Esquire Financial Holdings, Inc. - Quarter Report: 2022 March (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 March 31, 2022


☐	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 May 1, 2022, there were 8,076,320 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 (Loss) 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	23

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	35

Item 4.	Controls and Procedures	35

PART II. OTHER INFORMATION		37

Item 1.	Legal Proceedings	37

Item 1A.	Risk Factors	37

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	37

Item 3.	Defaults Upon Senior Securities	37

Item 4.	Mine Safety Disclosures	37

Item 5.	Other Information	37

Item 6.	Exhibits	38

	SIGNATURES	39

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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)


	March 31,		December 31,
	2022		2021
ASSETS
Cash and cash equivalents	$	148,940	$	149,156
Securities purchased under agreements to resell, at cost		48,143		50,271
Securities available-for-sale, at fair value		134,161		148,384
Securities held-to-maturity (fair value $44,926 at March 31, 2022)		47,544		—
Securities, restricted, at cost		2,680		2,680

Loans held for investment		817,997		784,517
Less: allowance for loan losses		(9,491)		(9,076)
Loans, net of allowance		808,506		775,441
Premises and equipment, net		3,163		3,334
Accrued interest receivable		4,343		4,197
Other assets		45,349		45,307
Total assets	$	1,242,829	$	1,178,770

LIABILITIES AND STOCKHOLDERS’ EQUITY
Deposits:
Demand	$	488,960	$	409,350
Savings, NOW and money market		581,721		599,747
Time		19,239		19,312
Total deposits		1,089,920		1,028,409

Accrued expenses and other liabilities		9,524		6,626
Total liabilities	$	1,099,444	$	1,035,035

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; 8,112,402 and 8,123,152 shares issued, respectively; and 8,076,320 and 8,088,846 shares outstanding, respectively		81		81
Additional paid-in capital		94,172		93,611
Retained earnings		56,802		51,460
Accumulated other comprehensive loss		(7,044)		(850)
Treasury stock at cost, 36,082 and 34,306 shares, respectively		(626)		(567)
Total stockholders’ equity		143,385		143,735
Total liabilities and stockholders’ equity	$	1,242,829	$	1,178,770

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
	Ended March 31,
	2022		2021
Interest income:
Loans	$	11,020	$	9,579
Securities		815		468
Securities purchased under agreements to resell		132		161
Interest earning deposits and other		57		40
Total interest income		12,024		10,248

Interest expense:
Savings, NOW and money market deposits		218		174
Time deposits		19		20
Borrowings		1		1
Total interest expense		238		195

Net interest income		11,786		10,053
Provision for loan losses		640		1,800
Net interest income after provision for loan losses		11,146		8,253

Noninterest income:
Payment processing fees		5,316		5,370
Customer related fees, service charges and other		186		94
Total noninterest income		5,502		5,464

Noninterest expense:
Employee compensation and benefits		6,134		4,996
Occupancy and equipment		751		699
Professional and consulting services		611		775
FDIC and regulatory assessments		123		98
Advertising and marketing		225		332
Travel and business relations		90		39
Data processing		1,008		851
Other operating expenses		438		398
Total noninterest expense		9,380		8,188

Net income before income taxes		7,268		5,529
Income tax expense		1,926		1,355

Net income	$	5,342	$	4,174

Earnings per share
Basic	$	0.70	$	0.56
Diluted	$	0.66	$	0.53

See accompanying condensed notes to interim condensed consolidated financial statements

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ESQUIRE FINANCIAL HOLDINGS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME

(Dollars in thousands)

(Unaudited)


	For the Three Months
	Ended March 31,
	2022		2021
Net income	$	5,342	$	4,174
Other comprehensive (loss) income:
Unrealized losses arising during the period on securities available-for-sale		(8,526)		(2,076)
Reclassification adjustment for net gains (losses) included in net income		—		—
Tax effect		2,332		591
Total other comprehensive loss		(6,194)		(1,485)
Total comprehensive (loss) income	$	(852)	$	2,689

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		loss		stock		equity
Balance at January 1, 2022	—	8,088,846	$	—	$	81	$	93,611	$	51,460	$	(850)	$	(567)	$	143,735
Net income	—	—		—		—		—		5,342		—		—		5,342
Other comprehensive loss	—	—		—		—		—		—		(6,194)		—		(6,194)
Restricted stock award forfeitures	—	(10,750)		—		—		—		—		—		—		—
Stock compensation expense	—	—		—		—		561		—		—		—		561
Vested restricted stock awards settlement	—	(1,776)		—		—		—		—		—		(59)		(59)
Balance at March 31, 2022	—	8,076,320	$	—	$	81	$	94,172	$	56,802	$	(7,044)	$	(626)	$	143,385

												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	—	—		—		—		—		4,174		—		—		4,174
Other comprehensive loss	—	—		—		—		—		—		(1,485)		—		(1,485)
Exercise of stock options, net of repurchases (40,468 shares)	—	36,333		—		1		9		—		—		—		10
Stock compensation expense	—	—		—		—		491		—		—		—		491
Balance at March 31, 2021	—	7,829,815	$	—	$	79	$	92,122	$	37,709	$	(77)	$	(567)	$	129,266

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 Three Months Ended March 31,
	2022		2021
Cash flows from operating activities:
Net income	$	5,342	$	4,174
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses		640		1,800
Depreciation		182		154
Stock compensation expense		561		491
Gain on loans held for sale		(90)		—
Net amortization (accretion):
Securities		124		254
Loans		(239)		(181)
Right of use asset		119		115
Software		301		257
Changes in other assets and liabilities:
Accrued interest receivable		(146)		(308)
Other assets		3,196		3,756
Operating lease liability		(142)		(132)
Accrued expenses and other liabilities		1,297		2,903
Net cash provided by operating activities		11,145		13,283

Cash flows from investing activities:
Net change in loans		(34,316)		(30,284)
Net change in securities purchased under agreements to resell		2,128		1,225
Purchases of securities available-for-sale		—		(33,617)
Purchases of securities held-to-maturity		(47,544)		—
Principal repayments on securities available-for-sale		7,316		17,346
Purchases of premises and equipment		(11)		(83)
Development of capitalized software		(386)		(779)
Net cash used in investing activities		(72,813)		(46,192)

Cash flows from financing activities:
Net increase in deposits		61,511		55,607
Exercise of stock options		—		10
Tax withholding payments for vested equity awards		(59)		—
Net cash provided by financing activities		61,452		55,617

(Decrease) increase in cash and cash equivalents		(216)		22,708

Cash and cash equivalents at beginning of the period		149,156		65,185

Cash and cash equivalents at end of the period	$	148,940	$	87,893

Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest	$	238	$	195
Taxes		342		275
Noncash transactions:
Transfer from loans held for investment to held for sale		850		—
Securities purchased but not yet settled		1,743		—

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, 2021 and 2020. Operating results for the three months ended March 31, 2022 are not necessarily indicative of the results that may be expected for the year ending December 31, 2022 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 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 March 31, 2022 there were no participants in the COVID-19 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 first quarter 2022 Consolidated Statement of Financial Condition and Consolidated Statement of Income.

Subsequent Events

On April 1, 2022, the Company finalized the sale of its legacy NFL consumer post settlement loan portfolio to a third part sponsored entity (or “Fund”) in exchange for a nonvoting economic interest in the Fund valued at $13.5 million.

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On April 28, 2022, the Company announced its first regular quarterly cash dividend of $0.09 per share of common stock, payable on June 1, 2022 to each stockholder of record on May 16, 2022.

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 held for sale are accounted for at lower of cost or fair value. Net unrealized losses, if any, are recorded as a valuation allowance and charged to earnings. Loans held for sale is included with Other assets on the Consolidated Statement of Financial Condition.

New Accounting Pronouncements

In June 2016, the FASB issued Accounting Standards Update (“ASU”) 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 a smaller reporting company on January 1, 2023. The Company plans to adopt ASU 2016-13 on 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.

In March 2020, the FASB issued ASU 2020-04, “Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting.” ASU 2020-04 provides optional expedients and exceptions for accounting related to contracts, hedging relationships and other transactions affected by reference rate reform if certain criteria are met. ASU 2020-04 applies only to contracts, hedging relationships, and other transactions that reference LIBOR or another reference rate expected to be discontinued because of reference rate reform and do not apply to contract modifications made and hedging relationships entered into or evaluated after December 31, 2022, except for hedging relationships existing as of December 31, 2022, that an entity has elected certain optional expedients for and that are retained through the end of the hedging relationship. ASU 2020-04 was effective upon issuance and generally can be applied through December 31, 2022. Adoption of the standard is not expected to have a material impact on the Company’s operating results or financial condition.

In March 2022, the FASB issued ASU 2022-02, “Financial Instruments — Credit Losses (Topic 326): Troubled Debt Restructuring and Vintage Disclosures”. ASU 2022-02 eliminates the accounting guidance for TDRs by creditors in Subtopic 310-40, “Receivables — Troubled Debt Restructurings by Creditors”, while enhancing disclosure requirements for certain loan refinancing and restructurings by creditors when a borrower is experiencing financial difficulty. Additionally, the amendments in this ASU require that public business entities disclose current-period gross write-offs by year of origination for financing receivables and net investments in leases within the scope of ASU 326-20, “Financial Instruments — Credit Losses: Measured at Amortized Cost”. The Company is in the process of evaluating the ASU in conjunction with its adoption of CECL on January 1, 2023.

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NOTE 2 — Debt Securities

The following tables summarize the amortized cost and fair value of securities available-for-sale and securities held-to-maturity and the corresponding amounts of gross unrealized gains and losses recognized in accumulated other comprehensive loss and gross unrecognized gains and losses:


	March 31, 2022
			Gross		Gross
	Amortized		Unrealized		Unrealized		Fair
	Cost		Gains		Losses		Value

	(In thousands)
Securities available-for-sale:
Mortgage-backed securities – agency	$	120,157	$	107	$	(8,774)	$	111,490
Collateralized mortgage obligations (CMOs) – agency		23,720		4		(1,053)		22,671
Total available-for-sale	$	143,877	$	111	$	(9,827)	$	134,161

			Gross		Gross
	Amortized		Unrecognized		Unrecognized		Fair
	Cost		Gains		Losses		Value

	(In thousands)
Securities held-to-maturity:
Collateralized mortgage obligations (CMOs) – agency	$	47,544	$	—	$	(2,618)	$	44,926
Total held-to-maturity	$	47,544	$	—	$	(2,618)	$	44,926

	December 31, 2021
			Gross		Gross
	Amortized		Unrealized		Unrealized		Fair
	Cost		Gains		Losses		Value

	(In thousands)
Securities available-for-sale:
Mortgage-backed securities – agency	$	122,258	$	673	$	(2,050)	$	120,881
Collateralized mortgage obligations (CMOs) – agency		27,316		237		(50)		27,503
Total available-for-sale	$	149,574	$	910	$	(2,100)	$	148,384

As of December 31, 2021, there were no securities held-to-maturity.

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 months ended March 31, 2022 and 2021.

At March 31, 2022, securities having a carrying value of $155.4 million were pledged to the Federal Home Loan Bank of New York (FHLB) for borrowing capacity totaling $133.9 million. At December 31, 2021, securities having a fair value of $121.5 million were pledged to the FHLB for borrowing capacity totaling $115.4 million. At March 31, 2022 and December 31, 2021, the Company had no outstanding FHLB advances.

At March 31, 2022, securities having a fair value of $24.6 million were pledged to the Federal Reserve Bank of New York (FRB) for borrowing capacity totaling $23.8 million. At December 31, 2021, securities having a fair value of $26.9 million were pledged to the FRB for borrowing capacity totaling $26.1 million. At March 31, 2022 and December 31, 2021, the Company had no outstanding FRB borrowings.

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The following table provides the gross unrealized and unrecognized losses and fair value, aggregated by investment category and length of time the individual securities have been in a continuous unrealized or unrecognized loss position as of:


	March 31, 2022
	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)
Securities available-for-sale:
Mortgage-backed securities – agency	$	63,981	$	(4,256)	$	39,448	$	(4,518)	$	103,429	$	(8,774)
CMOs – agency		19,562		(981)		1,037		(72)		20,599		(1,053)
Total temporarily impaired securities	$	83,543	$	(5,237)	$	40,485	$	(4,590)	$	124,028	$	(9,827)

	Less Than 12 Months				12 Months or Longer				Total
	Fair Value		Gross Unrecognized Losses		Fair Value		Gross Unrecognized Losses		Fair Value		Gross Unrecognized Losses

	(In thousands)
Securities held-to-maturity:
CMOs – agency	$	44,926	$	(2,618)	$	—	$	—	$	44,926	$	(2,618)
Total temporarily impaired securities	$	44,926	$	(2,618)	$	—	$	—	$	44,926	$	(2,618)

	December 31, 2021
	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)
Securities available-for-sale:
Mortgage-backed securities - agency	$	101,235	$	(1,813)	$	4,503	$	(237)	$	105,738	$	(2,050)
CMOs - Agency		7,416		(50)		—		—		7,416		(50)
Total temporarily impaired securities	$	108,651	$	(1,863)	$	4,503	$	(237)	$	113,154	$	(2,100)

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 March 31, 2022, securities in unrealized or unrecognized 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 March 31, 2022.

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No impairment charges were recorded for the three months ended March 31, 2022 and 2021.

NOTE 3 — Loans

The composition of loans by class is summarized as follows:


	At March 31,		At December 31,
	2022		2021

	(In thousands)
Real estate:
1 – 4 family	$	33,468	$	40,753
Multifamily		262,465		254,852
Commercial real estate		62,447		48,589
Construction		—		—
Total real estate		358,380		344,194
Commercial		451,930		432,108
Consumer		8,281		8,681
Total loans held for investment	$	818,591	$	784,983
Deferred loan fees and unearned premiums, net		(594)		(466)
Allowance for loan losses		(9,491)		(9,076)
Loans held for investment, net	$	808,506	$	775,441

At December 31, 2021, the commercial loans balance included Small Business Administration (“SBA”) Paycheck Protection Program (“PPP”) loans of $4.2 million. There were no PPP loans outstanding at March 31, 2022.

The following tables present the activity in the allowance for loan losses by class for the three months ending March 31, 2022 and 2021:



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

	(In thousands)
March 31, 2022
Allowance for loan losses:
Beginning balance	$	285	$	6,319	$	1,789	$	552	$	—	$	131	$	9,076
Provision (credit) for loan losses		(54)		254		253		136		—		51		640
Recoveries		—		2		—		—		—		—		2
Loans charged-off		—		—		(178)		—		—		(49)		(227)
Total ending allowance balance	$	231	$	6,575	$	1,864	$	688	$	—	$	133	$	9,491

March 31, 2021
Allowance for loan losses:
Beginning balance	$	342	$	5,003	$	1,278	$	597	$	—	$	4,182	$	11,402
Provision (credit) for loan losses		(23)		753		247		16		—		807		1,800
Recoveries		—		—		—		—		—		—		—
Loans charged-off		—		—		—		—		—		(21)		(21)
Total ending allowance balance	$	319	$	5,756	$	1,525	$	613	$	—	$	4,968	$	13,181

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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 March 31, 2022 and December 31, 2021:


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

	(In thousands)
March 31, 2022
Allowance for loan losses:
Ending allowance balance attributable to loans:
Individually evaluated for impairment	$	—	$	—	$	—	$	—	$	—	$	—	$	—
Collectively evaluated for impairment		231		6,575		1,864		688		—		133		9,491

Total ending allowance balance	$	231	$	6,575	$	1,864	$	688	$	—	$	133	$	9,491

Loans:
Loans individually evaluated for impairment	$	—	$	—	$	—	$	—	$	—	$	—	$	—
Loans collectively evaluated for impairment		33,468		451,930		262,465		62,447		—		8,281		818,591

Total ending loans balance	$	33,468	$	451,930	$	262,465	$	62,447	$	—	$	8,281	$	818,591


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

	(In thousands)
December 31, 2021
Allowance for loan losses:
Ending allowance balance attributable to loans:
Individually evaluated for impairment	$	—	$	—	$	—	$	—	$	—	$	—	$	—
Collectively evaluated for impairment		285		6,319		1,789		552		—		131		9,076

Total ending allowance balance	$	285	$	6,319	$	1,789	$	552	$	—	$	131	$	9,076

Loans:
Loans individually evaluated for impairment	$	—	$	—	$	—	$	—	$	—	$	—	$	—
Loans collectively evaluated for impairment		40,753		432,108		254,852		48,589		—		8,681		784,983

Total ending loans balance	$	40,753	$	432,108	$	254,852	$	48,589	$	—	$	8,681	$	784,983

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

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There were no impaired loans as of March 31, 2022 and December 31, 2021.

The following table provides an analysis of average recorded investment and interest income recognized by segment on impaired loans during the three months ended March 31, 2022.


	For the Three Months Ended March 31,
	2022				2021
	Average		Interest		Average		Interest
	Recorded		Income		Recorded		Income
	Investment		Recognized		Investment		Recognized

	(In thousands)
1-4 family	$	—	$	—	$	—	$	—
Commercial		—		—		—		—
Multifamily		515		—		180		—
Commercial real estate		—		—		—		—
Construction		—		—		—		—
Consumer		2		—		2,120		—
Total	$	517	$	—	$	2,300	$	—

The following tables present the aging of the recorded investment in past due loans by class of loans as of March 31, 2022 and December 31, 2021:


									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)
March 31, 2022
1 – 4 family	$	—	$	—	$	—	$	—	$	—	$	33,468	$	33,468
Commercial		111		64		—		—		175		451,755		451,930
Multifamily		—		—		—		—		—		262,465		262,465
Commercial real estate		—		—		—		—		—		62,447		62,447
Construction		—		—		—		—		—		—		—
Consumer		44		7		—		7		58		8,223		8,281
Total	$	155	$	71	$	—	$	7	$	233	$	818,358	$	818,591


									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, 2021
1 – 4 family	$	—	$	—	$	—	$	—	$	—	$	40,753	$	40,753
Commercial		—		—		—		—		—		432,108		432,108
Multifamily		1,034		—		—		—		1,034		253,818		254,852
Commercial real estate		—		—		—		—		—		48,589		48,589
Construction		—		—		—		—		—		—		—
Consumer		21		10		—		6		37		8,644		8,681
Total	$	1,055	$	10	$	—	$	6	$	1,071	$	783,912	$	784,983

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

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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.

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)
March 31, 2022
1 – 4 family	$	30,453	$	3,015	$	—	$	—
Commercial		426,081		22,624		3,225		—
Multifamily		261,744		—		721		—
Commercial real estate		58,629		3,818		—		—
Construction		—		—		—		—
Consumer		8,281		—		—		—
Total	$	785,188	$	29,457	$	3,946	$	—


	Pass		Special Mention		Substandard		Doubtful

	(In thousands)
December 31, 2021
1 – 4 family	$	37,738	$	3,015	$	—	$	—
Commercial		410,548		17,977		3,583		—
Multifamily		254,131		—		721		—
Commercial real estate		44,771		3,818		—		—
Construction		—		—		—		—
Consumer		8,681		—		—		—
Total	$	755,869	$	24,810	$	4,304	$	—

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 March 31, 2022 and December 31, 2021. Furthermore, there were no loans modified during the three months ended March 31, 2022 and 2021 as TDRs. In order to determine whether

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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.

Pledged Loans

At March 31, 2022, loans totaling $27.3 million were pledged to the Federal Home Loan Bank of New York for borrowing capacity totaling $20.9 million. At December 31, 2021, loans totaling $33.9 million were pledged to the Federal Home Loan Bank of New York for borrowing capacity totaling $26.0 million.

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 March 31,
	2022		2021

	(In thousands)
Payment processing fees
Payment processing income	$	5,100	$	5,167
ACH income		216		203
Customer related fees, service charges and other
Administrative service income		9		18
Gain on loans held for sale ⁽¹⁾		90		—
Other		87		76
Total noninterest income	$	5,502	$	5,464

(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.

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●

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.

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 months ended March 31, 2022 and 2021.

The following table presents a summary of the activity related to options as of March 31, 2022:


				Weighted
		Weighted		Average
		Average		Remaining
		Exercise		Contractual
	Options	Price		Life (Years)
March 31, 2022
Outstanding at beginning of year	649,600	$	16.66
Granted	—		—
Exercised	—		—
Forfeited	(6,334)		25.68
Expired	—		—
Outstanding at period end	643,266	$	16.57	5.27
Vested or expected to vest	643,266	$	16.57	5.27
Exercisable at period end	532,364	$	14.43	4.44

The Company recognized compensation expense related to options of $124 thousand and $134 thousand for the three months ended March 31, 2022 and 2021, respectively. At March 31, 2022, unrecognized compensation cost related to nonvested options was approximately $1.1 million and is expected to be recognized over a weighted average period of 2.32 years. The intrinsic value for outstanding options and for options vested or expected to vest was $11.0 million and $10.2 million for exercisable options at March 31, 2022.

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


	For the Three Months Ended
	March 31,
	2022		2021

	(In thousands)
Intrinsic value of options exercised	$	—	$	861
Cash received from option exercises		—		10
Excess tax benefit from option exercises		—		164

The following table presents a summary of the activity related to restricted stock as of March 31, 2022:


		Weighted Average
		Grant Date
	Shares	Fair Value
March 31, 2022
Outstanding at beginning of year	482,750	$	24.59
Granted	—		—
Vested	(20,497)		19.25
Forfeited	(10,750)		24.32
Outstanding at period end	451,503	$	24.84

The Company recognized compensation expense related to restricted stock of $437 thousand and $357 thousand for the three months ended March 31, 2022 and 2021, respectively. As of March 31, 2022, there was $7.9 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 4.48 years.

NOTE 6 — Earnings per Share

The factors used in the earnings per share computation follow:


	For the Three Months Ended
	March 31,
	2022		2021

	(Dollars in thousands, except per share data)
Basic
Net income	$	5,342	$	4,174
Weighted average shares outstanding		7,620,241		7,426,139
Basic earnings per share	$	0.70	$	0.56

Diluted
Net income	$	5,342	$	4,174
Weighted average shares outstanding for basic earnings per share		7,620,241		7,426,139
Add: Dilutive effects of share based awards		527,234		420,137
Average shares and dilutive potential shares		8,147,475		7,846,276
Diluted earnings per share	$	0.66	$	0.53

Share-based awards totaling 69,150 and 118,350 shares of common stock were not considered in computing diluted earnings per common share for the three months ended March 31, 2022 and March 31, 2021, 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 March 31, 2022, right of use (“ROU”) lease assets and related lease liabilities were $2.3 million and $2.8 million, respectively. As of December 31, 2021, ROU lease assets and related lease liabilities were $2.4 million and $3.0 million, respectively. ROU assets are included within Other assets and related lease liabilities are included within Accrued expenses and other liabilities on the Consolidated Statements of Financial Condition.

Maturities of the Company’s operating lease liabilities at March 31, 2022 are as follows:


		Operating Lease
		Liabilities
		(In thousands)
2022	$	480
2023		636
2024		652
2025		668
2026		627
Thereafter		—
Total operating lease payments	$	3,063
Less: interest		217
Present value of operating lease liabilities	$	2,846


	As of March 31,
	2022			2021
Weighted-average remaining lease term		4.65	years		5.59	years
Weighted-average discount rate		3.07	%		3.04	%

The components of total lease cost are as follows:



	For the Three Months Ended
	March 31,
	2022		2021

	(In thousands)
Operating lease cost	$	142	$	142
Short-term lease cost		—		—
Total lease cost	$	142	$	142

Cash paid for operating leases	$	163	$	159

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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)
March 31, 2022
Assets
Available-for-sale securities
Mortgage-backed securities – agency	$	—	$	111,490	$	—
CMOs – agency		—		22,671		—
Total	$	—	$	134,161	$	—

December 31, 2021
Assets
Available-for-sale securities
Mortgage-backed securities – agency	$	—	$	120,881	$	—
CMOs – agency		—		27,503		—
Total	$	—	$	148,384	$	—

There were no transfers between Level 1 and Level 2 during the three months ended March 31, 2022 and 2021.

The legacy NFL consumer loan portfolio was measured on a nonrecurring basis and assigned a Level 3 fair value of $14.2 million and $14.1 million as of March 31, 2022 and December 31, 2021, respectively, 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 9% discount rate applied which reflects the rate of return market participants would expect to earn on investments of equivalent risk. A partial release of the valuation allowance was recorded during the first quarter 2022 which totaled $90 thousand. We also had a multifamily loan held for sale with a Level 2 fair value of $850 thousand which was measured utilizing an offer from a market participant.

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The following tables present the carrying amounts and fair values (represents exit price) of financial instruments not carried at fair value at March 31, 2022 and December 31, 2021:


	Fair Value Measurement at March 31, 2022, Using:
	Carrying
	Value		(Level 1)		(Level 2)		(Level 3)		Total

	(In thousands)
Financial Assets:
Cash and cash equivalents	$	148,940	$	1,100	$	147,840	$	—	$	148,940
Securities purchased under agreements to resell, at cost		48,143		—		—		48,143		48,143
Securities, held-to-maturity		47,544		—		44,926		—		44,926
Securities, restricted, at cost		2,680		N/A		N/A		N/A		N/A
Loans held for investment, net		808,506		—		—		801,863		801,863
Accrued interest receivable		4,343		—		278		3,972		4,250

Financial Liabilities:
Time deposits		19,239		—		19,178		—		19,178
Demand and other deposits		1,070,681		1,070,681		—		—		1,070,681
Secured borrowings		48		—		48		—		48
Accrued interest payable		—		—		—		—		—


	Fair Value Measurement at December 31, 2021, Using:
	Carrying
	Value		(Level 1)		(Level 2)		(Level 3)		Total

	(In thousands)
Financial Assets:
Cash and cash equivalents	$	149,156	$	2,202	$	146,954	$	—	$	149,156
Securities purchased under agreements to resell, at cost		50,271		—		—		50,271		50,271
Securities, restricted, at cost		2,680		N/A		N/A		N/A		N/A
Loans held for investment, net		775,441		—		—		774,114		774,114
Accrued interest receivable		4,197		—		252		3,945		4,197

Financial Liabilities:
Time deposits		19,312		—		19,330		—		19,330
Demand and other deposits		1,009,097		1,009,097		—		—		1,009,097
Secured borrowings		48		—		48		—		48
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 months ending March 31, 2022 and 2021:


	Three Months Ended
	March 31,
	2022		2021

	(In thousands)
Unrealized (Losses) Gains on Available-for-Sale Securities
Beginning balance	$	(850)	$	1,408
Other comprehensive loss before reclassifications, net of tax		(6,194)		(1,485)
Amounts reclassified from accumulated other comprehensive income		—		—
Net current period other comprehensive loss		(6,194)		(1,485)
Ending balance	$	(7,044)	$	(77)

There were no reclassifications out of accumulated other comprehensive (loss) income for the three months ended March 31, 2022 and 2021.

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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 March 31, 2022 and December 31, 2021 and results of operations for the three months ended March 31, 2022 and 2021 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, 2021 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 payment processing 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 a 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, including the Dodd-Frank Act and the JOBS Act, which could result in, among other things, increased deposit insurance premiums and assessments, capital requirements, regulatory fees and compliance costs, particularly the new capital regulations, and the resources we have available to address such changes;

●

changes in accounting policies and practices, as may be adopted by the bank regulatory agencies, the Financial Accounting Standards Board, the Securities and Exchange Commission or the Public Company Accounting Oversight Board;

●

loan delinquencies and changes in the underlying cash flows of our borrowers;

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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.

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, 2021, 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.

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.

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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.

A company loses emerging growth company status on the earlier of: (i) the last day of the fiscal year of the company during which it had total annual gross revenues of $1.07 billion or more; (ii) the last day of the fiscal year of the issuer following the fifth anniversary of the date of the first sale of common equity securities of the company pursuant to an effective registration statement under the Securities Act of 1933; (iii) the date on which such company has, during the previous three-year period, issued more than $1.0 billion in non-convertible debt; or (iv) the date on which such company is deemed to be a “large accelerated filer” under Securities and Exchange Commission regulations (generally, at least $700 million of voting and non-voting equity held by non-affiliates).

The Company will lose its emerging growth company status on December 31, 2022 since that would be the last day of the fiscal year of the Company following the fifth anniversary of the date of the first sale of the common equity securities of the Company pursuant to an effective registration statement under the Securities Act of 1933.

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 elected to participate in the Paycheck Protection Program administered by the SBA with the intention to provide our customer base access to this critical program. 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 March 31, 2022, we have been fully repaid on our PPP loan portfolio cumulatively totaling $45.5 million.

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 March 31, 2022, there were no participants in our payment deferral program.

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Comparison of Financial Condition at March 31, 2022 and December 31, 2021

Assets. Our total assets were $1.2 billion at March 31, 2022, an increase of $64.1 million, or 5.4%, from $1.2 billion at December 31, 2021, primarily due to the deployment of excess cash in the first quarter of 2022 into securities held-to-maturity of $47.5 million, and increases in loans held for investment of $33.5 million, or 4.3%, offset by net paydowns and unrealized losses in securities available-for-sale of $14.2 million, or 9.6%, and reverse repurchase agreement paydowns of $2.1 million, or 4.2%.

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


	At March 31,				At December 31,
	2022				2021
	Amount		Percent		Amount		Percent

	(Dollars in thousands)
Real estate:
Multifamily	$	262,465	32.1	%	$	254,852	32.5	%
Commercial real estate		62,447	7.6			48,589	6.1
1 – 4 family		33,468	4.1			40,753	5.2
Total real estate		358,380	43.8			344,194	43.8
Commercial		451,930	55.2			427,859	54.6
PPP		—	—			4,249	0.5
Consumer		8,281	1.0			8,681	1.1
Total loans held for investment	$	818,591	100.0	%	$	784,983	100.0	%
Deferred loan fees and unearned premiums, net		(594)				(466)
Allowance for loan losses		(9,491)				(9,076)
Loans held for investment, net	$	808,506			$	775,441

At March 31, 2022, loans were $818.0 million, or 75.1% of total deposits, compared to $784.5 million, or 76.3% of total deposits, at December 31, 2021. The growth in loans was primarily driven by net production in commercial and commercial real estate loans. Commercial loans increased $24.1 million, or 5.6%, to $451.9 million at March 31, 2022 from $427.9 million at December 31, 2021. Commercial real estate loans increased $13.9 million, or 28.5%, to $62.4 million at March 31, 2022 from $48.6 million at December 31, 2021.

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


	March 31, 2022				December 31, 2021
	Amount		Percent		Amount		Percent

	(Dollars in thousands)
Litigation-Related Loans
Commercial Litigation-Related:
Working capital lines of credit	$	207,700	52.6	%	$	210,148	54.4	%
Case cost lines of credit		131,803	33.3			127,859	33.1
Term loans		53,208	13.5			45,415	11.8
Total Commercial Litigation-Related		392,711	99.4			383,422	99.3
Consumer Litigation-Related:
Post-settlement consumer loans		2,460	0.6			2,451	0.7
Structured settlement loans		92	0.0			116	0.0
Total Consumer Litigation-Related		2,552	0.6			2,567	0.7
Total Litigation-Related Loans	$	395,263	100.0	%	$	385,989	100.0	%

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At March 31, 2022, our Litigation-Related loans, which include commercial loans to law firms and consumer lending to plaintiffs/claimants and attorneys, totaled $395.3 million, or 48.3% of our total loan portfolio, compared to $386.0 million, or 49.2% of our total loan portfolio at December 31, 2021. We remain focused on prudently growing our Litigation-Related loan portfolio.

Securities. Securities available-for-sale decreased $14.2 million, or 9.6%, to $134.2 million at March 31, 2022 from $148.4 million at December 31, 2021, driven by unrealized losses of $8.5 million, paydowns of $7.3 million, and net amortization of $124 thousand, offset by purchases of $1.7 million. Commencing in the first quarter of 2022, we invested a portion of our excess liquidity in held-to-maturity securities, totaling $47.5 million at March 31, 2022.

Funding. Total deposits increased $61.5 million, or 6.0%, to $1.1 billion at March 31, 2022 from $1.0 billion at December 31, 2021. 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 $1.1 billion at March 31, 2022, or 98.2% of total deposits at that date, compared to $1.0 billion or 98.1% of total deposits at December 31, 2021. Demand deposits (noninterest bearing) increased $79.6 million, or 19.4%, to $489.0 million, representing 44.9% of total deposits.

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 $618.0 million at March 31, 2022 which is a $80.5 million, or 15.0%, increase from the December 31, 2021 balance of $537.5 million.

At March 31, 2022, we had the ability to borrow a total of $154.9 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 $23.8 million. At March 31, 2022, 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 March 31, 2022.

Equity. Total stockholders’ equity decreased $350 thousand to $143.4 million at March 31, 2022, from $143.7 million at December 31, 2021, primarily due to other comprehensive losses of $6.2 million, due to the decline in fair value of available-for-sale securities reflective of the recent increases in short-term market interest rates, partially offset by net income of $5.3 million and amortization of share based compensation of $561 thousand.

Asset Quality. Nonperforming assets, totaling $7 thousand, consisted of several nonaccrual consumer loans as of March 31, 2022. As of March 31, 2022, the allowance for loan losses was $9.5 million, or 1.16% of total loans, as compared to $9.1 million, or 1.16% of total loans at December 31, 2021. The stability in the allowance as a percentage of loans is reflective of reduced pandemic related uncertainty. At March 31, 2022, special mention and substandard loans totaled $29.5 million and $3.9 million, respectively.

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

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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 March 31,
	2022						2021

					(Dollars in thousands)
	Average				Average		Average				Average
	Balance		Interest		Yield/Cost		Balance		Interest		Yield/Cost
INTEREST EARNING ASSETS
Loans, held for investment	$	776,521	$	11,020	5.76	%	$	677,531	$	9,579	5.73	%
Securities, includes restricted stock		181,328		815	1.82	%		119,829		468	1.58	%
Securities purchased under agreements to resell		49,612		132	1.08	%		51,446		161	1.27	%
Interest earning cash and other		72,456		57	0.32	%		57,284		40	0.28	%
Total interest earning assets		1,079,917		12,024	4.52	%		906,090		10,248	4.59	%

NONINTEREST EARNING ASSETS		50,832						30,843

TOTAL AVERAGE ASSETS	$	1,130,749					$	936,933

INTEREST BEARING LIABILITIES

Savings, NOW, Money Market deposits	$	489,245	$	218	0.18	%	$	402,776	$	174	0.18	%
Time deposits		19,242		19	0.40	%		11,189		20	0.72	%
Total interest bearing deposits		508,487		237	0.19	%		413,965		194	0.19	%
Borrowings		50		1	8.11	%		50		1	8.11	%
Total interest bearing liabilities		508,537		238	0.19	%		414,015		195	0.19	%

NONINTEREST BEARING LIABILITIES
Demand deposits		469,938						386,826
Other liabilities		8,414						8,779
Total noninterest bearing liabilities		478,352						395,605
Stockholders' equity		143,860						127,313

TOTAL AVG. LIABILITIES AND EQUITY	$	1,130,749					$	936,933
Net interest income			$	11,786					$	10,053
Net interest spread					4.33	%					4.40	%
Net interest margin					4.43	%					4.50	%

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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
	March 31,
	2022 vs. 2021
	Increase				Total
	(Decrease) due to				Increase
	Volume		Rate		(Decrease)

	(In thousands)
Interest earned on:
Loans held for investment	$	1,405	$	36	$	1,441
Securities, includes restricted stock		268		79		347
Securities purchased under agreements to resell		(6)		(23)		(29)
Interest earning cash and other		12		5		17
Total interest income		1,679		97		1,776

Interest paid on:
Savings, NOW, Money Markets		38		6		44
Time deposits		10		(11)		(1)
Total deposits		48		(5)		43
Borrowings		—		—		—
Total interest expense		48		(5)		43
Change in net interest income	$	1,631	$	102	$	1,733

Comparison of Operating Results for the Three Months Ended March 31, 2022 and 2021

General. Net income increased $1.2 million, or 28.0%, to $5.3 million for the three months ended March 31, 2022 from $4.2 million for the three months ended March 31, 2021. The increase resulted from a $1.7 million increase in net interest income and a decrease in the provision for loan losses of $1.2 million, partially offset by an increase of $1.2 million in noninterest expense.

Net Interest Income. Net interest income increased $1.7 million, or 17.2%, to $11.8 million for the three months ended March 31, 2022 from $10.1 million for the three months ended March 31, 2021, due to a $1.8 million increase in interest income, partially offset by a $43 thousand increase in interest expense.

Our net interest margin decreased 7 basis points to 4.43% for the three months ended March 31, 2022 from 4.50% for the three months ended March 31, 2021.

Interest Income. Interest income increased $1.8 million, or 17.3%, to $12.0 million for the three months ended March 31, 2022 from $10.2 million for the three months ended March 31, 2021 and was attributable to an increase in loan interest income, interest earning cash and other, and securities interest income, offset by a decrease in reverse repurchase interest income.

Loan interest income increased $1.4 million, or 15.0%, to $11.0 million for the three months ended March 31, 2022 from $9.6 million for the three months ended March 31, 2021. This increase was attributable to a $99.0 million, or 14.6%, increase in the average loan balance primarily from our litigation-related and multifamily portfolios and a 3 basis point increase in loan yields.

Securities interest income increased $347 thousand, or 74.1%, to $815 thousand for the three months ended March 31, 2022 from $468 thousand for the three months ended March 31, 2021. This increase was primarily attributable to the

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investment of excess liquidity into held-to-maturity securities totaling $47.5 million at March 31, 2022, driving a $61.5 million, or 51.3%, increase in average securities balances. Additionally, impacts of the current interest rate environment led to a 24 basis point increase in yields.

Securities purchased under agreements to resell income decreased $29 thousand, or 18.0%, to $132 thousand for the three months ended March 31, 2022 from $161 thousand for the three months ended March 31, 2021. The decrease was attributable to fluctuations in short-term interest rates.

Interest earning cash and other interest income increased $17 thousand, or 42.5%, to $57 thousand for the three months ended March 31, 2022 from $40 thousand for the three months ended March 31, 2021.

Interest Expense. Interest expense increased $43 thousand, or 22.1%, to $238 thousand for the three months ended March 31, 2022 from $195 thousand for the three months ended March 31, 2021, primarily attributable to a $94.5 million, or 22.8%, increase in the average balance of interest bearing deposits, driven by our litigation depository relationships. The blended interest rate we paid on interest bearing deposits remained at 19 basis points for both the three months ended March 31, 2022 and 2021.

Provision for Loan Losses. Our provision for loan losses was $640 thousand for the three months ended March 31, 2022 compared to $1.8 million for the three months ended March 31, 2021. The decrease in the provision relates to a reduced pandemic related uncertainty and the reclassification of the NFL loan portfolio to loans held for sale in the third quarter of 2021.

Noninterest Income. Noninterest income information is as follows:


	For the Three Months Ended
	March 31,				Change
	2022		2021		Amount		Percent

	(Dollars in thousands)
Payment processing fees
Payment processing income	$	5,100	$	5,167	$	(67)	(1.3)	%
ACH income		216		203		13	6.4
Customer related fees and service charges
Administrative service income		9		18		(9)	(50.0)
Other		87		76		11	14.5
Unrealized gain on loans held for sale		90		—		90	NA
Total noninterest income	$	5,502	$	5,464	$	38	0.7	%

Payment processing income in the first quarter of 2022 was consistent with the first quarter of 2021. Payment processing volumes and transactions for the credit and debit card processing platform 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 post pandemic and were facilitated by our focus on technology and other resources in the payments vertical. Quarterly volumes increased $1.3 billion, or 25.5%, to $6.2 billion, as compared to the first quarter of 2021 and quarterly transactions increased 23.2 million, or 24.5%, to 117.8 million, during the same comparable period. Customer related fees and service charges have remained flat due to the impact of low short-term interest rates and its impact on administrative service income on off-balance sheet funds. Off-balance sheet sweep funds totaled $618.0 million at March 31, 2022, demonstrating the continued strength of our branchless core business model. In the first quarter of 2022, the Company recorded a partial release of the valuation allowance on the held for sale NFL consumer post settlement loan portfolio totaling $90 thousand.

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Noninterest Expense. Noninterest expense information is as follows:


	For the Three Months Ended
	March 31,				Change
	2022		2021		Amount		Percent

	(Dollars in thousands)
Noninterest expense
Employee compensation and benefits	$	6,134	$	4,996	$	1,138	22.8	%
Occupancy and equipment		751		699		52	7.4
Professional and consulting services		611		775		(164)	(21.2)
FDIC and regulatory assessments		123		98		25	25.5
Advertising and marketing		225		332		(107)	(32.2)
Travel and business relations		90		39		51	130.8
Data processing		1,008		851		157	18.4
Other operating expenses		438		398		40	10.1
Total noninterest expense	$	9,380	$	8,188	$	1,192	14.6	%

Employee compensation and benefits costs increased due to increases in staff and officer level employees to support our growth, investment in digital platforms and related sales/marketing divisions, and the impact of salary, bonus and stock-based compensation increases. Due to the effects of inflation on the overall economy and consumer prices, we pro-actively increased our employees’ base salary at year-end in excess of industry and national averages to support employee retention. Professional and consulting service costs decreased, partially offsetting the increase in employee compensation and benefits as previously contracted consultants were hired, primarily in our technology development and digital marketing departments. 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 and additional office space to support our continued growth. Travel and business relations costs increased as we re-engaged in our traditional high touch marketing and sales efforts to complement our digital marketing efforts. Advertising and marketing costs decreased due to certain discrete projects in the first quarter of 2021.

Income Tax Expense. We recorded an income tax expense of $1.9 million for the three months ended March 31, 2022, reflecting an effective tax rate of 26.5%, compared to $1.4 million, or 24.5%, for the three months ended March 31, 2021. This effective tax rate increase was driven by certain discrete tax benefits related to share-based compensation in the first quarter of 2021.

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

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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 March 31,
	2022
	Estimated
Changes in	12-Months
Interest Rates	Net Interest
(Basis Points)	Income			Change

	(Dollars in thousands)
400	$	76,148	$	20,776
300		70,550		15,178
200		64,937		9,565
100		59,782		4,410
0		55,372		—
-100		52,793		(2,579)
-200		50,814		(4,558)

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

The following table presents the estimated changes in EVE of Esquire Bank, National Association, calculated on a bank-only basis that would result from changes in market interest rates at March 31, 2022.


	At March 31,
	2022
Changes in	Economic
Interest Rates	Value of
(Basis Points)	Equity			Change

	(Dollars in thousands)
400	$	254,212	$	45,708
300		243,684		35,180
200		232,436		23,932
100		220,868		12,364
0		208,504		—
-100		189,469		(19,035)
-200		156,547		(51,957)

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

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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 March 31, 2022, cash and cash equivalents totaled $148.9 million.

At March 31, 2022, through pledging of our securities and certain loans, we had the ability to borrow a total of $154.9 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 $23.8 million. At March 31, 2022, 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 March 31, 2022.

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 March 31, 2022, 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.

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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 March 31, 2022
Total Risk-based Capital Ratio
Bank	10.00	%	10.50	%	15.63	%

Tier 1 Risk-based Capital Ratio
Bank	8.00	%	8.50	%	14.55	%

Common Equity Tier 1 Capital Ratio
Bank	6.50	%	7.00	%	14.55	%

Tier 1 Leverage Ratio
Bank	5.00	%	4.00	%	11.55	%

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.

Effects of Inflation. The impact of inflation, as it affects banks, differs substantially from the impact on non-financial institutions. Banks have assets which are primarily monetary in nature and which tend to move with inflation. This is especially true for banks with a high percentage of rate sensitive interest-earning assets and interest-bearing liabilities. A bank can further reduce the impact of inflation with proper management of its rate sensitivity gap. This gap represents the difference between interest rate sensitive assets and interest rate sensitive liabilities. The Company attempts to structure its assets and liabilities and manages its gap to protect against substantial changes in interest rate scenarios, in order to minimize the potential effects of inflation.

Item 3.Quantitative and Qualitative Disclosures About Market Risk

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

Item 4.Controls and Procedures

An evaluation was performed under the supervision and with the participation of the Company’s management, including the Principal Executive Officer and the Principal Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) promulgated under the Securities and Exchange Act of 1934, as amended) as of March 31, 2022. 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.

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During the quarter ended March 31, 2022, 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 March 31, 2022, 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.

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

The following table presents information with respect to purchases we made of our common stock during the quarter ended March 31, 2022.


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 (2)
January 1, 2022 through January 31, 2022	1,776 ⁽¹⁾	$	33.44	—	265,694
February 1, 2022 through February 28, 2022	—		—	—	265,694
March 1, 2022 through March 31, 2022	—		—	—	265,694

(1)

Repurchases made in connection with the vesting of certain share awards.

(2)

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 March 31, 2022, 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: May 13, 2022	/s/ Andrew C. Sagliocca
	Andrew C. Sagliocca
	President and Chief Executive Officer

Date: May 13, 2022	/s/ Michael Lacapria
	Michael Lacapria
	Senior Vice President and Chief Financial Officer