N/A		N/A
Loans held for investment, net		735,427		—		—		735,232		735,232
Accrued interest receivable		4,462		—		280		4,182		4,462
Other assets - loans held for sale		14,200		—		—		14,200		14,200

Financial Liabilities:
Time deposits		11,125		—		11,163		—		11,163
Demand and other deposits		965,918		965,918		—		—		965,918
Secured borrowings		48		—		48		—		48
Accrued interest payable		—		—		—		—		—


	Fair Value Measurement at December 31, 2020, Using:
	Carrying
	Value		(Level 1)		(Level 2)		(Level 3)		Total

	(In thousands)
Financial Assets:
Cash and cash equivalents	$	65,185	$	1,775	$	63,410	$	—	$	65,185
Securities purchased under agreements to resell, at cost		51,726		—		—		51,726		51,726
Securities available-for-sale		117,655		—		117,655		—		117,655
Securities, restricted, at cost		2,694		N/A		N/A		N/A		N/A
Loans held for investment, net		661,019		—		—		661,992		661,992
Accrued interest receivable		4,529		—		245		4,284		4,529
Other assets - loans held for sale		—		—		—		—		—

Financial Liabilities:
Time deposits		11,202		—		11,246		—		11,246
Demand and other deposits		792,852		792,852		—		—		792,852
Secured borrowings		49		—		49		—		49
Accrued interest payable		—		—		—		—		—

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NOTE 9 — Accumulated Other Comprehensive (Loss) Income

The following presents changes in accumulated other comprehensive (loss) income by component, net of tax, for the three and nine months ending September 30, 2021 and 2020:


	Three months ended				Nine months ended

	September 30,
	2021		2020		2021		2020

	(In thousands)
Unrealized (Losses) Gains on Available-for-Sale Securities
Beginning balance	$	323	$	1,899	$	1,408	$	386
Other comprehensive (loss) income before reclassifications, net of tax		(490)		(246)		(1,575)		1,267
Amounts reclassified from accumulated other comprehensive income		—		—		—		—
Net current period other comprehensive (loss) income		(490)		(246)		(1,575)		1,267
Ending balance	$	(167)	$	1,653	$	(167)	$	1,653

There were no reclassifications out of accumulated other comprehensive (loss) income for the three and nine months ended September 30, 2021 and 2020.

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Item 2.Management’s Discussion and Analysis of Financial Condition and Results of Operations

General

Management’s discussion and analysis of financial condition at September 30, 2021 and December 31, 2020 and results of operations for the three and nine months ended September 30, 2021 and 2020 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 Consolidated Financial Statements and the audited Consolidated Financial Statements as of December 31, 2020 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;

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●

significant increases in our loan losses, including as a result of our inability to resolve classified and nonperforming assets or reduce risks associated with our loans, and management’s assumptions in determining the adequacy of the allowance for loan losses;

●

interest rate fluctuations, which could have an adverse effect on our profitability;

●

external economic and/or market factors, such as changes in monetary and fiscal policies and laws, including the interest rate policies of the Board of Governors of the Federal Reserve System (“FRB”), inflation or deflation, changes in the demand for loans, and fluctuations in consumer spending, borrowing and savings habits, which may have an adverse impact on our financial condition;

●

continued or increasing competition from other financial institutions, credit unions, and non-bank financial services companies, many of which are subject to different regulations than we are;

●

credit risks of lending activities, including changes in the level and trend of loan delinquencies and write-offs and in our allowance for loan losses and provision for loan losses;

●

our success in increasing our legal and “litigation” market lending;

●

our ability to attract and maintain deposits and our success in introducing new financial products;

●

losses suffered by merchants or Independent Sales Organizations (ISOs) with whom we do business;

●

our ability to effectively manage risks related to our merchant services business;

●

our ability to leverage the professional and personal relationships of our board members and advisory board members;

●

changes in interest rates generally, including changes in the relative differences between short-term and long-term interest rates and in deposit interest rates, that may affect our net interest margin and funding sources;

●

fluctuations in the demand for loans;

●

technological changes that may be more difficult or expensive than expected;

●

changes in consumer spending, borrowing and savings habits;

●

declines in the yield on our assets resulting from the current low interest rate environment;

●

declines in our payment processing income as a result of reduced demand, competition and changes in laws or government regulations or policies affecting financial institutions, 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;

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●

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, terrorism, natural disasters or global market disruptions, including global pandemics;

●

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.

Further, given its ongoing and dynamic nature, it is difficult to predict the full impact of the COVID-19 outbreak on our business. The extent of such impact will depend on future developments, which are highly uncertain, including when the coronavirus can be controlled and abated and when and how the economy may be reopened. As the result of the COVID-19 pandemic and the related adverse local and national economic consequences, we could be subject to any of the following risks, any of which could have a material, adverse effect on our business, financial condition, liquidity, and results of operations: the demand for our products and services may decline, making it difficult to grow assets and income; if the economy is unable to remain substantially reopened, and higher levels of unemployment continue for an extended period of time, loan delinquencies, problem assets, and foreclosures may increase; collateral for loans, especially real estate, may decline in value; our allowance for loan losses may increase if borrowers experience financial difficulties; the net worth and liquidity of loan guarantors may decline, impairing their ability to honor commitments to us; and our cyber security risks are increased as the result of an increase in the number of employees working remotely.

The foregoing factors should not be construed as exhaustive and should be read in conjunction with other cautionary statements that are included in our Annual Report on Form 10-K for the year ended December 31, 2020, as supplemented by subsequent Quarterly Reports 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.

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Summary of Significant Accounting Policies

A summary of our accounting policies is described in Note 1 to the Consolidated Financial Statements included in our annual report. Critical accounting estimates are necessary in the application of certain accounting policies and procedures and are particularly susceptible to significant change. Critical accounting policies are defined as those involving significant judgments and assumptions by management that could have a material impact on the carrying value of certain 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. Management considers the accounting policy relating to the allowance for loan losses to be a critical accounting policy given the inherent subjectivity and uncertainty in estimating the levels of the allowance required to cover loan losses in the portfolio and the material effect that such judgements can have on the results of operations.

Emerging Growth Company. Pursuant to the JOBS Act, an emerging growth company is provided the option to adopt new or revised accounting standards that may be issued by the Financial Accounting Standards Board (“FASB”) or the SEC either (i) within the same periods as those otherwise applicable to non-emerging growth companies or (ii) within the same time periods as private companies. We have irrevocably elected to adopt new accounting standards within the public company adoption period.

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

Overview

We are a financial 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 litigation industry and small businesses nationally, as well as commercial and retail customers in the New York metropolitan market. We offer tailored financial and payment processing solutions to the litigation community and their clients as well as dynamic and flexible payment processing solutions to small business owners, both on a national basis. We also offer traditional banking products for businesses and consumers in our local market area.

Our results of operations depend primarily on our net interest income which is the difference between the interest income we earn on our interest-earning assets and the interest we pay on our interest-bearing liabilities. Our results of operations also are affected by our provision for loan losses, noninterest income and noninterest expense. Noninterest income currently consists primarily of payment processing fees and customer related fees and charges. Noninterest 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.

COVID-19 Pandemic Programs

We are participating in the Paycheck Protection Program administered by the SBA. The PPP provides borrower guarantees for lenders, as well as loan forgiveness incentives for borrowers that utilize the loan proceeds to cover employee compensation-related costs and other qualifying business costs. As of September 30, 2021, we have cumulatively funded PPP loans totaling $45.5 million, and have been remitted forgiveness principal payments from the SBA of $33.8 million, resulting in a net PPP loan balance of $11.7 million. All of our calendar year 2020 PPP loan originations have been fully repaid by the SBA.

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In 2020, management implemented a customer payment deferral program (principal and interest) under the CARES Act to assist business borrowers and certain consumers that may have been experiencing financial hardship due to COVID-19 related challenges. As of September 30, 2021, there were no participants in our payment deferral program.

Comparison of Financial Condition at September 30, 2021 and December 31, 2020

Assets. Our total assets were $1.1 billion at September 30, 2021, an increase of $186.6 million, or 19.9%, from $936.7 million at December 31, 2020, primarily due to increases in cash and cash equivalents of $73.1 million, or 112.1%, loans held for investment of $71.7 million, or 10.7%, and securities available-for-sale of $24.0 million, or 20.4%.

Loans. The following table provides information regarding the composition of our loans held for investment portfolio at the dates indicated:


	At September 30,				At December 31,
	2021				2020
	Amount		Percent		Amount		Percent

	(In thousands)
Real estate:
1 – 4 family	$	44,022	5.9	%	$	48,433	7.2	%
Multifamily		240,055	32.2			169,817	25.3
Commercial real estate		53,437	7.2			54,717	8.1
Construction		—	—			—	—
Total real estate		337,514	45.3			272,967	40.6
Commercial		398,511	53.5			358,410	53.3
Consumer		8,651	1.2			41,362	6.1
Total loans held for investment	$	744,676	100.0	%	$	672,739	100.0	%
Deferred loan fees and unearned premiums, net		(584)				(318)
Allowance for loan losses		(8,665)				(11,402)
Loans held for investment, net	$	735,427			$	661,019

At September 30, 2021, loans were $744.1 million, or 76.2% of total deposits, compared to $672.4 million, or 83.6% of total deposits, at December 31, 2020. The growth in loans was primarily driven by increases in multifamily and commercial loans. Multifamily loans increased $70.2 million, or 41.4%, to $240.1 million at September 30, 2021 from $169.8 million at December 31, 2020. Commercial loans increased $40.1 million, or 11.2%, to $398.5 million at September 30, 2021 from $358.4 million at December 31, 2020.

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The following table sets forth the composition of our Litigation-Related loan held for investment portfolio by type of loan at the dates indicated:


	September 30, 2021				December 31, 2020
	Amount		Percent		Amount		Percent

	(Dollars in thousands)
Litigation-Related Loans
Commercial Litigation-Related:
Working capital lines of credit	$	197,176	55.1	%	$	202,021	61.4	%
Case cost lines of credit		112,769	31.5			87,104	26.4
Term loans		45,425	12.7			10,527	3.2
Total Commercial Litigation-Related		355,370	99.3			299,652	91.0
Consumer Litigation-Related:
Post-settlement consumer loans		2,268	0.7			29,342	8.9
Structured settlement loans		141	0.0			236	0.1
Total Consumer Litigation-Related		2,409	0.7			29,578	9.0
Total Litigation-Related Loans	$	357,779	100.0	%	$	329,230	100.0	%

At September 30, 2021, our Litigation-Related loans, which include commercial loans to law firms and consumer lending to plaintiffs/claimants and attorneys, totaled $357.8 million, or 48.0% of our total loan portfolio, compared to $329.2 million at December 31, 2020. In addition, we had $11.7 million in PPP loans as of September 30, 2021 to attorney customers which are excluded from the table above. We remain focused on prudently growing our Litigation-Related loan portfolio.

Securities. Securities available-for-sale increased $24.0 million, or 20.4%, to $141.7 million at September 30, 2021 from $117.7 million at December 31, 2020, driven by purchases of $70.5 million, offset by paydowns of $43.6 million, unrealized losses of $2.2 million through other comprehensive income, and net amortization of $613 thousand.

Funding. Total deposits increased $173.0 million, or 21.5%, to $977.0 million at September 30, 2021 from $804.1 million at December 31, 2020. 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 $965.9 million at September 30, 2021, or 98.9% of total deposits at that date, compared to $792.9 million or 98.6% of total deposits at December 31, 2020.

In addition to our core deposits as a source of funding, the Company continues to prudently manage its balance sheet through deposit sweep programs, maintaining off-balance sheet funds totaling $443.9 million at September 30, 2021 which is a $63.6 million, or 16.7%, increase from the December 31, 2020 balance of $380.3 million.

At September 30, 2021, we had the ability to borrow a total of $133.8 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 $27.5 million. At September 30, 2021, we also had $67.5 million in aggregate unsecured lines of credit with unaffiliated correspondent banks. No amounts were outstanding on any of the aforementioned lines of credit at September 30, 2021.

Equity. Total stockholders’ equity increased $11.1 million, or 8.8%, to $137.2 million at September 30, 2021, from $126.1 million at December 31, 2020.

Asset Quality. Nonperforming assets, totaling $12 thousand, consisted of several nonaccrual consumer loans as of September 30, 2021. As of September 30, 2021, the allowance for loan losses was $8.7 million, or 1.16% of total loans, as compared to $11.4 million, or 1.70% of total loans at December 31, 2020. The decrease in the allowance as a percentage of loans is a result of the charge-off of $9.0 million upon reclassification of the legacy NFL consumer post settlement loan portfolio from held for investment to held for sale as our overall reserve for loan losses to total loans returned to pre-pandemic levels. At September 30, 2021, special mention and substandard loans totaled $24.8 million and $4.8 million, respectively.

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Average Balance Sheets and Rate/Volume Analysis

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 net premium amortization and net deferred loan origination fees accounted for as yield adjustments. No tax-equivalent yield adjustments were made, as we have no tax exempt investments.


	For the Three Months Ended September 30,
	2021						2020

					(Dollars in thousands)
	Average				Average		Average				Average
	Balance		Interest		Yield/Cost		Balance		Interest		Yield/Cost
INTEREST EARNING ASSETS
Loans, held for investment	$	738,281	$	10,709	5.75	%	$	608,313	$	8,936	5.84	%
Securities, includes restricted stock		138,200		583	1.67	%		113,580		494	1.73	%
Securities purchased under agreements to resell		50,972		150	1.17	%		—		—	—	%
Interest earning cash and other		66,726		51	0.30	%		143,420		66	0.18	%
Total interest earning assets		994,179		11,493	4.59	%		865,313		9,496	4.37	%

NONINTEREST EARNING ASSETS		33,765						28,708

TOTAL AVERAGE ASSETS	$	1,027,944					$	894,021

INTEREST BEARING LIABILITIES

Savings, NOW, Money Market deposits	$	453,678	$	189	0.17	%	$	430,511	$	203	0.19	%
Time deposits		11,126		19	0.68	%		17,751		85	1.90	%
Total interest bearing deposits		464,804		208	0.18	%		448,262		288	0.26	%
Borrowings		54		1	7.35	%		87		1	4.56	%
Total interest bearing liabilities		464,858		209	0.18	%		448,349		289	0.26	%

NONINTEREST BEARING LIABILITIES
Demand deposits		414,930						315,761
Other liabilities		11,550						10,260
Total noninterest bearing liabilities		426,480						326,021
Stockholders' equity		136,606						119,651

TOTAL AVG. LIABILITIES AND EQUITY	$	1,027,944					$	894,021
Net interest income			$	11,284					$	9,207
Net interest spread					4.41	%					4.11	%
Net interest margin					4.50	%					4.23	%

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	For the Nine Months Ended September 30,
	2021						2020

					(Dollars in thousands)
	Average				Average		Average				Average
	Balance		Interest		Yield/Cost		Balance		Interest		Yield/Cost
INTEREST EARNING ASSETS
Loans, held for investment	$	705,609	$	30,408	5.76	%	$	587,282	$	26,055	5.93	%
Securities, includes restricted stock		131,019		1,588	1.62	%		129,791		2,132	2.19	%
Securities purchased under agreements to resell		51,185		470	1.23	%		—		—	—	%
Interest earning cash and other		63,354		134	0.28	%		108,229		348	0.43	%
Total interest earning assets		951,167		32,600	4.58	%		825,302		28,535	4.62	%

NONINTEREST EARNING ASSETS		32,054						29,793

TOTAL AVERAGE ASSETS	$	983,221					$	855,095

INTEREST BEARING LIABILITIES

Savings, NOW, Money Market deposits	$	424,468	$	536	0.17	%	$	426,347	$	697	0.22	%
Time deposits		11,098		59	0.71	%		19,001		277	1.95	%
Total interest bearing deposits		435,566		595	0.18	%		445,348		974	0.29	%
Borrowings		70		2	3.82	%		105		4	5.09	%
Total interest bearing liabilities		435,636		597	0.18	%		445,453		978	0.29	%

NONINTEREST BEARING LIABILITIES
Demand deposits		405,427						283,841
Other liabilities		10,393						9,421
Total noninterest bearing liabilities		415,820						293,262
Stockholders' equity		131,765						116,380

TOTAL AVG. LIABILITIES AND EQUITY	$	983,221					$	855,095
Net interest income			$	32,003					$	27,557
Net interest spread					4.40	%					4.33	%
Net interest margin					4.50	%					4.46	%

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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						For the Nine Months Ended
	September 30,						September 30,
	2021 vs. 2020						2021 vs. 2020
	Increase				Total		Increase				Total
	(Decrease) due to				Increase		(Decrease) due to				Increase
	Volume		Rate		(Decrease)		Volume		Rate		(Decrease)

	(Dollars in thousands)
Interest earned on:
Loans held for investment	$	1,910	$	(137)	$	1,773	$	5,096	$	(743)	$	4,353
Securities, includes restricted stock		105		(16)		89		20		(564)		(544)
Securities purchased under agreements to resell		150		—		150		470		—		470
Interest earning cash and other		(46)		31		(15)		(117)		(97)		(214)
Total interest income		2,119		(122)		1,997		5,469		(1,404)		4,065

Interest paid on:
Savings, NOW, Money Markets		11		(25)		(14)		(3)		(158)		(161)
Time deposits		(24)		(42)		(66)		(86)		(132)		(218)
Total deposits		(13)		(67)		(80)		(89)		(290)		(379)
Borrowings		—		—		—		(1)		(1)		(2)
Total interest expense		(13)		(67)		(80)		(90)		(291)		(381)
Change in net interest income	$	2,132	$	(55)	$	2,077	$	5,559	$	(1,113)	$	4,446

Comparison of Operating Results for the Three Months Ended September 30, 2021 and 2020

General. Net income decreased $1.1 million, or 30.1%, to $2.5 million for the three months ended September 30, 2021 from $3.6 million for the three months ended September 30, 2020. The decrease primarily resulted from the reclassification of the legacy NFL consumer post settlement portfolio from held for investment to held for sale, where the Company incurred a $3.4 million pretax charge. Net income was also impacted by a $2.1 million increase in net interest income and a $1.0 million increase in noninterest income, partially offset by an increase in noninterest expense of $1.7 million.

Net Interest Income. Net interest income increased $2.1 million, or 22.6%, to $11.3 million for the three months ended September 30, 2021 from $9.2 million for the three months ended September 30, 2020, due to a $2.0 million increase in interest income and a $80 thousand decrease in interest expense.

Our net interest margin increased 27 basis points to 4.50% for the three months ended September 30, 2021 from 4.23% for the three months ended September 30, 2020.

Interest Income. Interest income increased $2.0 million, or 21.0%, to $11.5 million for the three months ended September 30, 2021 from $9.5 million for the three months ended September 30, 2020 and was attributable to an increase in loan, reverse repurchase interest income, and interest income on securities, offset by a decrease in interest earning cash and other.

Loan interest income increased $1.8 million, or 19.8%, to $10.7 million for the three months ended September 30, 2021 from $8.9 million for the three months ended September 30, 2020. This increase was attributable to a $130.0 million, or 21.4%, increase in the average loan balance primarily from our litigation-related and multifamily portfolios offset by a 9 basis point decrease in loan yields. The decrease in loan yields is due to the historically low interest rate

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environment caused by the pandemic and its effects on the overall economy. The impact of the decline in loan yields on interest income was partially offset by an 8 basis point decrease in rates on interest bearing deposits as part of the Company’s overall asset/liability management strategy.

Securities interest income increased $89 thousand, or 18.0%, to $583 thousand for the three months ended September 30, 2021 from $494 thousand for the three months ended September 30, 2020. This increase was attributable to a $24.6 million, or 21.7%, increase in average securities balances, offset by a 6 basis point decrease in yields, driven by accelerated prepayments due to the current interest rate environment.

Securities purchased under agreements to resell income was $150 thousand for the three months ended September 30, 2021. We invested excess deposit funds in reverse repurchase agreements in the fourth quarter of 2020.

Interest earning cash and other interest income decreased $15 thousand, or 22.7%, to $51 thousand for the three months ended September 30, 2021 from $66 thousand for the three months ended September 30, 2020.

Interest Expense. Interest expense decreased $80 thousand, or 27.7%, to $209 thousand for the three months ended September 30, 2021 from $289 thousand for the three months ended September 30, 2020, primarily attributable to rate reductions on deposits. The blended interest rate we paid on interest bearing deposits decreased 8 basis points to 0.18% for the three months ended September 30, 2021 from 0.26% for the three months ended September 30, 2020. Our average balance of interest bearing deposits increased $16.5 million, or 3.7%, to $464.8 million for the three months ended September 30, 2021 from $448.3 million for the three months ended September 30, 2020 attributable primarily to our litigation and small business depository relationships, offset by certificate of deposit maturities.

Provision for Loan Losses. Our provision for loan losses was $3.8 million for the three months ended September 30, 2021 compared to $900 thousand for the three months ended September 30, 2020. The third quarter 2021 provision for loan losses was driven by the reclassification of the legacy NFL consumer post settlement loan portfolio from held for investment to held for sale, which resulted in a $9.0 million charge-off of which $3.0 million was recognized as a component of the third quarter’s provision for loan losses.

Noninterest Income. Noninterest income information is as follows:


	For the Three Months Ended
	September 30,				Change
	2021		2020		Amount		Percent

	(Dollars in thousands)
Payment processing fees
Payment processing income	$	5,021	$	3,552	$	1,469	41.4	%
ACH income		206		169		37	21.9
Customer related fees and service charges
Administrative service income		—		41		(41)	(100.0)
Other		81		122		(41)	(33.6)
Unrealized loss on loans held for sale		(384)		—		(384)	NA
Total noninterest income	$	4,924	$	3,884	$	1,040	26.8	%

Payment processing income increased due to the continued expansion of our sales channels through ISOs, the increased number of merchants, payment processing volume increases and fee allocation arrangements, as well as the reopening of the economy as the pandemic restrictions continued to ease nationally. Quarterly volumes increased $2.0 billion, or 47.6%, to $6.2 billion, as compared to the third quarter of 2020. Customer related fees and service charges have decreased due to decreases in administrative service income on off-balance sheet funds, which is impacted by the volume of off-balance sheet funds, the duration of these funds and short-term interest rates. Off-balance sheet sweep funds totaled $443.9 million at September 30, 2021, demonstrating the continued strength of our branchless core business model. Upon reclassification of the NFL consumer post settlement loan portfolio, the Company incurred an unrealized loss of $384 thousand.

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Noninterest Expense. Noninterest expense information is as follows:


	For the Three Months Ended
	September 30,				Change
	2021		2020		Amount		Percent

	(Dollars in thousands)
Noninterest expense
Employee compensation and benefits	$	5,523	$	4,372	$	1,151	26.3	%
Occupancy and equipment		696		615		81	13.2
Professional and consulting services		773		845		(72)	(8.5)
FDIC and regulatory assessments		111		95		16	16.8
Advertising and marketing		289		171		118	69.0
Travel and business relations		105		33		72	218.2
Data processing		977		772		205	26.6
Other operating expenses		533		382		151	39.5
Total noninterest expense	$	9,007	$	7,285	$	1,722	23.6	%

Employee compensation and benefits costs increased due to increases in staffing of 16% to support our investment in digital platforms and related sales/marketing divisions, and the impact of salary and stock-based compensation increases. Data processing costs increased due to increased processing volume, primarily driven by our core banking platform, and additional costs related to our technology implementations. Other operating expenses increased due to hiring efforts to support our investment in digital platforms and related sales/marketing divisions as well as general increases in staffing to support our continued growth. Advertising, marketing, travel and business relations costs increased as we continued our digital marketing efforts and thought leadership in our national verticals. We have also re-engaged in our traditional high touch marketing and sales efforts at conferences and other in-person industry forums. Occupancy and equipment costs increased primarily due to amortization of our investments in internally developed software to support our new digital platform and additional office space to support our continued growth. Professional and consulting services costs decreased subsequent to our third quarter 2020 rebranding launch and from the transition of consultants to full time employees, partially offset by approximately $240 thousand in costs associated with the management of the NFL loan portfolio.

Income Tax Expense. We recorded an income tax expense of $932 thousand for the three months ended September 30, 2021, reflecting an effective tax rate of 27.0%, compared to $1.3 million, or 26.5%, for the three months ended September 30, 2020. This effective tax rate increase was driven by the continued expansion of our national litigation and merchant platforms as well as certain non-deductible compensation expenses.

Comparison of Operating Results for the Nine Months Ended September 30, 2021 and 2020

General. Net income increased $2.5 million, or 28.1%, to $11.2 million for the nine months ended September 30, 2021 from $8.7 million for the nine months ended September 30, 2020. The increase resulted from a $5.9 million increase in noninterest income and a $4.4 million increase in net interest income, partially offset by an increase in noninterest expense of $5.4 million.

Net Interest Income. Net interest income increased $4.4 million, or 16.1%, to $32.0 million for the nine months ended September 30, 2021 from $27.6 million for the nine months ended September 30, 2020, due to a $4.1 million increase in interest income and a $381 thousand decrease in interest expense.

Our net interest margin increased 4 basis points to 4.50% for the nine months ended September 30, 2021 from 4.46% for the nine months ended September 30, 2020. The increase in net interest margin was due to the stability of our interest earning asset yields and a decline of 11 basis points on our cost of interest bearing deposits.

Interest Income. Interest income increased $4.1 million, or 14.2%, to $32.6 million for the nine months ended September 30, 2021 from $28.5 million for the nine months ended September 30, 2020 and was attributable to an

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increase in loan and reverse repurchase interest income offset by a decrease in interest income on securities and interest earning cash and other.

Loan interest income increased $4.4 million, or 16.7%, to $30.4 million for the nine months ended September 30, 2021 from $26.1 million for the nine months ended September 30, 2020. This increase was attributable to a $118.3 million, or 20.1%, increase in the average loan balance primarily from our litigation-related and multifamily portfolios offset by a 17 basis point decrease in loan yields. The decrease in loan yields is due to the historically low interest rate environment caused by the pandemic and its effects on the overall economy. The impact of the decline in loan yields on interest income was partially offset by a 11 basis point decrease in rates on interest bearing deposits as part of the Company’s overall asset/liability management strategy.

Securities interest income decreased $544 thousand, or 25.5%, to $1.6 million for the nine months ended September 30, 2021 from $2.1 million for the nine months ended September 30, 2020. This decrease was attributable to a 57 basis point decrease in yields, driven by accelerated prepayments due to the current interest rate environment.

Securities purchased under agreements to resell income was $470 thousand for the nine months ended September 30, 2021. We invested excess deposit funds in reverse repurchase agreements in the fourth quarter of 2020.

Interest earning cash and other interest income decreased $214 thousand, or 61.5%, to $134 thousand for the nine months ended September 30, 2021 from $348 thousand for the nine months ended September 30, 2020. This decrease was attributable to a 15 basis point decrease in yields driven by the current interest rate environment and a $44.9 million, or 41.5%, decrease in average cash balance primarily due to deployment of excess funds into higher yielding reverse repurchase agreements.

Interest Expense. Interest expense decreased $381 thousand, or 39.0%, to $597 thousand for the nine months ended September 30, 2021 from $978 thousand for the nine months ended September 30, 2020, primarily attributable to rate reductions on deposits. The blended interest rate we paid on interest bearing deposits decreased 11 basis points to 0.18% for the nine months ended September 30, 2021 from 0.29% for the nine months ended September 30, 2020. Our average balance of interest bearing deposits decreased $9.8 million, or 2.2%, to $435.6 million for the nine months ended September 30, 2021 from $445.3 million for the nine months ended September 30, 2020 attributable primarily to decreases in time deposits as a result of certificate of deposit maturities.

Provision for Loan Losses. Our provision for loan losses was $6.4 million for the nine months ended September 30, 2021 compared to $4.7 million for the nine months ended September 30, 2020. The provision for loan losses was driven by the reclassification of the legacy NFL consumer post settlement loan portfolio from held for investment to held for sale, which resulted in a $9.0 million charge-off of which $3.0 million was recognized as a component of the third quarter’s provision for loan losses. The remaining provision for the nine months ended September 30, 2021 relates to an increase in the general reserve attributable to loan growth.

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Noninterest Income. Noninterest income information is as follows:


	For the Nine Months Ended
	September 30,				Change
	2021		2020		Amount		Percent

	(Dollars in thousands)
Payment processing fees
Payment processing income	$	15,339	$	9,023	$	6,316	70.0	%
ACH income		609		504		105	20.8
Customer related fees and service charges
Administrative service income		29		140		(111)	(79.3)
Other		263		292		(29)	(9.9)
Unrealized loss on loans held for sale		(384)		—		(384)	NA
Total noninterest income	$	15,856	$	9,959	$	5,897	59.2	%

Payment processing income increased due to the continued expansion of our sales channels through ISOs, the increased number of merchants, payment processing volume increases and fee allocation arrangements as well as the reopening of the economy. Quarterly volumes increased $7.0 billion, or 67.3%, to $17.4 billion, as compared to the nine months ended 2020. Customer related fees and service charges have decreased due to decreases in administrative service income on off-balance sheet funds, which is impacted by the volume of off-balance sheet funds, the duration of these funds and short-term interest rates. Off-balance sheet sweep funds totaled $443.9 million at September 30, 2021, demonstrating the continued strength of our branchless core business model. Upon reclassification of the NFL consumer post settlement loan portfolio, the Company incurred an unrealized loss of $384 thousand.

Noninterest Expense. Noninterest expense information is as follows:


	For the Nine Months Ended
	September 30,				Change
	2021		2020		Amount		Percent

	(Dollars in thousands)
Noninterest expense
Employee compensation and benefits	$	16,189	$	12,448	$	3,741	30.1	%
Occupancy and equipment		2,104		1,735		369	21.3
Professional and consulting services		2,352		2,382		(30)	(1.3)
FDIC and regulatory assessments		320		280		40	14.3
Advertising and marketing		936		289		647	223.9
Travel and business relations		212		173		39	22.5
Data processing		2,734		2,272		462	20.3
Other operating expenses		1,466		1,351		115	8.5
Total noninterest expense	$	26,313	$	20,930	$	5,383	25.7	%

Employee compensation and benefits costs increased due to a 16% increase in staffing to support our investment in digital platforms and related sales/marketing divisions, and the impact of salary and stock-based compensation increases. Advertising and marketing costs increased as we continued our new digital marketing efforts and thought leadership in our national verticals. We also re-engaged in our traditional high touch marketing and sales efforts at conferences and other in-person industry forums. Data processing costs increased due to increased processing volume, primarily driven by our core banking platform, and additional costs related to our technology implementations. Occupancy and equipment costs increased primarily due to amortization of our investments in internally developed software to support our new digital platform, precautionary office cleaning costs related to COVID-19 and additional office space to support our continued growth.

Income Tax Expense. We recorded an income tax expense of $4.0 million for the nine months ended September 30, 2021, reflecting an effective tax rate of 26.1%, compared to $3.2 million, or 26.5%, for the nine months ended September 30, 2020. The decrease in tax rate was due to certain discrete tax benefits related to shared based compensation.

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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.


	At September 30,
	2021
	Estimated
Changes in	12-Months
Interest Rates	Net Interest
(Basis Points)	Income			Change

	(Dollars in thousands)
400	$	66,433	$	19,307
300		61,333		14,207
200		56,306		9,180
100		51,652		4,526
0		47,126		—
-100		44,779		(2,347)
-200		43,347		(3,779)

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

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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, 2021.


	At September 30,
	2021
Changes in	Economic
Interest Rates	Value of
(Basis Points)	Equity			Change

	(Dollars in thousands)
400	$	204,533	$	58,050
300		191,738		45,255
200		178,051		31,568
100		163,132		16,649
0		146,483		—
-100		120,168		(26,315)
-200		103,634		(42,849)

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, 2021, cash and cash equivalents totaled $138.2 million.

At September 30, 2021, through pledging of our securities and certain loans, we had the ability to borrow a total of $133.8 million from the Federal Home Loan Bank of New York and had an available line of credit with the Federal Reserve Bank of New York discount window of $27.5 million. At September 30, 2021, we also had $67.5 million in aggregate unsecured lines of credit with unaffiliated correspondent banks. No amounts were outstanding on any of the aforementioned lines of credit at September 30, 2021.

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.

Esquire Bank is subject to various regulatory capital requirements administered by the Office of the Comptroller of the Currency (the “OCC”), and the Federal Deposit Insurance Corporation. At September 30, 2021,

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Esquire Bank exceeded all applicable regulatory capital requirements, and was considered “well capitalized” under regulatory guidelines.

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.

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


			For Capital Adequacy
			Purposes
			Minimum Capital with		Actual
	“Well Capitalized”		Conservation Buffer		At September 30, 2021
Total Risk-based Capital Ratio
Bank	10.00	%	10.50	%	15.90	%

Tier 1 Risk-based Capital Ratio
Bank	8.00	%	8.50	%	14.79	%

Common Equity Tier 1 Capital Ratio
Bank	6.50	%	7.00	%	14.79	%

Tier 1 Leverage Ratio
Bank	5.00	%	4.00	%	11.32	%

Effective January 1, 2020, the federal banking agencies adopted a rule to establish for institutions with assets of less than $10 billion that meet other specified criteria a “community bank leverage ratio” (the ratio of a bank’s tangible equity capital to average total consolidated assets) of 9% that such institutions may elect to utilize in lieu of the generally applicable leverage and risk-based capital requirements noted above. A “qualifying community bank” with capital exceeding 9% will be considered compliant with all applicable regulatory capital and leverage requirements, including the requirement to be “well capitalized”. The CARES Act and implementing rules temporarily reduced the community bank leverage ratio to 8%, to be gradually increased back to 9% by 2022. The CARES Act also provides that, during the same time period, if a qualifying community banking organization falls no more than 1% below the community bank leverage ratio, it will have a two-quarter grace period to satisfy the community bank leverage ratio. For the current period, Esquire Bank has elected to continue to utilize the generally applicable leverage and risk based requirements and not apply the community bank leverage ratio.

Off-Balance Sheet Arrangements

We are a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of our customers. These financial instruments include commitments to extend credit, which involve elements of credit and interest rate risk in excess of the amount recognized in the Consolidated Statements of Financial Condition. Our exposure to credit loss is represented by the contractual amount of the instruments. We use the same credit policies in making commitments as we do for on-balance sheet instruments.

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

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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, 2021. 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, 2021, 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.

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PART II – OTHER INFORMATION

Item 1. Legal Proceedings

Periodically, we are involved in claims and lawsuits, such as claims to enforce liens, condemnation proceedings on properties in which we hold security interests, claims involving the making and servicing of real property loans and other issues incident to our business. At September 30, 2021, we are not a party to any pending legal proceedings that we believe would have a material adverse effect on our financial condition, results of operations or cash flows.

Item 1A. Risk Factors

There have been no material changes to our risk factors as disclosed in the Company’s Annual Report on Form 10-K.

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

The following table presents information regarding repurchases of our common stock during the quarter ended September 30, 2021 and the stock repurchase program approved by our Board of Directors.


Period	Total number of shares purchased		Average price paid per share	Total number of shares purchased as part of publicly announced plans or programs	Maximum number of shares that may yet be purchased under the plans or programs (1)
July 1, 2021 through July 31, 2021	—	$	—	—	265,694
August 1, 2021 through August 31, 2021	—		—	—	265,694
September 1, 2021 through September 30, 2021	—		—	—	265,694
Total	—	$	—	—	265,694

(1)

On January 9, 2019, the Company announced a share repurchase program, which authorized the purchase of up to 300,000 shares of common stock. There is no expiration date for the stock repurchase program.

Item 3. Defaults Upon Senior Securities

None.

Item 4. Mine Safety Disclosures

Not applicable.

Item 5. Other Information

None.

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Item 6.Exhibits


Exhibit
Number		Description

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

3.2		Amended and Restated Bylaws of Esquire Financial Holdings, Inc. (2)

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 Principal Executive Officer and Principal Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

101.0		The following materials for the quarter ended September 30, 2021, 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.

101.INS		XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document.

101.SCH		XBRL Taxonomy Extension Schema Document

101.CAL		XBRL Taxonomy Calculation Linkbase Document

101.DEF		XBRL Taxonomy Extension Definition Linkbase Document

101.LAB		XBRL Taxonomy Label Linkbase Document

101.PRE		XBRL Taxonomy Presentation Linkbase Document

104		Cover Page Interactive Data File - the cover page interactive data file does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document.

(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 3.3 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.

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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 10, 2021	/s/ Andrew C. Sagliocca
	Andrew C. Sagliocca
	President and Chief Executive Officer

Date: November 10, 2021	/s/ Michael Lacapria
	Michael Lacapria
	Senior Vice President and Chief Financial Officer