Esquire Financial 10Q 2021 Q2 Quarterly report

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 June 30, 2021


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

For the transition period from to

Commission File No. 001-38131

Esquire Financial Holdings, Inc.

(Exact Name of Registrant as Specified in Its Charter)


Maryland		27-5107901
(State or Other Jurisdiction of Incorporation or Organization)		(I.R.S. Employer Identification No.)

100 Jericho Quadrangle, Suite 100, Jericho, New York		11753
(Address of Principal Executive Offices)		(Zip Code)

(516) 535-2002

(Registrant’s Telephone Number, Including Area Code)

N/A

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

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

Title of each class

Trading

Symbol(s)

Name of each exchange on which registered

Common Stock, $0.01 par value

ESQ

The Nasdaq Stock Market LLC

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

YES ⌧ NO ◻

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

YES ⌧ NO ◻

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


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

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

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

YES ☐ NO ⌧

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: As of August 1, 2021, there were 7,830,704 outstanding shares of the issuer’s common stock.

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Esquire Financial Holdings, Inc.

Form 10-Q

Table of Contents

		Page
PART I. FINANCIAL INFORMATION		3

Item 1.	Financial Statements (unaudited)	3

	Condensed Consolidated Statements of Financial Condition	3

	Condensed Consolidated Statements of Income	4

	Condensed Consolidated Statements of Comprehensive Income	5

	Condensed Consolidated Statements of Changes in Stockholders’ Equity	6

	Condensed Consolidated Statements of Cash Flows	7

	Notes to Interim Condensed Consolidated Financial Statements	8

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

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	40

Item 4.	Controls and Procedures	40

PART II. OTHER INFORMATION		42

Item 1.	Legal Proceedings	42

Item 1A.	Risk Factors	42

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	44

Item 3.	Defaults Upon Senior Securities	44

Item 4.	Mine Safety Disclosures	44

Item 5.	Other Information	44

Item 6.	Exhibits	45

	SIGNATURES	46

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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)


	June 30,		December 31,
	2021		2020
ASSETS
Cash and cash equivalents	$	145,736	$	65,185
Securities purchased under agreements to resell, at cost		51,373		51,726
Securities available-for-sale, at fair value		126,300		117,655
Securities, restricted, at cost		2,680		2,694

Loans		707,377		672,421
Less: allowance for loan losses		(14,017)		(11,402)
Loans, net		693,360		661,019
Premises and equipment, net		2,931		3,017
Accrued interest receivable		4,480		4,529
Other assets		31,217		30,889
Total assets	$	1,058,077	$	936,714

LIABILITIES AND STOCKHOLDERS’ EQUITY
Deposits:
Demand	$	395,644	$	351,692
Savings, NOW and money market		507,743		441,160
Time		11,274		11,202
Total deposits		914,661		804,054

Accrued expenses and other liabilities		8,746		6,584
Total liabilities	$	923,407	$	810,638

Commitments and contingencies		—		—

Stockholders’ equity:
Preferred stock, par value $0.01; authorized 2,000,000 shares; NaN issued		—		—
Common stock, par value $0.01; authorized 15,000,000 shares; 7,865,010 and 7,827,788 shares issued, respectively; and 7,830,704 and 7,793,482 shares outstanding, respectively		79		78
Additional paid-in capital		92,624		91,622
Retained earnings		42,211		33,535
Accumulated other comprehensive income		323		1,408
Treasury stock at cost, 34,306 and 34,306 shares, respectively		(567)		(567)
Total stockholders’ equity		134,670		126,076
Total liabilities and stockholders’ equity	$	1,058,077	$	936,714

See accompanying condensed notes to interim condensed consolidated financial statements.

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ESQUIRE FINANCIAL HOLDINGS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(Dollars in thousands, except per share data)

(Unaudited)


	For the Three Months				For the Six Months
	Ended June 30,				Ended June 30,
	2021		2020		2021		2020
Interest income:
Loans	$	10,120	$	8,678	$	19,699	$	17,119
Securities		538		752		1,005		1,638
Securities purchased under agreements to resell		160		—		320		—
Interest earning deposits and other		42		36		83		283
Total interest income		10,860		9,466		21,107		19,040
					��
Interest expense:
Savings, NOW and money market deposits		173		197		347		494
Time deposits		19		96		39		192
Borrowings		1		1		2		3
Total interest expense		193		294		388		689

Net interest income		10,667		9,172		20,719		18,351
Provision for loan losses		850		1,900		2,650		3,800
Net interest income after provision for loan losses		9,817		7,272		18,069		14,551

Noninterest income:
Payment processing fees		5,351		2,850		10,721		5,806
Customer related fees and service charges		116		105		211		269
Total noninterest income		5,467		2,955		10,932		6,075

Noninterest expense:
Employee compensation and benefits		5,669		4,099		10,666		8,076
Occupancy and equipment		709		574		1,408		1,119
Professional and consulting services		804		690		1,579		1,537
FDIC and regulatory assessments		111		94		208		185
Advertising and marketing		315		42		647		118
Travel and business relations		69		12		108		140
Data processing		907		771		1,757		1,500
Other operating expenses		533		499		932		971
Total noninterest expense		9,117		6,781		17,305		13,646

Net income before income taxes		6,167		3,446		11,696		6,980
Income tax expense		1,665		913		3,020		1,850

Net income	$	4,502	$	2,533	$	8,676	$	5,130

Earnings per share
Basic	$	0.60	$	0.34	$	1.17	$	0.69
Diluted	$	0.57	$	0.33	$	1.10	$	0.67

See accompanying condensed notes to interim condensed consolidated financial statements

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ESQUIRE FINANCIAL HOLDINGS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Dollars in thousands)

(Unaudited)


	For the Three Months				For the Six Months
	Ended June 30,				Ended June 30,
	2021		2020		2021		2020
Net income	$	4,502	$	2,533	$	8,676	$	5,130
Other comprehensive income:
Unrealized gains (losses) arising during the period on securities available-for-sale		560		670		(1,518)		2,115
Reclassification adjustment for net gains (losses) included in net income		—		—		—		—
Tax effect		(160)		(190)		433		(602)
Total other comprehensive income (loss)		400		480		(1,085)		1,513
Total comprehensive income	$	4,902	$	3,013	$	7,591	$	6,643

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) income		stock		equity
Balance at April 1, 2021	—	7,829,815	$	—	$	79	$	92,122	$	37,709	$	(77)	$	(567)	$	129,266
Net income	—	—		—		—		—		4,502		—		—		4,502
Other comprehensive income	—	—		—		—		—		—		400		—		400
Exercise of stock options	—	889		—		—		11		—		—		—		11
Stock compensation expense	—	—		—		—		491		—		—		—		491
Balance at June 30, 2021	—	7,830,704	$	—	$	79	$	92,624	$	42,211	$	323	$	(567)	$	134,670

												Accumulated
								Additional				other				Total
	Preferred	Common		Preferred		Common		paid-in		Retained		comprehensive		Treasury		stockholders'
	shares	shares		stock		stock		capital		earnings		income		stock		equity
Balance at April 1, 2020	—	7,669,440	$	—	$	77	$	90,360	$	23,514	$	1,419	$	(485)	$	114,885
Net income	—	—		—		—		—		2,533		—		—		2,533
Other comprehensive income	—	—		—		—		—		—		480		—		480
Stock compensation expense	—	—		—		—		387		—		—		—		387
Purchase of common stock	—	(6,600)		—		—		—		—		—		(82)		(82)
Balance at June 30, 2020	—	7,662,840	$	—	$	77	$	90,747	$	26,047	$	1,899	$	(567)	$	118,203

												Accumulated
								Additional				other				Total
	Preferred	Common		Preferred		Common		paid-in		Retained		comprehensive		Treasury		stockholders'
	shares	shares		stock		stock		capital		earnings		income		stock		equity
Balance at January 1, 2021	—	7,793,482	$	—	$	78	$	91,622	$	33,535	$	1,408	$	(567)	$	126,076
Net income	—	—		—		—		—		8,676		—		—		8,676
Other comprehensive loss	—	—		—		—		—		—		(1,085)		—		(1,085)
Exercise of stock options, net of repurchases (40,468 shares)	—	37,222		—		1		20		—		—		—		21
Stock compensation expense	—	—		—		—		982		—		—		—		982
Balance at June 30, 2021	—	7,830,704	$	—	$	79	$	92,624	$	42,211	$	323	$	(567)	$	134,670

												Accumulated
								Additional				other				Total
	Preferred	Common		Preferred		Common		paid-in		Retained		comprehensive		Treasury		stockholders'
	shares	shares		stock		stock		capital		earnings		income		stock		equity
Balance at January 1, 2020	—	7,652,170	$	—	$	77	$	89,682	$	20,917	$	386	$	—	$	111,062
Net income	—	—		—		—		—		5,130		—		—		5,130
Other comprehensive income	—	—		—		—		—		—		1,513		—		1,513
Exercise of stock options, net of repurchases (20,224 shares)	—	44,976		—		—		290		—		—		—		290
Stock compensation expense	—	—		—		—		775		—		—		—		775
Purchase of common stock	—	(34,306)		—		—		—		—		—		(567)		(567)
Balance at June 30, 2020	—	7,662,840	$	—	$	77	$	90,747	$	26,047	$	1,899	$	(567)	$	118,203

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 Six Months Ended June 30,
	2021		2020
Cash flows from operating activities:
Net income	$	8,676	$	5,130
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses		2,650		3,800
Depreciation		332		276
Stock compensation expense		982		775
Net amortization (accretion):
Securities		458		417
Loans		(466)		(83)
Right of use asset		298		230
Software		502		255
Changes in other assets and liabilities:
Accrued interest receivable		49		(814)
Other assets		681		1,955
Operating lease liability		(267)		(221)
Accrued expenses and other liabilities		2,429		2,109
Net cash provided by operating activities		16,324		13,829

Cash flows from investing activities:
Net change in loans		(34,525)		(29,454)
Net change in securities purchased under agreements to resell		353		—
Purchases of securities available-for-sale		(43,793)		—
Principal repayments on securities available-for-sale		33,172		25,492
Purchase of securities, restricted		14		(29)
Purchases of premises and equipment		(246)		(328)
Development of capitalized software		(1,376)		(916)
Net cash used in investing activities		(46,401)		(5,235)

Cash flows from financing activities:
Net increase in deposits		110,607		44,306
Decrease in borrowings		—		(1)
Exercise of stock options		21		290
Purchase of common stock		—		(567)
Net cash provided by financing activities		110,628		44,028

Increase in cash and cash equivalents		80,551		52,622

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

Cash and cash equivalents at end of the period	$	145,736	$	114,428

Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest	$	388	$	691
Taxes		4,650		2,090
Noncash transactions:
Right of use asset obtained in exchange for lease liability		—		543

See accompanying condensed notes to interim condensed consolidated financial statements.

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ESQUIRE FINANCIAL HOLDINGS, INC.

NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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

Basis of Presentation

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

The accompanying unaudited Interim Condensed Consolidated Financial Statements have been prepared in accordance with generally accepted accounting principles for interim financial information. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial information. In the opinion of management, the interim statements reflect all adjustments necessary for a fair presentation of the financial position, results of operations and cash flows of the Company on a consolidated basis and all such adjustments are recurring in nature. These financial statements and the accompanying notes should be read in conjunction with the Company’s audited financial statements for the years ended December 31, 2020 and 2019. Operating results for the three and six months ended June 30, 2021 are not necessarily indicative of the results that may be expected for the year ending December 31, 2021 or any other period. Certain balances in the prior year financial statements were reclassified to conform to current presentation. The reclassifications had no effect on prior year net income or stockholders’ equity.

Risks and Uncertainties

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

We have implemented a customer payment deferral program (principal and interest) to assist business borrowers and certain consumers that may be experiencing financial hardship due to COVID-19 related challenges. These loans will continue to accrue interest during the deferral period unless otherwise classified as nonperforming. Consistent with regulatory guidance and the provisions of the Coronavirus Aid, Relief and Economic Security Act (the “CARES Act”), borrowers that were otherwise current on loan payments that were granted COVID-19 related financial hardship payment deferrals will continue to be reported as current loans during the deferral period and not evaluated as to whether they are troubled debt restructurings (“TDR”). There were 0 delinquent loans upon adoption of our payment deferral program.

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

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

Subsequent Events

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

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Loss Contingencies

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

New Accounting Pronouncements

On June 16, 2016, the FASB issued Accounting Standards Update No. 2016-13, “Financial Instruments — Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments” (the ASU). This ASU replaces the incurred loss model with an expected loss model, referred to as “current expected credit loss” (CECL) model. It will significantly change estimates for credit losses related to financial assets measured at amortized cost, including loans receivable and certain other contracts. This ASU will be effective for the Company in fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. The Company plans to adopt ASU 2016-13 on or before January 1, 2023, using the required modified retrospective method with a cumulative effect adjustment as of the beginning of the reporting period. The Company has gathered the necessary data and continues to prepare for the implementation of this standard.

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

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

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NOTE 2 — Debt Securities

Available-for-Sale Securities

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


			Gross		Gross
	Amortized		Unrealized		Unrealized		Fair
	Cost		Gains		Losses		Value

	(In thousands)
June 30, 2021
Mortgage-backed securities – agency	$	93,713	$	946	$	(1,002)	$	93,657
Collateralized mortgage obligations (CMOs) – agency		32,136		516		(9)		32,643
Total available-for-sale	$	125,849	$	1,462	$	(1,011)	$	126,300

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

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

There were 0 sales or calls of securities for the three and six months ended June 30, 2021 and 2020.

At June 30, 2021, securities having a fair value of $96.5 million were pledged to the Federal Home Loan Bank of New York (FHLB) for borrowing capacity totaling $92.0 million. At December 31, 2020, securities having a fair value of $98.6 million were pledged to the FHLB for borrowing capacity totaling $93.8 million. At June 30, 2021 and December 31, 2020, the Company had 0 outstanding FHLB advances.

At June 30, 2021, securities having a fair value of $29.8 million were pledged to the Federal Reserve Bank of New York (FRB) for borrowing capacity totaling $28.9 million. At December 31, 2020, securities having a fair value of $19.1 million were pledged to the FRB for borrowing capacity totaling $18.7 million. At June 30, 2021 and December 31, 2020, the Company had 0 outstanding FRB borrowings.

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


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

	(In thousands)
June 30, 2021
Mortgage-backed securities – agency	$	54,897	$	(1,002)	$	—	$	—	$	54,897	$	(1,002)
CMOs – agency		2,125		(9)		—		—		2,125		(9)
Total temporarily impaired securities	$	57,022	$	(1,011)	$	—	$	—	$	57,022	$	(1,011)

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

Management reviews the investment portfolio on a quarterly basis to determine the cause, magnitude and duration of declines in the fair value of each security. In estimating other-than-temporary impairment (OTTI), management considers many factors including: (1) the length of time and extent that fair value has been less than cost, (2) the financial condition and near term prospects of the issuer, (3) whether the market decline was affected by macroeconomic conditions, and (4) whether the Company has the intent to sell the security or more likely than not will be required to sell the security before its anticipated recovery. If either of the criteria regarding intent or requirement to sell is met, the entire difference between amortized cost and fair value is recognized as impairment through earnings. For debt securities that do not meet the aforementioned criteria, the amount of impairment is split into two components as follows: (1) OTTI related to credit loss, which must be recognized in the income statement and (2) OTTI related to other factors, which is recognized in other comprehensive income. The credit loss is defined as the difference between the present value of the cash flows expected to be collected and the amortized cost basis. The assessment of whether any other than temporary decline exists may involve a high degree of subjectivity and judgment and is based on the information available to management at a point in time. Management evaluates securities for OTTI at least on a quarterly basis, and more frequently when economic or market conditions warrant such an evaluation.

At June 30, 2021, securities in unrealized loss positions were issuances from government sponsored entities. Due to the decline in fair value being attributable to changes in interest rates, not credit quality and because the Company does not have the intent to sell the securities and it is likely that it will not be required to sell the securities before their anticipated recovery, the Company does not consider the securities to be other-than-temporarily impaired at June 30, 2021.

NaN impairment charges were recorded for the three and six months ended June 30, 2021 and 2020.

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NOTE 3 — Loans

The composition of loans by class is summarized as follows:


	At June 30,		At December 31,
	2021		2020

	(In thousands)
Real estate:
1 – 4 family	$	44,423	$	48,433
Multifamily		201,171		169,817
Commercial real estate		53,771		54,717
Construction		—		—
Total real estate		299,365		272,967
Commercial		373,887		358,410
Consumer		35,213		41,362
Total Loans		708,465		672,739
Deferred loan fees and unearned premiums, net		(1,088)		(318)
Allowance for loan losses		(14,017)		(11,402)
Loans, net	$	693,360	$	661,019

At June 30, 2021 and December 31, 2020, the commercial loans balance included Small Business Administration (“SBA”) Paycheck Protection Program (“PPP”) loans of $23.6 million and $21.9 million, respectively.

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



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

	(In thousands)
June 30, 2021
Allowance for loan losses:
Beginning balance	$	319	$	5,756	$	1,525	$	613	$	—	$	4,968	$	13,181
Provision (credit) for loan losses		(7)		(209)		(107)		(10)		—		1,183		850
Recoveries		0		0		0		0		0		0		0
Loans charged-off		0		0		0		0		0		(14)		(14)
Total ending allowance balance	$	312	$	5,547	$	1,418	$	603	$	—	$	6,137	$	14,017

June 30, 2020
Allowance for loan losses:
Beginning balance	$	497	$	5,086	$	1,441	$	817	$	—	$	1,037	$	8,878
Provision (credit) for loan losses		242		(270)		685		165		—		1,078		1,900
Recoveries		0		0		0		0		0		0		0
Loans charged-off		0		0		0		0		0		(102)		(102)
Total ending allowance balance	$	739	$	4,816	$	2,126	$	982	$	—	$	2,013	$	10,676

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


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

	(In thousands)
June 30, 2021
Allowance for loan losses:
Beginning balance	$	342	$	5,003	$	1,278	$	597	$	—	$	4,182	$	11,402
Provision (credit) for loan losses		(30)		544		140		6		—		1,990		2,650
Recoveries		—		—		—		—		—		—		—
Loans charged-off		—		—		—		—		—		(35)		(35)
Total ending allowance balance	$	312	$	5,547	$	1,418	$	603	$	—	$	6,137	$	14,017

June 30, 2020
Allowance for loan losses:
Beginning balance	$	344	$	4,048	$	1,048	$	560	$	161	$	828	$	6,989
Provision (credit) for loan losses		395		768		1,078		422		(161)		1,298		3,800
Recoveries		—		—		—		—		—		—		—
Loans charged-off		—		—		—		—		—		(113)		(113)
Total ending allowance balance	$	739	$	4,816	$	2,126	$	982	$	—	$	2,013	$	10,676

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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 June 30, 2021 and December 31, 2020:


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

	(In thousands)
June 30, 2021
Allowance for loan losses:
Ending allowance balance attributable to loans:
Individually evaluated for impairment	$	0	$	0	$	0	$	0	$	0	$	0	$	0
Collectively evaluated for impairment		312		5,547		1,418		603		—		6,137		14,017

Total ending allowance balance	$	312	$	5,547	$	1,418	$	603	$	—	$	6,137	$	14,017

Loans:
Loans individually evaluated for impairment	$	0	$	0	$	0	$	0	$	0	$	2,271	$	2,271
Loans collectively evaluated for impairment		44,423		373,887		201,171		53,771		—		32,942		706,194

Total ending loans balance	$	44,423	$	373,887	$	201,171	$	53,771	$	—	$	35,213	$	708,465


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

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

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

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

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

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

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


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

	(In thousands)
1-4 family	$	—	$	—	$	—	$	—
Commercial		—		—		—		—
Multifamily		—		—		—		—
Commercial real estate		—		—		—		—
Construction		—		—		—		—
Consumer		2,271		2,271		2,303		2,303
Total	$	2,271	$	2,271	$	2,303	$	2,303

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


	For the three months ended June 30,								For the six months ended June 30,
	2021				2020				2021				2020
	Average		Interest		Average		Interest		Average		Interest		Average		Interest
	Recorded		Income		Recorded		Income		Recorded		Income		Recorded		Income
	Investment		Recognized		Investment		Recognized		Investment		Recognized		Investment		Recognized

	(In thousands)
1-4 family	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—
Commercial		—		—		—		—		—		—		—		—
Multifamily		361		—		—		—		206		—		—		—
Commercial real estate		—		—		—		—		—		—		—		—
Construction		—		—		—		—		—		—		—		—
Consumer		2,271		—		893		—		2,285		—		1,096		—
Total	$	2,632	$	—	$	893	$	—	$	2,491	$	—	$	1,096	$	—

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


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

	(In thousands)
June 30, 2021
1 – 4 family	$	0	$	0	$	0	$	—	$	0	$	44,423	$	44,423
Commercial		0		0		0		—		0		373,887		373,887
Multifamily		0		0		0		—		0		201,171		201,171
Commercial real estate		0		0		0		—		0		53,771		53,771
Construction		0		0		0		—		0		—		—
Consumer		21		12		0		2,271		2,304		32,909		35,213
Total	$	21	$	12	$	0	$	2,271	$	2,304	$	706,161	$	708,465

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

	(In thousands)
December 31, 2020
1 – 4 family	$	0	$	0	$	0	$	—	$	0	$	48,433	$	48,433
Commercial		0		0		0		—		0		358,410		358,410
Multifamily		0		0		0		—		0		169,817		169,817
Commercial real estate		0		0		0		—		0		54,717		54,717
Construction		0		0		0		—		0		—		—
Consumer		26		0		0		2,303		2,329		39,033		41,362
Total	$	26	$	0	$	0	$	2,303	$	2,329	$	670,410	$	672,739

Credit Quality Indicators

The Company categorizes loans into risk categories based on relevant information about the ability of borrowers to service their debt such as: current financial information, historical payment experience, credit documentation, public information, and current economic trends, among other factors. The Company analyzes loans individually by classifying the loans as to credit risk. This analysis is performed whenever a credit is extended, renewed or modified, or when an observable event occurs indicating a potential decline in credit quality, and no less than annually for large balance loans.

The Company uses the following definitions for risk ratings:

Special Mention - Loans classified as special mention have a potential weakness that deserves management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan or of the institution’s credit position at some future date.

Substandard - Loans classified as substandard are inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. Loans so classified have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the institution will sustain some loss if the deficiencies are not corrected.

Doubtful - Loans classified as doubtful have all the weaknesses inherent in those classified as substandard, with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable.

Loans not meeting the criteria above that are analyzed individually as part of the above described process are considered to be pass rated loans.

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


	Pass		Special Mention		Substandard		Doubtful

	(In thousands)
June 30, 2021
1 – 4 family	$	41,408	$	3,015	$	0	$	0
Commercial		349,498		17,977		6,412		0
Multifamily		200,450		0		721		0
Commercial real estate		49,953		3,818		0		0
Construction		—		0		0		0
Consumer		28,934		4,008		2,271		0
Total	$	670,243	$	28,818	$	9,404	$	0


	Pass		Special Mention		Substandard		Doubtful

	(In thousands)
December 31, 2020
1 – 4 family	$	45,418	$	3,015	$	0	$	0
Commercial		358,295		0		115		0
Multifamily		169,096		721		0		0
Commercial real estate		54,717		0		0		0
Construction		—		0		0		0
Consumer		34,896		4,163		2,303		0
Total	$	662,422	$	7,899	$	2,418	$	0

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 0 loans identified as TDRs at June 30, 2021 and December 31, 2020. Furthermore, there were 0 loans modified during the three and six months ended June 30, 2021 and 2020 as TDRs. In order to determine whether a borrower is experiencing financial difficulty, an evaluation is performed of the probability that the borrower will be in payment default on any of its debt in the foreseeable future without the modification. As discussed in Note 1, the Company implemented a payment deferral program in response to the COVID-19 crisis and elected to evaluate the modified loan population under the CARES Act which allows for troubled debt restructuring categorization to be suspended. As of June 30, 2021, there were no participants in the payment deferral program.

Pledged Loans

At June 30, 2021, loans totaling $36.7 million were pledged to the Federal Home Loan Bank of New York for borrowing capacity totaling $25.0 million. At December 31, 2020, loans totaling $37.5 million were pledged to the Federal Home Loan Bank of New York for borrowing capacity totaling $28.6 million.

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NOTE 4 — Noninterest Income

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


	For the Three Months Ended June 30,				For the Six Months Ended June 30,
	2021		2020		2021		2020

	(In thousands)
Payment processing fees
Payment processing income	$	5,151	$	2,689	$	10,318	$	5,472
ACH income		200		161		403		334
Customer related fees and service charges
Administrative service income		10		13		28		99
Other		106		92		183		170
Total noninterest income	$	5,467	$	2,955	$	10,932	$	6,075

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

●

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

●

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

●

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

●

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

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.

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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 0 stock options granted during the three and six months ended June 30, 2021 and 2020.

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


				Weighted
		Weighted		Average
		Average		Remaining
		Exercise		Contractual
	Options	Price		Life (Years)
June 30, 2021
Outstanding at beginning of year	907,099	$	14.11
Granted	0		0
Exercised	(77,690)		12.76
Forfeited	(501)		23.08
Expired	(166)		24.90
Outstanding at period end	828,742	$	14.23	5.26
Vested or expected to vest	828,742	$	14.23	5.26
Exercisable at period end	697,362	$	13.44	4.81

The Company recognized compensation expense related to options of $130 thousand and $131 thousand for the three months ended June 30, 2021 and 2020, respectively. The Company recognized compensation expense related to options of $264 thousand and $263 thousand for the six months ended June 30, 2021 and 2020, respectively. At June 30, 2021, unrecognized compensation cost related to nonvested options was approximately $683 thousand and is expected to be recognized over a weighted average period of 2.16 years. The intrinsic value for outstanding options and for options vested or expected to vest was $7.9 million and $7.2 million for exercisable options at June 30, 2021.

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


	For the three months ended				For the six months ended
	June 30,				June 30,
	2021		2020		2021		2020

	(Dollars in thousands)
Intrinsic value of options exercised	$	10	$	—	$	871	$	878
Cash received from option exercises		11		—		21		290
Excess tax benefit from option exercises		2		—		166		77

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


		Weighted Average
		Grant Date
	Shares	Fair Value
June 30, 2021
Outstanding at beginning of year	380,750	$	22.87
Granted	—		—
Vested	0		0
Outstanding at period end	380,750	$	22.87

The Company recognized compensation expense related to restricted stock of $361 thousand and $256 thousand for the three months ended June 30, 2021 and 2020, respectively. The Company recognized compensation expense related to restricted stock of $718 thousand and $512 thousand for the six months ended June 30, 2021 and 2020, respectively. As of June 30, 2021, there was $6.2 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				For the six months ended
	June 30,				June 30,
	2021		2020		2021		2020

	(Dollars in thousands, except per share data)
Basic
Net income	$	4,502	$	2,533	$	8,676	$	5,130
Weighted average common shares outstanding		7,449,075		7,407,031		7,437,670		7,419,532
Basic earnings per share	$	0.60	$	0.34	$	1.17	$	0.69

Diluted
Net income	$	4,502	$	2,533	$	8,676	$	5,130
Weighted average shares outstanding for basic earnings per share		7,449,075		7,407,031		7,437,670		7,419,532
Add: Dilutive effects of share based awards		436,946		158,205		428,542		251,593
Average shares and dilutive potential common shares		7,886,021		7,565,236		7,866,212		7,671,125
Diluted earnings per share	$	0.57	$	0.33	$	1.10	$	0.67

Share-based awards totaling 107,849 and 293,250 shares of common stock were not considered in computing diluted earnings per common share for the three months ended June 30, 2021 and June 30, 2020, respectively, because they were anti-dilutive. Share-based awards totaling 117,849 and 293,250 shares of common stock were not considered in computing diluted earnings per common share for the six months ended June 30, 2021 and June 30, 2020, respectively, because they were anti-dilutive.

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.

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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 June 30, 2021, right of use (“ROU”) lease assets and related lease liabilities were $2.6 million and $3.3 million, respectively. As of December 31, 2020, ROU lease assets and related lease liabilities were $2.9 million and $3.5 million, respectively. ROU assets are included within other assets and related lease liabilities are included within other liabilities on the consolidated statements of financial condition.

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


		Operating Lease
		Liabilities
		(In thousands)
2021	$	325
2022		643
2023		636
2024		652
2025		668
Thereafter		627
Total operating lease payments	$	3,551
Less: interest		286
Present value of operating lease liabilities	$	3,265


	As of June 30,
	2021			2020
Weighted-average remaining lease term		5.35	years		6.41	years
Weighted-average discount rate		3.07	%		3.10	%

The components of total lease cost are as follows:



	For the three months ended				For the six months ended

	June 30,
	2021		2020		2021		2020

	(In thousands)
Operating lease cost	$	142	$	140	$	284	$	281
Short-term lease cost		13		18		13		37
Total lease cost	$	155	$	158	$	297	$	318

Cash paid for operating leases	$	173	$	154	$	332	$	305

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.

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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)
June 30, 2021
Assets
Available-for-sale securities
Mortgage-backed securities – agency	$	0	$	93,657	$	0
CMOs – agency		0		32,643		0
Total	$	0	$	126,300	$	0

December 31, 2020
Assets
Available-for-sale securities
Mortgage-backed securities – agency	$	0	$	56,400	$	0
CMOs – agency		0		61,255		0
Total	$	0	$	117,655	$	0

There were 0 transfers between Level 1 and Level 2 during the three and six months ended June 30, 2021 and 2020. There were 0 assets measured on a nonrecurring basis as of June 30, 2021 and December 31, 2020.

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

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

	(In thousands)
Financial Assets:
Cash and cash equivalents	$	145,736	$	2,532	$	143,204	$	0	$	145,736
Securities purchased under agreements to resell, at cost		51,373		—		—		51,373		51,373
Securities available-for-sale		126,300		0		126,300		0		126,300
Securities, restricted, at cost		2,680		N/A		N/A		N/A		N/A
Loans, net		693,360		0		0		690,456		690,456
Accrued interest receivable		4,480		0		227		4,253		4,480

Financial Liabilities:
Time deposits		11,274		—		11,312		—		11,312
Demand and other deposits		903,387		903,387		0		0		903,387
Secured borrowings		49		0		49		0		49
Accrued interest payable		0		0		0		0		0


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

	(In thousands)
Financial Assets:
Cash and cash equivalents	$	65,185	$	1,775	$	63,410	$	0	$	65,185
Securities purchased under agreements to resell, at cost		51,726		—		—		51,726		51,726
Securities available-for-sale		117,655		0		117,655		0		117,655
Securities, restricted, at cost		2,694		N/A		N/A		N/A		N/A
Loans, net		661,019		0		0		661,992		661,992
Accrued interest receivable		4,529		0		245		4,284		4,529

Financial Liabilities:
Time deposits		11,202		0		11,246		0		11,246
Demand and other deposits		792,852		792,852		0		0		792,852
Secured borrowings		49		0		49		0		49
Accrued interest payable		—		0		0		0		0

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NOTE 9 — Accumulated Other Comprehensive Income (Loss)

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


	Three months ended				Six months ended

	June 30,
	2021		2020		2021		2020

	(In thousands)
Unrealized (Losses) Gains on Available-for-Sale Securities
Beginning balance	$	(77)	$	1,419	$	1,408	$	386
Other comprehensive income (loss) before reclassifications, net of tax		400		480		(1,085)		1,513
Amounts reclassified from accumulated other comprehensive income		0		0		0		0
Net current period other comprehensive income (loss)		400		480		(1,085)		1,513
Ending balance	$	323	$	1,899	$	323	$	1,899

There were 0 reclassifications out of accumulated other comprehensive income (loss) for the three and six months ended June 30, 2021 and 2020.

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

General

Management’s discussion and analysis of financial condition at June 30, 2021 and December 31, 2020 and results of operations for the three and six months ended June 30, 2021 and 2020 is intended to assist in understanding the financial condition and results of operations of Esquire Financial Holdings, Inc. The information contained in this section should be read in conjunction with the unaudited Consolidated Financial Statements and the audited Consolidated Financial Statements as of December 31, 2020 and the notes thereto appearing in Part I, Item 1, of this quarterly report on Form 10-Q.

Cautionary Note Regarding Forward-Looking Statements

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

●

statements of our goals, intentions and expectations;

●

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

●

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

●

estimates of our risks and future costs and benefits.

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

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

●

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

●

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

●

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

●

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

●

the impact of any potential strategic transactions;

●

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

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●

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

●

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

●

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

●

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

●

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

●

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

●

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

●

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

●

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

●

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

●

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

●

fluctuations in the demand for loans;

●

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

●

changes in consumer spending, borrowing and savings habits;

●

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

●

declines in our payment processing income as a result of reduced demand, competition and changes in laws or government regulations or policies affecting financial institutions, which could result in, among other things, increased deposit insurance premiums and assessments, capital requirements, regulatory fees and compliance costs, particularly the new capital regulations, and the resources we have available to address such changes;

●

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

●

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

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●

the impairment of our investment securities;

●

our ability to control costs and expenses, particularly those associated with operating as a publicly traded company;

●

the failure or security breaches of computer systems on which we depend;

●

political instability;

●

acts of war, terrorism, natural disasters or global market disruptions, including global pandemics;

●

competition and innovation with respect to financial products and services by banks, financial institutions and non-traditional providers, including retail businesses and technology companies;

●

changes in our organization and management and our ability to retain or expand our management team and our board of directors, as necessary;

●

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

●

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

●

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

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

The foregoing factors should not be construed as exhaustive and should be read in conjunction with other cautionary statements that are included in our Annual Report on Form 10-K for the year ended December 31, 2020, as supplemented by subsequent Quarterly Reports on Form 10-Q. If one or more events related to these or other risks or uncertainties materialize, or if our underlying assumptions prove to be incorrect, actual results may differ materially from what we anticipate. Accordingly, you should not place undue reliance on any such forward-looking statements. Any forward-looking statement speaks only as of the date on which it is made, and we do not undertake any obligation to publicly update or review any forward-looking statement, whether as a result of new information, future developments or otherwise. New risks and uncertainties arise from time to time, and it is not possible for us to predict those events or how they may affect us. In addition, we cannot assess the impact of each factor on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements.

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Summary of Significant Accounting Policies

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

Allowance for Loan Losses. Management considers the accounting policy relating to the allowance for loan losses to be a critical accounting policy given the inherent subjectivity and uncertainty in estimating the levels of the allowance required to cover loan losses in the portfolio and the material effect that such judgements can have on the results of operations.

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

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

Overview

We are a financial holding company headquartered in Jericho, New York and registered under the Bank Holding Company Act of 1956, as amended. Through our wholly owned bank subsidiary, Esquire Bank, National Association (“Esquire Bank” or the “Bank”), we are a full service commercial bank dedicated to serving the financial needs of the litigation industry and small businesses nationally, as well as commercial and retail customers in the New York metropolitan market. We offer tailored financial and payment processing solutions to the litigation community and their clients as well as dynamic and flexible payment processing solutions to small business owners, both on a national basis. We also offer traditional banking products for businesses and consumers in our local market area.

Our results of operations depend primarily on our net interest income which is the difference between the interest income we earn on our interest-earning assets and the interest we pay on our interest-bearing liabilities. Our results of operations also are affected by our provision for loan losses, noninterest income and noninterest expense. Noninterest income currently consists primarily of payment processing fees and customer related fees and charges. Noninterest expense currently consists primarily of employee compensation and benefits and professional and consulting services. Our results of operations also may be affected significantly by general and local economic and competitive conditions, changes in market interest rates, governmental policies, the litigation market and actions of regulatory authorities.

COVID-19 Pandemic Programs

We are participating in the Paycheck Protection Program administered by the SBA. The PPP provides borrower guarantees for lenders, as well as loan forgiveness incentives for borrowers that utilize the loan proceeds to cover employee compensation-related costs and other qualifying business costs. As of June 30, 2021, we have cumulatively funded PPP loans totaling $45.5 million, and have been remitted forgiveness principal payments from the SBA of $21.9 million, resulting in a net PPP loan balance of $23.6 million. All of our calendar year 2020 PPP loan originations have been fully repaid by the SBA.

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

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

Assets. Our total assets were $1.1 billion at June 30, 2021, an increase of $121.4 million, or 13.0%, from $936.7 million at December 31, 2020, primarily due to increases in cash and cash equivalents of $80.6 million, or 123.6%, loans of $35.0 million, or 5.2%, and securities available-for-sale of $8.6 million, or 7.3%.

Loans. The following table provides information regarding the composition of our loan portfolio at the dates indicated:


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

	(In thousands)
Real estate:
1 – 4 family	$	44,423	6.3	%	$	48,433	7.2	%
Multifamily		201,171	28.4			169,817	25.3
Commercial real estate		53,771	7.6			54,717	8.1
Construction		—	—			—	—
Total real estate		299,365	42.3			272,967	40.6
Commercial		373,887	52.8			358,410	53.3
Consumer		35,213	4.9			41,362	6.1
Total Loans	$	708,465	100.0	%	$	672,739	100.0	%
Deferred loan fees and unearned premiums, net		(1,088)				(318)
Allowance for loan losses		(14,017)				(11,402)
Loans, net	$	693,360			$	661,019

At June 30, 2021, loans were $707.4 million, or 77.3% of total deposits, compared to $672.4 million, or 83.6% of total deposits, at December 31, 2020. The growth in loans was primarily driven by increases in multifamily and commercial loans. Multifamily loans increased $31.4 million, or 18.5%, to $201.2 million at June 30, 2021 from $169.8 million at December 31, 2020. Commercial loans increased $15.5 million, or 4.3%, to $373.9 million at June 30, 2021 from $358.4 million at December 31, 2020.

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


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

	(Dollars in thousands)
Litigation-Related Loans
Commercial Litigation-Related:
Working capital lines of credit	$	183,183	51.8	%	$	202,021	61.4	%
Case cost lines of credit		100,594	28.4			87,104	26.4
Term loans		41,167	11.7			10,527	3.2
Total Commercial Litigation-Related		324,944	91.9			299,652	91.0
Consumer Litigation-Related:
Post-settlement consumer loans		28,558	8.1			29,342	8.9
Structured settlement loans		166	0.0			236	0.1
Total Consumer Litigation-Related		28,724	8.1			29,578	9.0
Total Litigation-Related Loans	$	353,668	100.0	%	$	329,230	100.0	%

At June 30, 2021, our Litigation-Related loans, which include commercial loans to law firms and consumer lending to plaintiffs/claimants and attorneys, totaled $353.7 million, or 49.9% of our total loan portfolio, compared to $329.2 million at December 31, 2020. In addition, we had $18.6 million in PPP loans as of June 30, 2021 to attorney customers which are excluded from the table above. We remain focused on prudently growing our Litigation-Related loan portfolio.

Securities. Securities available-for-sale increased $8.6 million, or 7.3%, to $126.3 million at June 30, 2021 from $117.7 million at December 31, 2020, driven by purchases of $43.8 million, offset by paydowns of $33.2 million, unrealized losses of $1.5 million through other comprehensive income, and net amortization of $458 thousand.

Funding. Total deposits increased $110.6 million, or 13.8%, to $914.7 million at June 30, 2021 from $804.1 million at December 31, 2020. We continue to focus on the acquisition and expansion of core deposit relationships, which we define as all deposits except for certificates of deposit. Core deposits totaled $903.4 million at June 30, 2021, or 98.8% of total deposits at that date, compared to $792.9 million or 98.6% of total deposits at December 31, 2020.

In addition to our core deposits as a source of funding, the Company continues to prudently manage its balance sheet through deposit sweep programs, maintaining off-balance sheet funds totaling $546.9 million at June 30, 2021 which is a $166.6 million, or 43.8%, increase from the December 31, 2020 balance of $380.3 million.

At June 30, 2021, we had the ability to borrow a total of $116.9 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 $28.9 million. At June 30, 2021, we also had $67.5 million in aggregate unsecured lines of credit with unaffiliated correspondent banks. No amounts were outstanding on any of the aforementioned lines of credit at June 30, 2021.

Equity. Total stockholders’ equity increased $8.6 million, or 6.8%, to $134.7 million at June 30, 2021, from $126.1 million at December 31, 2020.

Asset Quality. Nonperforming assets, totaling $2.3 million, consisted of several nonaccrual consumer loans as of June 30, 2021. At June 30, 2021, nonperforming assets as a percentage of total loans and total assets were 0.32% and 0.21% respectively, and our coverage ratio was 617%. As of June 30, 2021, the allowance for loan losses was $14.0 million, or 1.98% of total loans, as compared to $11.4 million, or 1.70% of total loans at December 31, 2020. The increase in the allowance as a percentage of loans was driven by a prudent increase in the general reserve attributable to growth in our loan portfolio and the inherent credit risk associated with the NFL consumer post settlement portfolio. At June 30, 2021, special mention and substandard loans totaled $28.8 million and $9.4 million, respectively.

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As previously disclosed, we believe the revisions to various claims administration protocols surrounding potential claims of fraud and the ongoing effects of the pandemic has extended the duration of our NFL post settlement loan portfolio. Specifically, the current uncertainty related to our borrowers’ (“claimants”) access to qualified testing, doctors, their attorneys and other administrative support, as well as claims process recalibration to address race norming allegations has introduced incremental duration risk which may further extend the settlement of claims and payoff of our NFL loans beyond the contractual maturity. The Company ceased NFL loan originations in December 2017. At June 30, 2021, NFL consumer loan exposure totaled $24.6 million with a weighted average life of less than one year. The Company increased its general allowance allocation to consumer loans to $6.1 million, or 17.4%, as of June 30, 2021, as compared to $2.0 million, or 4.7%, of the consumer portfolio as of June 30, 2020.

Average Balance Sheets and Rate/Volume Analysis

The following tables present average balance sheet information, interest income, interest expense and the corresponding average yields earned and rates paid for periods indicated. The average balances are daily averages and, for loans, include both performing and nonperforming balances. Interest income on loans includes the effects of net premium amortization and net deferred loan origination fees accounted for as yield adjustments. No tax-equivalent yield adjustments were made, as we have no tax exempt investments.


	For the Three Months Ended June 30,
	2021						2020

					(Dollars in thousands)
	Average				Average		Average				Average
	Balance		Interest		Yield/Cost		Balance		Interest		Yield/Cost
INTEREST EARNING ASSETS
Loans	$	700,349	$	10,120	5.80	%	$	593,964	$	8,678	5.88	%
Securities, includes restricted stock		134,828		538	1.60	%		131,873		752	2.29	%
Securities purchased under agreements to resell		51,142		160	1.25	%		—		—	—	%
Interest earning cash and other		65,947		42	0.26	%		99,942		36	0.14	%
Total interest earning assets		952,266		10,860	4.57	%		825,779		9,466	4.61	%

NONINTEREST EARNING ASSETS		31,519						26,452

TOTAL AVERAGE ASSETS	$	983,785					$	852,231

INTEREST BEARING LIABILITIES

Savings, NOW, Money Market deposits	$	416,389	$	173	0.17	%	$	415,659	$	197	0.19	%
Time deposits		10,980		19	0.69	%		19,570		96	1.97	%
Total interest bearing deposits		427,369		192	0.18	%		435,229		293	0.27	%
Borrowings		104		1	3.86	%		141		1	2.84	%
Total interest bearing liabilities		427,473		193	0.18	%		435,370		294	0.27	%

NONINTEREST BEARING LIABILITIES
Demand deposits		414,216						291,020
Other liabilities		10,826						9,683
Total noninterest bearing liabilities		425,042						300,703
Stockholders' equity		131,270						116,158

TOTAL AVG. LIABILITIES AND EQUITY	$	983,785					$	852,231
Net interest income			$	10,667					$	9,172
Net interest spread					4.39	%					4.34	%
Net interest margin					4.49	%					4.47	%

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	For the Six Months Ended June 30,
	2021						2020

					(Dollars in thousands)
	Average				Average		Average				Average
	Balance		Interest		Yield/Cost		Balance		Interest		Yield/Cost
INTEREST EARNING ASSETS
Loans	$	689,003	$	19,699	5.77	%	$	576,651	$	17,119	5.97	%
Securities, includes restricted stock		127,370		1,005	1.59	%		137,985		1,638	2.39	%
Securities purchased under agreements to resell		51,293		320	1.26	%		—		—	—	%
Interest earning cash and other		61,640		83	0.27	%		90,192		283	0.63	%
Total interest earning assets		929,306		21,107	4.58	%		804,828		19,040	4.76	%

NONINTEREST EARNING ASSETS		31,182						30,590

TOTAL AVERAGE ASSETS	$	960,488					$	835,418

INTEREST BEARING LIABILITIES

Savings, NOW, Money Market deposits	$	409,620	$	347	0.17	%	$	424,242	$	494	0.23	%
Time deposits		11,084		39	0.71	%		19,633		192	1.97	%
Total interest bearing deposits		420,704		386	0.19	%		443,875		686	0.31	%
Borrowings		77		2	5.24	%		116		3	5.20	%
Total interest bearing liabilities		420,781		388	0.19	%		443,991		689	0.31	%

NONINTEREST BEARING LIABILITIES
Demand deposits		400,597						267,705
Other liabilities		9,807						8,995
Total noninterest bearing liabilities		410,404						276,700
Stockholders' equity		129,303						114,727

TOTAL AVG. LIABILITIES AND EQUITY	$	960,488					$	835,418
Net interest income			$	20,719					$	18,351
Net interest spread					4.39	%					4.45	%
Net interest margin					4.50	%					4.59	%

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


	For the Three Months Ended								For the Six Months Ended
	June 30,								June 30,
	2021 vs. 2020								2021 vs. 2020
	Increase					Total			Increase					Total
	(Decrease) due to					Increase			(Decrease) due to					Increase
	Volume			Rate			(Decrease)			Volume		Rate		(Decrease)

	(Dollars in thousands)
Interest earned on:
Loans	$	1,561	$		(119)	$		1,442	$		3,189	$	(609)	$	2,580
Securities, includes restricted stock		17			(231)			(214)			(119)		(514)		(633)
Securities purchased under agreements to resell		160			—			160			320		—		320
Interest earning cash and other		(15)			21			6			(71)		(129)		(200)
Total interest income		1,723			(329)			1,394			3,319		(1,252)		2,067

Interest paid on:
Savings, NOW, Money Markets		—			(24)	��		(24)			(17)		(130)		(147)
Time deposits		(31)			(46)			(77)			(62)		(91)		(153)
Total deposits		(31)			(70)			(101)			(79)		(221)		(300)
Borrowings		—			—			—			(1)		—		(1)
Total interest expense		(31)			(70)			(101)			(80)		(221)		(301)
Change in net interest income	$	1,754	$		(259)	$		1,495	$		3,399	$	(1,031)	$	2,368

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

General. Net income increased $2.0 million, or 77.7%, to $4.5 million for the three months ended June 30, 2021 from $2.5 million for the three months ended June 30, 2020. The increase resulted from a $2.5 million increase in noninterest income and a $1.5 million increase in net interest income, partially offset by an increase in noninterest expense of $2.3 million.

Net Interest Income. Net interest income increased $1.5 million, or 16.3%, to $10.7 million for the three months ended June 30, 2021 from $9.2 million for the three months ended June 30, 2020, due to a $1.4 million increase in interest income and a $101 thousand decrease in interest expense.

Our net interest margin increased 2 basis points to 4.49% for the three months ended June 30, 2021 from 4.47% for the three months ended June 30, 2020.

Interest Income. Interest income increased $1.4 million, or 14.7%, to $10.9 million for the three months ended June 30, 2021 from $9.5 million for the three months ended June 30, 2020 and was attributable to an increase in loan, reverse repurchase interest income, and interest earning cash and other, offset by a decrease in interest income on securities.

Loan interest income increased $1.4 million, or 16.6%, to $10.1 million for the three months ended June 30, 2021 from $8.7 million for the three months ended June 30, 2020. This increase was attributable to a $106.4 million, or 17.9%, increase in the average loan balance primarily from our litigation-related and multifamily portfolios offset by an 8 basis point decrease in loan yields. The decrease in loan yields is due to the historically low interest rate environment caused by the pandemic and its effects on the overall economy. The impact of the decline in loan yields on interest

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income was partially offset by a 9 basis point decrease in rates on interest bearing deposits as part of the Company’s overall asset/liability management strategy.

Securities interest income decreased $214 thousand, or 28.5%, to $538 thousand for the three months ended June 30, 2021 from $752 thousand for the three months ended June 30, 2020. This decrease was attributable to a 69 basis point decrease in yields, driven by accelerated prepayments due to the current interest rate environment.

Securities purchased under agreements to resell income was $160 thousand for the three months ended June 30, 2021. We invested excess deposit funds in reverse repurchase agreements in the fourth quarter of 2020.

Interest earning cash and other interest income increased $6 thousand, or 16.7%, to $42 thousand for the three months ended June 30, 2021 from $36 thousand for the three months ended June 30, 2020.

Interest Expense. Interest expense decreased $101 thousand, or 34.4%, to $193 thousand for the three months ended June 30, 2021 from $294 thousand for the three months ended June 30, 2020, primarily attributable to rate reductions on deposits. The blended interest rate we paid on interest bearing deposits decreased 9 basis points to 0.18% for the three months ended June 30, 2021 from 0.27% for the three months ended June 30, 2020. Our average balance of interest bearing deposits decreased $7.9 million, or 1.8%, to $427.4 million for the three months ended June 30, 2021 from $435.2 million for the three months ended June 30, 2020 attributable primarily to certificate of deposit maturities.

Provision for Loan Losses. Our provision for loan losses was $850 thousand for the three months ended June 30, 2021 compared to $1.9 million for the three months ended June 30, 2020. The second quarter 2021 provision for loan losses was driven by a prudent increase in the general reserve attributable to growth in our loan portfolio and the inherent credit risk associated with the NFL consumer post settlement portfolio. As previously disclosed, we also believe the $24.6 million legacy NFL portfolio’s duration has extended as a result of revisions to various claims administration protocols surrounding potential claims of fraud, the ongoing effects of the pandemic coupled with revised qualifying physician requirements, and claims process recalibration to address race norming allegations.

Noninterest Income. Noninterest income information is as follows:


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

	(Dollars in thousands)
Payment processing fees
Payment processing income	$	5,151	$	2,689	$	2,462	91.6	%
ACH income		200		161		39	24.2
Customer related fees and service charges
Administrative service income		10		13		(3)	(23.1)
Other		106		92		14	15.2
Total noninterest income	$	5,467	$	2,955	$	2,512	85.0	%

Payment processing income increased due to the continued expansion of our sales channels through ISOs, the increased number of merchants, payment processing volume increases and fee allocation arrangements, as well as the reopening of the economy as the pandemic restrictions continued to ease nationally. Quarterly volumes increased $3.1 billion, or 98.8%, to $6.2 billion, as compared to the second quarter of 2020.

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Noninterest Expense. Noninterest expense information is as follows:


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

	(Dollars in thousands)
Noninterest expense
Employee compensation and benefits	$	5,669	$	4,099	$	1,570	38.3	%
Occupancy and equipment		709		574		135	23.5
Professional and consulting services		804		690		114	16.5
FDIC and regulatory assessments		111		94		17	18.1
Advertising and marketing		315		42		273	650.0
Travel and business relations		69		12		57	475.0
Data processing		907		771		136	17.6
Other operating expenses		533		499		34	6.8
Total noninterest expense	$	9,117	$	6,781	$	2,336	34.4	%

Employee compensation and benefits costs increased due to increases in staffing of 26% to support our investment in digital platforms and related sales/marketing divisions, and the impact of salary and stock-based compensation increases. Advertising, marketing, travel and business relations costs increased as we continued our digital marketing efforts and thought leadership in our national verticals. We have also re-engaged in our traditional high touch marketing and sales efforts at conferences and other in-person industry forums. 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. Professional and consulting expenses increased due to the continued investment made to expand our business and support infrastructure.

Income Tax Expense. We recorded an income tax expense of $1.7 million for the three months ended June 30, 2021, reflecting an effective tax rate of 27.0%, compared to $913 thousand, or 26.5%, for the three months ended June 30, 2020.

Comparison of Operating Results for the Six Months Ended June 30, 2021 and 2020

General. Net income increased $3.5 million, or 69.1%, to $8.7 million for the six months ended June 30, 2021 from $5.1 million for the six months ended June 30, 2020. The increase resulted from a $4.9 million increase in noninterest income and a $2.4 million increase in net interest income, partially offset by an increase in noninterest expense of $3.7 million.

Net Interest Income. Net interest income increased $2.4 million, or 12.9%, to $20.7 million for the six months ended June 30, 2021 from $18.4 million for the six months ended June 30, 2020, due to a $2.1 million increase in interest income and a $301 thousand decrease in interest expense.

Our net interest margin decreased 9 basis points to 4.50% for the six months ended June 30, 2021 from 4.59% for the six months ended June 30, 2020. The decrease in net interest margin was due to a 18 basis point decrease in the yields on interest earning assets, primarily due to the historically low interest rate environment and its negative effects on loans, securities, interest earning cash and other short-term investment yields. This decrease was offset by a 12 basis point decrease in our cost of funds on average interest bearing liabilities.

Interest Income. Interest income increased $2.1 million, or 10.9%, to $21.1 million for the six months ended June 30, 2021 from $19.0 million for the six months ended June 30, 2020 and was attributable to an increase in loan and reverse repurchase interest income offset by a decrease in interest income on securities and interest earning cash and other.

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Loan interest income increased $2.6 million, or 15.1%, to $19.7 million for the six months ended June 30, 2021 from $17.1 million for the six months ended June 30, 2020. This increase was attributable to a $112.4 million, or 19.5%, increase in the average loan balance primarily from our litigation-related and multifamily portfolios offset by a 20 basis point decrease in loan yields. The decrease in loan yields is due to the historically low interest rate environment caused by the pandemic and its effects on the overall economy. The impact of the decline in loan yields on interest income was partially offset by a 12 basis point decrease in rates on interest bearing deposits as part of the Company’s overall asset/liability management strategy.

Securities interest income decreased $633 thousand, or 38.6%, to $1.0 million for the six months ended June 30, 2021 from $1.6 million for the six months ended June 30, 2020. This decrease was attributable to a $10.6 million, or 7.7%, decrease in average securities balances and an 80 basis point decrease in yields, both driven by accelerated prepayments due to the current interest rate environment.

Securities purchased under agreements to resell income was $320 thousand for the six months ended June 30, 2021. We invested excess deposit funds in reverse repurchase agreements in the fourth quarter of 2020.

Interest earning cash and other interest income decreased $200 thousand, or 70.7%, to $83 thousand for the six months ended June 30, 2021 from $283 thousand for the six months ended June 30, 2020. This decrease was attributable to a 36 basis point decrease in yields driven by the current interest rate environment and a $28.6 million, or 31.7%, decrease in average cash balance primarily due to deployment of excess funds into higher yielding reverse repurchase agreements.

Interest Expense. Interest expense decreased $301 thousand, or 43.7%, to $388 thousand for the six months ended June 30, 2021 from $689 thousand for the six months ended June 30, 2020, primarily attributable to rate reductions on deposits. The blended interest rate we paid on interest bearing deposits decreased 12 basis points to 0.19% for the six months ended June 30, 2021 from 0.31% for the six months ended June 30, 2020. Our average balance of interest bearing deposits decreased $23.2 million, or 5.2%, to $420.7 million for the six months ended June 30, 2021 from $443.9 million for the six months ended June 30, 2020 attributable primarily to decreases in average savings, NOW, money market, and time deposits.

Provision for Loan Losses. Our provision for loan losses was $2.7 million for the six months ended June 30, 2021 compared to $3.8 million for the six months ended June 30, 2020. The provision for loan losses was driven by a prudent increase in the general reserve attributable to growth in our loan portfolio and the inherent credit risk associated with the NFL consumer post settlement portfolio. As previously disclosed, we also believe the $24.6 million legacy NFL portfolio’s duration has extended as a result of revisions to various claims administration protocols surrounding potential claims of fraud, the ongoing effects of the pandemic coupled with revised qualifying physician requirements, and claims process recalibration to address race norming allegations.

Noninterest Income. Noninterest income information is as follows:


	For the Six Months Ended
	June 30,				Change
	2021		2020		Amount		Percent

	(Dollars in thousands)
Payment processing fees
Payment processing income	$	10,318	$	5,472	$	4,846	88.6	%
ACH income		403		334		69	20.7
Customer related fees and service charges
Administrative service income		28		99		(71)	(71.7)
Other		183		170		13	7.6
Total noninterest income	$	10,932	$	6,075	$	4,857	80.0	%

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reopening of the economy. Quarterly volumes increased $5.0 billion, or 80.2%, to $11.2 billion, as compared to the six months ended 2020. Customer related fees and service charges have decreased due to decreases in administrative service income on off-balance sheet funds, which is impacted by the volume of off-balance sheet funds, the duration of these funds and short-term interest rates. Off-balance sheet sweep funds totaled $546.9 million at June 30, 2021, demonstrating the continued strength of our branchless core business model.

Noninterest Expense. Noninterest expense information is as follows:


	For the Six Months Ended
	June 30,				Change
	2021		2020		Amount		Percent

	(Dollars in thousands)
Noninterest expense
Employee compensation and benefits	$	10,666	$	8,076	$	2,590	32.1	%
Occupancy and equipment		1,408		1,119		289	25.8
Professional and consulting services		1,579		1,537		42	2.7
FDIC and regulatory assessments		208		185		23	12.4
Advertising and marketing		647		118		529	448.3
Travel and business relations		108		140		(32)	(22.9)
Data processing		1,757		1,500		257	17.1
Other operating expenses		932		971		(39)	(4.0)
Total noninterest expense	$	17,305	$	13,646	$	3,659	26.8	%

Employee compensation and benefits costs increased due to a 26% increase in staffing to support our investment in digital platforms and related sales/marketing divisions, and the impact of salary and stock-based compensation increases. Advertising and marketing costs increased as we continued our new digital marketing efforts and thought leadership in our national verticals. We also re-engaged in our traditional high touch marketing and sales efforts at conferences and other in-person industry forums. Occupancy and equipment costs increased primarily due to amortization of our investments in internally developed software to support our new digital platform, precautionary office cleaning costs related to COVID-19 and additional office space to support our continued growth. Data processing costs increased due to increased processing volume, primarily driven by our core banking platform, and additional costs related to our technology implementations.

Income Tax Expense. We recorded an income tax expense of $3.0 million for the six months ended June 30, 2021, reflecting an effective tax rate of 25.8%, compared to $1.9 million, or 26.5%, for the six months ended June 30, 2020. The decrease in tax rate was due to certain discrete tax benefits related to shared based compensation.

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.

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We manage our exposure to interest rates primarily by structuring our balance sheet in the ordinary course of business. We do not typically enter into derivative contracts for the purpose of managing interest rate risk, but we may do so in the future. Based upon the nature of our operations, we are not subject to foreign exchange or commodity price risk. We do not own any trading assets.

Net Interest Income Simulation. We use an interest rate risk simulation model to test the interest rate sensitivity of net interest income and the balance sheet. Instantaneous parallel rate shift scenarios are modeled and utilized to evaluate risk and establish exposure limits for acceptable changes in net interest margin. These scenarios, known as rate shocks, simulate an instantaneous change in interest rates and use various assumptions, including, but not limited to, prepayments on loans and securities, deposit decay rates, pricing decisions on loans and deposits, reinvestment and replacement of asset and liability cash flows.

The following table presents the estimated changes in net interest income of Esquire Bank, National Association, calculated on a bank-only basis, which would result from changes in market interest rates over a twelve-month period.


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

	(Dollars in thousands)
400	$	65,437	18,939
300		60,373	13,875
200		55,345	8,847
100		50,841	4,343
0		46,498	—
-100		44,265	(2,233)
-200		42,967	(3,531)

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.

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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 June 30, 2021.


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

	(Dollars in thousands)
400	$	207,898	61,489
300		194,227	47,818
200		179,447	33,038
100		163,914	17,505
0		146,409	—
-100		119,718	(26,691)
-200		106,641	(39,768)

Many assumptions are used to calculate the impact of interest rate fluctuations. Actual results may be significantly different than our projections due to several factors, including the timing and frequency of rate changes, market conditions and the shape of the yield curve. The computations of interest rate risk shown above do not include actions that our management may undertake to manage the risks in response to anticipated changes in interest rates, and actual results may also differ due to any actions taken in response to the changing rates.

Liquidity and Capital Resources

Liquidity is the ability to meet current and future financial obligations of a short-term nature. Our primary sources of funds consist of deposit inflows, loan repayments and maturities and sales of securities. While maturities and scheduled amortization of loans and securities are predictable sources of funds, deposit flows and mortgage prepayments are greatly influenced by general interest rates, economic conditions and competition.

We regularly review the need to adjust our investments in liquid assets based upon our assessment of: (1) expected loan demand, (2) expected deposit flows, (3) yields available on interest earning deposits and securities, and (4) the objectives of our asset/liability management program. Excess liquid assets are invested generally in interest earning deposits and short- and intermediate-term securities.

Our most liquid assets are cash and cash equivalents. The levels of these assets are dependent on our operating, financing, lending and investing activities during any given period. At June 30, 2021, cash and cash equivalents totaled $145.7 million.

At June 30, 2021, through pledging of our securities and certain loans, we had the ability to borrow a total of $116.9 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 $28.9 million. At June 30, 2021, we also had $67.5 million in aggregate unsecured lines of credit with unaffiliated correspondent banks. No amounts were outstanding on any of the aforementioned lines of credit at June 30, 2021.

We have no material commitments or demands that are likely to affect our liquidity other than set forth below. In the event loan demand were to increase faster than expected, or any unforeseen demand or commitment were to occur, we could access our borrowing capacity with the Federal Home Loan Bank of New York or obtain additional funds through brokered certificates of deposit.

Esquire Bank is subject to various regulatory capital requirements administered by the Office of the Comptroller of the Currency (the “OCC”), and the Federal Deposit Insurance Corporation. At June 30, 2021, Esquire Bank exceeded all applicable regulatory capital requirements, and was considered “well capitalized” under regulatory guidelines.

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We manage our capital to comply with our internal planning targets and regulatory capital standards administered by the OCC. We review capital levels on a monthly basis.

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


			For Capital Adequacy
			Purposes
			Minimum Capital with		Actual
	“Well Capitalized”		Conservation Buffer		At June 30, 2021
Total Risk-based Capital Ratio
Bank	10.00	%	10.50	%	17.86	%

Tier 1 Risk-based Capital Ratio
Bank	8.00	%	8.50	%	16.60	%

Common Equity Tier 1 Capital Ratio
Bank	6.50	%	7.00	%	16.60	%

Tier 1 Leverage Ratio
Bank	5.00	%	4.00	%	12.29	%

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

Off-Balance Sheet Arrangements

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

Item 3.Quantitative and Qualitative Disclosures About Market Risk

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

Item 4.Controls and Procedures

An evaluation was performed under the supervision and with the participation of the Company’s management, including the Principal Executive Officer and the Principal Financial Officer, of the effectiveness of the design and 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 June 30, 2021. Based on that evaluation, the Company’s

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management, including the Principal Executive Officer and the Principal Financial Officer, concluded that the Registrant’s disclosure controls and procedures were effective.

During the quarter ended June 30, 2021, there have been no changes in the Company’s internal controls over financial reporting that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

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PART II – OTHER INFORMATION

Item 1. Legal Proceedings

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

Item 1A. Risk Factors

There have been no material changes to our risk factors as disclosed in the Company’s Annual Report on Form 10-K except for the risk factor included below:

Potential fraud by our post-settlement consumer loan customers who are claimants or others related to the NFL Concussion Settlement Program, revisions to qualifying physician requirements, ongoing effects of the pandemic and other administrative changes could increase our actual loan losses which would decrease earnings.

On December 10, 2018, the United States District Court for the Eastern District of Pennsylvania (the “Court”) appointed a special investigator in the NFL Concussion Injury Litigation (Case No. 12-md-2323) to ensure the integrity of the NFL Concussion Settlement Program, the efficient processing of valid claims, and impose appropriate sanctions if wrongdoing is found in response to allegations of fraudulent claims. Additionally, on May 8, 2019, the Court modified the rules regarding qualifying physicians by limiting NFL claimants to utilizing doctors in their immediate area (a range of 150 miles from the claimant’s home address). We believe that these Court rulings, including other administrative processes enacted by the claims administrator, have extended the duration of our assets which may increase our credit risk. Although we have not encountered any such fraud at this time within our portfolio, if it is determined that any of our NFL loan borrowers or others committed fraud when filing their application to the NFL Concussion Settlement Program or to Esquire Bank for the related loan, we may experience credit losses, which could have an adverse effect on our operating results.

Additionally, the current COVID-19 health crisis, may also extend the duration of our portfolio. Specifically, the uncertainty related to our borrowers’ (“claimants”) access to qualified testing, doctors, their attorneys and other administrative support, has introduced incremental duration risk which may further extend the settlement of claims and payoff of our NFL loans beyond the contractual maturity.

Moreover, in August 2020, certain former NFL players filed lawsuits with the Court challenging the use of “race norming” to systematically disfavor Black players who submitted claims in the NFL Concussion Settlement Program. In general, the lawsuits alleged that “race-norming” was being used in the claims administration process to artificially reduce estimates of Black players’ pre-concussion cognitive functioning levels thereby concluding that Black players suffered lesser impairments from their concussions than their medical diagnoses and tests otherwise indicated. As a result, the plaintiffs allege that Black claimants were determined not to qualify for settlement payments despite sustaining incapacitating injuries comparable to their white counterparts. In March 2021, the Court dismissed one of the lawsuits on procedural grounds. On June 2, 2021, the NFL and class counsel voluntarily pledged to abandon “race-norming” in the assessment of all settlement claims both prospectively and retrospectively. The Magistrate mediating the revised protocols believes that a settlement on the revised claims assessment standards may be expected by the end of the summer of 2021. Overall, we believe this represents a positive development for NFL claimants and should positively impact our borrowers but will again further extend the NFL portfolio duration as the claim settlement process is re-calibrated and new claims protocols are developed for retrospective and prospective claims.

As of June 30, 2021, we have received payoffs on approximately 29% of our NFL claimant loans as compared to the overall payoffs for claim registrations with the NFL claims administrator of approximately 7%. To date we have charged-off 6% of our NFL loans and ceased the origination program in December 2017. Our NFL consumer loan exposure as of June 30, 2021 is approximately $24.6 million with a weighted average remaining maturity of less than one year, where loan exposures of $4.0 million and $2.3 million have been classified as special mention and

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substandard, respectively, representing approximately 26% of the remaining exposure. All substandard loan exposures related to this program have been placed on nonaccrual and are deemed nonperforming assets. If the processing of claims for our portfolio extends beyond our maturity for these loans due to the aforementioned fraud, revisions to qualifying physician requirements, effects of the pandemic, revised protocols due to “race-norming” claims, or the additional administrative processes, portfolio delinquencies, credit downgrades and further losses as the result of possible write-downs of these loans could occur or increase in the future, which would negatively impact our earnings.

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

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


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

(1)

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

Item 3. Defaults Upon Senior Securities

None.

Item 4. Mine Safety Disclosures

Not applicable.

Item 5. Other Information

None.

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Item 6.Exhibits


Exhibit
Number		Description

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

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

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

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

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

101.0		The following materials for the quarter ended June 30, 2021, formatted in XBRL (Extensible Business Reporting Language): (i) Balance Sheets, (ii) Statements of Income, (iii) Statements of Comprehensive Income, (iv) Statements of Cash Flows, and (v) Notes to Financial Statements.

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

101.SCH		XBRL Taxonomy Extension Schema Document

101.CAL		XBRL Taxonomy Calculation Linkbase Document

101.DEF		XBRL Taxonomy Extension Definition Linkbase Document

101.LAB		XBRL Taxonomy Label Linkbase Document

101.PRE		XBRL Taxonomy Presentation Linkbase Document

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

(1)	Incorporated by reference to Exhibit 3.1 in the Registration Statement on Form S-1 (File No. 333-218372) originally filed by the Company under the Securities Act of 1933 with the Commission on May 31, 2017, and all amendments or reports filed thereto.

(2)	Incorporated by reference to Exhibit 3.3 in the Registration Statement on Form S-1/A (File No. 333-218372) originally filed by the Company under the Securities Act of 1933 with the Commission on June 22, 2017, and all amendments or reports filed thereto.

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.


	ESQUIRE FINANCIAL HOLDINGS, INC.

Date: August 6, 2021	/s/ Andrew C. Sagliocca
	Andrew C. Sagliocca
	President and Chief Executive Officer

Date: August 6, 2021	/s/ Michael Lacapria
	Michael Lacapria
	Senior Vice President and Chief Financial Officer

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Esquire Financial (ESQ) 10-Q2021 Q2 Quarterly report

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