ESQUIRE FINANCIAL HOLDINGS, INC. Management’s Discussion and Analysis of Financial Condition and Results of Operations (form 10-Q)


Management's discussion and analysis of financial condition at June 30, 2022 and
December 31, 2021 and results of operations for the three and six months ended
June 30, 2022 and 2021 is intended to assist in understanding the financial
condition and results of operations of Esquire Financial Holdings, Inc. The
information contained in this section should be read in conjunction with the
unaudited Consolidated Financial Statements and the audited Consolidated
Financial Statements as of December 31, 2021 and the notes thereto appearing in
Part I, Item 1, of this quarterly report on Form 10-Q.

Cautionary Note Regarding Forward-Looking Statements

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

? statements of our goals, intentions and expectations;

? statements regarding our business plans, prospects, growth and operating


? 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;

? the continuing impact of the COVID-19 pandemic on our business and results of


? 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



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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


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


continued or increasing competition from other financial institutions, credit

? unions, and non-bank financial services companies, many of which are subject to

different regulations than we are;

credit risks of lending activities, including changes in the level and trend of

? loan delinquencies and write-offs and in our allowance for loan losses and

provision for loan losses;

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

? our ability to attract and maintain deposits and our success in introducing new

financial products;

? losses suffered by merchants or Independent Sales Organizations (ISOs) with

whom we do business;

? our ability to effectively manage risks related to our payment processing


? our ability to leverage the professional and personal relationships of our

board members and advisory board members;

changes in interest rates generally, including changes in the relative

? differences between short-term and long-term interest rates and in deposit

interest rates, that may affect our net interest margin and funding sources;

? fluctuations in the demand for loans;

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

? changes in consumer spending, borrowing and savings habits;

? declines in the yield on our assets resulting from a low interest rate


declines in our payment processing income as a result of reduced demand,

competition and changes in laws or government regulations or policies affecting

financial institutions, including the Dodd-Frank Act and the JOBS Act, which

? could result in, among other things, increased deposit insurance premiums and

assessments, capital requirements, regulatory fees and compliance costs,

particularly the new capital regulations, and the resources we have available

to address such changes;

changes in accounting policies and practices, as may be adopted by the bank

? regulatory agencies, the Financial Accounting Standards Board, the Securities

and Exchange Commission or the Public Company Accounting Oversight Board;

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


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? the impairment of our investment securities;

? our ability to control costs and expenses, particularly those associated with

operating as a publicly traded company;

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

? political instability;

? acts of war, terrorism, natural disasters or global market disruptions,

including global pandemics;

competition and innovation with respect to financial products and services by

? banks, financial institutions and non-traditional providers, including retail

businesses and technology companies;

? changes in our organization and management and our ability to retain or expand

our management team and our board of directors, as necessary;

the costs and effects of legal, compliance and regulatory actions, changes and

? developments, including the initiation and resolution of legal proceedings,

regulatory or other governmental inquiries or investigations, and/or the

results of regulatory examinations and reviews;

? the ability of key third-party service providers to perform their obligations

to us; and

other economic, competitive, governmental, regulatory and operational factors

? affecting our operations, pricing, products and services described elsewhere in

this Quarterly Report on Form 10-Q.

The foregoing factors should not be construed as exhaustive and should be read
in conjunction with other cautionary statements that are included in our Annual
Report on Form 10-K for the year ended December 31, 2021, as supplemented by
subsequent Quarterly Reports on Form 10-Q. If one or more events related to
these or other risks or uncertainties materialize, or if our underlying
assumptions prove to be incorrect, actual results may differ materially from
what we anticipate. Accordingly, you should not place undue reliance on any such
forward-looking statements. Any forward-looking statement speaks only as of the
date on which it is made, and we do not undertake any obligation to publicly
update or review any forward-looking statement, whether as a result of new
information, future developments or otherwise. New risks and uncertainties arise
from time to time, and it is not possible for us to predict those events or how
they may affect us. In addition, we cannot assess the impact of each factor on
our business or the extent to which any factor, or combination of factors, may
cause actual results to differ materially from those contained in any
forward-looking statements.

Summary of Significant Accounting Policies

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

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


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

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

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

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


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

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.

The Company's foundation for success has been our nationwide branchless
litigation and payment processing verticals supported by our forward-thinking
senior managers, outstanding client service teams, and inclusive corporate
culture. The future of our success will be the ability to continue developing
and embracing cutting-edge technology to significantly leverage these verticals,
differentiating us from other technology enabled financial firms and creating
the catalyst for industry leading growth and returns.

Litigation Market Commercial Banking. The litigation market has been and will
continue to be a significant growth opportunity for our Company as we offer
focused and tailored products and services to law firms nationally. U.S. tort
actions alone are estimated to consume 1.5%-2.0% of U.S. GDP annually(1) or $429
billion(2) (the total addressable market or "TAM"). We do not compete directly
with non-bank finance companies, the primary funders in this market, and believe
there are various and significant barriers to entry including, but not limited
to, our clear industry track record for


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15 years, extensive in-house experience, deep relationships with respected firms
nationally, and unique products tailored to commercial law firms’ needs and

We currently have clients in 27 states and our larger markets include the New
York metro area, California, Texas, New Jersey, and Florida. Our success is tied
to our unique ability to couple traditional commercial underwriting with
non-traditional asset-based underwriting. Our team understands law firms'
contingent case inventory valuation process (as well as traditional hourly
billing firms). Typically, these inventories of claims for injured consumers
have a duration of 2-3 years, significantly longer than traditional accounts
receivables or inventories of goods that can have a duration of 30-60 days or
120 days, respectively. These factors (the unique industry, contingent
collateral, longer durations of the law firms' inventories, atypical revenue
streams of the law firms and more) coupled with the TAM create a unique and
valuable opportunity for the Company with minimal incumbent competition. This
unique risk profile translates into a blended 7.6% variable rate asset yield on
these commercial loans for the quarter ended June 30, 2022. More importantly,
for every $1.00 we advance on these loans we receive on average $1.91 of
low-cost (our cost of funds for the quarter ended June 30, 2022 is 10 basis
points) core operating and escrow deposits through our branchless platform,
fueling and funding additional growth in our other asset classes. Our extremely
low historic delinquency rates and low charge-off rates clearly demonstrate our
strong underwriting process and expertise in this vertical. Coupling this with
our off-balance sheet commercial litigation funds of $496.8 million at June 30,
2022, this vertical represents a highly desirable core low-cost funding platform
for the entire company fueling growth in other lending areas.

Payment Processing. The payment processing (merchant acquiring) market has also
been and will continue to be a significant growth opportunity for our company,
as we offer focused and tailored products and services to small businesses
nationally. The payment industry grew 9.7% from 2019 to 2021 with payment
volumes or TAM of $9.5 trillion(3). Couple this with the fact that there are
less than 85 acquiring financial institutions in the U.S. and this vertical
clearly represents a significant growth opportunity for our company. We believe
there are various and significant barriers to entry to this market including,
but not limited to, our clear industry track record for 10 years, extensive
in-house experience, deep relationships with non-bank acquirers, and our unique
approach to servicing these small business merchants and their respective
verticals. We use proprietary and industry leading technology to ensure card
brand and regulatory compliance, support multiple processing platforms, manage
daily risk across approximately 72,000 small business merchants in all 50
states, and perform commercial treasury clearing services for approximately $7.1
billion in processing volume across 136.1 million transactions in the most
recent quarter.

Proprietary Technology. We are a branchless digital first company with
best-in-class technology to fuel future growth with industry leading client
retention rates. We have built a customized and fully integrated customer
relationship management ("CRM") platform, integrated into our digital marketing
cloud and our nCino loan platform (all built on Salesforce for excellence in
client service and operational efficiency) and have begun to invest in
artificial intelligence ("AI") to facilitate precision marketing and client
acquisition across both national verticals.

The success of our nationwide branchless technology enabled litigation and
payment processing verticals has led to industry leading performance. Our
branchless commercial banking loans and deposits have compound annual growth
rates of 23% since 2015, a net interest margin of 4.46% for the quarter ended
June 30, 2022, and drives a company wide efficiency ratio of 52.3% for the
quarter ended June 30, 2022. Our payment processing vertical has a compound
annual growth rate of 58% since 2017 and diversifies our product offerings with
stable fee income comprising 31% of revenues.  The integration of these
competencies and businesses has provided a sustainable average return on assets
and tangible common equity of 2.00% and 17.81%, respectively, for the quarter
ended June 30, 2022.

(1) Towers Watson U.S. Tort Trends

(2) U.S. Chamber of Commerce IRL Costs and Compensation of U.S. Tort System

(3) The Strawhecker Group

COVID-19 Pandemic Programs

We elected to participate in the Paycheck Protection Program administered by the
SBA with the intention to provide our customer base access to this critical
program. The PPP provides borrower guarantees for lenders, as well as loan
forgiveness incentives for borrowers that utilize the loan proceeds to cover
employee compensation-related costs and


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other qualifying business costs. As of March 31, 2022, we had been fully repaid
on our PPP loan portfolio cumulatively totaling $45.5 million, which concluded
our participation in the program.

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, 2022, there were no participants in our
payment deferral program, which is now closed.

Comparison of Financial Condition at June 30, 2022 and December 31, 2021

Assets.  Our total assets were $1.3 billion at June 30, 2022, an increase of
$130.9 million, or 11.1%, from $1.2 billion at December 31, 2021, due to growth
in our securities portfolio funded with low cost deposits where securities
held-to-maturity increased $76.3 million, and increases in loans held for
investment of $74.8 million, or 9.5%, offset by net paydowns and unrealized
losses on securities available-for-sale of $25.7 million, or 17.3%.

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

                                       At June 30,               At December 31,
                                           2022                        2021
                                     Amount      Percent         Amount      Percent

                                                  (Dollars in thousands)
Real estate:
Multifamily                        $  259,579       30.2 %     $  254,852       32.5 %
Commercial real estate                 80,488        9.3           48,589        6.1
1 - 4 family                           33,565        3.9           40,753        5.2
Total real estate                     373,632       43.4          344,194       43.8
Commercial                            478,149       55.6          427,859       54.6
PPP                                         -          -            4,249        0.5
Consumer                                8,327        1.0            8,681        1.1

Total loans held for investment $ 860,108 100.0 % $ 784,983

    100.0 %
Deferred loan fees and unearned
premiums, net                           (778)                       (466)
Allowance for loan losses            (10,271)                     (9,076)
Loans, held for investment         $  849,059                  $  775,441

Loans held for sale, net
(included in Other assets)         $        -                  $   14,100

At June 30, 2022, loans were $859.3 million, or 74.4% of total deposits,
compared to $784.5 million, or 76.3% of total deposits, at December 31, 2021.
The growth in loans was primarily driven by net production in commercial and
commercial real estate loans. Commercial loans increased $50.3 million, or
11.8%, to $478.1 million at June 30, 2022 from $427.9 million at December 31,
2021, driven by both our litigation related loans and other commercial
relationships. Commercial real estate loans increased $31.9 million, or 65.7%,
to $80.5 million at June 30, 2022 from $48.6 million at December 31, 2021.


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

                                          June 30, 2022            December 31, 2021
                                        Amount      Percent        Amount      Percent

                                                     (Dollars in thousands)
Litigation-Related Loans
Commercial Litigation-Related:
Working capital lines of credit        $ 195,224       49.1 %     $ 210,148
      54.4 %
Case cost lines of credit                134,974       34.0         127,859       33.1
Term loans                                64,654       16.3          45,415       11.8

Total Commercial Litigation-Related 394,852 99.4 383,422


Consumer Litigation-Related:
Post-settlement consumer loans             2,366        0.6           2,451


Structured settlement loans                   75        0.0             116


Total Consumer Litigation-Related          2,441        0.6           2,567


Total Litigation-Related Loans $ 397,293 100.0 % $ 385,989

100.0 %

At June 30, 2022, our Litigation-Related loans, which include commercial loans
to law firms and consumer lending to plaintiffs/claimants and attorneys, totaled
$397.3 million, or 46.2% of our total loan portfolio, compared to $386.0
million, or 49.2% of our total loan portfolio at December 31, 2021. We remain
focused on prudently growing our Litigation-Related loan portfolio.

Securities. Securities available-for-sale decreased $25.7 million, or 17.3%, to
$122.7 million at June 30, 2022 from $148.4 million at December 31, 2021, driven
by unrealized losses of $14.4 million and paydowns of $12.9 million, offset by
purchases of $1.7 million. Commencing in the first quarter of 2022, we invested
a portion of our excess liquidity in held-to-maturity securities, totaling $76.3
million at June 30, 2022.

Funding. Total deposits increased $127.1 million, or 12.4%, to $1.2 billion at
June 30, 2022 from $1.0 billion at December 31, 2021. We continue to focus on
the acquisition and expansion of core deposit relationships, which we define as
all deposits except certificates of deposit. Core deposits totaled $1.1 billion
at June 30, 2022, or 98.4% of total deposits at that date, compared to $1.0
billion or 98.1% of total deposits at December 31, 2021. Of which, litigation
and payment processing deposits represent 64% and 15%, respectively, of total
deposits. Demand deposits (noninterest bearing) increased $103.8 million, or
25.4%, to $513.1 million, representing 44.4% of total deposits.

In addition to our core deposits as a source of funding, the Company continues
to prudently manage its balance sheet through deposit sweep programs,
maintaining off-balance sheet funds totaling $496.8 million at June 30, 2022.

At June 30, 2022, we had the ability to borrow a total of $157.1 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 $39.6 million. At
June 30, 2022, we also had $67.5 million in aggregate unsecured lines of credit
with unaffiliated correspondent banks. No amounts were outstanding on any of the
aforementioned lines of credit at June 30, 2022.

Equity. Total stockholders' equity increased $1.8 million to $145.5 million at
June 30, 2022, from $143.7 million at December 31, 2021, primarily due to net
income of $11.7 million and amortization of share based compensation of $1.1
million, partially offset by other comprehensive losses of $10.4 million due to
the decline in fair value of available-for-sale securities reflective of the
recent increases in short-term market interest rates and a common stock dividend
of $727 thousand.

Asset Quality. Nonperforming assets, totaling $4 thousand, consisted of two
nonaccrual consumer loans as of June 30, 2022. As of June 30, 2022, the
allowance for loan losses was $10.3 million, or 1.20% of total loans, as
compared to $9.1 million, or 1.16% of total loans at December 31, 2021. The
increase in the allowance as a percentage of loans was related to qualitative
factors due to the current economic and inflationary environment. At June 30,
2022, special mention


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and substandard loans totaled $22.5 million and $721 thousand, respectively. At
December 31, 2021, special mention and substandard loans totaled $24.8 million
and $4.3 million, respectively.

Average Balance Sheets and Rate/Volume Analysis

The following tables present average balance sheet information, interest income,
interest expense and the corresponding average yields earned and rates paid for
periods indicated. The average balances are daily averages and, for loans,
include both performing and nonperforming balances. Interest income on loans
includes the effects of net premium 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,
                                                  2022                                       2021

                                                              (Dollars in thousands)
                                   Average                     Average        Average                   Average
                                   Balance      Interest     Yield/Cost       Balance     Interest     Yield/Cost
Loans, held for investment       $   841,336    $  12,423           5.92 %   $ 700,349    $  10,120          5.80 %
Securities, includes
restricted stock                     208,091        1,033           1.99 %     134,828          538          1.60 %
Securities purchased under
agreements to resell                  48,536          190           1.57 %      51,142          160          1.25 %
Interest earning cash and
other                                132,487          309           0.94 %      65,947           42          0.26 %
Total interest earning assets      1,230,450       13,955           4.55 %     952,266       10,860          4.57 %

NONINTEREST EARNING ASSETS            45,672                                    31,519

TOTAL AVERAGE ASSETS             $ 1,276,122                                 $ 983,785


Savings, NOW, Money Market
deposits                         $   608,817    $     255           0.17 %   $ 416,389    $     173          0.17 %
Time deposits                         19,178           26           0.54 %      10,980           19          0.69 %
Total interest bearing
deposits                             627,995          281           0.18 %     427,369          192          0.18 %
Borrowings                               103            1           3.89 %         104            1          3.86 %
Total interest bearing
liabilities                          628,098          282           0.18 %     427,473          193          0.18 %

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