S U C C E E D B O L D LY
2 0 2 2 A N N U A L R E P O R T
Esquire Financial Holdings, Inc. is a financial holding company headquartered in Jericho,
New York, with one branch office in Jericho, New York, and an administrative office in Boca
Raton, Florida. Its wholly-owned subsidiary, Esquire Bank, National Association, is 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
area. The bank offers 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. For more information, visit www.esquirebank.com.
TO O U R F E L LOW S TA K E H O L D E R S ,
In light of recent industry events commencing with the
Loan portfolio diversification with focused growth in
failure of SVB Financial Group and Signature Bank, the
higher yielding variable rate commercial loans anchored
last several weeks have sparked uncertainty in the finan-
by our litigation portfolio, totaling $947 million at year
cial markets causing most in the industry to re-evaluate
end with a CAGR of 23%, creating opportunities for full
their balance sheet management and overall strategy.
commercial relationship banking (deposits) through our
We want to take this opportunity to explain to our
commercial cash management platform.
stakeholders why, during these tumultuous weeks, not
a single Esquire client has left our Company nor moved
their deposit relationships. First, we are a full-service
commercial bank that focuses on “old fashioned” relation-
ship banking, treating our clients as business partners,
while coupling this with cutting edge technology and digital
thought leadership content. Secondly, we have always
prioritized our balance sheet management strategy,
along with safety and soundness before earnings
and our stock price—focusing on credit quality, core
relationship banking and funding, liquidity, interest rate
Solid credit metrics, asset quality, and reserve cover-
age ratios with no nonperforming loans at year-end
and 1.29% reserve to loans ratio.
Stable low-cost core commercial relationship deposit
model with a cost-of-funds of 0.15% totaling $1.2 billion
and a CAGR of 22% generated from a highly efficient
branchless technology-enabled deposit platform.
Off-balance sheet commercial relationship litigation
funds total $432 million at year-end, representing an
additional source of funding.
risk management, and capital. Finally, we believe that a
Diluted earnings per share was $3.47 for the year with
strong and fortified balance sheet starting with outstand-
a CAGR of 46%, generating an industry leading return
ing customer relationships will consistently generate
on average assets and equity of 2.31% and 19.44%,
long term growth and strong industry leading perfor-
respectively (2.80% and 23.89% for the fourth quarter
mance metrics—as we say, slow and steady wins the
2022, respectively). Both our return on average assets
race. In this message, we would like to expand on these
and average stockholders’ equity had a CAGR of
foundational values as well as expand on our transforma-
approximately 30%.
tional future.
In summary, we generated industry leading returns and
First, let’s briefly review certain 2022 performance met-
performance metrics fueled by our unique branchless
rics to demonstrate that our core principles are grounded
national verticals. Our diversified revenue streams were
in industry leading returns and performance metrics.
supported by our customer-centric employees and
Review of 2022
Esquire’s industry leading performance metrics once
again placed us among the top performing financial ser-
vices companies in the country. Since our growth metrics
year over year are included in our Annual Report, we
wanted to highlight several metrics for the year-ended
2022 with associated compounded annual growth rates
unique technology platforms, generating a strong effi-
ciency ratio of 49.8% (45.3% for the fourth quarter 2022)
while continually investing in technology and other
resources to generate future growth.
Serving our Business Partners with
Relationship Banking
While some companies lose their clarity and purpose in
(“CAGR”) since 2015, clearly demonstrating the consistent
the pursuit of growth and earnings, our path has been,
performance from our unique and valuable institution.
and will continue to be focused and clearer than it has
Exceptional revenue growth totaling $84 million for
the current year with a CAGR of 28%, fueled by a
strong net interest margin of 4.99% (5.81% for the
fourth quarter 2022) and fee income representing
30% of total revenue.
ever been. We start with “living and breathing” our two
national platforms every day—the litigation and pay-
ment processing verticals. Our client-centric approach
to relationship banking starts with listening to the needs
and wants of our customers (and prospective customers),
E S Q U I R E F I N A N C I A L H O L D I N G S , I N C . 1
meeting those needs and wants with tailored products
steadfast commitment to their success and business
and services, and making our clients’ success our top pri-
growth over the years. For us at Esquire, this clearly
ority. These core tenets coupled with our forward-think-
demonstrates that true relationship banking translates
ing managers, outstanding client service teams, and
into core and loyal commercial clients (lending facilities,
inclusive corporate culture differentiate us from most
commercial cash management depository relationships,
financial institutions.
payment processing clients, and more).
How do we do this? Simply put, in the litigation vertical,
we have extensive experience in this unique industry for
17 years. We understand the difference between various
types of law firms (i.e.—class action, mass tort, single
event, workers compensation, social security, hourly
firms, and more). We have extensive experience in valu-
ing the contingent fee collateral or inventories of law
firms, and we understand that these contingent assets
have longer durations than traditional commercial assets
(creating atypical revenue streams for law firms). This
experience and understanding creates deep
relationships within the litigation market with not only our
clients, but with non-client law firms, claims administra-
tors, lien resolution firms, the courts, and other related
professional service firms that assist this industry
throughout the country.
In the payment (merchant acquiring) processing vertical,
we again have extensive experience in this unique indus-
try for over 10 years, deep relationships with non-bank
acquirers, we use proprietary and industry leading tech-
nology to ensure card brand and regulatory compliance,
support multiple processing platforms, manage daily risk
across 76,000 small business merchants in all 50 states,
and perform commercial treasury clearing services for
approximately $28 billion in debit and credit card pro-
cessing volume across 536 million transactions annually
(excluding our ACH processing platform). Also, we are
one of only 85 acquiring banks in the country.
How do these relationships translate during the most
recent (and past) financial turmoil? During the first days
of the recent market uncertainty (the week of March 17,
2023), our executive and senior teams spoke directly
to most of our clients in both national verticals. These
clients reaffirmed their trust in Esquire, we reaffirmed our
commitment to them during the current and past market
turmoil (i.e.—the global pandemic), and reiterated Esquire’s
Foundational Balance Sheet Management First
Safety and soundness of any company, especially a
financial services company, starts and ends with strong
balance sheet management and an unwavering commit-
ment to not chasing short-term earnings, but long-term
strategies that will position our Company for growth and
success over the next decade.
Credit Quality. Strong credit quality starts with our unique
ability to couple traditional commercial underwriting with
non-traditional asset-based underwriting, understanding
the longer duration of law firm’s contingent case invento-
ries and the related valuation process. Our global loan-
to-value for these firms is typically less than 20%, clearly
demonstrating a strong credit culture. In the payment
processing vertical, we maintained ISO and merchant
reserves and residuals in noninterest bearing demand
deposit accounts totaling $144 million to protect our
Company’s capital from charge-back risk. Finally, we
have no exposure to crypto currency nor do we offer it as
a service for our customers.
Core relationship banking and funding. Our commercial
relationship banking model ensures that funding (depos-
its) is core to our Company. Our commercial loans tai-
lored to the litigation market come with low cost core
operating and escrow deposits, enhancing the overall
yield on our loan portfolio, and enabling us to achieve
industry leading net interest margins. The litigation verti-
cal typically represents 65%-75% of our deposit base at
any given time, with $564.0 million, or 46%, of total
deposits in longer duration escrow (or claimant trust) set-
tlement deposits at December 31, 2022. A significant
part of our core deposit focus is on managing escrow or
fiduciary funds for law firms and other related companies
(i.e.—claims administrators, courts, bankruptcy trustees)
nationally. These law firm escrow accounts as well as
2 E S Q U I R E F I N A N C I A L H O L D I N G S , I N C .
other fiduciary deposit accounts are for the benefit of
11.33% and 14.21%, respectively. Including our after tax
consumers (or claimants) with the FDIC insurance cover-
available-for-sale and held-to-maturity securities portfo-
age passing through the account to the beneficial owner
lios fair values, our TCE/TA and CET1 ratios are still robust
(claimant) of the funds. This is why only 25% of our depos-
at 10.86% and 12.03%, respectively. These ratios are far
its were not FDIC-insured at year end, with the majority
in excess of industry averages and demonstrate a strong
of our uninsured deposits representing customers with
capital foundation to grow our Company. We also gener-
full relationship banking at Esquire including, but not
ate a significant amount of capital from earnings as
limited to, law firm operating accounts, certain balances
demonstrated by our average return on assets and
of escrow accounts, merchant reserves, ISO reserves,
equity of 2.80% and 23.89% for the fourth quarter 2022,
ACH processing, and custodial accounts.
respectively, and 2.31% and 19.44% for the year ended
Liquidity and interest rate risk management. Our strong
liquidity and thoughtful asset structure/duration, sup-
ported by our interest rate risk management, ensures
that we can manage our Company in times of financial
crisis, and in the absence of this, allows us to grow and
support our clients’ (and prospective clients’) needs. At
year end, our overall liquidity position including cash,
2022, respectively. Our ability to generate significant
capital from earnings is due to our two unique high per-
forming national platforms—the litigation vertical that is
primarily net interest margin focused and the payment
processing vertical that is primarily stable non-interest
income focused, coupled with a highly efficient branch-
less national platform.
secured borrowings, unsecured borrowing, and reciprocal
For 17 years, we have operated a simple, straightforward
client sweep balances was $633 million, or 52% of our total
business model centered on taking extraordinary care of
deposits. We have never leveraged our balance sheet to
our clients and servicing their business needs daily
generate earnings, as we have always utilized core client
to grow their companies and meet their liquidity needs.
deposits to fund our asset growth and related earnings. As
We have successfully navigated various macroeconomic
we say, we keep our “powder dry” and maintain excess
and interest rate environments, a pandemic, and today
liquidity to manage through market turmoil or, to support
we have among the industry’s highest rates of client
our growth. From an interest rate risk perspective, our
satisfaction and retention, as well as returns and perfor-
assets are short-duration while most of our loans (approx-
mance metrics.
imately 58%) are variable rate and tied to prime. Our
funding sources for these assets are primarily core com-
mercial deposits tied to overall relationship banking
(i.e.–commercial lending facilities to law firm, payment
processing for ISOs and merchants) that are not interest
rate sensitive. Non-interest-bearing commercial demand
deposits and escrow funds total 36% and 46%, respec-
tively, at year end. These factors create a highly liquid
balance sheet that is not leveraged and, as rates rise,
allows our net interest margin to improve materially (our
net interest margin increased from 4.48% to 5.81% when
comparing the fourth quarter of 2021 to 2022).
Strong Capital. Finally, we have a solid capital founda-
tion as our capital levels are significantly higher than
regulatory requirements, with a tangible common
equity to tangible assets (“TCE/TA”) and a CET1 ratio of
Esquire’s Transformational Future Second
We operate in two significant national markets primed for
disruption: a $443 billion litigation market with 100,000+
law firms and a $9.5 trillion payment processing market
with 10+ million merchants/small businesses. These two
national verticals represent tremendous untapped poten-
tial since Esquire is a fraction of both verticals and they
are both primed for disruption by our client-centric and
tech-focused institution. We are thought leaders in the
litigation vertical, providing digital content to law firms to
help grow their business, and provide C-suite access to
ISOs for flexibility in the payment processing vertical. We
differentiate our brand from other financial institutions in
the U.S. and are positioned for growth, with tailored
products and state-of-the-art technology geared towards
effective client acquisition.
E S Q U I R E F I N A N C I A L H O L D I N G S , I N C . 3
Esquire is a digital-first branchless bank that executes
omni-channel account-based marketing (“ABM”) cam-
paigns, relying primarily on its technology to virtually
power all of its customer and prospect engagements.
Through its expanded partnership with Salesforce,
Esquire has begun to leverage artificial intelligence,
advanced data analytics, and new personalization fea-
tures to deliver real-time relevant thought leadership
content and experiences to customers and prospective
Concluding Thoughts
We believe that a strong and fortified balance sheet
starting with outstanding customer relationships will con-
sistently generate long term-growth and strong industry
leading performance metrics. Esquire is ripe for growth
in two expansive national markets primed for disruption
primarily due to the limited number of players and frag-
mented and inefficient approach to coupling financing and
technology in both verticals. Esquire will continue to be a
customers in the markets we operate. As we say, we
leader in financing and technology in both industries.
meet our target clients on their terms and timeframe, in
the digital channels and with the content that helps
them achieve their business goals, not in traditional
branches during traditional bank hours. We have tai-
lored our digital marketing for a subset of the litigation
market, focused on premium prospective clients that
meet our current profile, and generate industry leading
open rates, click-through rates, and unsubscribe rates for
digital marketing email campaigns conducted in 2022.
Approximately 50% of commercial law firm deals closed
in 2022 came through and were part of our digital-mar-
keting-driven approach to business development. The
key to increasing our market share in both markets is to
continue building and/or partnering with best-in-class
technology solutions to help solve current financial
Our commitment is to deliver value to the markets we
serve, our investors who entrusted us with their capital,
and our dedicated employees.
Sincerely,
Anthony Coelho
Chairman of the Board
needs in these national markets.
Andrew C. Sagliocca
Chief Executive Officer, President & Board Member
In the litigation market, we have partnered with, and
begun to enhance our payment platform for case cost
financing loans, a key product for law firms nationally.
This technology will allow law firms to self-service their
case costs for each claimant/case, track those costs, and
pass through the interest charged on these facilities to
the final settlement. We also plan to continue our prog-
ress to partner with best-in-class technology solutions in
the payment processing space to constantly enhance
our customer experience.
4 E S Q U I R E F I N A N C I A L H O L D I N G S , I N C .
2022 FORM 10 - K
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
☒ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended December 31, 2022
OR
☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number: 001-38131
Esquire Financial Holdings, Inc.
(Exact Name of Registrant as Specified in its Charter)
Maryland
(State or other jurisdiction of incorporation or organization)
27-5107901
(I.R.S. Employer Identification Number)
100 Jericho Quadrangle, Suite 100, Jericho, New York
(Address of principal executive offices)
11753
(Zip code)
(516) 535-2002
(Registrant’s telephone number including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Common Stock, $0.01 par value
Trading
Symbol(s)
ESQ
Name of each exchange on which registered
The Nasdaq Stock Market LLC
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes No
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act. Yes No
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 reports), and (2) has been subject to such filing 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 (§232.405 of this
chapter) during the preceding 12 months (or 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, a 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 has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under
Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☐
If securities are registered pursuant to Section 12(b) of the Act, indicate by check mark whether the financial statements of the registrant included in the filing reflect the correction of an
error to previously issued financial statements. ☐
Indicate by check mark whether any of those error corrections are restatements that required a recovery analysis of incentive-based compensation received by any of the registrant’s
executive officers during the relevant recovery period pursuant to § 240.10D-1(b). ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
The aggregate value of the voting and non-voting common stock held by non-affiliates of the registrant, computed by reference to the closing price of the common stock of $33.30 as of
June 30, 2022, was $228.8 million.
As of March 1, 2023, there were 8,198,258 shares outstanding of the registrant’s common stock.
1. Portions of the Proxy Statement for the 2023 Annual Meeting of Stockholders. (Part III)
DOCUMENTS INCORPORATED BY REFERENCE
TABLE OF CONTENTS
PART I
ITEM 1. Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
ITEM 1A. Risk Factors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
ITEM 1B. Unresolved Staff Comments . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
ITEM 2. Properties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
ITEM 3. Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
ITEM 4. Mine Safety Disclosures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
PART II
ITEM 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of
Equity Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
ITEM 6.
[Reserved] . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
ITEM 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations . . . . . . . .
ITEM 7A. Quantitative and Qualitative Disclosures About Market Risk . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
ITEM 8. Financial Statements and Supplementary Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
ITEM 9. Changes In and Disagreements With Accountants on Accounting and Financial Disclosure . . . . . . .
ITEM 9A. Controls and Procedures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
ITEM 9B. Other Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
ITEM 9C. Disclosure Regarding Foreign Jurisdictions that Prevent Inspections . . . . . . . . . . . . . . . . . . . . . . .. . .
PART III
ITEM 10. Directors, Executive Officers and Corporate Governance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
ITEM 11. Executive Compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
ITEM 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder
Matters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
ITEM 13. Certain Relationships and Related Transactions, and Director Independence. . . . . . . . . . . . . . . . . . . .
ITEM 14. Principal Accountant Fees and Services
PART IV
ITEM 15. Exhibits and Financial Statement Schedules . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
ITEM 16. Form 10-K Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
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SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
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i
ITEM 1. Business
Forward-Looking Statements
PART I
This annual report contains forward-looking statements within the meaning of the federal securities laws. These
forward-looking statements reflect our current views with respect to, among other things, future events and our financial
performance. These statements are often, but not always, made through the use of words or phrases 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 are not historical facts, and are based on current expectations, estimates and projections about
our industry, management’s beliefs and certain assumptions made by management, many of which, by their nature, are
inherently uncertain and beyond our control. Accordingly, we caution you that any such forward-looking statements are
not guarantees of future performance and are subject to risks, assumptions, estimates and uncertainties that are difficult to
predict. Although we believe that the expectations reflected in these forward-looking statements are reasonable as of the
date made, actual results may prove to be materially different from the results expressed or implied by the forward-looking
statements.
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:
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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;
the continuing impact of the COVID-19 pandemic on our business and results of operation;
our ability to enter new markets successfully and capitalize on growth opportunities;
significant increases in our loan losses, including as a result of our inability to resolve classified and
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;
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credit risks of lending activities, including changes in the level and trend of loan delinquencies and write-offs and
in our allowance for loan losses and provision for loan losses;
our success in increasing our legal and “litigation” market lending;
our ability to attract and maintain deposits and our success in introducing new financial products;
losses suffered by merchants or Independent Sales Organizations (“ISOs”) with whom we do business;
our ability to effectively manage risks related to our payment processing business;
our ability to leverage the professional and personal relationships of our board members and advisory board
members;
changes in interest rates generally, including changes in the relative differences between short-term and long-
term interest rates and in deposit interest rates, that may affect our net interest margin and funding sources;
fluctuations in the demand for loans;
technological changes that may be more difficult or expensive than expected;
changes in consumer spending, borrowing and savings habits;
declines in 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 (“FASB”), the Securities and Exchange Commission or the Public Company
Accounting Oversight Board;
loan delinquencies and changes in the underlying cash flows of our borrowers;
the impairment of our investment securities;
our ability to control costs and expenses, particularly those associated with operating as a publicly traded
company;
the failure or security breaches of computer systems on which we depend;
political instability;
acts of war, 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;
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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 Annual Report on Form 10-K.
The foregoing factors should not be construed as exhaustive and should be read in conjunction with other cautionary
statements that are included in this annual report. 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.
Esquire Financial Holdings, Inc.’s electronic filings with the SEC, including the Annual Report on Form 10-K,
Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and amendments to these reports filed or furnished
pursuant to Sections 13(a) or 15(d) of the Exchange Act, as amended, are made available at no cost in the Investor
Relations section of the Company’s website, www.esquirebank.com, as soon as reasonably practicable after the Company
files such material with, or furnishes it to, the SEC. The Company’s SEC filings are also available through the SEC’s
website at www.sec.gov.
Our Company
Esquire Financial Holdings, Inc. (“Esquire Financial” or the “Company”) is a financial holding company
headquartered in Jericho, New York and registered under the Bank Holding Company Act (“BHCA”) of 1956, as amended
(the “BHC Act”). Through our wholly owned bank subsidiary, Esquire Bank, National Association (“Esquire Bank” or
the “Bank”), we are a full service commercial bank dedicated to serving the financial needs of the legal and small business
communities on a national basis, as well as commercial and retail customers in the New York metropolitan market. We
offer tailored products and solutions to the legal community and their clients as well as dynamic and flexible 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 (a subset of the New York metropolitan market). We believe these
activities, anchored by our legal community focus, generate a stable source of low cost core deposits and a diverse asset
base to support our overall operations. Our commercial loans tailored to the litigation market (“Litigation-Related Loans”)
come with low cost core operating and escrow deposits, enhancing our overall yield on our loan portfolio, and enabling us
to earn attractive risk-adjusted net interest margins. Additionally, our payment processing activities to small businesses
nationally generate a relatively stable source of fee income. We believe our unique and dynamic business model
distinguishes us from other banks and non-bank financial services companies in the markets we operate as demonstrated
by comparing our performance metrics for the years ended 2022 and 2021.
For the year ended December 31, 2022:
• Our net income was $28.5 million or $3.47 per diluted share while our return on average assets and equity were
2.31% and 19.44%, respectively.
• We had a net interest margin of 4.99%, primarily driven by growth in higher yielding variable rate commercial
loans and a low cost of funds of 0.15% on our deposits (including demand deposits).
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• Our loans held for investment increased 20.7%, or $162.8 million, to $947.3 million, driven by growth in higher
yielding variable rate commercial loans.
• Our noninterest income increased 18.6%, or $3.9 million, to $24.9 million, which represented 29.6% of our total
revenue (net interest income plus noninterest income) at December 31, 2022, driven by our payment processing
platform and administrative service payment (“ASP”) fee income.
• As of December 31, 2022, our total assets, loans, deposits and stockholders’ equity totaled $1.4 billion,
$947.3 million, $1.2 billion and $158.2 million, respectively.
We remain true to our commitment to serve the litigation community and our commercial customers through our
tailored and innovative products and solutions including our digital platform. In October 2020, we launched a suite of best-
in-class digital technologies including our customer centric Customer Relationship Management (“CRM”) application
coupled with our digital marketing resources, newly designed and highly functional website, and new brand image to
support future growth. These digital technologies support our seamless communication to the communities we serve,
provide best-in-class multimedia digital marketing capabilities, streamline our online functionality and associated
application processes, and will support our industry leading performance metrics in the future.
Our unique products and services coupled with our thought-leadership digital marketing creates deep relationships
within the litigation community, driving our commercial loan growth, strong loan yields, and low cost core deposits. The
litigation community represented more than 71% of our deposit base at December 31, 2022, with $564.0 million, or 46%,
of total deposits in longer duration escrow or claimant trust settlement deposit accounts where the law firm is trustee for
the claimant settlement funds. In addition to our lending activities, we have also remained steadfast in growing our payment
processing platform. We provide dynamic and flexible payment processing solutions to small business owners. Our
payment processing platform has grown to approximately 76,000 small businesses at December 31, 2022, generating 26%
of our revenue for the year ended December 31, 2022. We believe that both our litigation and payment processing
platforms represent a significant opportunity for future growth in lending, fee income, core deposits and enhanced lending
opportunities.
Our low cost core deposits (total deposits, excluding time deposits), representing our primary funding source for loan
growth, totaled $1.2 billion at December 31, 2022, a key driver of our total cost of deposits of 0.15%. These stable low
cost funds are driven by our litigation related operating and escrow commercial deposits. We intend to continue to
prudently manage growth in deposits, utilizing customer sweep programs for our mass tort and class action business
banking programs. We do not have traditional “brick and mortar” branches to support our deposit growth. Instead, we rely
on our robust commercial online cash management technology to manage our customers’ operating, escrow, and money
market accounts as well as their business banking needs across the country.
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 1.85%-2.13% of U.S. GDP annually according to the U.S. Chamber of Commerce
Institute for Legal Reform (“Tort Costs in America – An Empirical Analysis of Costs and Compensation of U.S. Tort
System”) published in November 2022 with a total addressable market (“TAM”) of $443 billion for 2020. 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 16 years, extensive in-house
experience, deep relationships with respected firms nationally, and unique products tailored to commercial law firms’
needs and wants.
We currently have clients in 28 states and our larger markets include the New York metro area, California, Texas,
Florida, Pennsylvania, South Carolina and New Jersey. 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 or claimants 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)
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coupled with the TAM create a unique and valuable opportunity for the Company with minimal incumbent competition.
This unique risk profile translates approximately into a blended 9% variable rate asset yield on these commercial loans for
the year ended December 31, 2022. More importantly, since our commercial banking platform is focused on full service
relationship banking, for every $1.00 we advance on these loans we receive on average $1.85 of low-cost (our cost of
funds for the year ended December 31, 2022 is 15 basis points) core operating and escrow deposits from these law firms
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. Our longer duration escrow or claimant trust settlement deposits represent accounts where the law firm is
trustee for the claimant settlement funds and represent $564.0 million, or 46%, of total deposits. These law firm escrow
accounts as well as other fiduciary deposit accounts are for the benefit of the law firm’s customers (or claimants) and are
titled in a manner to ensure that the maximum amount of FDIC insurance coverage passes through the account to the
beneficial owner of the funds held in the account. Therefore, these law firm escrow accounts carry FDIC insurance at the
claimant settlement level, not at the deposit account level. Coupling these types of commercial relationships with our off-
balance sheet commercial litigation funds of $432.1 million at December 31, 2022, makes this litigation vertical a highly
desirable core low-cost funding platform 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 according
to company records on U.S. payment industry trends. 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 76,000 small business merchants in all 50 states, and perform commercial treasury clearing services for
approximately $28 billion in processing volume across 536 million transactions in the year ended December 31, 2022.
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 with an initial focus on the
litigation vertical.
The success of our national litigation and payment processing verticals coupled with our focus on the New York metro
market and branchless technology has led to industry leading performance. For the year ended 2022, we have produced
industry leading returns including, but not limited to, an average return on assets and equity of 2.31% and 19.44%,
respectively; industry leading net interest margin of 4.99% (5.81% for the fourth quarter of 2022); strong efficiency ratio
of 49.8%; and a diversified revenue stream as demonstrated by a strong net interest margin and stable fee income
representing 30% of total revenue (our payment processing vertical has a compound annual growth rate of 46% since
2017). Coupling these performance metrics with strong balance sheet management including, but not limited to, loan
portfolio diversification, an asset sensitive balance sheet with 58% of our loans being variable rate tied to prime, solid
credit metrics with no non-performing assets, a stable low cost deposit base, and strong available liquidity of $417.1
million with no outstanding borrowings ensures that our Company is poised for future growth and success.
Market Area
We define the market area for our legal community products and services as law firms practicing within the
United States, United States territories and United States commonwealths, and we serve the litigation market on a
nationwide basis. For traditional community banking products and services, our primary market area is the New York
metropolitan area, specifically Nassau County and New York City boroughs (Manhattan, Brooklyn, Bronx, and Queens)
of New York State and secondarily throughout the rest of New York State. As a Visa, MasterCard, American Express and
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Discover member, we provide payment processing for small businesses located throughout the United States primarily
through relationships with third party ISOs.
We have established ourselves in the litigation market through the strategic development of a business model that
understands this market’s unique needs and provides tailored banking products and services to our target customers. We
have designed unique, value added products and services for our current and potential customers and created a distribution
network with direct access to the market through the experience and networks of our management team, board, attorney
customers, state and national trial associations, and the investment in our CRM and related digital platforms. Our attorney
customers and network of non-customer attorneys are well-known, influential market figures and active members of some
of the leading litigation law firms in the nation, national and state bar associations and other industry leading companies.
In addition, we have established informal affiliations or relationships with key industry organizations such as National
Trial Lawyer Association, American Association of Justice, New York State Trial Lawyers Association, Consumer
Attorneys of California, and a number of other state and national trial attorney associations. Through our current law firm
clients and other relationships, we believe we have access to tens of thousands of plaintiff law firms as we leverage our
CRM, digital marketing and other proprietary technologies.
Our traditional community banking market area has a diversified economy typical of most urban population centers,
with the majority of employment provided by services, wholesale/retail trade, finance/insurance/real estate (“FIRE”) and
construction. As of December 31, 2022, New York County’s $2.8 trillion deposit market was much larger than the
$126 billion deposit market in Nassau County, according to data sourced from S&P Global Market Intelligence.
We have established an extensive market for our payment processing business as an acquiring bank throughout the
United States and its territories. We have a senior product management team that has developed in excess of 28 active ISO
relationships servicing approximately 76,000 merchants. The ISO model insulates the bank’s capital from merchant losses
through merchant reserves, ISO reserves, ISO monthly residuals and ISO portfolio values. In addition to mitigating risk,
the ISO business model allows the Bank to solicit merchants nationwide using numerous independent sales agents
employed by our ISOs.
Competition
The bank and non-bank financial services industries in our markets and surrounding areas is highly competitive. We
compete with a wide range of regional and national banks located in our market areas as well as non-bank commercial
finance companies on a nationwide basis. We experience competition in both lending and attracting deposit funds as well
as payment processing services from commercial banks, savings associations, credit unions, consumer finance companies,
pension trusts, mutual funds, insurance companies, mortgage bankers and brokers, brokerage and investment banking
firms, non-bank lenders, government agencies and certain other non-financial institutions. Many of these competitors have
more assets, capital and lending limits, and resources than we do and may be able to conduct more intensive and broader-
based promotional efforts to reach both commercial and individual customers. Competition for deposit products can
depend on pricing because of the ease with which customers can transfer deposits from one institution to another as well
as the expertise necessary to manage specialized accounts (i.e. interest on lawyer accounts (“IOLA”) and interest on
lawyer trust accounts (“IOLTA”)) which are specifically designed for designating law firm customer funds.
Competition for Litigation-Related Loans is derived primarily from a small number of nationally-oriented financial
companies that specialize in this market. Some of these companies are focused exclusively on loans to law firms, while
others offer loans to plaintiffs as well. While some overlap exists between the litigation market loan products offered by
Esquire Bank and these companies (primarily lines of credit, case-cost and post-settlement commercial loans), there are a
number of critical differences that we believe gives our Bank a competitive advantage including, but not limited to:
• Esquire Bank can offer more competitive terms (i.e.-rates) on loans compared to specialty finance companies
because its cost of funds is much lower than the funding costs for these non-bank competitors;
•
the non-bank companies are not able to offer commercial cash management services on deposit products (i.e.-
commercial on-line banking, remote deposit capture technology), letters of credit, debit cards, or other business
services; and
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•
non-banks cannot offer products uniformly across the country because they are not national banks.
The Bank provides payment processing services as an acquiring bank primarily through the third-party or ISO business
model in which we process and clear credit card, debit card, and ACH transactions on behalf of merchants. We are one of
less than eighty-five US acquiring banks and face competition from many larger institutions, including large commercial
banks and third party processors, that operate in the payment processing business. We believe we have a competitive
advantage to continue to attract and retain ISOs and merchants when considering our history of successful operations,
flexibility to settle through multiple payment processing platforms, superior customer relationship management, and an
ability to tailor our contractual arrangements to our customers’ needs.
Lending Activities
Our strategy is to maintain a loan portfolio that is broadly diversified by type and location. Within this general strategy,
we intend to focus our growth in Litigation-Related Loans, which include commercial loans to law firms and, to a much
lesser extent, consumer lending to attorneys and plaintiffs/claimants where we have expertise and market insights. As of
December 31, 2022, these product lines in aggregate totaled $467.4 million (or 49.3% of our loan portfolio). As of
December 31, 2022, our commercial Litigation-Related Loans, which consist of working capital lines of credit, case cost
lines of credit, term loans and other commercial Litigation-Related Loans (“Commercial Litigation-Related Loans”),
totaled $464.7 million, or 99.4% of our total Litigation-Related Loan portfolio and 49.0% of our loan portfolio. As of
December 31, 2022, our consumer Litigation-Related Loans, which consist of held for investment post-settlement
consumer loans and structured settlement loans (“Consumer Litigation-Related Loans”), totaled $2.7 million, or 0.6% of
our total Litigation-Related Loan portfolio and 0.3% of our loan portfolio. With respect to our Litigation-Related Loan
portfolio, we seek out customers on a nationwide basis.
At December 31, 2022, approximately 23.8%, 19.4%, and 17.5% of the Commercial Litigation-Related Loans
outstanding had been extended to customers in New York, California and Texas, respectively. There were three other
states with loan balance concentrations of at least 5.0% each of total Commercial Litigation-Related Loans.
As of December 31, 2022, our total real estate loans, which consist of multifamily loans, commercial real estate loans
and 1 – 4 family loans, totaled $379.9 million (or 40.1% of our loan portfolio). The majority of our real estate secured
loans are in the areas surrounding the New York metropolitan area. We anticipate continuing to focus on the commercial
and personal credit needs of businesses and individuals in these markets.
The following is a discussion of our major types of lending activity:
Commercial Loans and Lines of Credit (“Commercial”). Generally, commercial loans are originated to local small
to mid-size businesses to provide short-term financing for inventory, receivables, the purchase of supplies, or other
operating needs arising during the normal course of business and loans made to our qualified ISO customers. In addition,
specialized and tailored commercial loans are offered to attorneys and law firms nationally. At December 31, 2022,
commercial loans (excluding Commercial Litigation-Related Loans of $464.7 million) totaled $87.4 million (or 9.2% of
total loans). All commercial loans totaled $552.1 million (or 58.2% of our total loans) at December 31, 2022.
8
Commercial Litigation-Related Loans. The following is a summary of the specialized commercial loan products we
offer to meet the needs of the litigation community. Commercial Litigation-Related Loans are made to law firms and the
outstanding loan balances are included in the loan balance for commercial loans as noted above. A unique aspect of our
underwriting involves advances of loan proceeds against a “borrowing base”, which typically consists of the total inventory
of litigation cases for the firm. We complement this with traditional commercial underwriting (See “— Credit Risk
Management” below). Generally, the maximum amount a customer may borrow at any time is fixed as a percentage of the
borrowing base outstanding at any time and takes into account the firm’s operating performance and related debt service
coverage. In addition, on an opportunistic basis, we lend to law firms that may exhibit fluctuating earnings, cumulative
deficits, and negative cash flows. In such cases, we employ an asset based lending model to the deal structure. We consider
such financing opportunities where the terms and structure present manageable risks and the opportunity to achieve above
average returns.
• Working Capital Lines of Credit (“WC LOC”). WC LOCs are unsecured business lines of credit offered to law
firms for general corporate purposes, including meeting cash flow needs, advertising, financing the purchase of
fixed assets, or other reasons. The balance of such loans was $255.0 million at December 31, 2022 (or 54.6% of
total Litigation-Related Loans).
• Case Cost Lines of Credit. Case Cost Lines of Credit (“Case Cost LOC”) are unsecured business lines of credit
that are tied to the costs of contingency cases and totaled $130.3 million at December 31, 2022 (or 27.9% of total
Litigation-Related Loans). Contingency case costs include court filing fees, investigative costs, expert witness
fees, deposition costs, medical record costs, and other costs. Recovery of case costs is derived from gross
settlement proceeds from the settled case. In our experience, an average case can take two to four years to litigate
and law firms are prevented from charging their clients any interest for the out-of-pocket litigation costs, which
amounts to an interest-free loan provided to the client from the law firm. Thus, instead of using the law firm’s
cash flow, law firms use Case Cost LOCs to finance litigation cash flows because the finance charges can
generally be charged against the settlement proceeds. Case Cost LOCs are not contingent loans, meaning that
their repayment is not dependent on a favorable case settlement. In the event of an unfavorable outcome for the
borrower, the loans are repaid from the cash flows of the law firm.
• Term Loans. Term loans are short-term unsecured business loans originated to law firms for general corporate
purposes. These loans are offered to law firms at the same terms as those offered to other types of businesses.
Term loans to law firms totaled $59.4 million at December 31, 2022 (or 12.7% of total Litigation-Related Loans).
• Post-Settlement Commercial and Other Commercial Litigation-Related Loans. Post-settlement commercial
loans are bridge loans secured by proceeds from non-appealable, settled cases. Other commercial litigation-
related loans consist of both secured and unsecured loans to law firms and attorneys. At December 31, 2022 post-
settlement commercial loans totaled $20.0 million (or 4.3% of total Litigation-Related Loans) and are classified
as term loans.
Consumer Loans. Consumer loans are primarily personal loans and, to a lesser extent, post-settlement consumer
loans made to plaintiffs and claimants as described below. Personal loans are purchased or originated for debt
consolidation, medical expenses, living expenses, payment of outstanding bills, or other consumer needs on both a secured
and unsecured basis. At December 31, 2022, total consumer loans held for investment (excluding Consumer Litigation-
Related Loans of $2.7 million) totaled $13.9 million (or 1.5% of total loans).
Post-settlement consumer loans are generally bridge loans to individuals secured by proceeds from settled cases.
These loans generally meet the “life needs” of claimants in various litigation matters due to the delay between the time of
settlement and actual payment of the settlement. These delays are primarily due to various administrative matters in the
case. The balance of held for investment post-settlement consumer loans to individuals was $2.7 million at December 31,
2022.
Real Estate Loans. The majority of our real estate secured loans are in the New York metropolitan area.
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Multifamily. Multifamily loans are the largest component of the real estate loan portfolio and totaled $262.5 million
(or 27.7% of total loans) as of December 31, 2022. The multifamily loan portfolio consists of loans secured by apartment
buildings and mixed-use buildings (predominantly residential income producing) in our primary market area. We originate
and purchase multifamily loans. Whether originated or purchased, all loans are independently underwritten by us utilizing
the same underwriting criteria per our Board established credit policy.
Commercial Real Estate (“CRE”). CRE loans totaled $91.8 million (or 9.7% of total loans) as of December 31, 2022
and consisted primarily of loans secured by mixed use properties (56.6% of the CRE portfolio), warehouses (18.4% of the
CRE portfolio), hospitality properties (17.7% of the CRE portfolio), with the remainder comprised of condo associations
and office/retail properties (7.3% of the CRE portfolio). Owner-occupied loans represented 8.0% of the CRE portfolio at
December 31, 2022. We both originate and purchase CRE loans. All loans are independently underwritten by us utilizing
the same underwriting criteria per our Board established credit policy.
1 – 4 Family. Mortgage loans are primarily secured by 1 – 4 family cash flowing investment properties ($25.6 million,
or 2.7% of total loans, as of December 31, 2022) in our market area. The residential mortgage loan portfolio includes 1 –
4 family income producing investment properties, primary and secondary owner occupied residences, investor coops and
condos. The majority of residential mortgages are originated internally, although we do purchase residential mortgages
from time to time. Purchased loans are subject to all the asset quality and documentary precautions normally used when
originating a loan.
Construction Loans. Construction loans are originated on an opportunistic basis. At December 31, 2022, there were
no construction loans.
Payment Processing Activities
We provide payment processing as an acquiring bank primarily through the third-party or ISO business model in
which we process and clear credit and debit card transactions on behalf of merchants. This model is designed to mitigate
the risks associated with merchant losses resulting from chargebacks, fraud, non-compliance issues or even ISO or
merchant insolvency. In an ISO model, the bank and the ISO jointly enter into the merchant agreement with each merchant.
We believe this model provides an added layer of protection against losses from merchants since losses that are not
absorbed by a merchant would be the liability of the ISO payable from reserves posted by the ISO or other funds the bank
owes to the ISO. Even with this recourse, Esquire Bank is ultimately liable for losses from actions of merchants and those
of ISOs. To date, Esquire Bank has not incurred any losses from its payment processing activities.
We entered into the payment processing business as an acquiring bank in 2012 in an effort to increase our noninterest
income revenue and to provide cross selling opportunities for other business banking products and services. For the year
ended December 31, 2022, payment processing revenues were approximately $21.9 million, which was 26.0% of our total
revenue. At December 31, 2022, we had 28 active ISOs, servicing approximately 76,000 merchants, and for the year ended
December 31, 2022, we processed $28.0 billion in card volume. We intend to continue to expand our payment processing
business.
Under the ISO model, Esquire Bank and the ISO determine the appropriate amount of merchant reserves, which is
generally based on the nature of the merchant’s business, product delivery timeframe, its chargeback and refund history,
processing volumes and the merchant’s financial health. The ISO performs an underwriting and risk management review,
although Esquire Bank itself also reviews and underwrites applications and performs separate risk monitoring and
management to ensure compliance with Esquire Bank’s internal underwriting policies. As of December 31, 2022, we had
contractual arrangements with three payment processors or clearing agents, TSYS, Repay and Fiserv, which are utilized
by Esquire Bank and our ISOs to authorize, clear and settle card transactions.
We have implemented a comprehensive risk mitigation program for our payment processing business which includes
detailed policies and procedures applicable to both ISOs and merchants pertaining to due diligence, risk and underwriting
and Bank Secrecy Act and card brand network (i.e. Visa and Mastercard) compliance, among other objectives. Our
Merchant Acquiring and Risk Policy establishes authorities and guidelines for the Bank to acquire payment processing
arrangements with ISOs, agent banks, payment facilitators, direct merchants and through merchant portfolio acquisitions.
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Such guidelines include initial and ongoing due diligence requirements and approval authorities. All merchants, regardless
of how the merchant is acquired, must meet our Merchant Credit/Underwriting Policy requirements. In addition, credit
approval requirements and authorities for approving merchants and ISOs are clearly defined in our Merchant Acquiring
and Risk Policy.
Our Merchant Acquiring and Risk Policy establishes stringent requirements related to the due diligence conducted
initially and on an ongoing basis, requirements for the ISO contract, our responsibilities and the ISO’s responsibilities in
connection with the sponsorship and other matters. In the event of a potential loss and in accordance with the terms of the
ISO Merchant Agreement, we can take the following actions to collect: charge the merchant account; charge the merchant
reserve account; charge the ISO reserve account; deduct from the ISO monthly residual on an ongoing basis until fully
recovered; and liquidate all or a portion of the ISO merchant portfolio.
In exchange for the liabilities and costs assumed by ISOs, we receive reduced revenue on our payment processing
portfolio as compared to direct payment processing providers that do not obtain such indemnification and administrative
support. For the year ended December 31, 2022, we received a blended rate of approximately eight basis points for
payment processing, compared to direct payment processing providers that may receive two to three times that rate for a
portfolio with similar risk characteristics. However, we believe that our acquiring bank ISO business model represents less
risk for Esquire Bank and we are compensated for the risk assumed.
Deposit Funding
Deposits are our primary source of funds to support our earning assets and growth. We offer depository products,
including checking, savings, money market and certificates of deposit with a variety of rates. Deposits are insured by the
FDIC up to statutory limits. Our unique low cost core deposit model is primarily driven by escrow and operating accounts
from law firms and other litigation settlements on a national basis, representing 71% of the $1.2 billion in total deposits at
December 31, 2022. Our core deposits (excluding time deposits) represent 98.4% of our total deposits at December 31,
2022. Our total cost of deposits is 0.15% for the year ended December 31, 2022, anchored by our noninterest bearing
demand deposits and litigation related escrow funds representing 36.2% and 47.6%, respectively, of total deposits. We do
not use a traditional “brick and mortar” branch network to support our deposit growth and have only one branch, located
in Jericho, New York. The vast majority of our commercial loan customers utilize our cash management platform for their
commercial deposit balances including, but not limited to, their commercial operating accounts, escrow accounts, and
commercial money market accounts.
Deposits have traditionally been our primary source of funds for use in lending and investment activities and we do
not utilize borrowings currently or traditionally as a source of funding for asset growth. Besides generating deposits from
law firms and litigation settlements, we also generate deposits from our payment processing platform and other local
businesses, individuals through client referrals, other relationships and through our single retail branch. We believe we
have a stable core deposit base due primarily to the litigation market strategy as we strongly encourage and are successful
in having law firm borrowers maintain their operating and escrow banking relationship with us. Our low cost of funds is
due to our deposit composition consisting of approximately 98.4% in core deposit accounts at December 31, 2022. Our
deposit strategy primarily focuses on developing lending and other service orientated relationships with customers rather
than competing with other institutions on rate. Our longer duration escrow or claimant trust settlement deposits represent
accounts where the law firm is trustee for the claimant settlement funds and represent $564.0 million, or 46%, of total
deposits. These law firm escrow accounts as well as other fiduciary deposit accounts are for the benefit of the law firm’s
customers (or claimants) and are titled in a manner to ensure that the maximum amount of FDIC insurance coverage passes
through the account to the beneficial owner of the funds held in the account. Therefore, these law firm escrow accounts
carry FDIC insurance at the claimant settlement level, not at the deposit account level. Further, the majority of our
uninsured deposits represent customers with full relationship banking (loans and associated deposits) including, but not
limited to, law firm operating accounts, law firm escrow accounts, merchant reserves, ISO reserves, ACH processing, and
custodial accounts.
The Bank participates in sweep programs to provide our customers FDIC insured deposit products and access to
treasury secured money market funds. In order to participate in these programs, the Bank places, or sweeps, deposits to
these programs where a portion of which may be utilized as a source of liquidity. Access to these sweep programs is not
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considered when assessing liquidity, which is further discussed in “Item 7. Management’s Discussion and Analysis of
Financial Condition and Results of Operations—Liquidity and Capital Resources.” The litigation market provides unique
opportunities for the Bank to access funds due to the significant deposit sources such as mass tort and class action
settlements and escrow deposits. As of December 31, 2022, off-balance sheet sweep funds totaled approximately $432.1
million, of which approximately $216.1 million, or 50.0%, was available to be swept back onto the Bank’s balance sheet.
Credit Risk Management
We control credit risk both through a Board approved Credit Policy, disciplined underwriting of each loan, as well as
active credit management processes and procedures to manage risk and minimize loss throughout the life of a transaction.
We seek to maintain a broadly diversified loan portfolio in terms of type of customer, type of loan product, geographic
area and industries in which our business customers are engaged. We have developed tailored underwriting criteria and
credit management processes for each of the various loan product types we offer our customers.
Underwriting. In evaluating each potential loan relationship, we adhere to a disciplined underwriting evaluation
process including but not limited to the following:
•
•
•
understanding the customer’s financial condition and ability to repay the loan;
verifying that the primary and secondary sources of repayment are adequate in relation to the amount and structure
of the loan;
observing appropriate loan to value guidelines for collateral secured loans;
• maintaining our targeted levels of diversification for the loan portfolio, both as to type of borrower and geographic
location of collateral;
•
•
ensuring that each loan is properly documented with perfected liens on collateral; and
applying customized risk rating models tailored to our lending activities.
Commercial Loans. These loans are typically made on the basis of the borrower’s ability to make repayments from
the cash flow of the borrower’s business and the collateral securing these loans which may fluctuate in value. Our
commercial loans are originated based on the identified cash flow of the borrower and on the underlying collateral provided
by the borrower. Most often, for our Litigation-Related Loans, this collateral consists of the case inventory of the law firm
(borrowing base) and, to a lesser extent, accounts receivable or equipment.
• Commercial Litigation-Related Loans (working capital lines of credit, case cost lines of credit, and term
loans). We perform the underwriting criteria typical for commercial business loans (generally, but not limited to,
three years of tax returns, three years of financial data, cash flows, partner guarantees, partner personal financials,
credit history, background checks, etc.). We also review the firm’s case inventory to ascertain the value of their
future receivables. Typically, at least three years of successful experience in plaintiff practice are required.
Working capital lines of credit and case cost lines of credit are floating rate, prime-based loans. The proceeds of
a Case Cost loan can only be used against case expenses. These loans are subject to a general security agreement
evidenced by UCC-1 filing on all assets of the borrower, including but not limited to case inventory, accounts
receivable, fixtures and deposits where applicable. A key component of the underwriting process is an evaluation
of the pending cases of an applicant law firm to determine the probability and amount of future settlements. These
loans are based on a borrowing base that was developed by us whereby a law firm’s case inventory is segmented
into various stages and evaluated taking into account the firm’s operating performance and related debt service
coverage. In connection with these loans, the Bank generally requires personal guarantees of key partners in most
circumstances and, in certain circumstances an assignment of life insurance of partners, in accordance with our
Board approved Lending Policy.
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From time to time we will have the opportunity to provide financing to a law firm that through its existence or its
partners’ professional work histories have demonstrated long-term success with large, complex, and profitable
litigations. Firms of this nature are structured in such a way that their business model and legal talent profile has
been positioned to manage such activity. These are typically firms specializing in Mass Tort or Class Action
claims which often exhibit cumulative deficits, fluctuating earnings, and extended periods of negative cash flow.
When structured properly, with sufficient due diligence and the application of loan structuring concepts typically
associated with asset based lending, such facilities can present manageable risks and above average returns. We
will entertain such financing opportunities where the terms, structure, borrower willingness and ability to
cooperate with our underwriting requirements will provide an appropriate risk adjusted return. These types of
asset based loans are limited to 35% of our total attorney related commercial loan portfolio as per our Board
approved Lending Policy.
Consumer Loans. Consumer loans primarily consist of our personal loans and, to a lesser extent, Consumer
Litigation-Related Loans, which include post-settlement consumer loans. Personal loans are purchased or originated to
individuals for debt consolidation, medical expenses, living expenses, payment of outstanding bills, or other consumer
needs, are generally dependent on the credit quality of the individual borrower and may be secured or unsecured. Post-
settlement consumer loans are generally for two year terms with extensions granted based on acceptable supporting
documentation regarding case status and viability, at Esquire Bank’s discretion. To ensure the value of the settlement
amount and likelihood and timeframe of payout, we require an executed settlement agreement or an affidavit of attorney
attesting to the existence of an accepted offer. As the settlements are court ordered, the risks of settlements being
renegotiated after we have made the loans are minimal. The loan-to-value (“LTV”) ratio is generally limited to 50% of the
net settlement amount due to the borrower.
1 – 4 Family Loans. Residential mortgage loans are originated or purchased primarily for investment purposes,
generally with fixed rates and 30-year or 15-year terms. Adjustable-rate mortgages (“ARMs”) are purchased or originated
as 1 year ARMs, 5/1 ARMs, or 7/1 ARMs. We perform an extensive credit history review for each borrower. Second
homes or investment properties are subject to additional requirements. Debt-to-income (“DTI”) and debt service coverage,
if applicable, ratios generally conform to industry standards for conforming loans. Flood insurance, title insurance and
fire/hazard insurance are mandatory for all applications, as appropriate.
Commercial Real Estate and Multifamily Loans. Loans secured by commercial and multifamily real estate generally
have larger balances and involve a greater degree of risk than 1 – 4 family mortgage loans. Of primary concern in
commercial and multifamily real estate lending is the borrower’s creditworthiness and the feasibility and cash flow
potential of the project. Payments on loans secured by income properties often depend on successful operation and
management of the properties. As a result, repayment of such loans may be subject to a greater extent than 1 – 4 family
real estate loans, to adverse conditions in the real estate market or the economy.
In approving a commercial or multifamily real estate loan, we consider and review a global cash flow analysis of the
borrower and consider the net operating income of the property, the borrower’s expertise, credit history and profitability
and the value of the underlying property. Maximum LTV ratios are 80% of appraised value and we generally require that
the properties securing these real estate loans have minimum debt service ratios (the ratio of earnings before debt service
to debt service) of 115%. Loan terms are fifteen years or less with the option to extend another five years and amortization
is based on a 25 – 30 year schedule or less. An environmental phase one report is obtained when the possibility exists that
hazardous materials may have existed on the site, or the site may have been impacted by adjoining properties that handled
hazardous materials. To monitor cash flows on income properties, we require borrowers and loan guarantors, if any, to
provide annual financial statements on commercial and multifamily real estate loans.
Construction Loans. Construction lending involves additional risks when compared with permanent 1 – 4 family
lending because funds are advanced upon the security of the project, which is of uncertain value prior to its completion.
This type of lending also typically involves higher loan principal amounts and is often concentrated with a small number
of builders. In addition, generally during the term of a construction loan, interest may be funded by the borrower or
disbursed from an interest reserve set aside from the construction loan budget. These loans often involve the disbursement
of substantial funds with repayment substantially dependent on the success of the ultimate project and the ability of the
borrower to sell or lease the property or obtain permanent take-out financing, rather than the ability of the borrower or
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guarantor to repay principal and interest. Construction loans are based upon estimates of costs and values associated with
the completed project. Underwriting is focused on the borrowers’ financial strength, credit history and demonstrated ability
to produce a quality product and effectively market and manage their operations.
Loan Approval Authority. Our lending activities follow written, non-discriminatory, underwriting standards and loan
origination procedures established by our Board of Directors and management. We have established several levels of
lending authority that have been delegated by the Board of Directors to the Directors Loan Committee, the Chief Lending
Officer and other personnel in accordance with the Lending Authority in the Loan Policy. Authority limits are based on
the total exposure of the borrower and are conditioned on the loan conforming to the policies contained in the Loan Policy.
Any Loan Policy exceptions are fully disclosed to the approving authority.
Loans to One Borrower. In accordance with loans-to-one-borrower regulations, the Bank is generally limited to
lending no more than 15% of its unimpaired capital and unimpaired surplus to any one borrower or borrowing entity. This
limit may be increased by an additional 10% for loans secured by readily marketable collateral having a market value, as
determined by reliable and continuously available price quotations, at least equal to the amount of funds outstanding. To
qualify for this additional 10% the bank must perfect a security interest in the collateral and the collateral must have a
market value at all times of at least 100% of the loan amount that exceeds the 15% general limit. At December 31, 2022,
our regulatory limit on loans-to-one borrower was $23.0 million.
Management understands the importance of concentration risk and continuously monitors to ensure that portfolio risk
is balanced between such factors as loan type, industry, geography, collateral, structure, maturity and risk rating, among
other things. Our Loan Policy establishes detailed concentration limits and sub limits by loan type and geography.
Ongoing Credit Risk Management. In addition to the tailored underwriting process described above, we perform
ongoing risk monitoring and review processes for all credit exposures. Although we grade and classify our loans internally,
we have an independent third party professional firm perform regular loan reviews to confirm loan classifications. We
strive to identify potential problem loans early in an effort to aggressively seek resolution of these situations before the
loans create a loss, record any necessary charge-offs promptly and maintain adequate allowance levels for probable loan
losses incurred in the loan portfolio.
In general, whenever a particular loan or overall borrower relationship is downgraded to pass-watch, special mention
or substandard based on one or more standard loan grading factors, our credit officers engage in active evaluation of the
asset to determine the appropriate resolution strategy. Management regularly reviews the status of the watch list and
classified assets portfolio as well as the larger credits in the portfolio.
In addition to our general credit risk management processes, we employ incremental risk management processes for
our commercial loans to law firms. We require borrowing base updates at least annually and also engage in active review
and monitoring of the borrowing base collateral, including assessments of the underlying litigation status and quality of
the legal work. Where a relationship is considered to be structured similar to an asset based lending facility, the ongoing
credit risk management of the relationship is conducted at least semiannually.
Investments
We manage our investments primarily for liquidity purposes, with a secondary focus on returns. All of our debt
securities are classified as available-for-sale or held-to-maturity and can be used to collateralize Federal Home Loan Bank
of New York (“FHLB”) borrowings, FRB borrowings, or other borrowings. At December 31, 2022, our securities had a
fair value of $187.6 million, and consisted of U.S. Government Agency collateralized mortgage obligations and mortgage-
backed securities.
Our investment objectives are primarily to provide and maintain liquidity, establish an acceptable level of interest rate
risk, to provide a use of funds when demand for loans is weak and to generate a favorable return. Our board of directors
has the overall responsibility for the investment portfolio, including approval of our investment policy. The Asset Liability
Committee (“ALCO”) and management are responsible for implementation of the investment policy and monitoring our
investment performance. The Board of Directors reviews the status of our investment portfolio monthly.
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We are required to maintain an investment in FHLB stock, which is based on our level of mortgage related assets
(“MRA”) and adjusted for any FHLB borrowings, for which we had none at December 31, 2022. Additionally, we are
required to maintain an investment in Federal Reserve Bank (“FRB”) of New York stock equal to six percent of our capital
and surplus. While we have the authority under applicable law to invest in derivative instruments, we had no investments
in derivative instruments at December 31, 2022.
The Company enters into purchases of securities under agreements to resell identical securities which consist of
mortgage loans that meet the Ginnie Mae (“GNMA”) pooling qualifications. The cash advanced to the counterparty are
reflected as assets on the Statement of Financial Condition and are accounted for at cost. The Company obtains possession
of securities collateral with a market value equal to or in excess of the principal amount loaned under the resell agreement
and has the right to request additional collateral, based on its daily monitoring of the fair value of the securities. As of
December 31, 2022, there is one open contract with one counterparty that is scheduled to mature within thirty days with a
carrying amount of $49.6 million.
Borrowings
We maintain diverse funding sources including borrowing lines at the FHLB, the FRB discount window and other
financial institutions. Traditionally, we have not utilized borrowings to fund our operations. The FHLB functions as a
central reserve bank providing credit for its member financial institutions. As a member, we are required to own capital
stock in the FHLB and are authorized to apply for advances on the security of such stock and certain of our whole first
mortgage loans and other assets (principally securities which are obligations of, or guaranteed by, the United States),
provided certain standards related to creditworthiness have been met. Advances are made under several different programs,
each having its own interest rate and range of maturities. Depending on the program, limitations on the amount of advances
are based either on a fixed percentage of an institution’s net worth or on the FHLB assessment of the institution’s
creditworthiness. As of December 31, 2022, we had $149.4 million of available borrowing capacity with the FHLB. We
also had a borrowing capacity with the FRB of New York discount window of $36.1 million. The other borrowing lines
are maintained primarily for contingency funding sources and totaled $67.5 million. No amounts were outstanding on any
of the aforementioned lines as of December 31, 2022.
Human Capital Resources
At December 31, 2022, we employed 116 individuals, nearly all of whom are full-time and of which approximately
60% are either minorities or women. None of our employees are represented by a collective bargaining agreement. The
Company’s national platform employs a business model that combines high-touch service, technology and a relationship-
based focus of a community bank with an extensive suite of banking and innovative financial services to businesses and
individuals embracing the new digital banking era. We seek to hire well-qualified employees who also fit our corporate
culture.
Training, Development, and Retention. We encourage and support the growth and development of our employees
and, wherever possible, seek to fill positions by promotion and transfer from within the organization. The Company
provides a collaborative environment where opportunities are provided through on the job skills training, firm sponsored
training, informal peer mentoring, and interaction with senior leaders. This collaborative environment offers internal
mobility as well as competitive compensation and benefits packages allowing for significant employee retention.
Safety, Health and Welfare. The safety, health and wellness of our employees is a top priority. During the COVID-
19 pandemic, we continued to responsibly serve the needs of our customers while prioritizing the health and safety of our
employees and their families. The Bank requires certain health protocols to be followed when deemed necessary by state
and local authorities, which has previously included, but not limited to, reduced corporate travel, office cleaning measures,
social distancing practices and the use of face coverings. While COVID-19 has resulted in widespread disruption to the
lives and businesses of the Bank’s customers and employees, the Bank’s response has enabled the Bank to remain focused
on assisting customers and ensuring that the Bank remains fully operational. Management continues to monitor updates
from the relevant authorities to assess whether adjustments to our existing health protocols are necessary.
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Benefits. On an ongoing basis, we further promote the health and wellness of our employees by strongly encouraging
work-life balance. Our benefits package includes health care coverage, retirement benefits, life and disability insurance,
paid time off and leave policies.
Community Involvement. As part of our Community Reinvestment Act obligations as a community bank, Esquire
Bank supports a multitude of diverse, worthy, community-based organizations through a comprehensive grant and lending
program. Additionally, the Bank donates to a variety of local and national charitable organizations.
Subsidiaries
Esquire Bank, National Association is the sole subsidiary of Esquire Financial Holdings, Inc. and there are no
subsidiaries of Esquire Bank, National Association.
Supervision and Regulation
General. Esquire Bank is a national bank organized under the laws of the United States of America and its deposits
are insured to applicable limits by the Deposit Insurance Fund (the “DIF”). The lending, investment, deposit-taking, and
other business authority of Esquire Bank is governed primarily by federal law and regulations and Esquire Bank is
prohibited from engaging in any operations not authorized by such laws and regulations. Esquire Bank is subject to
extensive regulation, supervision and examination by, and the enforcement authority of, the Office of the Comptroller of
the Currency (the “OCC”), and to a lesser extent by the FDIC, as its deposit insurer, as well as by the FRB. Esquire Bank
is also subject to federal financial consumer protection and fair lending laws and regulations of the Consumer Financial
Protection Bureau, though the OCC is responsible for examining and supervising the bank’s compliance with these laws.
The regulatory structure establishes a comprehensive framework of activities in which a national bank may engage and is
primarily intended for the protection of depositors, customers and the DIF. The regulatory structure gives the regulatory
agencies extensive discretion in connection with their supervisory and enforcement activities and examination policies,
including policies with respect to the classification of assets and the establishment of adequate loan loss reserves for
regulatory purposes.
Esquire Financial Holdings, Inc. is a bank holding company, due to its control of Esquire Bank, and is therefore subject
to the requirements of the BHC Act and regulation and supervision by the FRB. The Company files reports with and is
subject to periodic examination by the FRB.
Any change in the applicable laws and regulations, whether by the OCC, the FDIC, the FRB or through legislation,
could have a material adverse impact on Esquire Bank, the Company and their operations and the Company’s stockholders.
The Dodd-Frank Act made extensive changes in the regulation of insured depository institutions. Among other things,
the Dodd-Frank Act (i) created the Consumer Financial Protection Bureau as an independent bureau to assume
responsibility for the implementation of the federal financial consumer protection and fair lending laws and regulations, a
function previously assigned to prudential regulators; (although institutions of less than $10 billion in assets, such as
Esquire Bank, continue to be examined for compliance with consumer protection and fair lending laws and regulations by,
and be subject to the primary enforcement authority of their primary federal bank regulator rather than the Consumer
Financial Protection Bureau); (ii) directed changes in the way that institutions are assessed for deposit insurance;
(iii) mandated the revision of regulatory capital requirements; (iv) codified the FRB’s long-standing policy that a bank
holding company must serve as a source of financial and managerial strength for its subsidiary banks; (v) required
regulations requiring originators of certain securitized loans to retain a percentage of the risk for the transferred loans;
(vi) stipulated regulatory rate-setting for certain debit card interchange fees; (vii) repealed restrictions on the payment of
interest on commercial demand deposits; (viii) enacted the so-called Volcker Rule, which generally prohibits banking
organizations from engaging in proprietary trading and from investing in, sponsoring or having certain relationships with
hedge funds and (ix) contained a number of reforms related to mortgage originations.
Many of the provisions of the Dodd-Frank Act had delayed effective dates and/or required the issuance of
implementing regulations. However, the Dodd-Frank Act has, and will likely continue to cause increased regulatory
burden, compliance costs and interest expense for the Company and Esquire Bank.
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What follows is a summary of some of the laws and regulations applicable to Esquire Bank and Esquire Financial
Holdings. The summary is not intended to be exhaustive and is qualified in its entirety by reference to the actual laws and
regulations.
Esquire Bank, National Association
Loans and Investments
National banks have authority to originate and purchase any type of loan, including commercial, commercial real
estate, 1 – 4 family mortgages or consumer loans. Aggregate loans by a national bank to any single borrower or group of
related borrowers are generally limited to 15% of Esquire Bank’s capital and surplus, plus an additional 10% if secured
by specified readily marketable collateral.
Federal law and OCC regulations limit Esquire Bank’s investment authority. Generally, a national bank is prohibited
from investing in corporate equity securities for its own account other than companies through which the bank conducts
its business. Under OCC regulations, a national bank may invest in investment securities up to specified limits depending
upon the type of security. “Investment securities” are generally defined as marketable obligations that are investment grade
and not predominantly speculative in nature. The OCC classifies investment securities into five different types and,
depending on its type, a national bank may have the authority to deal in and underwrite the security. The OCC has also
permitted national banks to purchase certain noninvestment grade securities that can be reclassified and underwritten as
loans.
Lending Standards
The federal banking agencies adopted uniform regulations prescribing standards for extensions of credit that are
secured by liens or interests in real estate or made for the purpose of financing permanent improvements to real estate.
Under these regulations, all insured depository institutions, such as Esquire Bank, must adopt and maintain written policies
establishing appropriate limits and standards for extensions of credit that are secured by liens or interests in real estate or
are made for the purpose of financing permanent improvements to real estate. These policies must establish loan portfolio
diversification standards, prudent underwriting standards (including loan-to-value limits) that are clear and measurable,
loan administration procedures, and documentation, approval and reporting requirements. The real estate lending policies
must reflect consideration of the federal bank regulators’ Interagency Guidelines for Real Estate Lending Policies that
have been adopted.
Federal Deposit Insurance
Deposit accounts at Esquire Bank are insured by the FDIC’s Deposit Insurance Fund (“DIF”).
The FDIC adopted a final rule in 2022, applicable to all insured depository institutions, to increase initial base deposit
insurance assessment rate schedules uniformly by two basis points, beginning in the first quarterly assessment period of
2023. The FDIC also concurrently maintained the DIF reserve ratio at 2.0% for 2023. The increase in assessment rate
schedules is intended to increase the likelihood that the reserve ratio reaches the statutory minimum of 1.35% by the
statutory deadline of September 30, 2028.
The FDIC may terminate deposit insurance upon a finding that an institution has engaged in unsafe or unsound
practices, is in an unsafe or unsound condition to continue operations or has violated any applicable law, regulation, rule,
order or condition imposed by the FDIC. We do not know of any practice, condition or violation that might lead to
termination of Esquire Bank’s deposit insurance.
Capitalization
Federal regulations require FDIC insured depository institutions, including national banks, to meet several minimum
capital standards: a common equity Tier 1 capital to risk-based assets ratio, a Tier 1 capital to risk-based assets ratio, a
total capital to risk-based assets and a Tier 1 capital to total assets leverage ratio. The existing capital requirements were
17
effective January 1, 2015 and are the result of a final rule implementing regulatory amendments based on
recommendations of the Basel Committee on Banking Supervision and certain requirements of the Dodd-Frank Act.
The capital standards require the maintenance of common equity Tier 1 capital, Tier 1 capital and total capital to risk-
weighted assets of at least 4.5%, 6% and 8%, respectively, and a leverage ratio of at least 4% Tier 1 capital. Common
equity Tier 1 capital is generally defined as common stockholders’ equity and retained earnings. Tier 1 capital is generally
defined as common equity Tier 1 and Additional Tier 1 capital. Additional Tier 1 capital generally includes certain
noncumulative perpetual preferred stock and related surplus and minority interests in equity accounts of consolidated
subsidiaries. Total capital includes Tier 1 capital (common equity Tier 1 capital plus Additional Tier 1 capital) and Tier 2
capital. Tier 2 capital is comprised of capital instruments and related surplus meeting specified requirements, and may
include cumulative preferred stock and long-term perpetual preferred stock, mandatory convertible securities, intermediate
preferred stock and subordinated debt. Also included in Tier 2 capital is the allowance for loan and lease losses limited to
a maximum of 1.25% of risk-weighted assets and, for institutions that have exercised an opt-out election regarding the
treatment of Accumulated Other Comprehensive Income (“AOCI”), up to 45% of net unrealized gains on available-for-
sale equity securities with readily determinable fair market values. Institutions that have not exercised the AOCI opt-out
have AOCI incorporated into common equity Tier 1 capital (including unrealized gains and losses on available-for-sale-
securities). We exercised the opt-out election regarding the treatment of AOCI. Calculation of all types of regulatory
capital is subject to deductions and adjustments specified in the regulations.
In determining the amount of risk-weighted assets for purposes of calculating risk-based capital ratios, a bank’s assets,
including certain off-balance sheet assets (e.g., recourse obligations, direct credit substitutes, residual interests), are
multiplied by a risk weight factor assigned by the regulations based on perceived risks inherent in the type of asset. Higher
levels of capital are required for asset categories believed to present greater risk. For example, a risk weight of 0% is
assigned to cash and U.S. government securities, a risk weight of 50% is generally assigned to prudently underwritten first
lien 1 – 4 family mortgages, a risk weight of 100% is assigned to commercial and consumer loans, a risk weight of 150%
is assigned to certain past due loans and a risk weight of between 0% to 600% is assigned to permissible equity interests,
depending on certain specified factors.
In addition to establishing the minimum regulatory capital requirements, the regulations limit capital distributions and
certain discretionary bonus payments to management if the institution does not hold a “capital conservation buffer”
consisting of 2.5% of common equity Tier 1 capital to risk-weighted assets above the amount necessary to meet its
minimum risk-based capital requirements.
Legislation enacted in 2018 required the federal banking agencies, including the Federal Reserve, to establish a
“community bank leverage ratio” of between 8-10% of average total consolidated assets for qualifying institutions with
less than $10 billion of assets. Banks meeting the specified requirement and electing to follow the alternative framework
would be deemed to comply with the regulatory capital requirements, including the risk-based requirements. The federal
agencies final rule issued in 2019 set the community bank leverage ratio at 9%. The Bank has not elected to utilize this
alternative framework as of December 31, 2022.
Safety and Soundness Standards
Each federal banking agency, including the OCC, has adopted guidelines establishing general standards relating to
internal controls, information and internal audit systems, loan documentation, credit underwriting, interest rate exposure,
asset growth, asset quality, earnings, compensation, fees and benefits and information security standards. In general, the
guidelines require appropriate systems and practices to identify and manage the risks and exposures specified in the
guidelines. The guidelines prohibit excessive compensation as an unsafe and unsound practice and describe compensation
as excessive when the amounts paid are unreasonable or disproportionate to the services performed by an executive officer,
employee, director, or principal stockholder. The FDIC also has issued guidance on risks banks may face from third party
relationships (e.g. relationships under which the third party provides services to the bank). The guidance generally requires
the bank to perform adequate due diligence on the third party, appropriately document the relationship, and perform
adequate oversight and auditing, in order to the limit the risks to the bank.
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Prompt Corrective Regulatory Action
Federal law requires that federal bank regulatory authorities take “prompt corrective action” with respect to
institutions that do not meet minimum capital requirements. For these purposes, the statute establishes five capital tiers:
well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized and critically undercapitalized.
National banks that have insufficient capital are subject to certain mandatory and discretionary supervisory measures.
For example, a bank that is “undercapitalized” (i.e. fails to comply with any regulatory capital requirement) is subject to
growth limitations and is required to submit a capital restoration plan; a holding company that controls such a bank is
required to guarantee that the bank complies with the restoration plan. A “significantly undercapitalized” bank is subject
to additional restrictions. National banks deemed by the OCC to be “critically undercapitalized” are subject to the
appointment of a receiver or conservator.
Under the prompt corrective action requirements, insured depository institutions are required to meet the following in
order to qualify as “well capitalized:” (1) a common equity Tier 1 risk-based capital ratio of 6.5%; (2) a Tier 1 risk-based
capital ratio of 8%; (3) a total risk-based capital ratio of 10% and (4) a Tier 1 leverage ratio of 5%. The Bank was well
capitalized at December 31, 2022.
Dividends
Under federal law and applicable regulations, a national bank may generally declare a cash dividend, without approval
from the OCC, in an amount equal to its year-to-date net income plus the prior two years’ net income that is still available
for cash dividend. Cash dividends exceeding those amounts require application to and approval by the OCC. To pay a cash
dividend, a national bank must also maintain an adequate capital conservation buffer under the capital rules discussed
above.
Transactions with Affiliates and Insiders
Sections 23A and 23B of the Federal Reserve Act govern transactions between a national bank and its affiliates, which
includes the Company. The FRB has adopted Regulation W, which implements and interprets Sections 23A and 23B, in
part by codifying prior FRB interpretations.
An affiliate of a bank is any company or entity that controls, is controlled by or is under common control with the
bank. A subsidiary of a bank that is not also a depository institution or a “financial subsidiary” under federal law is not
treated as an affiliate of the bank for the purposes of Sections 23A and 23B; however, the OCC has the discretion to treat
subsidiaries of a bank as affiliates on a case-by-case basis. Section 23A limits the extent to which a bank or its subsidiaries
may engage in “covered transactions” with any one affiliate to 10% of the bank’s capital stock and surplus. There is an
aggregate limit of 20% of the bank’s capital stock and surplus for such transactions with all affiliates. The term “covered
transaction” includes, among other things, the making of a loan to an affiliate, a purchase of assets from an affiliate, the
issuance of a guarantee on behalf of an affiliate and the acceptance of securities of an affiliate as collateral for a loan. All
such transactions are required to be on terms and conditions that are consistent with safe and sound banking practices and
no transaction may involve the acquisition of any “low quality asset” from an affiliate. Certain covered transactions, such
as loans to or guarantees on behalf of an affiliate, must be secured by collateral in amounts ranging from 100 to 130 percent
of the loan amount, depending upon the type of collateral. In addition, Section 23B requires that any covered transaction
(and specified other transactions) between a bank and an affiliate must be on terms and conditions that are substantially
the same, or at least as favorable, to the bank, as those that would be provided to a non-affiliate.
In September 2021, Esquire Bank sold its legacy consumer NFL portfolio to its parent company, Esquire Financial
Holdings, Inc., at a fair value of approximately $14.6 million, in compliance with Regulation W. On April 1, 2022, the
Company finalized the sale of its legacy NFL consumer post settlement loan portfolio to a third party sponsored entity (or
“Fund”) in exchange for a nonvoting economic interest in the Fund valued at $13.5 million.
A bank’s loans to its executive officers, directors, any owner of more than 10% of its stock (each, an “insider”) and
certain entities affiliated with any such person (an insider’s “related interest”) are subject to the conditions and limitations
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imposed by Section 22(h) of the Federal Reserve Act and the FRB’s Regulation O. The aggregate amount of a bank’s
loans to any insider and the insider’s related interests may not exceed the loans-to-one-borrower limit applicable to national
banks. Aggregate loans by a bank to its insiders and insiders’ related interests may not exceed the bank’s unimpaired
capital and unimpaired surplus. With certain exceptions, such as education loans and certain 1 – 4 family mortgages a
bank’s loans to its executive officers, may not exceed the greater of $25,000 or 2.5% of the bank’s unimpaired capital and
unimpaired surplus, but in no event more than $100,000. Regulation O also requires that any loan to an insider or a related
interest of an insider be approved in advance by a majority of the board of directors of the bank, with any interested director
not participating in the voting, if the loan, when aggregated with any existing loans to that insider or the insider’s related
interests, would exceed the lesser or $500,000 or 5% of the bank’s unimpaired capital and surplus. Generally, such loans
must be made on substantially the same terms as, and follow credit underwriting procedures that are no less stringent than,
those that are prevailing at the time for comparable transactions with other persons and must not present more than a
normal risk of collectability. An exception is made for extensions of credit made pursuant to a benefit or compensation
plan of a bank that is widely available to employees of the bank and that does not give any preference to insiders of the
bank over other employees of the bank. As of April 29, 2021, as a matter of policy, the Bank ceased making new loans
and extension of credit available to its insiders of the Bank and their related interests.
Enforcement
The OCC has extensive enforcement authority over national banks to correct unsafe or unsound practices and
violations of law or regulation. Such authority includes the issuance of cease and desist orders, assessment of civil money
penalties and removal of officers and directors. The OCC may also appoint a conservator or receiver for a national bank
under specified circumstances, such as where (i) the bank’s assets are less than its obligations to creditors, (ii) the bank is
likely to be unable to pay its obligations or meet depositors’ demands in the normal course of business or (iii) a substantial
dissipation of bank assets or earnings has occurred due to a violation of law of regulation or unsafe or unsound practices.
Federal Reserve System
Under federal law and regulations, the Bank is required to maintain sufficient liquidity to ensure safe and sound
banking practices. Regulation D, promulgated by the FRB, imposes reserve requirements on all depository institutions,
including the Bank, which maintain transaction accounts or non-personal time deposits. In March 2020, due to a change
in its approach to monetary policy due to the COVID-19 pandemic, the FRB implemented a final rule to amend Regulation
D requirements and reduce reserve requirement ratios to zero. The FRB has indicated that it has no plans to re-impose
reserve requirements, but may do so in the future if conditions warrant.
Examinations and Assessments
Esquire Bank is required to file periodic reports with and is subject to periodic examination by the OCC. Federal
regulations generally require periodic on-site examinations for all depository institutions. Esquire Bank is required to pay
an annual assessment to the OCC to fund the agency’s operations.
Community Reinvestment Act and Fair Lending Laws
Under the CRA, Esquire Bank has a continuing and affirmative obligation consistent with its safe and sound operation
to help meet the credit needs of its entire community, including low and moderate income neighborhoods. The CRA does
not establish specific lending requirements or programs for financial institutions nor does it limit an institution’s discretion
to develop the types of products and services that it believes are best suited to its particular community. The CRA requires
the OCC to assess its record of meeting the credit needs of its community and to take that record into account in its
evaluation of certain applications by Esquire Bank. For example, the regulations specify that a bank’s CRA performance
will be considered in its expansion (e.g., branching or merger) proposals and may be the basis for approving, denying or
conditioning the approval of an application. As of the date of its most recent OCC evaluation, Esquire Bank was rated
“outstanding” with respect to its CRA compliance.
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USA PATRIOT Act and Money Laundering
Esquire Bank is subject to the federal Bank Secrecy Act (the “BSA”), which incorporates several laws, including the
Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of
2001, or the USA PATRIOT Act and related regulations. The USA PATRIOT Act gives the federal government powers
to address money laundering and terrorist threats through enhanced domestic security measures, expanded surveillance
powers, increased information sharing, and broadened anti-money laundering requirements. By way of amendments to the
Bank Secrecy Act, Title III of the USA PATRIOT Act implemented measures intended to encourage information sharing
among bank regulatory agencies and law enforcement bodies. Further, certain provisions of Title III impose affirmative
obligations on a broad range of financial institutions, including banks, thrifts, brokers, dealers, credit unions, money
transfer agents and parties registered under the Commodity Exchange Act.
Among other things, Title III of the USA PATRIOT Act and the related regulations require:
• Establishment of anti-money laundering compliance programs that includes policies, procedures, and internal
controls; the appointment of an anti-money laundering compliance officer; a training program; and independent
testing;
• Filing of certain reports to FinCEN and law enforcement that are designated to assist in the detection and
prevention of money laundering and terrorist financing activities;
• Establishment of a program specifying procedures for obtaining and maintaining certain records from customers
seeking to open new accounts, including verifying the identity of customers;
•
In certain circumstances, compliance with enhanced due diligence policies, procedures and controls designed to
detect and report money-laundering, terrorist financing and other suspicious activity;
• Monitoring account activity for suspicious transactions; and
• A heightened level of review for certain high risk customers or accounts.
The USA PATRIOT Act also includes prohibitions on correspondent accounts for foreign shell banks and requires
compliance with record keeping obligations with respect to correspondent accounts of foreign banks.
The bank regulatory agencies have increased the regulatory scrutiny of the Bank Secrecy Act and anti-money
laundering programs maintained by financial institutions. Significant penalties and fines, as well as other supervisory
orders may be imposed on a financial institution for non-compliance with these requirements. In addition, the federal bank
regulatory agencies must consider the effectiveness of financial institutions engaging in a merger transaction in combating
money laundering activities.
Esquire Bank has adopted policies and procedures to comply with these requirements.
Privacy and Cybersecurity Laws
Esquire Bank is subject to a variety of federal and state privacy laws, which govern the collection, safeguarding,
sharing and use of customer information. For example, the Gramm-Leach-Bliley Act requires all financial institutions
offering financial products or services to retail customers to provide such customers with the financial institution’s privacy
policy and provide such customers the opportunity to “opt out” of the sharing of certain personal financial information
with unaffiliated third parties. It also requires banks to safeguard personal information of consumer customers. Some state
laws also protect the privacy of information of state residents and require adequate security for such data.
In November 2021, the federal bank regulatory agencies issued a final rule requiring banking organizations to notify
their primary federal regulator as soon as possible and no later than 36 hours of determining that a “computer-security
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incident” that rises to the level of a “notification incident,” as those terms are defined in the final rule, has occurred. A
notification incident is a “computer-security incident” that has materially disrupted or degraded, or is reasonably likely to
materially disrupt or degrade, the banking organization’s ability to deliver services to a material portion of its customer
base, jeopardize the viability of key operations of the banking organization, or impact the stability of the financial sector.
The final rule also requires bank service providers to notify any affected bank to or on behalf of which the service provider
provides services “as soon as possible” after determining that it has experienced an incident that materially disrupts or
degrades, or is reasonably likely to materially disrupt or degrade, covered services provided to such bank for four or more
hours. The rule was effective April 1, 2022, with compliance required by May 1, 2022.
In March 2022, the SEC proposed new rules that would require registrants, such as the Company, to (i) report material
cybersecurity incidents on Form 8-K, (ii) include updated disclosure in Forms 10-K and 10-Q of previously disclosed
cybersecurity incidents and disclose previously undisclosed individually immaterial incidents when a determination is
made that they have become material on an aggregated basis, (iii) disclose cybersecurity policies and procedures and
governance practices, including at the board and management levels in Form 10-K, and (iv) disclose the board of directors’
cybersecurity expertise.
Payment Processing
Esquire Bank is also subject to the rules of Visa, MasterCard and other payment networks in which it participates. If
Esquire Bank fails to comply with such rules, the networks could impose fines or require us to stop providing payment
processing for cards under such network’s brand or routed through such network.
Other Regulations
Esquire Bank’s operations are also subject to federal laws applicable to credit transactions, such as:
• The Truth-In-Lending Act, governing disclosures of credit terms to consumer borrowers;
• The Real Estate Settlement Procedures Act, requiring that borrowers for mortgage loans for 1 – 4 family real
estate receive various disclosures, including good faith estimates of settlement costs, lender servicing and escrow
account practices, and prohibiting certain practices that increase the cost of settlement services;
• The Home Mortgage Disclosure Act, requiring financial institutions to provide information to enable the public
and public officials to determine whether a financial institution is fulfilling its obligation to help meet the housing
needs of the community it serves;
• The Equal Credit Opportunity Act and other fair lending laws, prohibiting discrimination on the basis of race,
religion, sex and other prohibited factors in extending credit;
• The Fair Credit Reporting Act, governing the use of credit reports on consumers and the provision of information
to credit reporting agencies;
• Unfair or Deceptive Acts or Practices laws and regulations;
• The Coronavirus Aid, Relief and Economic Security Act;
• The Fair Debt Collection Act, governing the manner in which consumer debts may be collected by collection
agencies; and
• The rules and regulations of the various federal agencies charged with the responsibility of implementing such
federal laws.
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The operations of Esquire Bank are further subject to the:
• The Truth in Savings Act, which specifies disclosure requirements with respect to deposit accounts;
• The Right to Financial Privacy Act, which imposes a duty to maintain confidentiality of consumer financial
records and prescribes procedures for complying with administrative subpoenas of financial records;
• The Electronic Funds Transfer Act and Regulation E promulgated thereunder, which govern automatic deposits
to and withdrawals from deposit accounts and customers’ rights and liabilities arising from the use of automated
teller machines and other electronic banking services; and
• The Check Clearing for the 21st Century Act (also known as “Check 21”), which gives “substitute checks,” such
as digital check images and copies made from that image, the same legal standing as the original paper check.
Holding Company Regulation
The Company, as a bank holding company, controlling Esquire Bank, is subject to regulation and supervision by the
FRB under the BHCA. The Company is periodically examined by, required to submit reports to the FRB and is required
to comply with the FRB’s rules and regulations. Among other things, the FRB has authority to restrict activities by a bank
holding company that are deemed to pose a serious risk to the subsidiary bank. The FRB has historically imposed
consolidated capital adequacy guidelines for bank holding structured similar, but not identical, to those of the OCC for
national banks. The Dodd-Frank Act directed the FRB to issue consolidated capital requirements for depository institution
holding companies that are no less stringent, both quantitatively and in terms of components of capital, than those
applicable to institutions themselves. The previously discussed final rule regarding regulatory capital requirements
implemented the Dodd-Frank Act as to bank holding company capital standards. Consolidated regulatory capital
requirements identical to those applicable to the subsidiary banks applied to bank holding companies as of January 1, 2015.
However, the FRB exempts from the consolidated capital requirements bank holding companies that are below a specified
asset size, unless otherwise directed in specific cases. Legislation in 2018 raised the asset threshold for the exemption
from $1 billion to $3 billion. Consequently, the Company is not currently subject to the consolidated holding company
capital requirements.
The Gramm-Leach-Bliley Act of 1999 authorizes a bank holding company that meets specified conditions, including
depository institutions subsidiaries that are “well capitalized” and “well managed,” to opt to become a “financial holding
company.” A “financial holding company” may engage in a broader array of financial activities than permitted a typical
bank holding company. Such activities can include insurance underwriting and investment banking. The Company has
elected to be a “financial holding company.”
The policy of the FRB is that a bank holding company must serve as a source of financial and managerial strength to
its subsidiary banks by providing capital and other support in times of distress. The Dodd-Frank Act codified the source
of strength policy.
Under the prompt corrective action provisions of federal law, a bank holding company parent of an undercapitalized
subsidiary bank is required to guarantee, within specified limits, the capital restoration plan that is required of an
undercapitalized bank. If an undercapitalized bank fails to file an acceptable capital restoration plan or fails to implement
an accepted plan, the FRB may prohibit the bank holding company parent of the undercapitalized bank from paying
dividends or making any other capital distribution.
As a bank holding company, the Company is required to obtain the prior approval of the FRB to acquire more than
5% of a class of voting securities of any additional bank or bank holding company or to acquire all or substantially all, the
assets of any additional bank or bank holding company. In evaluating acquisition application, the FRB evaluates factors
such as the financial condition, management resources and future prospects of the parties, the convenience and needs of
the communities involved and competitive factors. In addition, bank holding companies may generally only engage in
activities that are closely related to banking as determined by the FRB. Bank holding companies that meet certain criteria
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may opt to become a financial holding company and thereby engage in a broader array of financial activities, which the
Company has elected to do.
FRB policy is that a bank holding company should pay cash dividends only to the extent that the company’s net
income for the past two years is sufficient to fund the dividends and the prospective rate of earnings retention is consistent
with the company’s capital needs, asset quality and overall financial condition. In addition, FRB guidance sets forth the
supervisory expectation that bank holding companies will inform and consult with FRB staff in advance of issuing a cash
dividend that exceeds earnings for the quarter and should inform the FRB and should eliminate, defer or significantly
reduce dividends if (i) net income available to stockholders for the past four quarters, net of dividends previously paid
during that period, is not sufficient to fully fund the dividends, (ii) prospective rate of earnings retention is not consistent
with the bank holding company’s capital needs and overall current and prospective financial condition, or (iii) the bank
holding company will not meet, or is in danger of not meeting, its minimum regulatory capital adequacy ratios.
A bank holding company is required to give the FRB prior written notice of any repurchase or redemption of its
outstanding equity securities if the gross consideration for repurchase or redemption, when combined with the net
consideration paid for all such repurchases or redemptions during the preceding 12 months, will be equal to 10% or more
of the company’s consolidated net worth. The FRB may disapprove such a repurchase or redemption if it determines that
the proposal would constitute an unsafe and unsound practice or violate a law or regulation. Such notice and approval is
not required for a bank holding company that meets certain qualitative criteria. However, FRB guidance generally provides
for bank holding company consultation with FRB staff prior to engaging in a repurchase or redemption of a bank holding
company’s stock, regardless of whether a formal written notice is required. Moreover, the Federal Reserve staff is
interpreting the capital regulations as requiring a bank holding company to secure Federal Reserve approval prior to
redeeming or repurchasing any capital stock that is included in regulatory capital.
The above FRB requirements may restrict a bank holding company’s ability to pay dividends to stockholders or
engage in repurchases or redemptions of its shares.
Acquisition of Control of the Company. Under the Change in Bank Control Act, no person may acquire control of a
bank holding company such as the Company unless the FRB has been prior written notice and has not issued a notice
disapproving the proposed acquisition. In evaluating such notices, the FRB takes into consideration such factors as the
financial resources, competence, experience and integrity of the acquirer, the future prospects the bank holding company
involved and its subsidiary bank and the competitive effects of the acquisition. Control, as defined under federal law,
means ownership, control of or holding irrevocable proxies representing more than 25% of any class of voting stock,
control in any manner of the election of a majority of the company’s directors, or a determination by the regulator that the
acquiror has the power to direct, or directly or indirectly to exercise a controlling influence over, the management or
policies of the institution. Acquisition of more than 10% of any class of a bank holding company’s voting stock constitutes
a rebuttable presumption of control under the regulations under certain circumstances including where, is the case with the
Company, the issuer has registered securities under Section 12 of the Securities Exchange Act of 1934.
Federal Securities Laws
Esquire Financial Holdings, Inc.’s common stock is registered with the Securities and Exchange Commission.
Consequently, Esquire Financial Holdings, Inc. is subject to the information, proxy solicitation, insider trading and other
restrictions and requirements of the SEC under the Securities Exchange Act of 1934.
Emerging Growth Company Status
Esquire Financial Holdings, Inc. no longer qualifies as an emerging growth company under the JOBS Act effective
December 31, 2022 since that is 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.
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The Company will now be required to hold stockholder votes to approve annual executive compensation (more
frequently referred to as “say-on-pay” votes) or executive compensation payable in connection with a merger (more
frequently referred to as “say-on-golden parachute” votes).
Sarbanes-Oxley Act of 2002
The Sarbanes-Oxley Act of 2002 is intended to improve corporate responsibility, to provide for enhanced penalties
for accounting and auditing improprieties at publicly traded companies and to protect investors by improving the accuracy
and reliability of corporate disclosures pursuant to the securities laws. We have policies, procedures and systems designed
to comply with these regulations, and we review and document such policies, procedures and systems to ensure continued
compliance with these regulations.
Inflation Reduction Act
The Inflation Reduction Act, which was signed into law on August 16, 2022, among other things, implements a new
alternative minimum tax of 15% on corporations with profits in excess of $1 billion, a 1% excise tax on stock repurchases,
and several tax incentives to promote clean energy and climate initiatives. These provisions are effective beginning
January 1, 2023.
ITEM 1A. Risk Factors
The material risks that management believes affect the Company are described below. You should carefully consider
the risks as described below, together with all of the information included herein. The risks described below are not the
only risks the Company faces. Additional risks not presently known also may have a material adverse effect on the
Company’s results of operations and financial condition.
Risks Related to Our Lending Activities
Because we intend to continue to increase our commercial loans, our credit risk may increase.
At December 31, 2022, our commercial loans totaled $552.1 million, or 58.2% of our total loans, including
$464.7 million of Commercial Litigation-Related Loans, which represented 84.2% of our commercial loans. We intend to
increase our originations of commercial loans, including our Commercial Litigation-Related Loans, which consist of
working capital lines of credit, case cost lines of credit, term loans to law firms, and other commercial litigation-related
loans. These loans generally have more risk than 1 – 4 family mortgage loans and commercial loans secured by real estate.
Since repayment of commercial loans, including our Commercial Litigation-Related Loans, depends on the successful
receipt of settlement proceeds or the successful management and operation of the borrower’s businesses, repayment of
such loans can be affected by adverse court decisions and adverse conditions in the local and national economy.
Commercial Litigation-Related Loans present unique credit risks in that attorney or law firm revenues can be volatile
depending on the number of cases, the timing of court decisions, the timing of the overall judicial process, and the timing
of those settlements as well as related payments on those settlements. In our experience, an average case can take two to
four years to litigate and settle. Determining the value of an attorney’s or law firm’s case inventory (borrowing base) is
also inherently an imprecise exercise. Though repayment of case lines is not dependent on a favorable case settlement,
unfavorable outcomes can ultimately impact the cash flows of the borrower. An adverse development with respect to one
loan or one Commercial Litigation-Related Loan credit relationship can expose us to significantly greater risk of loss
compared to an adverse development with respect to a 1 – 4 family mortgage loan or a commercial real estate loan. Because
we plan to continue to increase our originations of these loans, commercial loans generally have a larger average size as
compared with other loans such as commercial real estate loans, and the collateral for commercial loans is generally less
readily-marketable, losses incurred on a small number of commercial loans could have a disproportionate and material
adverse impact on our financial condition and results of operations.
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A substantial portion of our loan portfolio consists of multifamily real estate loans and commercial real estate loans,
which have a higher degree of risk than other types of loans.
At December 31, 2022, we had $262.5 million of multifamily loans and $91.8 million of commercial real estate loans.
Multifamily and commercial real estate loans represented 37.4% of our total loan portfolio at December 31, 2022.
Multifamily and commercial real estate loans are often larger and involve greater risks than other types of lending because
payments on such loans are often dependent on the successful operation or development of the property or business
involved. Repayment of such loans is often more sensitive than other types of loans to adverse conditions in the real estate
market or the general business climate and economy. Accordingly, a downturn in the real estate market and a challenging
business and economic environment may increase our risk related to multifamily and commercial real estate loans. Unlike
1 – 4 family mortgage loans, which generally are made on the basis of the borrower’s ability to make repayment from their
employment and other income and which are secured by real property whose value tends to be more easily ascertainable,
multifamily and commercial real estate loans typically are made on the basis of the borrower’s ability to make repayment
from the cash flow of the commercial venture. If the cash flow from business operations is reduced, the borrower’s ability
to repay the loan may be impaired. Due to the larger average size of each multifamily and commercial real estate loan as
compared with other loans such as 1 – 4 family loans, as well as collateral that is generally less readily-marketable, losses
incurred on a small number of multifamily and commercial real estate loans could have a material adverse impact on our
financial condition and results of operations.
We expect to increase our purchases or originations of consumer loans, and such loans generally carry greater risk
than loans secured by owner-occupied, 1 – 4 family real estate, and these risks will increase as we continue to
increase originations of these types of loans.
At December 31, 2022, our consumer held for investment loans totaled $16.6 million, or 1.7% of our total loan
portfolio, of which $2.7 million, or 16.0%, were post-settlement consumer loans. Consumer loan collections are dependent
on the borrower’s continuing financial stability and are therefore more likely to be affected by adverse personal
circumstances, such as a loss of employment or unexpected medical costs. While our Consumer Litigation-Related Loans,
which consist of post-settlement consumer loans, are typically well secured by the settlement amount, we can still be
exposed to the financial stability of the borrower as a result of unforeseen rulings or administrative legal anomalies with a
particular borrower’s settlement that eliminate or greatly reduce their settlement amount. Furthermore, the application of
various federal and state laws, including bankruptcy and insolvency laws, may limit our ability to recover on such loans.
As we increase our purchases or originations of consumer loans, it may become necessary to increase our provision for
loan losses in the event our losses on these loans increase, which would reduce our profits.
A substantial majority of our loans and operations are in New York, and therefore our business is particularly
vulnerable to a downturn in the New York City economy.
Unlike larger financial institutions that are more geographically diversified, a large portion of our business is
concentrated primarily in the state of New York, and in New York City in particular. As of December 31, 2022, 50.8% of
our loan portfolio was in New York and our loan portfolio had concentrations of 40.2% in New York City. If the local
economy, and particularly the real estate market, declines, the rates of delinquencies, defaults, foreclosures, bankruptcies
and losses in our loan portfolio would likely increase. As a result of this lack of diversification in our loan portfolio, a
downturn in the local economy generally and real estate market specifically could significantly reduce our profitability
and growth and adversely affect our financial condition.
If the allowance for loan losses is not sufficient to cover actual loan losses, earnings could decrease.
Loan customers may not repay their loans according to the terms of their loans, and the collateral securing the payment
of their loans may be insufficient to assure repayment. We may experience significant credit losses, which could have a
material adverse effect on our operating results. Various assumptions and judgments about the collectability of the loan
portfolio are made, including the creditworthiness of borrowers and the value of the real estate and other assets serving as
collateral for the repayment of many loans. In determining the amount of the allowance for loan losses, management
reviews the loans and the loss and delinquency experience and evaluates economic conditions. At December 31, 2022, our
allowance for loan losses as a percentage of total loans, net of unearned income, was 1.29%. The determination of the
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appropriate level of allowance is subject to judgment and requires us to make significant estimates of current credit risks
and trends, all of which are subject to material changes. If assumptions prove to be incorrect, the allowance for loan losses
may not cover probable incurred losses in the loan portfolio at the date of the financial statements. Significant additions to
the allowance would materially decrease net income. We had $4 thousand in nonperforming loans at December 31, 2022.
Nonperforming loans may increase and nonperforming or delinquent loans may adversely affect future performance. In
addition, federal and state regulators periodically review the allowance for loan losses and may require an increase in the
allowance for loan losses or recognize further loan charge-offs. Any significant increase in our allowance for loan losses
or loan charge-offs as required by these regulatory agencies could have a material adverse effect on our results of
operations and financial condition. Bank regulators periodically review our allowance for loan losses and may require an
increase to the provision for loan losses or further loan charge-offs. Any increase in our allowance for loan losses or loan
charge-offs as required by these regulatory authorities may have a material adverse effect on our results of operations or
financial condition.
The FASB issued an accounting standard update that will result in a significant change in how the Company
recognizes credit losses, which may have a material impact on its financial condition or results of operations.
In June 2016, the FASB issued an accounting standard update, “Financial Instruments – Credit Losses (Topic 326),
Measurement of Credit Losses on Financial Instruments,” which replaces the current “incurred loss” model for recognizing
credit losses with an “expected loss” model referred to as the CECL model. Under the CECL model, the Company will be
required to present certain financial assets carried at amortized cost, such as loans held for investment and HTM debt
securities, at the net amount expected to be collected. The measurement of expected credit losses is to be based on
information about past events, including historical experience, current conditions, and reasonable and supportable forecasts
that affect the collectability of the reported amount. This measurement will take place at the time the financial asset is first
entered into and periodically thereafter. This differs significantly from the “incurred loss” model required under current
GAAP, which delays recognition until it is probable a loss has been incurred. The CECL model may create more volatility
in the level of the ALLL. If the Company is required to materially increase its level of the ALLL for any reason, such
increase could adversely affect its business, financial condition and results of operations.
Our loan portfolio is unseasoned.
With a growing and generally unseasoned loan portfolio, our credit risk may continue to increase and our future
performance could be adversely affected. While we believe we have underwriting standards designed to manage normal
lending risks, it is difficult to assess the future performance of our loan portfolio due to the recent origination of many of
these loans. As a result, it is difficult to predict whether any of our loans will become nonperforming or delinquent loans,
or whether we will have any nonperforming or delinquent loans that will adversely affect our future performance. At
December 31, 2022, the weighted average age of our loans was 5.55 years, 2.69 years, 1.45 years, 2.97 years and
1.02 years for our 1 – 4 family loans, multifamily loans, commercial real estate loans, commercial loans and consumer
loans, respectively. At December 31, 2022, the weighted average age of our loan portfolio was 2.78 years, however, the
average customer relationship is of a longer term.
We may not be able to adequately measure and limit the credit risk associated with our loan portfolio, which could
adversely affect our profitability.
As a part of the products and services that we offer, we make commercial, consumer and commercial real estate loans.
The principal economic risk associated with each class of loans is the creditworthiness of the borrower, which is affected
by the strength of the relevant business market segment, local market conditions, and general economic conditions.
Additional factors related to the credit quality of commercial loans include the quality of the management of the business
and the borrower’s ability both to properly evaluate changes in the supply and demand characteristics affecting their market
for products and services, and to effectively respond to those changes. Additional factors related to the credit quality of
consumer loans, particularly consumer post-settlement loans, include the quality of the post-settlement claim and
unforeseen court rulings or administrative legal anomalies which could impact the final settlement amount. Additional
factors related to the credit quality of commercial real estate loans include tenant vacancy rates and the quality of
management of the property. A failure to effectively measure and limit the credit risk associated with our loan portfolio
could have an adverse effect on our business, financial condition, and results of operations.
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Risks Related to our Business
We have a limited operating history and have experienced significant growth, which makes it difficult to forecast our
revenue and evaluate our business and future prospects.
We have only been in existence since 2006, and from 2016 through 2022, we experienced significant growth following
our initial public offering, a capital raise and the conversion from a savings and loan holding company with a savings bank
subsidiary to a bank holding company with a national bank subsidiary. As a result of our limited operating history and
recent accelerated growth, in particular in our payment processing business, our ability to forecast our future results of
operations and plan for and model future growth is limited and subject to a number of uncertainties. We have encountered
and will continue to encounter risks and uncertainties frequently experienced by growing companies in the financial
services industry, such as the risks and uncertainties described herein. Accordingly, we may be unable to prepare accurate
internal financial forecasts and our results of operations in future reporting periods may be below the expectations of
investors. If we do not address these risks successfully, our results of operations could differ materially from our estimates
and forecasts or the expectations of our stockholders, causing our business to suffer and our stock price to decline.
A substantial portion of our business is dependent on the prospects of the legal industry and changes in the legal
industry may adversely affect our growth and profitability.
We depend on our relationships within the legal community and our products and services tailored to the legal industry
account for a significant source of our revenue. As we intend to focus our growth on our Litigation-Related Loan products,
changes in the legal industry, including a significant decrease in the number of litigation cases in the United States, reform
of the tort industry that reduces the ability of plaintiffs to bring cases or reduces the damages plaintiffs can receive, or a
significant increase in the unemployment rate for attorneys, could, individually or in the aggregate, have a material adverse
effect on our profitability, financial condition and growth of our business.
A lack of liquidity could adversely affect the Company’s financial condition and results of operations.
Liquidity is essential to the Company’s business. The Company relies on its ability to generate deposits and effectively
manage the repayment of its liabilities to ensure that there is adequate liquidity to fund operations. An inability to raise
funds through deposits, borrowings, the sale and maturities of loans and securities and other sources could have a
substantial negative effect on liquidity. The Company’s most important source of funds is its deposits. Deposit balances
can decrease when customers perceive alternative investments as providing a better risk adjusted return, which are strongly
influenced by such external factors as the direction of interest rates, local and national economic conditions and the
availability and attractiveness of alternative investments. Further, the demand for deposits may be reduced due to a variety
of factors such as current negative trends in the banking sector, the level of and/or composition of our uninsured deposits,
demographic patterns, changes in customer preferences, reductions in consumers’ disposable income, the monetary policy
of the FRB or regulatory actions that decrease customer access to particular products. If customers move money out of
bank deposits and into other investments such as money market funds, the Company would lose a relatively low-cost
source of funds, which would increase its funding costs and reduce net interest income. Any changes made to the rates
offered on deposits to remain competitive with other financial institutions may also adversely affect profitability and
liquidity. Other primary sources of funds consist of cash flows from operations, maturities and sales of investment
securities and/or loans, brokered deposits, borrowings from the FHLB of New York and/or FRB discount window, and
unsecured borrowings. The Company also may borrow funds from third-party lenders, such as other financial institutions.
The Company’s access to funding sources in amounts adequate to finance or capitalize its activities, or on terms that are
acceptable, could be impaired by factors that affect the Company directly or the financial services industry or economy in
general, such as disruptions in the financial markets or negative views and expectations about the prospects for the financial
services industry, a decrease in the level of the Company’s business activity as a result of a downturn in markets or by one
or more adverse regulatory actions against the Company or the financial sector in general. Any decline in available funding
could adversely impact the Company’s ability to originate loans, invest in securities, meet expenses, or to fulfill obligations
such as meeting deposit withdrawal demands, any of which could have a material adverse impact on its liquidity, business,
financial condition and results of operations.
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The loss of our deposit clients or substantial reduction of our deposit balances could force us to fund our business with
more expensive and less stable funding sources.
As of December 31, 2022, approximately $310.4 million, or 25.3%, of our total Bank deposits of $1.2 billion, were
not FDIC insured. This excludes $10.5 million of the Company’s deposits held by the Bank. We have traditionally obtained
funds through deposits for use in lending and investment activities. The interest rates stated for borrowings typically exceed
the interest rates paid on deposits. Deposit outflows can occur for a number of reasons, including; clients may seek
investments with higher yields, clients with uninsured deposits may seek greater financial security during prolonged
periods of volatile and unstable market conditions or clients may simply prefer to do business with our competitors, or for
other reasons. If a significant portion of our deposits were withdrawn, we may need to rely more heavily on more expensive
borrowings and other sources of funding to fund our business and meet withdrawal demands, adversely affecting our net
interest margin. The occurrence of any of these events could materially and adversely affect our business, results of
operations or financial condition.
The Bank has deposit accounts whose ownership is based on a fiduciary relationship, which management evaluates to
identify an appropriate estimate of FDIC insurance coverage, and such estimates may underreport the amount of the
Bank’s uninsured deposits.
The Bank has deposit accounts whose ownership is based on a fiduciary relationship. Part 330 of the FDIC's
regulations generally states that the titling of the deposit account (together with the underlying records) must indicate the
existence of the fiduciary relationship in order for insurance coverage to be available on a "pass-through" basis. Fiduciary
relationships include, but are not limited to, relationships involving a trustee, agent, nominee, guardian, executor, or
custodian. A bank with fiduciary deposit accounts with balances of more than $250,000 must diligently use the available
data on these deposit accounts, including data indicating the existence of different principal and income beneficiaries to
determine its best estimate of the uninsured portion of these accounts. As of December 31, 2022, the Company had
approximately $564.0 million of law firm escrow (or trust) deposits that were evaluated by management to identify an
appropriate estimate of FDIC insurance coverage that passes through each deposit account to the beneficial owner of the
funds held in the account. To a lesser extent, the Bank maintains fiduciary accounts for our qualified settlement fund
relationships as well as bankruptcy trustee relationships where management estimates are also employed to determine
FDIC coverage. Management’s uninsured balance estimate may understate the amount of the Bank’s uninsured deposits
and may not reflect the assessment of the FDIC if the Bank is placed into receivership. Such understated amounts of
uninsured deposits would result in less deposit insurance coverage available to our depositors and could materially and
adversely affect our business, results of operations or financial condition.
Reputational risk and social factors may impact our results and damage our brand.
Our ability to attract and retain customers is highly dependent upon the perceptions of borrower customers and deposit
holders and other external perceptions of our products, services, trustworthiness, business practices, workplace culture,
compliance practices or our financial health. In addition, our brand is very important to us. Maintaining and enhancing our
brand depends largely on our ability to continue to provide high-quality products and services. Adverse perceptions
regarding our reputation could lead to difficulties in generating and maintaining customers as well as in financing their
needs. In particular, negative public perceptions regarding our reputation, including negative perceptions regarding our
ability to maintain the security of our technology systems and protect customer data or our compliance programs, could
lead to decreases in the levels of deposits that customers and potential customers choose to maintain with us or significantly
increase the costs of attracting and retaining customers. Negative public opinion or damage to our brand could also result
from actual or alleged conduct in any number of activities or circumstances, including lending practices, regulatory
compliance (including compliance with anti-money laundering statutes and regulations), security breaches (including the
use and protection of customer data), corporate governance, resolution of conflicts of interest and ethical issues, sales and
marketing, and from actions taken by regulators or other persons in response to such conduct. Such conduct could fall
short of our customers' and the public's heightened expectations of financial institutions with rigorous privacy, data
protection, data security and compliance practices, and could further harm our reputation. In addition, third parties with
whom we have relationships may take actions over which we have limited control that could negatively impact perceptions
about us or the financial services industry. The proliferation of social media may increase the likelihood that negative
information about the Bank, whether or not the information is accurate, could impact our reputation and business. Once
29
information has spread through social media, it can be difficult to address it effectively, either by correcting inaccuracies
or communicating remedial steps taken to address actual issues.
We may incur losses related to our exposure to NFL consumer post-settlement loans through our equity method
investment in a third party sponsored variable interest entity.
On April 1, 2022, the Company finalized the sale of its legacy NFL consumer post settlement loan portfolio to a third
party sponsored entity (or “Fund”) in exchange for a nonvoting economic interest in the Fund as the loan portfolio’s
duration has extended over several years as a result of revisions to various claims administration protocols, the ongoing
effects of the pandemic, revisions to qualifying physician requirements and the controversial use of race-based norms on
former NFL players’ concussion claims. The following summarizes the chronology of related events and its impact to our
risk:
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 the Fund’s assets which may increase its credit risk and
our risk of loss of our investment. Although we have not encountered any such fraud at this time within our portfolio, if it
is determined that any of the Fund’s NFL loan borrowers or others committed fraud when filing their application to the
NFL Concussion Settlement Program or to Esquire Bank as originator for the related loan, we may experience a loss on
our investment, which could have an adverse effect on our operating results. Additionally, the continuing COVID-19
health crisis may also extend the duration of the Fund’s loan 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 the 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. On
October 23, 2021, there was further agreement that no race norms or race demographic estimates shall be used in the
settlement program going forward and the NFL will not be able to appeal to settlement administrators to require race norms
be applied. On March 4, 2022 the Court formally approved an agreement to eliminate any consideration of race in the
Settlement Program and modified the neuropsychological testing protocol. Overall, we believe this may represent a
positive development for NFL claimants but may 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. If the processing
of claims for the Fund’s loan portfolio continues to extend 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 charge-offs of these loans could occur or increase in the future, which would negatively impact our
investment. As of December 31, 2022, the carrying amount of our investment in the fund and our total exposure is $12.6
million.
As a business operating in the financial services industry, our business and operations may be adversely affected in
numerous and complex ways by weak economic conditions.
Our business and operations, which primarily consist of lending money to customers in the form of loans, borrowing
money from customers in the form of deposits and investing in securities, are sensitive to general business and economic
30
conditions in the United States. If the U.S. economy weakens, our growth and profitability from our lending, deposit and
investment operations could be constrained. Uncertainty about the federal fiscal policymaking process, the medium and
long-term fiscal outlook of the federal government, and future tax rates is a concern for businesses, consumers and
investors in the United States. In addition, economic conditions in foreign countries could affect the stability of global
financial markets, which could hinder U.S. economic growth. Weak economic conditions are characterized by deflation,
fluctuations in debt and equity capital markets, a lack of liquidity and/or depressed prices in the secondary market for
mortgage loans, increased delinquencies on mortgage, consumer and commercial loans, 1 – 4 family and commercial real
estate price declines and lower home sales and commercial activity. All of these factors are detrimental to our business,
and the interplay between these factors can be complex and unpredictable. Our business is also significantly affected by
monetary and related policies of the U.S. federal government and its agencies. Changes in any of these policies are
influenced by macroeconomic conditions and other factors that are beyond our control. Inflation could also negatively
impact us through rising costs and interest rates. Adverse economic conditions and government policy responses to such
conditions could have a material adverse effect on our business, financial condition, results of operations and prospects.
We may not be able to grow, and if we do we may have difficulty managing that growth.
Our business strategy is to continue to grow our assets and expand our operations, including through potential strategic
acquisitions. Our ability to grow depends, in part, upon our ability to expand our market share, successfully attract core
deposits, and to identify loan and investment opportunities as well as opportunities to generate fee-based income. We can
provide no assurance that we will be successful in increasing the volume of our loans and deposits at acceptable levels and
upon terms acceptable to us. We also can provide no assurance that we will be successful in expanding our operations
organically or through strategic acquisition while managing the costs and implementation risks associated with this growth
strategy. We expect to continue to experience growth in the number of our employees and customers and the scope of our
operations. Our success will depend upon the ability of our officers and key employees to continue to implement and
improve our operational and other systems, to manage multiple, concurrent customer relationships, and to hire, train and
manage our employees. In the event that we are unable to perform all these tasks and meet these challenges effectively,
including continuing to attract core deposits, our operations, and consequently our earnings, could be adversely impacted.
Our ten largest deposit clients account for 19.3% of our total deposits.
As of December 31, 2022, our ten largest bank depositors accounted for, in the aggregate, 19.3% of our total deposits.
As a result, a material decrease in the volume of those deposits by a relatively small number of our depositors could reduce
our liquidity, in which event it could became necessary for us to replace those deposits with higher-cost deposits or FHLB
borrowings, which would adversely affect our net interest income and, therefore, our results of operations.
Risks Related to Market Interest Rates
Interest rate shifts may reduce net interest income and otherwise negatively impact our financial condition and
results of operations.
The FRB decreased benchmark interest rates significantly, to near zero, in response to the COVID-19 pandemic. The
FRB has reversed its policy of near zero interest rates given its concerns over inflation. Market interest rates have risen in
response to the FRB’s rate increases. These policies can thus affect the activities and results of operations of financial
institutions. The actions of the FRB influence the rates of interest that we charge on loans and that we pay on borrowings
and interest-bearing deposits. Rates of interest can also affect the value of our on-balance sheet and off-balance sheet
financial instruments. Thus, the increase in market interest rates may have an adverse effect on our net interest income and
profitability.
Interest rate shifts may reduce net interest income and otherwise negatively impact our financial condition and
results of operations.
The majority of our banking assets are monetary in nature and subject to risk from changes in interest rates. Like most
financial institutions, our earnings and cash flows depend to a great extent upon the level of our net interest income, or the
difference between the interest income we earn on loans, investments and other interest earning assets, and the interest we
31
pay on interest bearing liabilities, such as deposits and borrowings. Changes in interest rates can increase or decrease our
net interest income, because different types of assets and liabilities may react differently, and at different times, to market
interest rate changes. When interest bearing liabilities mature or reprice more quickly, or to a greater degree than interest
earning assets in a period, an increase in interest rates could reduce net interest income. Similarly, when interest earning
assets mature or reprice more quickly, or to a greater degree than interest bearing liabilities, falling interest rates could
reduce net interest income. Additionally, an increase in interest rates may, among other things, reduce the demand for
loans and our ability to originate loans and decrease loan repayment rates. A decrease in the general level of interest rates
may affect us through, among other things, increased prepayments on our loan portfolio and increased competition for
deposits. Accordingly, changes in the level of market interest rates affect our net yield on interest earning assets, loan
origination volume and our overall results. Although our asset-liability management strategy is designed to control and
mitigate exposure to the risks related to changes in market interest rates, those rates are affected by many factors outside
of our control, including governmental monetary policies, inflation, deflation, recession, changes in unemployment, the
money supply, international disorder and instability in domestic and foreign financial markets.
Risks Related to Operations
Inflation can have an adverse impact on our business and on our customers.
Inflation risk is the risk that the value of assets or income from investments will be worth less in the future as inflation
decreases the value of money. Over the past year, in response to a pronounced rise in inflation, the FRB has raised certain
benchmark interest rates to combat inflation. As discussed above under “Risks Related to Market Interest Rates – Interest
rate shifts may reduce net interest income and otherwise negatively impact our financial condition and results of
operations,” as inflation increases and market interest rates rise the value of our investment securities, particularly those
with longer maturities, would decrease, although this effect can be less pronounced for floating rate instruments. In
addition, inflation generally increases the cost of goods and services we use in our business operations, such as electricity
and other utilities, which increases our non-interest expenses. Furthermore, our customers are also affected by inflation
and the rising costs of goods and services used in their households and businesses, which could have a negative impact on
their ability to repay their loans with us. Sustained higher interest rates by the FRB to tame persistent inflationary price
pressures could also push down asset prices and weaken economic activity. A deterioration in economic conditions in the
United States and our markets could result in an increase in loan delinquencies and non-performing assets, decreases in
loan collateral values and a decrease in demand for our products and services, all of which, in turn, would adversely affect
our business, financial condition and results of operations.
We are exposed to the risks of natural disasters and global market disruptions.
We handle a substantial volume of customer and other financial transactions every day. Our financial, accounting,
data processing, check processing, electronic funds transfer, loan processing, online and mobile banking, automated teller
machines, backup or other operating or security systems and infrastructure may fail to operate properly or become disabled
or damaged as a result of a number of factors including events that are wholly or partially beyond our control. This could
adversely affect our ability to process these transactions or provide these services. There could be a sudden change in
customer transaction volume, electrical, telecommunications or other major physical infrastructure outages, natural
disasters, events arising from local or larger scale political or social matters, including terrorist acts, pandemics, and cyber-
attacks. We continuously update these systems to support our operations and growth. This updating entails significant
costs and creates risks associated with implementing new systems and integrating them with existing ones. Operational
risk exposures could adversely impact our results of operations, liquidity and financial condition, and cause reputational
harm. Additionally, global markets may be adversely affected by natural disasters, inflation, the emergence of widespread
health emergencies or pandemics, cyber-attacks or campaigns, military conflict, including the war in Ukraine, terrorism
or other geopolitical events. Global market disruptions may affect our business liquidity. Also, any sudden or prolonged
market downturn in the United States or abroad, as a result of the above factors or otherwise could result in a decline in
revenue and adversely affect our results of operations and financial condition, including capital and liquidity levels.
32
We rely heavily on our management team and our business could be adversely affected by the unexpected loss of one
or more of our officers.
We are led by a management team with substantial experience in the markets that we serve and the financial products
that we offer. Our operating strategy focuses on providing products and services through long-term relationship managers.
Accordingly, our success depends in large part on the performance of our key officers, as well as on our ability to attract,
motivate and retain highly qualified senior and middle management. Competition for employees is intense, and the process
of identifying key personnel with the combination of skills and attributes required to execute our business plan may be
lengthy. We may not be successful in retaining our key employees and the unexpected loss of services of one or more of
our officers could have a material adverse effect on our business because of their skills, knowledge of our market and
financial products, years of industry experience, long-term business and customer relationships and the difficulty of finding
qualified replacement personnel. If the services of any of our key personnel should become unavailable for any reason, we
may not be able to identify and hire qualified persons on terms acceptable to us, which could have an adverse effect on
our business, financial condition and results of operations.
We are subject to certain operational risks, including, but not limited to, customer or employee fraud and data
processing system failures and errors.
Employee errors and employee and customer misconduct could subject us to financial losses or regulatory sanctions
and seriously harm our reputation. Misconduct by our employees could include hiding unauthorized activities from us,
improper or unauthorized activities on behalf of our customers or improper use of confidential information. It is not always
possible to prevent employee errors and misconduct, and the precautions we take to prevent and detect this activity may
not be effective in all cases. Employee errors could also subject us to financial claims for negligence. We maintain a system
of internal controls and insurance coverage to mitigate against operational risks, including data processing system failures
and errors and customer or employee fraud. If our internal controls fail to prevent or detect an occurrence, or if any resulting
loss is not insured or exceeds applicable insurance limits, it could have a material adverse effect on our business, financial
condition and results of operations.
The Company’s controls and procedures may fail or be circumvented.
Our management and board review and update the Company’s internal controls over financial reporting, disclosure
controls and procedures, and corporate governance policies and procedures. Any system of controls, however well
designed and operated, is based in part on certain assumptions and can provide only reasonable, not absolute, assurances
that the objectives of the system are met. Any failure to follow or circumvention of these controls, policies and procedures
could have a material adverse impact on our financial condition and results of operations.
We face risks related to our operational, technological and organizational infrastructure.
Our ability to grow and compete is dependent on our ability to build or acquire the necessary operational and
technological infrastructure and to manage the cost of that infrastructure as we expand. Similar to other large corporations,
operational risk can manifest itself in many ways, such as errors related to failed or inadequate processes, faulty or disabled
computer systems, fraud by employees or outside persons and exposure to external events. As discussed below, we are
dependent on our operational infrastructure to help manage these risks. In addition, we are heavily dependent on the
strength and capability of our technology systems which we use both to interface with our customers and to manage our
internal financial and other systems. Our ability to develop and deliver new products that meet the needs of our existing
customers and attract new ones depends on the functionality of our technology systems. Additionally, our ability to run
our business in compliance with applicable laws and regulations is dependent on these infrastructures. We continuously
monitor our operational and technological capabilities and make modifications and improvements when we believe it will
be cost effective to do so. In some instances, we may build and maintain these capabilities ourselves. We also outsource
some of these functions to third parties. Specifically, we depend on third parties to provide our core systems processing,
essential web hosting and other internet systems, deposit processing and other processing services. In connection with our
payment processing business, we (and our ISOs) rely on various third parties to provide processing and clearing and
settlement services to us in connection with card transactions. If these third-party service providers experience difficulties,
fail to comply with banking regulations or terminate their services and we are unable to replace them with other service
33
providers, our operations could be interrupted. If an interruption were to continue for a significant period of time, our
business, financial condition and results of operations could be adversely affected, perhaps materially. Even if we are able
to replace them, it may be at a higher cost to us, which could adversely affect our business, financial condition and results
of operations. We also face risk from the integration of new infrastructure platforms and/or new third party providers of
such platforms into its existing businesses.
A failure in our operational systems or infrastructure, or those of third parties, could impair our liquidity, disrupt our
businesses, result in the unauthorized disclosure of confidential information, damage our reputation and cause
financial losses.
Our business, and in particular, our payment processing business, is partially dependent on our ability to process and
monitor, on a daily basis, a large number of transactions, many of which are highly complex, across numerous and diverse
markets. These transactions, as well as the information technology services we provide to clients, often must adhere to
client-specific guidelines, as well as legal and regulatory standards. Due to the breadth of our client base and our
geographical reach, developing and maintaining our operational systems and infrastructure is challenging, particularly as
a result of rapidly evolving legal and regulatory requirements and technological shifts. Our financial, accounting, data
processing or other operating systems and facilities, and, as discussed above, those the third-party service providers upon
which we depend, may fail to operate properly or become disabled as a result of events that are wholly or partially beyond
our control, such as a spike in transaction volume, cyber-attack or other unforeseen catastrophic events, which may
adversely affect our ability to process these transactions or provide services.
The occurrence of fraudulent activity, breaches or failures of our information security controls or cybersecurity-
related incidents could have a material adverse effect on our business, financial condition and results of operations.
Our operations rely on the secure processing, storage and transmission of confidential and other sensitive business
and consumer information on our computer systems and networks, as well as those of our ISOs and processors. Under the
card network rules and various federal and state laws, we are responsible for safeguarding such information. Although we
take protective measures to maintain the confidentiality, integrity and availability of information across all geographic and
product lines, and endeavor to modify these protective measures as circumstances warrant, the nature of the threats
continues to evolve. As a result, our computer systems, software and networks are vulnerable to unauthorized access, loss
or destruction of data (including confidential client information), account takeovers, unavailability of service, computer
viruses or other malicious code, cyber-attacks and other events that could have an adverse security impact. Despite the
defensive measures we take to manage our internal technological and operational infrastructure, these threats have in the
past and may in the future originate externally from third parties such as foreign governments, organized crime and other
hackers, and outsource or infrastructure-support providers and application developers, or may originate internally from
within our organization. Given the increasingly high volume of our transactions, certain errors may be repeated or
compounded before they can be discovered and rectified. In addition, security breaches or failures could result in the bank
incurring liability to ISOs, members of the card network and card issuers in relation to our payment processing business.
In particular, information pertaining to us and our customers is maintained, and transactions are executed, on the
networks and systems of us, our customers and certain of our third-party partners, such as our online banking or reporting
systems, ISO’s customers and merchants who are part of our payment processing business. The secure maintenance and
transmission of confidential information, as well as execution of transactions over these systems, are essential to protect
us and our customers against fraud and security breaches and to maintain our clients’ confidence. Breaches of information
security also may occur, and in infrequent cases have occurred, through intentional or unintentional acts by those having
access or gaining access to our systems or our customers’ or counterparties’ confidential information, including employees.
In addition, increases in criminal activity levels and sophistication, advances in computer capabilities, new discoveries,
vulnerabilities in third-party technologies (including browsers and operating systems) or other developments could result
in a compromise or breach of the technology, processes and controls that we use to prevent fraudulent transactions and to
protect data about us, our customers and underlying transactions, as well as the technology used by our customers to access
our systems. We cannot be certain that the security measures we or our ISOs or processors have in place to protect this
sensitive data will be successful or sufficient to protect against all current and emerging threats designed to breach our
systems or those of our ISOs or processors. Although we have developed, and continue to invest in, systems and processes
that are designed to detect and prevent security breaches and cyber-attacks and periodically test our security, a breach of
34
our systems, or those of our ISOs or processors, could result in losses to us or our customers; loss of business and/or
customers; damage to our reputation; the incurrence of additional expenses (including the cost of notification to consumers,
credit monitoring and forensics, and fees and fines imposed by the card networks); disruption to our business; our inability
to grow our online services or other businesses; additional regulatory scrutiny or penalties; or our exposure to civil
litigation and possible financial liability — any of which could have a material adverse effect on our business, financial
condition and results of operations.
If our enterprise risk management framework is not effective at mitigating risk and loss to us, we could suffer
unexpected losses and our results of operations could be materially adversely affected.
Our enterprise risk management framework seeks to achieve an appropriate balance between risk and return, which
is critical to optimizing stockholder value. We have established processes and procedures intended to identify, measure,
monitor, report and analyze the types of risk to which we are subject, including credit, liquidity, operational, regulatory
compliance and reputational. However, as with any risk management framework, there are inherent limitations to our risk
management strategies as there may exist, or develop in the future, risks that we have not appropriately anticipated or
identified. If our risk management framework proves ineffective, we could suffer unexpected losses and our business and
results of operations could be materially adversely affected.
Risks Related to the COVID-19 Pandemic
The ongoing COVID-19 pandemic and measures intended to prevent its spread could adversely affect the Company’s
business activities, financial condition, and results of operations.
Global health concerns relating to the COVID-19 pandemic and related government actions taken to reduce the spread
of the virus have affected the macroeconomic environment, both nationally and in the Company’s market area. Federal
and state agencies may pass measures to address the economic and social consequences of the pandemic that could impact
the Company’s financial results and have a destabilizing effect on financial markets, key market indices, and overall
economic activity. Prolonged measures by public health or other governmental authorities encouraging or requiring
significant restrictions on travel, assembly or other core business practices could harm the Bank’s business and that of its
customers, in particular small to medium-sized business customers. Although the Company has business continuity plans
and other safeguards in place, there is no assurance that they will be effective. A decline in economic conditions generally
and a prolonged negative impact on small to medium-sized businesses, in particular, due to the COVID-19 pandemic,
could result in a material adverse effect on the Company’s business, financial condition, and results of operations and may
heighten many of the known risks described herein and in other filings with the SEC.
Risks Related to Competitive Matters
We operate in a highly competitive industry and face significant competition from other financial institutions and
financial services providers, which may decrease our growth or profits.
Consumer and commercial banking as well as payment processing are highly competitive industries. Our market area
contains not only a large number of community and regional banks, but also a significant presence of the country’s largest
commercial banks. We compete with other state and national financial institutions, as well as savings and loan associations,
savings banks, and credit unions, for deposits and loans. In addition, we compete with financial intermediaries, such as
consumer finance companies, specialty finance companies, commercial finance companies, mortgage banking companies,
insurance companies, securities firms, mutual funds, and several government agencies, as well as major retailers, all
actively engaged in providing various types of loans and other financial services, including payment processing.
Competition for Litigation-Related Loans is derived primarily from a small number of nationally-oriented financial
companies that specialize in this market as well as local community banks. Some of these companies are focused
exclusively on loans to law firms, while others offer loans to plaintiffs as well. We also face significant competition from
many larger institutions, including large commercial banks and third party processors that operate in the payment
processing business, and our ability to grow that portion of our business depends on us being able to continue to attract
and retain ISOs and merchants. Some of these competitors may have a long history of successful operations nationally as
35
well as in our market area and greater ties to businesses or the legal community and more expansive banking relationships,
as well as more established depositor bases, fewer regulatory constraints, and lower cost structures than we do. Competitors
with greater resources may possess an advantage through their ability to maintain numerous banking locations in more
convenient sites, to conduct more extensive promotional and advertising campaigns, or to operate a more developed
technology platform. Due to their size, many competitors may offer a broader range of products and services, as well as
better pricing for certain products and services than we can offer. For example, competitors with lower costs of capital
may solicit our customers to refinance their loans with a lower interest rate. Further, increased competition among financial
services companies due to the recent consolidation of certain competing financial institutions may adversely affect our
ability to market our products and services. Technology has lowered barriers to entry and made it possible for banks and
specifically finance companies to compete in our market area and for non-banks to offer products and services traditionally
provided by banks.
The financial services industry could become even more competitive as a result of legislative, regulatory, and
technological changes and continued consolidation. Banks, securities firms, and insurance companies can merge under the
umbrella of a financial holding company, which can offer virtually any type of financial service, including banking,
securities underwriting, insurance (both agency and underwriting), and payment processing. Our ability to compete
successfully depends on a number of factors, including: (i) our ability to develop, maintain, and build upon long-term
customer relationships based on quality service and high ethical standards; (ii) our ability to attract and retain qualified
employees to operate our business effectively; (iii) our ability to expand our market position; (iv) the scope, relevance,
and pricing of products and services that we offer to meet customer needs and demands; (v) the rate at which we introduce
new products and services relative to our competitors; (vi) customer satisfaction with our level of service; and (vii) industry
and general economic trends. Failure to perform in any of these areas could weaken our competitive position, which could
adversely affect our growth and profitability, which, in turn, could harm our business, financial condition, and results of
operations.
Risks Related to our Payment Processing Business
Our merchants or ISOs may be unable to satisfy obligations for which we may ultimately be liable.
We are subject to the risk of our merchants or ISOs being unable to satisfy obligations for which we may ultimately
be liable. If we are unable to collect amounts due from a merchant or ISO because of insolvency or other reasons, we may
bear the loss for those full amounts. We manage our credit risk and attempt to mitigate our risk by obtaining cash reserves,
both from merchants and ISOs, and through other contractual remedies. It is possible, however, that a default on such
obligations by one or more of our ISOs or merchants, could, individually or in the aggregate, have a material adverse effect
on our business, financial condition and results of operations.
Fraud by merchants or others could have a material adverse effect on our business and financial condition.
We may be subject to liability for fraudulent transactions initiated by merchants or others. Examples of such fraud
include when a merchant or other party knowingly uses a stolen or counterfeit card to make a transaction, or if a merchant
intentionally fails to deliver the merchandise or services sold in an otherwise valid transaction. Criminals are using
increasingly sophisticated methods to engage in illegal activities such as counterfeiting and fraud. It is possible that
incidents of fraud could increase in the future. Failure to effectively manage risk and prevent fraud would increase our
chargeback liability or other liability. Increases in chargebacks or other liability could have a material adverse effect on
our business, financial condition, and results of operations.
Changes in card network rules, standards or fees could adversely affect our business or operations.
In order to provide our payment processing services, we are members of the Visa and MasterCard networks. As such,
we are subject to card network rules that could subject us or our ISOs and merchants to a variety of fines or penalties that
may be assessed on us, our ISOs, and our merchants. The termination of our membership, or the revocation of registration
of any of our ISOs, or any changes in card network rules or standards could increase the cost of operating our payment
processor business or limit our ability to provide payment processing to or through our customers, and could have a
material adverse effect on our business, financial condition and results of operations. From time to time, the card networks
36
increase the fees that they charge to acquirers and we charge to our merchants. It is possible that competitive pressures
will result in us absorbing a portion of such increases in the future, which would increase our costs, reduce our profit
margin and adversely affect our business and financial condition. In addition, the card networks require certain capital
requirements. An increase in the required capital level would further limit our use of capital for other purposes.
Risks Related to Laws and Regulation and Their Enforcement
As a bank holding company, the sources of funds available to us are limited.
Any future constraints on liquidity at the holding company level could impair our ability to declare and pay dividends
or repurchase our common stock. In some instances, notice to, or approval from, the FRB may be required prior to our
declaration or payment of dividends or repurchase of common stock. Further, our operations are primarily conducted by
our subsidiary, Esquire Bank, which is subject to significant regulation. Federal banking laws restrict the payment of
dividends by banks to their holding companies, and Esquire Bank will be subject to these restrictions in paying dividends
to us. Because our ability to receive dividends or loans from Esquire Bank is restricted, our ability to pay dividends to our
stockholders and repurchase our common stock is also restricted. Additionally, the right of a bank holding company to
participate in the assets of its subsidiary bank in the event of a bank-level liquidation or reorganization is subject to the
claims of the bank’s creditors, including depositors, which take priority, except to the extent that the holding company
may be a creditor with a recognized claim.
Our business, financial condition, results of operations and future prospects could be adversely affected by the highly
regulated environment and the laws and regulations that govern our operations, corporate governance, executive
compensation and accounting principles, or changes in any of them.
As a bank holding company, we are subject to extensive examination, supervision and comprehensive regulation by
various federal and state agencies that govern almost all aspects of our operations. These laws and regulations are not
intended to protect our stockholders. Rather, these laws and regulations are intended to protect customers, depositors, the
DIF and the overall financial stability of the U.S. These laws and regulations, among other matters, prescribe minimum
capital requirements, impose limitations on the business activities in which we can engage, limit the dividend or
distributions that Esquire Bank can pay to us, restrict the ability of institutions to guarantee our debt, and impose certain
specific accounting requirements on us that may be more restrictive and may result in greater or earlier charges to earnings
or reductions in our capital than generally accepted accounting principles would require. Compliance with these laws and
regulations is difficult and costly, and changes to these laws and regulations often impose additional compliance costs.
Our failure to comply with these laws and regulations, even if the failure follows good faith effort or reflects a difference
in interpretation, could subject us to restrictions on our business activities, fines and other penalties, any of which could
adversely affect our results of operations, capital base and the price of our securities. Further, any new laws, rules and
regulations could make compliance more difficult or expensive. Likewise, the Company operates in an environment that
imposes income taxes on its operations at both the federal and state levels to varying degrees. Strategies and operating
routines have been implemented to minimize the impact of these taxes. Consequently, any change in tax legislation could
significantly alter the effectiveness of these strategies. The net deferred tax asset reported on the Company’s balance sheet
generally represents the tax benefit of future deductions from taxable income for items that have already been recognized
for financial reporting purposes. The bulk of these deferred tax assets consists of deferred loan loss deductions and deferred
compensation deductions. The net deferred tax asset is measured by applying currently-enacted income tax rates to the
accounting period during which the tax benefit is expected to be realized.
Federal regulators periodically examine our business, and we may be required to remediate adverse examination
findings.
The FRB, the OCC and the FDIC, periodically examine our business, including our compliance with laws and
regulations. If, as a result of an examination, a federal banking agency were to determine that our financial condition,
capital resources, asset quality, earnings prospects, management, liquidity or other aspects of any of our operations had
become unsatisfactory, or that we were in violation of any law or regulation, it may take a number of different remedial
actions as it deems appropriate. These actions include the power to enjoin “unsafe or unsound” practices, to require
affirmative action to correct any conditions resulting from any violation or practice, to issue an administrative order that
37
can be judicially enforced, to direct an increase in our capital, to restrict our growth, to assess civil monetary penalties
against our officers or directors, to remove officers and directors and, if it is concluded that such conditions cannot be
corrected or there is an imminent risk of loss to depositors, to terminate our deposit insurance and place us into receivership
or conservatorship. If we become subject to any regulatory actions, it could have a material adverse effect on our business,
results of operations, financial condition and growth prospects.
We are subject to the Community Reinvestment Act and fair lending laws, and failure to comply with these laws could
lead to material penalties.
The Community Reinvestment Act (“CRA”), the Equal Credit Opportunity Act, the Fair Housing Act and other fair
lending laws and regulations impose nondiscriminatory lending requirements on financial institutions. A successful
challenge to an institution’s performance under the CRA or fair lending laws and regulations could result in a wide variety
of sanctions, including the required payment of damages and civil money penalties, injunctive relief, imposition of
restrictions on mergers and acquisitions activity and restrictions on expansion activity. Private parties may also have the
ability to challenge an institution’s performance under fair lending laws in private class action litigation.
Monetary policies and regulations of the Federal Reserve could adversely affect our business, financial condition and
results of operations.
In addition to being affected by general economic conditions, our earnings and growth are affected by the policies of
the FRB. An important function of the FRB is to regulate the money supply and credit conditions. Among the instruments
used by the FRB to implement these objectives are open market purchases and sales of U.S. government securities,
adjustments of the discount rate and changes in banks’ reserve requirements against bank deposits. These instruments are
used in varying combinations to influence overall economic growth and the distribution of credit, bank loans, investments
and deposits. Their use also affects interest rates charged on loans or paid on deposits. The monetary policies and
regulations of the FRB have had a significant effect on the operating results of commercial banks in the past and are
expected to continue to do so in the future. The effects of such policies upon our business, financial condition and results
of operations cannot be predicted.
We face a risk of noncompliance and enforcement action with the Bank Secrecy Act and other anti-money
laundering statutes and regulations.
The Bank Secrecy Act, the USA Patriot Act and other laws and regulations require financial institutions, among other
duties, to institute and maintain an effective anti-money laundering program and to file reports such as suspicious activity
reports and currency transaction reports. We are required to comply with these and other anti-money laundering
requirements. The federal banking agencies and Financial Crimes Enforcement Network are authorized to impose
significant civil money penalties for violations of those requirements and have recently engaged in coordinated
enforcement efforts against banks and other financial services providers with the U.S. Department of Justice, Drug
Enforcement Administration and Internal Revenue Service. We are also subject to increased scrutiny of compliance with
the rules enforced by the Office of Foreign Assets Control. If our policies, procedures and systems are deemed deficient,
we would be subject to liability, including fines and regulatory actions, which may include restrictions on our ability to
pay dividends and the necessity to obtain regulatory approvals to proceed with certain aspects of our business plan,
including our acquisition plans. Failure to maintain and implement adequate programs to combat money laundering and
terrorist financing could also have serious reputational consequences for us. Any of these results could have a material
adverse effect on our business, financial condition, results of operations and growth prospects.
We could be adversely affected by the soundness of other financial institutions and other third parties we rely on.
Financial services institutions are interrelated as a result of trading, clearing, counterparty or other relationships. We
have exposure to many different industries and counterparties, and routinely execute transactions with counterparties in
the financial services industry, including commercial banks, brokers and dealers, investment banks and other institutional
customers. Many of these transactions expose us to credit risk in the event of a default by a counterparty or client. In
addition, our credit risk may be exacerbated when our collateral cannot be foreclosed upon or is liquidated at prices not
sufficient to recover the full amount of the credit or derivative exposure due. Furthermore, successful operation of our
38
payment processing business depends on the soundness of ISOs, third party processors, payment facilitators, clearing
agents and others that we rely on to conduct our payment processing business. Any losses resulting from such third parties
could adversely affect our business, financial condition and results of operations.
Risks Related to Accounting Matters
Changes in accounting standards could materially impact our financial statements.
From time to time, the FASB or the SEC may change the financial accounting and reporting standards that govern the
preparation of our financial statements. Such changes may result in us being subject to new or changing accounting and
reporting standards. In addition, the bodies that interpret the accounting standards may change their interpretations or
positions on how these standards should be applied. These changes may be beyond our control, can be hard to predict, and
can materially impact how we record and report our financial condition and results of operations. In some cases, we could
be required to apply a new or revised standard retrospectively, or apply an existing standard differently, also
retrospectively, in each case resulting in our needing to revise or restate prior period financial statements.
Our accounting estimates rely on analytics, models and assumptions, which may not accurately predict events.
Our accounting policies and methods are fundamental to how we record and report our financial condition and results
of operations. Our management must exercise judgment in selecting and applying many of these accounting policies and
methods so they comply with GAAP and reflect management’s judgment of the most appropriate manner to report our
financial condition and results. In some cases, management must select the accounting policy or method to apply from two
or more alternatives, any of which may be reasonable under the circumstances, yet which may result in our reporting
materially different results than would have been reported under a different alternative. Certain accounting policies are
critical to presenting our financial condition and results of operations. They require management to make difficult,
subjective or complex judgments about matters that are uncertain. Materially different amounts could be reported under
different conditions or using different assumptions or estimates. Management considers the accounting policy relating to
the allowance for loan losses to be a critical accounting policy. Because of the uncertainty of estimates involved in these
matters, we may be required to do one or more of the following: significantly increase the allowance for loan losses or
sustain loan losses that are significantly higher than the reserve provided. These could have a material adverse effect on
our business, financial condition or results of operations.
Risks Related to Our Common Stock
The Company’s stock price can be volatile.
The Company’s stock price can fluctuate in response to a variety of factors, some of which are not under our control.
The factors that could cause the Company’s stock price to decrease include, but are not limited to: (i) our past and future
dividend practice; (ii) our financial condition, performance, creditworthiness and prospects; (iii) variations in our operating
results or the quality of our assets; (iv) operating results that vary from the expectations of management, securities analysts
and investors; (v) changes in expectations as to our future financial performance; (vi) changes in financial markets related
to market valuations of financial industry companies; (vii) current or future financial institutional illiquidity and/or seizures
by federal regulators; (viii) the operating and securities price performance of other companies that investors believe are
comparable to us; (ix) future sales of our equity or equity-related securities; (x) the credit, mortgage and housing markets,
the markets for securities relating to mortgages or housing, and developments with respect to financial institutions
generally; and (xi) changes in global financial markets and global economies and general market conditions, such as
interest or foreign exchange rates, inflation, recessionary conditions, stock, commodity or real estate valuations or volatility
and other geopolitical, regulatory or judicial events.
39
The limited liquidity of our common stock may limit your ability to trade our shares and may impact the value of our
common stock.
While the Company’s common stock is traded on the NASDAQ Capital Market, the trading volume has historically
been less than that of larger financial services companies. A public trading market having the desired characteristics of
depth, liquidity and orderliness depends on the presence in the marketplace of willing buyers and sellers of our common
stock at any given time. Given the relatively low trading volume of our common stock, significant sales of our common
stock in the public market, or the perception that those sales may occur, could cause the trading price of our common stock
to decline or to be lower than it otherwise might be in the absence of those sales or perceptions.
Anti-takeover provisions could negatively impact our shareholders.
Certain provisions in the Company’s Articles of Incorporation and Bylaws, as well as federal banking laws, regulatory
approval requirements, and Maryland law, could make it more difficult for a third party to acquire the Company, even if
doing so would be perceived to be beneficial to the Company’s stockholders.
ITEM 1B. Unresolved Staff Comments
None.
ITEM 2. Properties
At December 31, 2022, we conducted business through our corporate headquarters and full service branch in Jericho,
New York (Nassau County) and one administrative office in Boca Raton, Florida. All the current locations are leased
properties. At December 31, 2022, the total net book value of our leasehold improvements, furniture, fixtures and
equipment was approximately $2.7 million.
ITEM 3. 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 December 31, 2022, we are not a party to any pending legal proceedings that we believe
would have a material adverse effect on our financial condition, results of operations or cash flows.
ITEM 4. Mine Safety Disclosures
Not applicable.
40
PART II
ITEM 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity
Securities
Our shares of common stock are traded on the NASDAQ Capital Market under the symbol “ESQ”. The approximate
number of holders of record of Esquire Financial Holding, Inc.’s common stock as of March 1, 2023 was 4,148. The
Company’s common stock began trading on the NASDAQ Capital Market on June 27, 2017.
In 2022, we initiated a regular quarterly dividend on our common stock. Any determination to pay cash dividends on
our common stock is made by our board of directors and depends on a number of factors, including:
•
•
•
•
•
•
•
•
•
our historical and projected financial condition, liquidity and results of operations;
our capital levels and requirements;
statutory and regulatory prohibitions and other limitations;
any contractual restriction on our ability to pay cash dividends, including pursuant to the terms of any of our
credit agreements or other borrowing arrangements;
our business strategy;
tax considerations;
any acquisitions or potential acquisitions that we may examine;
general economic conditions; and
other factors deemed relevant by our board of directors.
The following table summarizes information as of December 31, 2022 relating to equity compensation plans of the
Company pursuant to which grants of options, restricted stock awards or other rights to acquire shares may be granted
from time to time.
Number of securities
Number of securities
to be issued upon
exercise of
Weighted-average
exercise price of
remaining available for
future issuance under
equity compensation
Plan Category
Equity Compensation Plans Approved by
Security Holders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Equity Compensation Plans Not Approved by
Security Holders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total Equity Compensation Plans . . . . . . . . . . . . . . . . .
outstanding options, outstanding options, plans (excluding securities
reflected in column (a))
warrants and rights warrants and rights
(c)
(b)
(a)
633,984
$
18.61
—
633,984
$
—
18.61
164,565
—
164,565
On January 9, 2019, the Company’s board of directors approved a stock repurchase program which authorized the
repurchase of up to 300,000 shares of the Company’s common stock, or approximately 4.0% of its outstanding shares.
There is no expiration for the stock repurchase plan. As of December 31, 2022, 34,306 shares have been repurchased under
the plan.
41
The following table presents information regarding purchase of our common stock during the quarter ended
December 31, 2022 and the stock repurchase program approved by our Board of Directors.
Period
October 1, 2022 through October 31, 2022 . . . . . .
November 1, 2022 through November 30, 2022. .
December 1, 2022 through December 31, 2022 . .
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
265,694
265,694
265,694
42
ITEM 6. [Reserved]
ITEM 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
This discussion and analysis reflects our financial statements and other relevant statistical data, and is intended to
enhance your understanding of our financial condition and results of operations. The information in this section has been
derived from the financial statements, which appear elsewhere in this Annual Report. You should read the information in
this section in conjunction with the other business and financial information provided in this annual report.
Overview
We are a financial holding company headquartered in Jericho, New York and registered under the BHC Act. Through
our wholly owned bank subsidiary, Esquire Bank, National Association, we are a full service commercial bank dedicated
to serving the financial needs of the legal and small business communities on a national basis, as well as commercial and
retail customers in the New York metropolitan market. We offer tailored products and solutions to the legal community
and their clients as well as dynamic and flexible 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 provisions for loan losses, noninterest income and noninterest expense. Noninterest
income currently consists primarily of payment processing income, ASP fee income and customer related fees and charges.
Noninterest expense currently consists primarily of employee compensation and benefits, data processing costs, occupancy
and equipment costs 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.
Critical Accounting Policies
A summary of our accounting policies is described in Note 1 to the Consolidated Financial Statements included in
this 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 credit losses in the portfolio and the material effect that such judgments can have on the results of
operations. The determination of the appropriate level of allowance is subject to judgment and requires us to make
significant estimates of current credit risks and trends, all of which are subject to material changes. In particular, because
of a low charge off history, a significant portion of the general component of the allowance for loan losses is determined
using qualitative factors on loans with similar risk characteristics, which involve significant judgment and subjective
measurement on part of management. For loans that do not share risk characteristics, the Company evaluates the loan on
an individual basis based on various factors. Factors that may be considered are borrower delinquency trends and
nonaccrual status, probability of foreclosure or note sale, changes in the borrower’s circumstances or cash collections,
borrower’s industry, or other facts and circumstances of the loan or collateral.
If such judgments and/or assumptions prove to be incorrect, the allowance for loan losses may not cover probable
incurred losses in the loan portfolio at the date of the financial statements. In addition, various regulatory agencies, as an
integral part of the examination process, periodically review the allowance for credit losses. Such agencies may require
the Bank to recognize adjustments to the allowance based on their judgments of the information available to them at the
time of their examination. Significant additions to the allowance would materially decrease net income. Additional
information can be found in Note 1 of the Notes to the Consolidated Financial Statements.
43
Selected Financial Data
The following information is derived in part from the consolidated financial statements of Esquire Financial
Holdings, Inc.
2022
At or For the Years Ended December 31,
2019
2021
2020
(Dollars in thousands, except share and per share data)
Balance Sheet Data:
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,395,639
164,122
Cash and cash equivalents . . . . . . . . . . . . . . .
109,269
Securities available-for-sale, at fair value . . .
78,377
Securities held-to-maturity, at cost . . . . . . . .
947,295
Loans, held for investment . . . . . . . . . . . . . . .
1,228,236
Total deposits . . . . . . . . . . . . . . . . . . . . . . . . . .
158,158
Total stockholders’ equity . . . . . . . . . . . . . . .
$ 1,178,770
149,156
148,384
—
784,517
1,028,409
143,735
—
$ 798,008
61,806
146,419
—
565,369
680,620
111,062
$ 936,714
65,185
117,655
672,421
804,054
126,076
$ 38,630
1,190
37,440
6,250
31,190
14,099
548
14,647
16,873
11,797
28,670
17,167
4,549
$ 12,618
2018
$ 663,899
30,562
145,698
—
468,101
568,421
92,774
26,364
4,961
2,894
7,855
13,039
9,256
22,295
11,924
3,190
8,734
1.18
1.13
12.32
12.32
$
$
$ 36,659
2,548
34,111
1,850
$ 28,951
1,212
27,739
1,375
32,261
10,976
835
11,811
14,677
10,257
24,934
19,138
4,995
$ 14,143
2.40
2.26
17.77
17.77
$
1.70
1.65
16.18
16.18
$
1.91
1.82
14.51
14.51
Income Statement Data:
Interest income . . . . . . . . . . . . . . . . . . . . . . . . $
Interest expense . . . . . . . . . . . . . . . . . . . . . . . .
Net interest income . . . . . . . . . . . . . . . . . . . .
Provision for loan losses . . . . . . . . . . . . . . . . .
Net interest income after provision for
loan losses . . . . . . . . . . . . . . . . . . . . . . . . . . .
Payment processing income . . . . . . . . . . . . . .
Other noninterest income . . . . . . . . . . . . . . . .
Total noninterest income . . . . . . . . . . . . . . .
Employee compensation and benefits . . . . . .
Other expenses . . . . . . . . . . . . . . . . . . . . . . . . .
Total noninterest expense . . . . . . . . . . . . . . .
Net income before income taxes . . . . . . . . . .
Income tax expense . . . . . . . . . . . . . . . . . . . . .
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
60,993
1,647
59,346
3,490
55,856
21,944
2,981
24,925
25,774
16,206
41,980
38,801
10,283
28,518
Per Share Data:
Earnings per share:
Basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Book value per share(1) . . . . . . . . . . . . . . . . . .
Tangible book value per share(2). . . . . . . . . . .
3.73
3.47
19.30
19.30
$
$
$
44,531
828
43,703
6,955
36,748
20,856
168
21,024
21,741
13,323
35,064
22,708
4,783
17,925
Selected Performance Ratios:
Return on average assets . . . . . . . . . . . . . . . . .
Return on average equity . . . . . . . . . . . . . . . .
Interest rate spread . . . . . . . . . . . . . . . . . . . . .
Net interest margin . . . . . . . . . . . . . . . . . . . . .
Efficiency ratio(3) . . . . . . . . . . . . . . . . . . . . . . .
Loan to deposit ratio . . . . . . . . . . . . . . . . . . . .
Average interest earning assets to average
interest bearing liabilities . . . . . . . . . . . . . . . .
Average equity to average assets . . . . . . . . . .
2.31 %
1.77 %
1.45 %
1.93 %
1.45 %
19.44
4.85
4.99
49.82
77.13
201.47
11.89
13.42
4.40
4.49
54.17
76.28
10.69
4.34
4.47
55.04
83.63
13.95
4.56
4.86
54.30
83.07
10.12
4.56
4.73
59.34
82.35
215.72
13.22
191.12
13.61
181.71
13.83
182.23
14.37
44
2022
At or For the Years Ended December 31,
2020
2019
2021
2018
Asset Quality Ratios (Loans Held for Investment):
Allowance for loan losses to total loans . . . . . . . . . . . . . . . . . . . .
Allowance for loan losses to nonperforming loans(4) . . . . . . . . . .
Net charge-offs (recoveries) to average outstanding loans. . . . . .
Nonperforming loans to total loans(4) . . . . . . . . . . . . . . . . . . . . . . .
Nonperforming loans to total assets(4) . . . . . . . . . . . . . . . . . . . . . .
Nonperforming assets to total assets(5) . . . . . . . . . . . . . . . . . . . . . .
1.29 %
NM
0.04 %
0.00 %
0.00 %
0.00 %
1.16 %
NM
1.29 %
0.0 %
0.0 %
0.0 %
1.70 %
495 %
0.30 %
0.34 %
0.25 %
0.25 %
1.20 %
1.24 %
474 % NM
0.10 %
0.26 %
0.18 %
0.18 %
0.00 %
0.00 %
0.00 %
0.00 %
Capital Ratios (Esquire Bank):
Total capital to risk weighted assets. . . . . . . . . . . . . . . . . . . . . . . .
Tier 1 capital to risk weighted assets . . . . . . . . . . . . . . . . . . . . . . .
Tier 1 common equity to risk weighted assets . . . . . . . . . . . . . . .
Tier 1 leverage capital ratio . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
15.44 % 15.89 % 16.69 % 17.83 % 18.70 %
14.21 % 14.79 % 15.44 % 16.68 % 17.54 %
14.21 % 14.79 % 15.44 % 16.68 % 17.54 %
10.98 % 11.46 % 12.51 % 13.50 % 13.26 %
Other:
Number of offices . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Number of full-time equivalent employees . . . . . . . . . . . . . . . . . .
3
115
3
110
3
99
3
86
3
74
(1) For purposes of computing book value per share, book value equals total common stockholders’ equity divided by
total number of shares of common stock outstanding. Total common stockholders’ equity equals total stockholders’
equity, less preferred equity. Preferred equity was $0 as of the dates indicated.
(2) The Company had no intangible assets as of the dates indicated. Thus, tangible book value per share is the same as
book value per share for each of the periods indicated.
(3) See “Non-GAAP Financial Measure Reconciliation” below for the computation of the efficiency ratio.
(4) Nonperforming loans include nonaccrual loans, loans past due 90 days and still accruing interest and loans modified
under troubled debt restructurings.
(5) Nonperforming assets include nonperforming loans, other real estate owned and other foreclosed assets.
Non-GAAP Financial Measure Reconciliation
The efficiency ratio is a non-GAAP measure of expense control relative to recurring revenue. We calculate the
efficiency ratio by dividing total noninterest expenses excluding non-recurring items by the sum of total net interest income
and total noninterest income as determined under GAAP, but excluding net gains on securities from this calculation and
other non-recurring income sources, if applicable, which we refer to below as recurring revenue. We believe that this
provides one reasonable measure of recurring expenses relative to recurring revenue.
We believe that this non-GAAP financial measure provides information that is important to investors and that is useful
in understanding our financial position, results and ratios. However, this non-GAAP financial measure is supplemental
and is not a substitute for an analysis based on GAAP measures. As other companies may use different calculations for
this measure, this presentation may not be comparable to other similarly titled measures by other companies.
45
2022
2021
At December 31,
2020
(Dollars in thousands)
2019
2018
Efficiency Ratio
Net interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Noninterest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Recurring revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 59,346
24,925
$ 84,271
$ 43,703
21,024
$ 64,727
Total noninterest expense . . . . . . . . . . . . . . . . . . . . . . . .
Less: nonrecurring compensation charge . . . . . . . . . . .
Recurring noninterest expense . . . . . . . . . . . . . . . . . . .
$ 41,980
—
$ 41,980
$ 35,064
—
$ 35,064
$ 37,440 $ 34,111 $ 27,739
7,855
$ 52,087 $ 45,922 $ 35,594
11,811
14,647
$ 28,670 $ 24,934 $ 22,295
1,173
—
—
$ 28,670 $ 24,934 $ 21,122
Efficiency ratio . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
49.82 %
54.17 %
55.04 %
54.30 %
59.34 %
Discussion and Analysis of Financial Condition for the Years Ended December 31, 2022 and 2021
Assets. Our total assets were $1.4 billion at December 31, 2022, an increase of $216.9 million from $1.2 billion at
December 31, 2021. The increase was primarily due to growth in our loan portfolio, securities held-to-maturity and cash
offset by decreases in securities available-for-sale.
Loan Portfolio Analysis. At December 31, 2022, loans were $947.3 million, or 67.9% of total assets, compared to
$784.5 million, or 66.6% of total assets, at December 31, 2021. Commercial loans increased $120.0 million, or 27.8%, to
$552.1 million at December 31, 2022 from $432.1 million at December 31, 2021. Commercial real estate loans increased
$43.2 million, or 89.0%, to $91.8 million at December 31, 2022 from $48.6 million at December 31, 2021. Multifamily
loans increased $7.6 million, or 3.0%, to $262.5 million at December 31, 2022 from $254.9 million at December 31, 2021.
Consumer loans increased $7.9 million or 91.0%, to $16.6 million at December 31, 2022 from $8.7 million at
December 31, 2021. 1 – 4 family loans decreased $15.2 million, or 37.3%, to $25.6 million at December 31, 2022 from
$40.8 million at December 31, 2021. We had no construction loans as of December 31, 2022 and 2021. On April 1, 2022,
the Company finalized the sale of its legacy NFL consumer post settlement loan portfolio to a Fund in exchange for a
nonvoting economic interest in the Fund valued at $13.5 million. As of December 31, 2022, the carrying amount of our
investment in the fund, classified in Other assets, is $12.6 million as loan payoffs were received and distributed by the
Fund to its investors.
46
Loan Portfolio Composition. The following table sets forth the composition of our loan portfolio by type of loan at
the dates indicated.
Real estate:
At December 31,
2022
2021
Amount
Percent Amount
(Dollars in thousands)
Percent
Multifamily . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Commercial real estate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ..
1 – 4 family . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Construction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total real estate. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Commercial . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consumer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total loans held for investment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred loan fees and unearned premiums, net . . . . . . . . . . . . . . . . . . . . . .
Allowance for loan losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Loans held for investment, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 262,489
91,837
25,565
—
379,891
552,082
16,580
$ 948,553
(1,258)
(12,223)
$ 935,072
27.7 % $ 254,852
48,589
9.7
40,753
2.7
—
—
344,194
40.1
432,108
58.2
8,681
1.7
100.0 % $ 784,983
(466)
(9,076)
$ 775,441
32.5 %
6.1
5.2
—
43.8
55.1
1.1
100.0 %
Loans held for sale, net (included in Other assets) . . . . . . . . . . . . . . . . . . . .
$
—
$ 14,100
The following table sets forth the composition of our held for investment Litigation-Related Loan portfolio by type
of loan at the dates indicated.
December 31, 2022
December 31, 2021
Amount
Percent Amount
(Dollars in thousands)
Percent
Litigation-Related Loans:
Commercial Litigation-Related:
Working capital lines of credit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Case cost lines of credit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Term loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total Commercial Litigation-Related . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consumer Litigation-Related:
Post-settlement consumer loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Structured settlement loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total Consumer Litigation-Related . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total Litigation-Related Loans. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 254,960
130,290
79,425
464,675
2,653
49
2,702
$ 467,377
54.5 % $ 210,148
127,859
27.9
45,415
17.0
383,422
99.4
54.4 %
33.1
11.8
99.3
0.6
—
0.6
2,451
116
2,567
100.0 % $ 385,989
0.7
—
0.7
100.0 %
At December 31, 2022, our Litigation-Related Loans, which include commercial and consumer lending to attorneys,
law firms and plaintiffs/claimants, totaled $467.4 million, or 49.3% of our total loan portfolio, compared to $386.0 million
at December 31, 2021. We also had Commercial Litigation-Related committed and uncommitted undrawn lines of credit
totaling $22.8 million and $311.3 million, respectively, at December 31, 2022.
Litigation-Related post-settlement consumer loans held for investment increased $202 thousand to $2.7 million as of
December 31, 2022, from $2.5 million as of December 31, 2021.
47
Loan Maturity. The following table sets forth certain information at December 31, 2022 regarding the contractual
maturity of our held for investment loan portfolio. Demand loans, loans having no stated repayment schedule or maturity,
and overdraft loans are reported as being due in one year or less. The table does not include any estimate of prepayments
that could significantly shorten the average life of all loans and may cause our actual repayment experience to differ from
that shown below.
December 31, 2022
Multifamily Real Estate 1 – 4 Family Construction Commercial Consumer
Total
Commercial
(In thousands)
Amounts due in:
One year or less . . . . . . . . . . . . . . . . $ 45,825 $
More than one to five years . . . . . . 145,703
More than five to fifteen years . . . . 66,176
More than fifteen years . . . . . . . . . .
4,785
Total . . . . . . . . . . . . . . . . . . . . . . . . . $ 262,489 $ 91,837 $ 25,565 $
42,225
44,861
408
11,000
119
1,198
4,343 $ 13,248 $
— $ 341,676 $ 3,787 $ 408,879
393,680
— 182,206 12,546
139,603
247
28,200
—
—
6,391
—
—
— $ 552,082 $ 16,580 $ 948,553
The following table sets forth fixed and adjustable-rate held for investment loans at December 31, 2022 that are
contractually due after December 31, 2023.
Fixed
Due After December 31, 2023
Adjustable
(In thousands)
Total
Real estate
Multifamily . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Commercial real estate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . .
1 – 4 family . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Construction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Commercial . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consumer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 212,532 $ 4,132
13,733
46
—
192,345
1,244
$ 328,174 $ 211,500
73,761
12,271
—
18,061
11,549
$ 216,664
87,494
12,317
—
210,406
12,793
$ 539,674
At December 31, 2022, substantially all of our $552.1 million commercial loans are variable rate and tied to prime,
comprising approximately 58% of our loan portfolio.
Nonperforming Assets
Nonperforming assets include loans that are 90 or more days past due or on nonaccrual status, including troubled debt
restructurings on nonaccrual status, and real estate and other loan collateral acquired through foreclosure and repossession.
Loans 90 days or greater past due may remain on an accrual basis if adequately collateralized and in the process of
collection. At December 31, 2022 and 2021, we did not have any accruing loans past due 90 days or greater.
Real estate that we acquire as a result of foreclosure or by deed-in-lieu of foreclosure is classified as foreclosed real
estate until it is sold. When property is acquired, it is initially recorded at the fair value less costs to sell at the date of
foreclosure, establishing a new cost basis. Holding costs and declines in fair value after acquisition of the property result
in charges against income. At December 31, 2022 and 2021, we have not had any foreclosed assets.
Troubled debt restructurings include loans for economic or legal reasons related to the borrower’s financial
difficulties, for which we grant a concession to the borrower that we would not consider otherwise. Troubled debt
restructurings are separately identified for impairment disclosures and are measured at the present value of estimated future
cash flows using the loan’s effective rate at inception. If a troubled debt restructuring is considered to be a collateral
dependent loan, the loan is reported, net, at the fair value of the collateral. For troubled debt restructurings that subsequently
default, we determine the amount of reserve in accordance with the accounting policy for the allowance for loan losses.
48
The following table sets forth information regarding our nonperforming assets at the dates indicated.
At December 31,
2022
2021
(Dollars in thousands)
Nonaccrual loans:
Multifamily . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Commercial real estate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . .
1 – 4 family . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Construction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Commercial . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consumer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total nonaccrual loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other real estate owned . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Loans past due 90 days and still accruing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Troubled debt restructurings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total nonperforming assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
$
—
—
—
—
—
4
4
—
—
—
4
$
$
—
—
—
—
—
6
6
—
—
—
6
Total loans held for investment(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Allowance for loan losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total nonaccrual loans to total loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total nonperforming assets to total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Allowance for loan losses to nonaccrual loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Allowance for loan losses to nonperforming loans. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Allowance for loan losses to total loans at end of the period(1) . . . . . . . . . . . . . . . . . . . . . .
947,295
$
$ 1,395,639
12,223
$
784,517
$
$ 1,178,770
9,076
$
0.00 %
0.00 %
NM
NM
1.29 %
0.00 %
0.00 %
NM
NM
1.16 %
(1) Loans are presented before the allowance for loan losses and include net deferred loan fees and unearned premiums.
Allowance for Loan Losses
Please see “— Critical Accounting Policies — Allowance for Loan Losses” for additional discussion of our allowance
policy.
The allowance for loan losses is maintained at levels considered adequate by management to provide for probable
loan losses inherent in the loan portfolio as of the Consolidated Statements of Financial Condition reporting dates. The
allowance for loan losses is based on management’s assessment of various factors affecting the loan portfolio, including
portfolio composition, delinquent and nonaccrual loans, national and local business conditions and loss experience and an
overall evaluation of the quality of the underlying collateral.
49
The following table sets forth activity in our allowance for loan losses for the periods indicated.
For the Years Ended December 31,
2020
2021
2022
(In thousands)
Allowance at beginning of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Provision for loan losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
9,076 $ 11,402
6,955
3,490
$
6,989
6,250
Charge-offs:
Multifamily . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Commercial real estate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . .
1 – 4 family . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Construction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Commercial . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consumer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total charge-offs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Recoveries:
Multifamily . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Commercial real estate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . .
1 – 4 family . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Construction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Commercial . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consumer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total recoveries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Allowance at end of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
178
—
—
—
64
150
392
17
—
—
—
32
—
49
$ 12,223 $
—
—
—
—
111
9,170
9,281
—
—
—
—
—
—
—
9,076
—
—
—
—
2
1,835
1,837
—
—
—
—
—
—
—
$ 11,402
The following table presents average loans and loan loss experience for the periods indicated.
For the Years Ended December 31,
2022
Net
Net
Charge-offs
to Average
Average
Loans (1)
Charge-offs Loans
2021
Average
Net
Loans (1) Charge-offs Loans
Net
Charge-offs
to Average
Multifamily . . . . . . . . . . . . . . . . . . . . . . $ 260,291
71,055
Commercial real estate . . . . . . . . . . . . .
32,532
1 – 4 family . . . . . . . . . . . . . . . . . . . . . .
Construction . . . . . . . . . . . . . . . . . . . . .
—
470,373
Commercial . . . . . . . . . . . . . . . . . . . . . .
10,851
Consumer . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . $ 845,102
$
$
161
—
—
—
32
150
343
(1) Excludes net deferred loan fees and unearned premiums.
(Dollars in thousands)
0.06 % $ 208,363 $
—
—
—
0.01
1.38
0.04 % $ 718,450 $
52,155
44,733
—
384,501
28,698
—
—
—
—
111
9,170
9,281
— %
—
—
—
0.03
31.95
1.29 %
Net charge-offs to average outstanding loans decreased to 0.04% for the year ended December 31, 2022 as compared
to 1.29% in 2021, primarily due to the reclassification of the NFL consumer post settlement loan portfolio in 2021 from
held for investment to held for sale, which resulted in a $9.0 million charge-off. On April 1, 2022, the Company finalized
the sale of its legacy NFL consumer post settlement loan portfolio to a Fund in exchange for a nonvoting economic interest
50
in the Fund valued at $13.5 million. As of December 31, 2022, the carrying amount of our investment in the fund is $12.6
million as loans payoffs were received and distributed by the Fund to its investors.
Allocation of Allowance for Loan Losses. The following tables set forth the allowance for loan losses allocated by
loan category and the percent of the allowance in each category to the total allocated allowance at the dates indicated. The
allowance for loan losses allocated to each category is not necessarily indicative of future losses in any particular category
and does not restrict the use of the allowance to absorb losses in other categories.
Allowance
for Loan
Losses
Multifamily . . . . . . . . . . . . . . $ 2,017
1,022
Commercial real estate . . . . .
192
1 – 4 family . . . . . . . . . . . . . .
—
Construction . . . . . . . . . . . . .
8,645
Commercial . . . . . . . . . . . . . .
347
Consumer . . . . . . . . . . . . . . .
Total allocated allowance . $ 12,223
At December 31,
2022
Percent of Percent of
Allowance
for Loan
Losses to
Total
Allowance
Loans in
Each
Category
to Total
Loans
(Dollars in thousands)
27.7 % $ 1,789
552
9.7
285
2.7
—
—
6,319
58.2
131
1.7
100.0 % 100.0 % $ 9,076
16.5 %
8.4
1.6
—
70.7
2.8
2021
Allowance
for Loan
Allowance Losses to
for Loan
Losses
Percent of Percent of
Loans in
Each
Category
to Total
Loans
Total
Allowance
19.7 %
6.1
3.2
—
69.6
1.4
100.0 %
32.5 %
6.1
5.2
—
55.1
1.1
100.0 %
Loans rated special mention decreased $11.1 million to $13.7 million as of December 31, 2022 from $24.8 million as
of December 31, 2021, the balance was driven by our commercial, CRE, multifamily and consumer loan portfolios. Loans
rated substandard decreased $3.6 million to $721 thousand as of December 31, 2022, from $4.3 million at December 31,
2021. Our special mention and substandard loans as a percentage of loans was 1.4% and 0.1% as of December 31, 2022,
respectively and 3.2% and 0.5% as of December 31, 2021, respectively. The allowance for loan losses as a percentage of
loans was 1.29% and 1.16% as of December 31, 2022 and 2021, respectively. The increase in the allowance as a percentage
of loans was general reserve driven considering loan growth and the qualitative factors associated with the current
uncertain economic environment.
Although we believe that we use the best information available to establish the allowance for loan losses, future
adjustments to the allowance for loan losses may be necessary and our results of operations could be adversely affected if
circumstances differ substantially from the assumptions used in making the determinations. Furthermore, while we believe
we have established our allowance for loan losses in conformity with generally accepted accounting principles in the
United States of America, there can be no assurance that regulators, in reviewing our loan portfolio, will not require us to
increase our allowance for loan losses. In addition, because future events affecting borrowers and collateral cannot be
predicted with certainty, there can be no assurance that the existing allowance for loan losses is adequate or that increases
will not be necessary should the quality of any loans deteriorate as a result of the factors discussed above. Any material
increase in the allowance for loan losses may adversely affect our financial condition and results of operations.
Payment Processing Credit Risk
From a payment processing perspective, we continuously evaluate credit exposure, primarily defined as merchant
returns and chargebacks, by merchant industry type and category. We have also assessed the level and adequacy of our
ISO and merchant reserves held on deposit at Esquire Bank. Currently, based on our assessments, we have not identified
any elevated credit risk and our returns and chargeback ratios are within normal levels and commensurate to the merchant
portfolio risk profile.
51
Debt Securities Portfolio
At December 31, 2022 and 2021, all debt securities available-for-sale were carried at fair value and we had no
investments in a single company or entity, other than government and government agency securities, which had an
aggregate book value in excess of 10% of our equity. Securities available-for-sale totaled $109.3 million at December 31,
2022, as compared to $148.4 million at December 31, 2021. Commencing in the first quarter of 2022, we invested a portion
of our excess liquidity in held-to-maturity securities, totaling $78.4 million at December 31, 2022.
We review 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), we consider 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 we
have 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 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. We evaluate securities for OTTI
at least on a quarterly basis, and more frequently when economic or market conditions warrant such an evaluation.
At December 31, 2022 and December 31, 2021, securities in unrealized loss positions were issuances from
government sponsored entities. The decline in fair value is attributable to changes in interest rates, not credit quality and
because we do not have the intent to sell the securities and it is likely that we will not be required to sell the securities
before their anticipated recovery, we do not consider the securities to be other-than-temporarily impaired at December 31,
2022 and 2021.
No impairment charges were recorded for the years ended December 31, 2022, 2021 and 2020.
52
Portfolio Maturities and Yields. The composition and maturities of the investment securities portfolio at
December 31, 2022, are summarized in the following table. Maturities are based on the final contractual payment dates
and do not reflect the impact of prepayments or early redemptions that may occur. No tax-equivalent yield adjustments
have been made as we have no tax free interest earning assets.
At December 31, 2022
One Year or Less
Weighted
More Than One Year More Than Five Years
Through Ten Years
Weighted
through Five Years
Weighted
Amortized Average
Cost
Yield
Amortized Average
Yield
Cost
Amortized Average
Yield
Cost
(Dollars in thousands)
More Than Ten Years
Total
Weighted
Amortized Average
Cost
Yield
Weighted
Amortized Average
Cost
Yield
Securities
available-for-sale:
Mortgage backed
securities-agency . . $
Collateralized
mortgage
obligations-agency .
Total securities
available-for-sale . . $
Securities held-to-
maturity:
Collateralized
mortgage
obligations-agency . $
Total securities
held-to-maturity . . . $
Deposits
—
— % $
—
— % $ 6,425
2.88 % $ 105,020
1.63 % $ 111,445
1.71 %
—
—
—
—
2,211
2.27
16,464
1.91
18,675
1.95
—
— % $
—
— % $ 8,636
2.73 % $ 121,484
1.67 % $ 130,120
1.74 %
—
— % $
—
— % $ —
— % $ 78,377
2.88 % $ 78,377
2.88 %
—
— % $
—
— % $ —
— % $ 78,377
2.88 % $ 78,377
2.88 %
Total deposits increased $199.8 million, or 19.4%, to $1.2 billion at December 31, 2022 from $1.0 billion at
December 31, 2021. We continue to focus on the acquisition and expansion of core deposit relationships, which we define
as all deposits except for certificates of deposit. Core deposits totaled $1.2 billion at December 31, 2022, or 98.4% of total
deposits at that date.
The following tables set forth the distribution of average deposits by account type at the dates indicated.
For the Years Ended December 31,
2022
Average
Balance
Percent
Average
Cost
Average
Balance
(Dollars in thousands)
2021
Average
Percent
Cost
Demand (noninterest bearing) . . . . . . . . . . . . . . .
Savings, NOW and Money Market . . . . . . . . . . .
Time . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
485,277
572,498
17,775
$ 1,075,550
45.12 % 0.00 % $ 415,662
439,718
53.23
11,152
1.65
0.26
0.87
47.97 % 0.00 %
50.74
1.29
0.17
0.71
100.00 % 0.15 % $ 866,532 100.00 % 0.10 %
As of December 31, 2022, the aggregate amount of uninsured deposits (deposits in amounts greater than or equal to
$250,000) was $310.4 million, or 25.3%, of our total Bank deposits of $1.2 billion, excluding $10.5 million of the
Company’s deposits held by the Bank. As of December 31, 2021, the aggregate amount of uninsured deposits was $254.9
million, or 24.8%, of our total Bank deposits of $1.0 billion, excluding $662 thousand of the Company’s deposits held by
the Bank. As of December 31, 2022, the Company had approximately $564.0 million of law firm escrow (or trust) deposits
with the majority of these law firms also having commercial lending relationship with the Bank. Law firm escrow accounts
as well as other fiduciary deposit accounts are for the benefit of the law firm’s customers (or claimants) and are titled in a
manner to ensure that the maximum amount of FDIC insurance coverage passes through the account to the beneficial
53
owner of the funds held in the account. Therefore, these law firm escrow accounts carry FDIC insurance at the claimant
settlement level, not at the deposit account level. The FDIC insured and uninsured deposited balances reflect
management’s determination of settlement claims deposited as of period end. In addition, as of December 31, 2022, the
aggregate amount of our uninsured certificates of deposit was $554 thousand. We have no deposits that are uninsured for
any reason other than being in excess of the maximum amount for federal deposit insurance. The following table sets forth
the maturity of the uninsured certificates of deposit as of December 31, 2022.
Maturing period:
Three months or less . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Over three months through six months . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Over six months through twelve months . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Over twelve months . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
290
—
264
—
554
At December 31, 2022
(In thousands)
Borrowings
At December 31, 2022, we had the ability to borrow a total of $149.4 million from the FHLB of New York. We also
had a borrowing capacity with the FRB of New York discount window of $36.1 million. At December 31, 2022, we also
had $67.5 million in aggregate unsecured lines of credit with unaffiliated correspondent banks. No amounts were
outstanding on any of the aforementioned lines as of December 31, 2022.
Stockholders’ Equity
Total stockholders’ equity increased $14.4 million, or 10.0%, to $158.2 million at December 31, 2022, from
$143.7 million at December 31, 2021. The increase for the year ended December 31, 2022 was primarily due to net income
of $28.5 million and amortization of share-based compensation of $2.4 million, partially offset by other comprehensive
losses of $14.3 million and dividends declared to common stockholders of $2.3 million.
54
Average Balance Sheets and Related Yields and Rates
The following tables present average balance sheet information, interest income, interest expense and the
corresponding average yields earned and rates paid for the years ended December 31, 2022, 2021 and 2020. The average
balances are daily averages and, for loans, include both performing and nonperforming balances. Interest income on loans
includes the effects of discount accretion and net deferred loan origination costs accounted for as yield adjustments. No
tax-equivalent adjustments have been made as we have no tax exempt investments.
2022
For the Years Ended December 31,
2021
2020
Average
Balance
Interest Yield/Cost
Average Average
Balance
Average Average
Interest Yield/Cost
Balance
Average
Interest Yield/Cost
(Dollars in thousands)
INTEREST EARNING
ASSETS
Loans held for investment . . $ 844,393 $ 54,007
Securities, includes
restricted stock . . . . . . . . . .
Securities purchased under
agreements to resell . . . . . . .
Interest earning cash and
other . . . . . . . . . . . . . . . . . .
91,206
Total interest earning assets . 1,189,373
1,574
60,993
204,501
49,273
1,251
4,161
NONINTEREST
EARNING ASSETS . . . . . .
45,004
TOTAL AVERAGE
ASSETS . . . . . . . . . . . . . . . $ 1,234,377
INTEREST BEARING
LIABILITIES
Savings, NOW, money
market deposits . . . . . . . . . . $ 572,498 $
17,775
Time deposits . . . . . . . . . . .
590,273
Total deposits . . . . . . . . . . .
Borrowings . . . . . . . . . . . . .
75
Total interest
bearing liabilities . . . . . . . . .
590,348
NONINTEREST
BEARING LIABILITIES
Demand deposits . . . . . . . . .
Other liabilities . . . . . . . . . .
Total noninterest bearing
liabilities . . . . . . . . . . . . . . .
Stockholders' equity . . . . . .
485,277
12,043
497,320
146,709
6.40 % $
717,680 $ 41,545
5.79 % $ 605,273 $ 35,588
5.88 %
2.03 %
133,958
2,174
1.62 %
126,166
2,556
2.03 %
2.54 %
51,008
619
1.21 %
7,402
94
1.27 %
1.73 %
5.13 %
70,132
972,778
193
44,531
0.28 %
4.58 %
99,069
837,910
392
38,630
0.40 %
4.61 %
37,941
30,028
$ 1,010,719
$ 867,938
1,488
155
1,643
4
0.26 % $
0.87 %
0.28 %
5.33 %
439,718 $
11,152
450,870
78
1,647
0.28 %
450,948
746
79
825
3
828
0.17 % $ 421,530 $
16,785
0.71 %
438,315
0.18 %
113
3.85 %
888
297
1,185
5
0.21 %
1.77 %
0.27 %
4.42 %
0.18 % 438,428
1,190
0.27 %
415,662
10,491
426,153
133,618
301,359
10,066
311,425
118,085
TOTAL AVG.
LIABILITIES AND
EQUITY . . . . . . . . . . . . . . . $ 1,234,377
Net interest income . . . . . . .
Net interest spread . . . . . . . .
Net interest margin . . . . . . .
$ 59,346
$ 1,010,719
$ 43,703
$ 867,938
$ 37,440
4.85 %
4.99 %
4.40 %
4.49 %
4.34 %
4.47 %
55
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.
Interest earned on:
Loans held for investment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Securities, includes restricted stock . . . . . . . . . . . . . . . . . . . . . . .
Securities purchased under agreements to resell . . . . . . . . . . . . .
Interest earning cash and other . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest paid on:
Savings, NOW, money market deposits . . . . . . . . . . . . . . . . . . . .
Time deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Borrowings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Change in net interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
$
For the Years Ended
December 31,
2022 vs. 2021
Increase
(Decrease) due to
Rate
(In thousands)
Volume
Total
Increase
(Decrease)
7,818
1,341
(22)
74
9,211
$ 4,644 $ 12,462
1,987
632
1,381
16,462
646
654
1,307
7,251
269
55
324
—
324
8,887
473
21
494
1
495
742
76
818
1
819
$ 6,756 $ 15,643
For the Years Ended
December 31,
2021 vs. 2020
Increase
(Decrease) due to
Total
Increase
(Decrease)
Volume
Rate
(In thousands)
Interest earned on:
Loans held for investment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Securities, includes restricted stock . . . . . . . . . . . . . . . . . . . . . . .
Securities purchased under agreements to resell . . . . . . . . . . . . .
Interest earning cash and other . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest paid on:
Savings, NOW, money market deposits . . . . . . . . . . . . . . . . . . . .
Time deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Borrowings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Change in net interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
$
6,515
150
529
(97)
7,097
$
(558) $
(532)
(4)
(102)
(1,196)
5,957
(382)
525
(199)
5,901
37
(78)
(41)
(1)
(42)
7,139
$
(179)
(140)
(319)
(1)
(320)
(876) $
(142)
(218)
(360)
(2)
(362)
6,263
56
Comparison of Operating Results for the Years Ended December 31, 2022 and 2021
General. Net income increased $10.6 million or 59.1%, to $28.5 million for the year ended December 31, 2022 from
$17.9 million for the year ended December 31, 2021. The increase resulted from a $15.6 million increase in net interest
income and a $3.9 million increase in noninterest income, partially offset by an increase in noninterest expense of $6.9
million.
Net Interest Income. Net interest income increased $15.6 million, or 35.8%, to $59.3 million for the year ended
December 31, 2022 from $43.7 million for the year ended December 31, 2021, due to a $16.5 million increase in interest
income, partially offset by a $819 thousand increase in interest expense.
Our net interest margin increased 50 basis points to 4.99% for the year ended December 31, 2022 from 4.49% for
the year ended December 31, 2021. The increase in net interest margin was due to a 55 basis point increase in interest
earning asset yields, offset by an increase in the cost of interest bearing liabilities of 10 basis points, primarily due to
growth in higher yielding variable rate commercial loans and increases in short-term interest rates. Growth was partially
funded by a $69.6 million, or 16.7%, increase in average noninterest bearing demand deposits to $485.3 million for the
year ended December 31, 2022 from $415.7 million for the year ended December 31, 2021.
Interest Income. Interest income increased $16.5 million, or 37.0%, to $61.0 million for the year ended
December 31, 2022 from $44.5 million for the year ended December 31, 2021 and was attributable to an increase in loan,
securities, interest earning cash and other and reverse repurchase interest income.
Loan interest income increased $12.5 million, or 30.0%, to $54.0 million for the year ended December 31, 2022 from
$41.5 million for the year ended December 31, 2021. This increase was attributable to a $137.8 million, or 23.2%, increase
in the average loan balance of our commercial and multifamily loan portfolios as well as a 61 basis point increase in loan
yields, driven primarily by our higher yielding variable rate commercial loans (tied to prime) and increases in short-term
interest rates.
Securities interest income increased $2.0 million, or 91.4%, to $4.2 million for the year ended December 31, 2022
from $2.2 million for the year ended December 31, 2021. This increase was attributable to a 41 basis point increase in
yields, driven by opportunistic investment of excess liquidity into the securities portfolio, as well as a $70.5 million, or
52.7%, increase in average securities balances at a higher rate.
Interest earning cash and other interest income increased $1.4 million, to $1.6 million for the year ended December 31,
2022 from $193 thousand for the year ended December 31, 2021. This increase was attributable to a 145 basis point
increase in yields driven by the movement in short-term interest rates.
Securities purchased under agreements to resell interest income increased $632 thousand to $1.3 million for the year
ended December 31, 2022 from $619 thousand for the year ended December 31, 2021. The movement in short-term
interest rates resulted in a 133 basis point increase in yields.
Interest Expense. Interest expense increased $819 thousand, or 98.9%, to $1.6 million for the year ended
December 31, 2022 from $828 thousand for the year ended December 31, 2021, as expense was impacted by both increases
in the volume and rate on interest bearing deposits. Interest bearing deposit rates increased a modest 10 basis points to
0.28% for the year ended December 31, 2022 from 0.18% for the year ended December 31, 2021. Our average balance of
interest bearing deposits increased $139.4 million, or 30.9%, to $590.3 million for the year ended December 31, 2022 from
$450.9 million for the year ended December 31, 2021 attributable primarily to litigation related escrow deposit growth.
Provision for Loan Losses. Our provision for loan losses was $3.5 million for the year ended December 31, 2022
compared to $7.0 million for the year ended December 31, 2021. This decrease was due to the charge recognized in 2021
on our legacy NFL consumer post settlement loan portfolio. The 2022 provision was general reserve driven considering
loan growth and qualitative factors associated with the current uncertain economic environment.
57
Noninterest Income. Noninterest income information is as follows:
For the Years Ended
December 31,
Change
2022
2021
Amount Percent
(Dollars in thousands)
Payment processing fees:
Payment processing income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
ACH income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total payment processing fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 21,101
843
21,944
$ 20,040 $ 1,061
27
1,088
816
20,856
5.3 %
3.3
5.2
Customer related fees, service charges and other:
Administrative service income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ..
Gain (loss) on loans held for sale . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total customer related fees, service charges and other . . . . . . . . . . . . . .
Total noninterest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2,534
88
359
2,981
$ 24,925
29
(295)
434
168
2,505
383
(75)
2,813
$ 21,024 $ 3,901
8,637.9
(129.8)
(17.3)
1,674.4
18.6 %
Payment processing income increased due to the expansion of our sales channels through ISOs, merchants and
additional fee allocation arrangements, with annual volumes increasing 18.1% to $28.0 billion for 2022 compared to $23.7
billion for 2021. Customer related fees and service charges increased due to increases in administrative service income
which was positively impacted by movements in short-term interest rates. These administrative service fees are impacted
by the volume of off-balance sheet funds, the duration of these funds and short-term interest rates.
Noninterest Expense. Noninterest expense information is as follows:
Noninterest expense:
Employee compensation and benefits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Occupancy and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Professional and consulting services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
FDIC and regulatory assessments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Advertising and marketing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Travel and business relations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Data processing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other operating expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total noninterest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
For the Years Ended
December 31,
Change
2022
2021
Amount Percent
(Dollars in thousands)
$ 25,774
3,236
3,376
558
1,462
566
4,222
2,786
$ 41,980
$ 21,741 $ 4,033
428
454
111
288
239
551
812
$ 35,064 $ 6,916
2,808
2,922
447
1,174
327
3,671
1,974
18.6 %
15.2
15.5
24.8
24.5
73.1
15.0
41.1
19.7 %
Employee compensation and benefits costs increased due to increases in staff and officer level employees to support
growth, continued investment in digital platforms and related sales/marketing divisions, and the impact of salary, bonus
and stock-based compensation increases. Consulting service costs decreased, partially offsetting the increase in employee
compensation and benefits as previously contracted consultants were hired, primarily in our technology development and
digital marketing departments. Professional services costs increased due to continued business development and
administration primarily related to our CECL implementation and the NFL consumer loan transaction. 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. Advertising and marketing costs increased as we continued to grow our digital marketing platform and
expand our thought leadership in our national verticals. Hiring related costs increased as we continue to invest in our
future. Travel and business relations costs increased as we continued to re-engage in our traditional high touch marketing
and sales efforts on a national basis to complement our digital marketing efforts.
58
Income Tax Expense. We recorded income tax expense of $10.3 million for the year ended December 31, 2022,
reflecting an effective tax rate of 26.5%, compared to $4.8 million, or an effective tax rate of 21.1%, for the year ended
December 31, 2021. The increase represents a return to a historically normalized tax rate as certain discrete tax benefits
related to share-based compensation were recognized in the fourth quarter of 2021, driving a decrease in the 2021 tax rate.
Comparison of Operating Results for the Years Ended December 31, 2021 and 2020
General. Net income increased $5.3 million or 42.1%, to $17.9 million for the year ended December 31, 2021 from
$12.6 million for the year ended December 31, 2020. The increase resulted from a $6.4 million increase in noninterest
income and a $6.3 million increase in net interest income, partially offset by an increase in noninterest expense of $6.4
million.
Net Interest Income. Net interest income increased $6.3 million, or 16.7%, to $43.7 million for the year ended
December 31, 2021 from $37.4 million for the year ended December 31, 2020, due to a $5.9 million net increase in interest
income and a $362 thousand decrease in interest expense.
Our net interest margin increased 2 basis points to 4.49% for the year ended December 31, 2021 from 4.47% for
the year ended December 31, 2020. The increase in net interest margin was due to a 9 basis point decrease in the cost of
interest bearing deposits, offset by the decrease in interest earning asset yields of 3 basis points, primarily due to the
historically low interest rate environment. Our asset and liability management model allows us to maintain our net interest
margin at this level as the growth in our interest earning assets was primarily funded by a $114.3 million, or 37.9%,
increase in average noninterest bearing demand deposits to $415.7 million for the year ended December 31, 2021 from
$301.4 million for the year ended December 31, 2020.
Interest Income. Interest income increased $5.9 million or 15.3%, to $44.5 million for the year ended December 31,
2021 from $38.6 million for the year ended December 31, 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.
Loan interest income increased $6.0 million, or 16.7%, to $41.5 million for the year ended December 31, 2021 from
$35.6 million for the year ended December 31, 2020. This increase was attributable to a $112.4 million, or 18.6%, increase
in the average loan balance from our litigation-related and multifamily loan portfolios offset by a 9 basis point decrease in
loan yields. The decrease in loan yields is primarily due to the impact of the historically low interest rate environment and
its effect on our real estate loan portfolio pricing. The impact of the decline in loan yields on interest income was primarily
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 $382 thousand, or 14.9%, to $2.2 million for the year ended December 31, 2021
from $2.6 million for the year ended December 31, 2020. This decrease was attributable to a 41 basis point decrease in
yields, driven by accelerated prepayments due to the current interest rate environment, offset by a $7.8 million, or 6.2%,
increase in average securities balances at a lower rate.
Securities purchased under agreements to resell interest income increased $525 thousand to $619 thousand for the
year ended December 31, 2021 from $94 thousand for the year ended December 31, 2020 as this program commenced in
the fourth quarter of 2020.
Interest earning cash and other interest income decreased $199 thousand, or 50.8%, to $193 thousand for the year
ended December 31, 2021 from $392 thousand for the year ended December 31, 2020. This decrease was attributable to
a 12 basis point decrease in yields driven by the current interest rate environment as well as a $28.9 million, or 29.2%,
decrease in average cash balance primarily due to the investment of cash into higher yielding loans.
Interest Expense. Interest expense decreased $362 thousand, or 30.4%, to $828 thousand for the year ended
December 31, 2021 from $1.2 million for the year ended December 31, 2020, primarily attributable to rate reductions on
deposits. Interest rates we paid on interest bearing deposits decreased 9 basis points to 0.18% for the year ended December
31, 2021 from 0.27% for the year ended December 31, 2020. Our average balance of interest bearing deposits increased
59
$12.6 million, or 2.9%, to $450.9 million for the year ended December 31, 2021 from $438.3 million for the year ended
December 31, 2020 attributable primarily to litigation related deposit growth.
Provision for Loan Losses. Our provision for loan losses was $7.0 million for the year ended December 31, 2021
compared to $6.3 million for the year ended December 31, 2020. The 2021 provision included approximately $5.1 million
for the NFL portfolio, which was reclassified to held for sale in the third quarter. The remaining provision of approximately
$1.9 million was primarily related to growth experienced in the loan portfolio.
Noninterest Income. Noninterest income information is as follows:
For the Years Ended
December 31,
Change
2021
2020
Amount Percent
(Dollars in thousands)
Payment processing fees:
Payment processing income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
ACH income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 20,040
816
$ 13,403 $ 6,637
120
696
49.5 %
17.2
Customer related fees and service charges:
Administrative service income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Loss on loans held for sale . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total noninterest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
29
434
(295)
$ 21,024
183
365
—
(154)
69
(295)
$ 14,647 $ 6,377
(84.2)
18.9
NA
43.5 %
Payment processing income increased due to the expansion of our sales channels through ISOs, merchants and
additional fee allocation arrangements, with annual volumes increasing 59.4% to $23.7 billion for 2021 compared to $14.8
billion for 2020. Customer related fees and service charges have decreased due to decreases in administrative service
income due to reductions in short-term rates offset by an increase in off balance sheet funds. Our off balance sheet funds
increased $157.3 million, or 41.4%, to $537.5 million as of December 31, 2021 as compared to $380.2 million as of
December 31, 2020. These administrative service fees are impacted by the volume of off-balance sheet funds, the duration
of these funds and short-term interest rates.
Noninterest Expense. Noninterest expense information is as follows:
Noninterest expense:
Employee compensation and benefits . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Occupancy and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Professional and consulting services . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
FDIC and regulatory assessments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Advertising and marketing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Travel and business relations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. .
Data processing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other operating expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total noninterest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
For the Years Ended
December 31,
Change
2021
2020
Amount Percent
(Dollars in thousands)
$ 21,741
2,808
2,922
447
1,174
327
3,671
1,974
$ 35,064
$ 16,873 $ 4,868
386
(307)
72
590
117
551
117
$ 28,670 $ 6,394
2,422
3,229
375
584
210
3,120
1,857
28.9 %
15.9
(9.5)
19.2
101.0
55.7
17.7
6.3
22.3 %
Employee compensation and benefits costs increased due to increases in staff and officer level employees to primarily
support our growth, investment in digital platforms and related sales/marketing divisions, and the impact of salary, bonus
and stock-based compensation increases. Professional and consulting services costs decreased and partially offset the
increase in employee compensation and benefits as previously contracted consultants were hired, primarily in our
technology development and digital marketing departments. Advertising and marketing costs increased as we purposefully
enhanced our brand and sales channels through our new digital marketing efforts and thought leadership in our national
60
verticals. We also re-engaged in our traditional high touch marketing and sales efforts to complement our digital marketing
efforts. 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 platforms,
precautionary office cleaning costs related to COVID-19 and additional office space to support our continued growth.
Income Tax Expense. We recorded income tax expense of $4.8 million for the year ended December 31, 2021,
reflecting an effective tax rate of 21.1%, compared to $4.5 million, or an effective tax rate of 26.5%, for the year ended
December 31, 2020. The decrease in the effective tax rate is a result of certain discrete tax benefits totaling approximately
$1.4 million related to share-based compensation recognized in 2021.
Management of Market Risk
General. The principal objective of our asset and liability management function is to evaluate the interest rate risk
within the balance sheet and pursue a controlled assumption of interest rate risk while maximizing net income and
preserving adequate levels of liquidity and capital. The board of directors of our bank has oversight of our asset and liability
management function, which is managed by our Asset/Liability Management Committee. Our Asset/Liability
Management Committee meets regularly to review, among other things, the sensitivity of our assets and liabilities to
market interest rate changes, local and national market conditions and market interest rates. That group also reviews our
liquidity, capital, deposit mix, loan mix and investment positions.
As a financial institution, our primary component of market risk is interest rate volatility. Fluctuations in interest rates
will ultimately impact both the level of income and expense recorded on most of our assets and liabilities, and the fair
value of all interest earning assets and interest bearing liabilities, other than those which have a short-term to maturity.
Interest rate risk is the potential of economic losses due to future interest rate changes. These economic losses can be
reflected as a loss of future net interest income and/or a loss of current fair values. The objective is to measure the effect
on net interest income and to adjust the balance sheet to minimize the inherent risk while at the same time maximizing
income.
We manage our exposure to interest rates primarily by structuring our balance sheet in the ordinary course of business.
We do not typically enter into derivative contracts for the purpose of managing interest rate risk, but we may do 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.
61
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 twelve-month periods
beginning December 31, 2022. The tables below demonstrate that we are asset-sensitive in a rising interest rate
environment.
Changes in
Interest Rates
(Basis Points)
At December 31,
2022
Estimated
12-Months
Net Interest
Income
Change
400 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
300 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
200 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
100 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
0 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
-100 . . . . .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
-200 . . . . .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
(Dollars in thousands)
97,973 $
93,370
88,773
84,135
79,442
74,270
67,541
18,531
13,928
9,331
4,693
—
(5,172)
(11,901 )
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.
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 as of December 31, 2022.
Changes in
Interest Rates
(Basis Points)
400 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
300 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
200 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
100 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
0 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
-100 . . . . .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
-200 . . . . .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
At December 31,
2022
Economic
Value of
Equity
Change
$
(Dollars in thousands)
317,313 $
309,190
300,493
290,852
279,637
265,449
242,430
37,676
29,553
20,856
11,215
—
(14,188 )
(37,207 )
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.
62
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 December 31, 2022 and 2021, cash and cash
equivalents totaled $164.1 million and $149.2 million, respectively. As of December 31, 2022, management is not aware
of any events that are reasonably likely to have a material adverse impact on our liquidity, capital resources or operations.
In addition, management is not aware of any regulatory recommendations regarding liquidity that would have a material
adverse effect on us.
At December 31, 2022, through pledging of our securities and certain loans, we had the ability to borrow a total of
$149.4 million from the FHLB of New York and had a borrowing capacity with the FRB of New York discount window
of $36.1 million. At December 31, 2022, we also had $67.5 million in aggregated unsecured lines of credit with
unaffiliated correspondent banks. No amounts were outstanding on any of the aforementioned lines as of December 31,
2022.
We have no material commitments or demands that are likely to affect our liquidity other than set forth below. In the
event loan demand were to increase faster than expected, or any unforeseen demand or commitment were to occur, we
could access our borrowing capacity.
Esquire Bank is subject to various regulatory capital requirements administered by Office of the Comptroller of the
Currency (the “OCC”), and the Federal Deposit Insurance Corporation. At December 31, 2022 and 2021, Esquire Bank
exceeded all applicable regulatory capital requirements, and was considered “well capitalized” under regulatory guidelines.
We manage our capital to comply with our internal planning targets and regulatory capital standards administered by
the OCC and review capital levels on a monthly basis. At December 31, 2022, Esquire Bank was classified as well-
capitalized.
The following table presents our capital ratios as of the indicated dates for Esquire Bank.
Total Risk-based Capital Ratio
Bank . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Tier 1 Risk-based Capital Ratio
Bank . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Common Equity Tier 1 Capital Ratio
Bank . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Tier 1 Leverage Ratio
Bank . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
For Capital Adequacy
Purposes
Minimum Capital with
Actual
“Well Capitalized”
Conservation Buffer At December 31, 2022
10.00 %
10.50 %
15.44 %
8.00 %
8.50 %
14.21 %
6.50 %
7.00 %
14.21 %
5.00 %
4.00 %
10.98 %
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
63
leverage ratio to 8%, to be gradually increased back to 9% by 2022. The CARES Act also provides that, during the same
time period, if a qualifying community banking organization falls no more than 1% below the community bank leverage
ratio, it will have a two-quarter grace period to satisfy the community bank leverage ratio. For the current period, Esquire
Bank has elected to continue to utilize the generally applicable leverage and risk based requirements and not apply the
community bank leverage ratio.
Effects of Inflation. The impact of inflation, as it affects banks, differs substantially from the impact on non-financial
institutions. Banks have assets which are primarily monetary in nature and which tend to move with inflation. This is
especially true for banks with a high percentage of rate sensitive interest-earning assets and interest-bearing liabilities. A
bank can further reduce the impact of inflation with proper management of its rate sensitivity gap. This gap represents the
difference between interest rate sensitive assets and interest rate sensitive liabilities. The Company attempts to structure
its assets and liabilities and manages its gap to protect against substantial changes in interest rate scenarios, in order to
minimize the potential effects of inflation.
ITEM 7A. Quantitative and Qualitative Disclosures About Market Risk
The quantitative and qualitative disclosures about market risk are included under the section of this Annual Report
entitled “Item 7 — Management’s Discussion and Analysis of Financial Condition and Results of Operations —
Management of Market Risk.”
64
ITEM 8. Financial Statements and Supplementary Data
Crowe LLP
Independent Member Crowe Global
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Shareholders and the Board of Directors of
Esquire Financial Holdings, Inc.
Jericho, New York
Opinion on the Financial Statements
We have audited the accompanying consolidated statements of financial condition of Esquire Financial Holdings, Inc. (the
"Company") as of December 31, 2022 and 2021, the related consolidated statements of income, comprehensive income,
changes in stockholders’ equity, and cash flows for each of the years in the three-year period ended December 31, 2022,
and the related notes (collectively referred to as the "financial statements"). In our opinion, the financial statements present
fairly, in all material respects, the financial position of the Company as of December 31, 2022 and 2021, and the results of
its operations and its cash flows for each of the three years in the period ended December 31, 2022, in conformity with
accounting principles generally accepted in the United States of America.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion
on the Company's financial statements based on our audits. We are a public accounting firm registered with the Public
Company Accounting Oversight Board (United States) ("PCAOB") and are required to be independent with respect to the
Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and
Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement,
whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of
the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such
procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements.
Our audits also included evaluating the accounting principles used and significant estimates made by management, as well
as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for
our opinion.
Critical Audit Matter
The critical audit matter communicated below is a matter arising from the current period audit of the financial statements
that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or
disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex
judgments. The communication of the critical audit matter does not alter in any way our opinion on the financial statements,
taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the
critical audit matter or on the accounts or disclosures to which it relates.
65
Allowance For Loan Losses – Qualitative Factors
The Company identified the allowance for loan losses to be a critical accounting estimate. Refer to Note 1 to the
consolidated financial statements for the Company’s accounting policy related to the provision and allowance for loan
losses.
The Company’s allowance for loan losses consists of allowance for loan losses for loans collectively evaluated for
impairment (“general component”) and loans individually classified as impaired (“specific component”). The general
component of the allowance for loan loss begins with a calculation of historical loss experience based on actual historical
losses experienced by the Company. The historical loss experience is then supplemented for qualitative factors to arrive
at the Company’s estimate of probable incurred losses on loans collectively evaluated for impairment.
The determination of qualitative factors related to the general component of the allowance for loan and lease losses
involves significant professional judgment and the use of subjective measurement by management. Evaluating
management’s judgments in their determination of the qualitative factors required a higher degree of auditor effort and
judgment. Therefore, we considered the collective nature of the qualitative factors to be a critical audit matter due to the
subjective nature of the qualitative factors, the resulting measurement uncertainty, and because a significant portion of the
allowance for loan losses is determined through qualitative factors.
The primary procedures we performed to address this critical audit matter included:
• Testing management’s process related to the qualitative factors within the general component of the allowance
for loan losses. Procedures included (i) testing the relevance and reliability of significant data, (ii) evaluating the
reasonableness of significant assumptions including the directional consistency and the magnitude of the changes
in the qualitative factors (assumptions) compared to changes in the trends in the internal and external data; and
(iii) evaluating the overall reasonableness of the allowance for loan losses.
We have served as the Company's auditor since 2006.
New York, New York
March 27, 2023
/s/ Crowe LLP
66
ESQUIRE FINANCIAL HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(Dollars in thousands, except per share data)
ASSETS:
Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Securities purchased under agreements to resell, at cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Securities available-for-sale, at fair value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Securities held-to-maturity, at cost (fair value $69,346 at December 31, 2022) . . . . . . . . . .
Securities, restricted, at cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
December 31, December 31,
2022
2021
$ 164,122 $ 149,156
50,271
148,384
—
2,680
49,567
109,269
78,377
2,810
Loans held for investment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Less: allowance for loan losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . .
Loans, net of allowance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Premises and equipment, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accrued interest receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred tax assets, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
947,295
(12,223)
935,072
2,704
5,768
9,572
38,378
784,517
(9,076)
775,441
3,334
4,197
2,845
42,462
$ 1,395,639 $ 1,178,770
LIABILITIES AND STOCKHOLDERS’ EQUITY:
Deposits:
Demand . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Savings, NOW and money market . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Time . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 444,324 $ 409,350
599,747
19,312
1,028,409
764,354
19,558
1,228,236
Accrued expenses and other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
9,245
1,237,481
6,626
1,035,035
Commitments and contingencies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Stockholders’ equity:
Preferred stock, par value $0.01; authorized 2,000,000 shares; none issued . . . . . . . . . . . . .
Common stock, par value $0.01; authorized 15,000,000 shares; 8,238,041 and 8,123,152
shares issued, respectively; and 8,195,333 and 8,088,846 shares outstanding, respectively .
Additional paid-in capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . .
Retained earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accumulated other comprehensive loss. . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . .
Treasury stock at cost, 42,708 and 34,306 shares, respectively. . . . . . . . . . . . . . . . . . . . . . . .
Total stockholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total liabilities and stockholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
—
—
—
—
82
96,387
77,712
(15,117)
(906)
158,158
81
93,611
51,460
(850)
(567)
143,735
$ 1,395,639 $ 1,178,770
See accompanying notes to consolidated financial statements.
67
ESQUIRE FINANCIAL HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF INCOME
(Dollars in thousands, except per share data)
Interest income:
Loans held for investment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Securities, includes restricted stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Securities purchased under agreements to resell. . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest earning cash and other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . .
For the Years Ended December 31,
2020
2021
2022
$ 54,007 $ 41,545
2,174
619
193
44,531
4,161
1,251
1,574
60,993
$ 35,588
2,556
94
392
38,630
Interest expense:
Savings, NOW and money market deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Time deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Borrowings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,488
155
4
1,647
746
79
3
828
Net interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Provision for loan losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net interest income after provision for loan losses. . . . . . . . . . . . . . . . . . . . . . . . . . .
59,346
3,490
55,856
43,703
6,955
36,748
Noninterest income:
Payment processing fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Customer related fees, service charges and other . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Gain (loss) on loans held for sale . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total noninterest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . .
21,944
2,893
88
24,925
20,856
463
(295)
21,024
Noninterest expense:
Employee compensation and benefits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . .
Occupancy and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Professional and consulting services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
FDIC and regulatory assessments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Advertising and marketing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Travel and business relations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . .
Data processing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other operating expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total noninterest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . .
25,774
3,236
3,376
558
1,462
566
4,222
2,786
41,980
21,741
2,808
2,922
447
1,174
327
3,671
1,974
35,064
Net income before income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income tax expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
38,801
10,283
22,708
4,783
888
297
5
1,190
37,440
6,250
31,190
14,099
548
—
14,647
16,873
2,422
3,229
375
584
210
3,120
1,857
28,670
17,167
4,549
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 28,518 $ 17,925
$ 12,618
Earnings per share
Basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
$
3.73 $
3.47 $
2.40
2.26
$
$
1.70
1.65
See accompanying notes to consolidated financial statements.
68
ESQUIRE FINANCIAL HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Dollars in thousands)
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other comprehensive (loss) income:
Unrealized (losses) gains arising during the period on securities available-for-sale . .
Reclassification adjustment for net (losses) gains included in net income. . . . . . . . . .
Tax effect . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total other comprehensive (loss) income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total comprehensive income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . .
For the Years Ended December 31,
2021
$ 28,518 $ 17,925 $ 12,618
2020
2022
—
5,394
(19,661) (3,159)
—
901
(14,267) (2,258)
1,429
—
(407)
1,022
$ 14,251 $ 15,667 $ 13,640
See accompanying notes to consolidated financial statements.
69
ESQUIRE FINANCIAL HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
(Dollars in thousands)
Additional
other
Total
Accumulated
Preferred Common Preferred Common paid-in
capital
shares
shares
stock
stock
Retained comprehensive Treasury stockholders'
earnings (loss) income
equity
stock
Balance at January 1, 2020 . . . .
Net income . . . . . . . . . . . . . . . . .
Other comprehensive income . . .
Exercise of stock options, net of
repurchases (20,224 shares) . . . .
Restricted stock grants . . . . . . . .
Stock compensation expense . . . .
Purchase of common stock . . . . .
Balance at December 31, 2020 .
Net income . . . . . . . . . . . . . . . . .
Other comprehensive loss . . . . . .
Exercise of stock options, net of
repurchases (132,369 shares) . . .
Restricted stock grants . . . . . . . .
Stock compensation expense . . . .
Balance at December 31, 2021 .
Net income . . . . . . . . . . . . . . . . .
Other comprehensive loss . . . . . .
Exercise of stock options, net of
repurchases (11,912 shares) . . . .
Restricted stock grants, net of
forfeitures (13,750 shares) . . . . .
Stock compensation expense . . . .
Shares received related to tax
withholding . . . . . . . . . . . . . . . .
Cash dividends declared to
common stockholders
($0.28 per share) . . . . . . . . . . . .
Balance at December 31, 2022 .
— 7,652,170 $
—
—
—
—
53,868
121,750
—
(34,306)
—
—
—
—
— 7,793,482 $
—
—
—
—
193,364
102,000
—
—
—
—
— 8,088,846 $
—
—
—
—
—
39,919
—
—
74,970
—
—
(8,402)
— $
—
—
—
—
—
—
— $
—
—
—
—
—
— $
—
—
—
—
—
—
77 $ 89,682 $ 20,917 $
—
—
— 12,618
—
—
—
—
—
—
401
—
(1)
1
1,540
—
—
—
78 $ 91,622 $ 33,535 $
—
—
— 17,925
—
—
—
—
—
25
(1)
1,965
2
1
—
81 $ 93,611 $ 51,460 $
—
—
— 28,518
—
—
—
1
—
—
333
(1)
2,444
—
—
—
—
—
— $
—
—
111,062
12,618
1,022
386 $
—
1,022
—
—
—
—
1,408 $
—
(2,258)
—
—
—
(850) $
—
(14,267)
—
—
—
(567)
(567) $
—
—
—
—
—
(567) $
—
—
—
—
—
—
—
—
401
—
1,540
(567)
126,076
17,925
(2,258)
27
—
1,965
143,735
28,518
(14,267)
333
—
2,444
—
(339)
(339)
—
— 8,195,333 $
—
—
— $
—
82 $ 96,387 $ 77,712 $
— (2,266)
—
(15,117) $
—
(906) $
(2,266)
158,158
See accompanying notes to consolidated financial statements.
70
ESQUIRE FINANCIAL HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
Cash flows from operating activities:
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Depreciation and amortization of premises and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Stock compensation expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(Gain) loss on loans held for sale . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred tax expense (benefit) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net amortization (accretion):
Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Right of use asset . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Software . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Changes in other assets and liabilities:
Accrued interest receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Operating lease liability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accrued expenses and other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net cash provided by operating activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash flows from investing activities:
Net change in loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net change in securities purchased under agreements to resell . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Purchases of securities available-for-sale . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Purchases of securities held-to-maturity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Principal repayments on securities available-for-sale . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Principal repayments on securities held-to-maturity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(Purchase) redemption of securities, restricted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Payments on loans held for sale, previously classified as held for investment . . . . . . . . . . . . . . . . . . .
Purchases of premises and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Development of capitalized software . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net cash used in investing activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash flows from financing activities:
Net increase in deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Decrease in borrowings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Exercise of stock options, net of repurchases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Tax withholding payments for vested equity awards . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash dividends paid to common stockholders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Purchase of common stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net cash provided by financing activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
For the Years Ended December 31,
2020
2021
2022
$
28,518
$
17,925
$
12,618
3,490
703
2,444
(88)
(1,333)
537
(1,054)
466
1,380
(1,571)
3,184
(561)
2,682
38,797
(162,067)
704
(1,739)
(84,092)
20,761
5,610
(130)
688
(73)
(1,163)
(221,501)
199,827
(2)
333
(339)
(2,149)
—
197,670
6,955
687
1,965
295
653
776
(1,422)
534
1,014
332
322
(544)
587
30,079
(134,539)
1,455
(86,828)
—
52,164
—
14
189
(1,004)
(1,940)
(170,489)
224,355
(1)
27
—
—
—
224,381
6,250
568
1,540
—
(955)
1,079
(339)
391
665
(1,287)
(4,611)
(418)
89
15,590
(109,665)
(51,726)
(37,975)
—
67,089
—
(29)
—
(750)
(2,386)
(135,442)
123,434
(37)
401
—
—
(567)
123,231
Increase in cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
14,966
83,971
3,379
Cash and cash equivalents at beginning of the period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
149,156
65,185
61,806
Cash and cash equivalents at end of the period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 164,122
$ 149,156
$
65,185
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
1,618
8,654
$
828
5,960
$
1,202
6,246
Noncash transactions:
Contribution of loans held for sale in exchange for an equity interest in a variable interest entity . . .
Transfer from loans held for investment to held for sale. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Right of use asset obtained in exchange for lease liability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Dividends declared but not paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
13,500
—
383
117
—
14,584
—
—
—
—
624
—
See accompanying notes to consolidated financial statements.
71
ESQUIRE FINANCIAL HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2022 and 2021
(Dollars in thousands, except per share data)
NOTE 1 — Business and Summary of Significant Accounting Policies
Business
Esquire Financial Holdings, Inc. (the “Company”) is a financial holding company incorporated in Maryland and
headquartered in Jericho, New York, with one branch office in Jericho, New York and an administrative office in Boca
Raton, Florida. Its wholly-owned subsidiary, Esquire Bank, National Association (the “Bank”), is a full service commercial
bank dedicated to serving the financial needs of the legal industry and small businesses nationally, as well as commercial
and retail customers in the New York metropolitan area.
The Bank offers tailored products and solutions to the legal community and their clients as well as dynamic and
flexible payment processing solutions to small business owners. Banking products offered for businesses and consumers
include checking, savings, money market and time deposits; a wide range of commercial and consumer loans, as well as
customary banking services. These activities, primarily anchored by our legal community focus, generate a stable source
of low cost deposits and a diverse asset base to support our overall operations.
The Bank operates a payment processing platform through third party Independent Sales Organizations (“ISOs”). As
an acquiring bank, fees are charged to merchants for the settlement of credit card, debit card and ACH transactions. The
Bank’s revenue from these operational services is presented as payment processing fees on the Consolidated Statement of
Income.
The Consolidated Financial Statements include Esquire Financial Holdings, Inc. and its wholly owned subsidiary,
Esquire Bank, N.A. and are referred to as “the Company.” Intercompany transactions and balances are eliminated in
consolidation.
Risks and Uncertainties
The COVID-19 pandemic has and may continue to impact the operations and business results of the Company. The
extent to which the COVID-19 crisis may impact business activity or financial results will depend on future developments,
which are highly uncertain and cannot be predicted, including new information which may emerge concerning the severity
of the coronavirus or new variants and the actions required to contain the coronavirus or treat its impact, among others.
This uncertainty may impact the accuracy of our significant estimates, which includes the allowance for loan losses. 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 2022 Consolidated Statement of Financial Condition and Consolidated Statement of
Income.
Dividend Restriction
Banking regulations require maintaining certain capital levels and may limit the dividends paid by the bank to the
holding company or by the holding company to shareholders.
Basis of Presentation and Use of Estimates
The accounting and financial reporting policies are in conformity with U.S. generally accepted accounting principles
(“GAAP”). The preparation of financial statements requires that management make estimates and assumptions that affect
the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of income and expenses during the reporting period. Such estimates are subject to
change in the future as additional information becomes available or previously existing circumstances are modified. Actual
results could differ from those estimates.
72
ESQUIRE FINANCIAL HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2022 and 2021
(Dollars in thousands, except per share data)
Statement of Cash Flows
For purposes of the accompanying statements of cash flows, cash and cash equivalents are defined as the amounts
included in the Consolidated Statements of Financial Condition under the captions “Cash and cash equivalents”, with
contractual maturities of less than 30 days. Net cash flows are primarily reported for customer loan and deposit
transactions.
Securities Purchased Under Agreements to Resell
The Company enters into purchases of securities under agreements to resell identical securities which consist of
mortgage loans that meet the GNMA pooling qualifications. The cash advanced to the counterparty are reflected as assets
on the Statement of Financial Condition and are accounted for at cost. The Company obtains possession of securities
collateral with a market value equal to or in excess of the principal amount loaned under the resell agreement and has the
right to request additional collateral, based on its daily monitoring of the fair value of the securities. As of December 31,
2022, there is one open contract with one counterparty that is scheduled to mature within thirty days.
Debt Securities
Securities are classified as either available-for-sale or held-to-maturity at purchase. Securities where management
intends to hold to maturity are designated as held-to-maturity. All other securities are designated as available-for-sale.
Securities available-for-sale are carried at fair value and unrealized gains and losses on these securities are reported, net
of applicable taxes, as a separate component of accumulated other comprehensive (loss) income, a component of
stockholders’ equity. Securities held-to-maturity are carried at cost and gains and losses on these securities are
unrecognized.
Interest income on securities, including amortization of premiums and accretion of discounts, is recognized using the
level yield method without anticipating prepayments (except for mortgage-backed securities where prepayments are
anticipated) over the lives of the individual securities. Realized gains and losses on sales of securities are computed using
the specific identification method.
Loans
Loans that management has the intent and ability to hold for the foreseeable future until maturity or payoff are stated
at the principal amount outstanding, net of deferred loan fees and costs for originated loans and net of unamortized
premiums or discounts for purchased loans. Interest income is recognized using the level yield method. Net deferred loan
fees, origination costs, unamortized premiums or discounts are recognized in interest income over the loan term as a yield
adjustment.
Nonaccrual
Interest income on mortgage and commercial loans is discontinued at the time the loan is 90 days delinquent unless
the loan is well-secured and in process of collection. Consumer loans are typically charged-off no later than 120 days past
due. Past due status is based on the contractual terms of the loan. In all cases, loans are placed on nonaccrual or charged-
off at an earlier date if collection of principal or interest is considered doubtful. Nonaccrual loans and loans past due
90 days still on accrual include both smaller balance homogeneous loans that are collectively evaluated for impairment
and individually classified impaired loans. A loan is moved to nonaccrual status in accordance with the Company’s policy,
typically after 90 days of non-payment.
All interest accrued but not received for loans placed on nonaccrual is reversed against interest income. Interest
received on such loans is accounted for on the cash-basis or cost-recovery method, until qualifying for return to accrual.
73
ESQUIRE FINANCIAL HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2022 and 2021
(Dollars in thousands, except per share data)
Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and
future payments are reasonably assured.
Provision and Allowance for Loan Losses
The allowance for loan losses is a valuation allowance for probable incurred credit losses. The allowance for loan
losses is increased by provisions for loan losses charged to income. Losses are charged to the allowance when all or a
portion of a loan is deemed to be uncollectible. Subsequent recoveries of loans previously charged-off are credited to the
allowance for loan losses when realized. Management estimates the allowance balance required using past loan loss
experience, the nature and volume of the portfolio, information about specific borrower situations and estimated collateral
values, economic conditions and other factors. Allocations of the allowance may be made for specific loans, but the entire
allowance is available for any loan that, in management’s judgment, should be charged-off.
The allowance consists of specific and general components. The specific component relates to loans that are
individually classified as impaired when, based on current information and events, it is probable that the Company will be
unable to collect all amounts due according to the contractual terms of the loan agreement.
Factors considered by management in determining impairment include payment status, collateral value, and the
probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment
delays and payment shortfalls generally are not classified as impaired. Management determines the significance of
payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances
surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior
payment record, and the amount of the shortfall in relation to the principal and interest owed.
All loans, except for smaller dollar consumer loans, are individually evaluated for impairment. If a loan is impaired,
a portion of the allowance is allocated as a specific allowance. The measurement of an impaired loan is based on (i) the
present value of expected future cash flows discounted at the loan’s effective interest rate, (ii) the loan’s observable market
price or (iii) the fair value of the collateral if the loan is collateral dependent.
Loans for which the terms have been modified resulting in a concession, and for which the borrower is experiencing
financial difficulties, are considered troubled debt restructurings and classified as impaired. Troubled debt restructurings
are separately identified for impairment disclosures and are measured at the present value of estimated future cash flows
using the loan’s effective rate at inception. If a troubled debt restructuring is considered to be a collateral dependent loan,
the loan is reported, net, at the fair value of the collateral. For troubled debt restructurings that subsequently default, the
Company determines the amount of reserve in accordance with the accounting policy for the allowance for loan losses.
The general component is based on historical loss experience adjusted for current factors. The historical loss
experience is determined by portfolio segment and is based on the actual loss history experienced by the Company. This
actual loss experience is supplemented with qualitative factors based on the risks present for each portfolio segment. These
qualitative factors include consideration of the following: levels of and trends in delinquencies and impaired loans; levels
of and trends in charge-offs and recoveries; trends in volume and terms of loans; effects of any changes in risk selection
and underwriting standards; other changes in lending policies, procedures, and practices; experience, ability, and depth of
lending management and other relevant staff; national and local economic trends and conditions; industry conditions; and
effects of changes in credit concentrations. The determination of the qualitative factors involves significant judgment and
subjective measurement.
Management has identified the following loan segments: Commercial Real Estate, Multifamily, Construction,
Commercial, 1 – 4 Family and Consumer. The risks associated with a concentration in real estate loans include potential
losses from fluctuating values of land and improved properties. Commercial Real Estate and Multifamily loans are
expected to be repaid from the cash flow of the underlying property so the collective amount of rents must be sufficient to
cover all operating expenses, property management and maintenance, taxes and debt service. Increases in vacancy rates,
74
ESQUIRE FINANCIAL HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2022 and 2021
(Dollars in thousands, except per share data)
interest rates or other changes in general economic conditions can all have an impact on the borrower and their ability to
repay the loan. Construction loans are considered riskier than commercial financing on improved and established
commercial real estate. The risk of potential loss increases if the original cost estimates or time to complete are significantly
off. The remainder of the loan portfolio is comprised of commercial and consumer loans. The primary risks associated
with the commercial loans is the cash flow of the business, the experience and quality of the borrowers’ management, the
business climate, and the impact of economic factors. The primary risks associated with 1 – 4 Family and Consumer loans
relate to the borrower, such as the risk of a borrower’s unemployment as a result of deteriorating economic conditions or
the amount and nature of a borrower’s other existing indebtedness, and the value of the collateral securing the loan if the
Bank must take possession of the collateral. Post-settlement consumer loans are also subject to unforeseen rulings or
administrative legal anomalies that may eliminate or greatly reduce a borrowers settlement amount.
Premises and Equipment
Premises and equipment, including leasehold improvements, are stated at cost, net of accumulated depreciation and
amortization. Equipment, which includes furniture and fixtures, are depreciated over the assets’ estimated useful lives
using the straight-line method (three to ten years). Amortization of leasehold improvements is recognized on a straight-
line basis over the lesser of the expected lease term or the estimated useful life of the asset. Costs incurred to improve or
extend the life of existing assets are capitalized. Repairs and maintenance are charged to expense.
Internal-Use Software
Implementation costs with respect to internal-use software is capitalized once the project stage is complete. Project
stage includes determining the performance requirements, strategic decisions related to allocation of resources,
determining the technology needed to achieve performance requirements, selection of vendors, and other items. Costs
during the project stage are expensed as incurred. Once the internal-use software is placed into operation, capitalized
software costs are amortized using the straight-line method over 3-5 years.
Securities, Restricted, at Cost
The Bank is a member of the FHLB system and the FRB of New York, and Atlantic Central Banker’s Bank where
members are required to own a certain number of shares of stock in order to conduct business with these institutions.
FHLB stock holdings are based on the level of MRA, borrowings and other factors while FRB stock holding levels are
capital based. These equity investments are carried at cost and classified as restricted securities which are periodically
evaluated for impairment based on the ultimate recovery of par value. Dividends from these equity investments are
reported as interest income on the Consolidated Statements of Income.
Loan Commitments
The Company enters into commitments to extend credit to customers to meet their financing needs which are in the
form of lines of credit, letters of credit, and loan funding commitments. The face amount of these financial instruments
represents the exposure to loss before considering customer collateral or ability to repay. Such financial instruments are
recorded on balance sheet at cost when funded and presented as loans on the Consolidated Statements of Financial
Condition.
Equity Investment Without Readily Determinable Fair Value
In April 2018, the Company purchased a 4.95% interest in Litify, Inc., a technology solution to automate and manage
a law firm’s business and cases, for a cost of $2,410. As Litify, Inc. is a private company, the investment does not have a
readily determinable fair value and management has elected to determine the recorded carrying amount based on its cost
adjusted for observable price changes less impairment. At December 31, 2022, the investment’s carrying amount was
$2,410. Based on our evaluation, we noted no significant adverse changes which would indicate the asset is impaired or
75
ESQUIRE FINANCIAL HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2022 and 2021
(Dollars in thousands, except per share data)
any observable price changes as of December 31, 2022. The investment is presented within other assets on the
Consolidated Statements of Financial Condition.
Investment in Variable Interest Entity
On April 1, 2022, the Company sold its legacy NFL consumer post-settlement loan portfolio to a variable interest
entity (“VIE”) in exchange for a nonvoting interest valued at $13,500 where the Company will remain as servicer of the
loan portfolio at the discretion of the VIE manager. The Company’s investment is considered a significant variable interest,
but it does not have the power to direct the activities that most significantly impact the VIE’s economic performance.
Therefore, the Company is not considered the primary beneficiary of this VIE and does not consolidate the entity in the
Company’s financial statements. The Company’s maximum exposure to loss is limited to the carrying amount of its
investment and accounted for under the equity method which is presented within other assets on the Consolidated
Statement of Financial Condition. As of December 31, 2022, the investment’s carrying amount was $12,636.
Transfers of Financial Assets
Transfers of financial assets are accounted for as sales, when control over the assets has been relinquished. Control
over transferred assets is deemed to be surrendered when the assets have been isolated from the Company, the transferee
obtains the right (free of conditions that constrain it from taking advantage of that right) to pledge or exchange the
transferred assets, and the Company does not maintain effective control over the transferred assets through an agreement
to repurchase them before their maturity.
Income Taxes
Income taxes are provided for under the asset and liability method. Deferred tax assets and liabilities are recognized
for the future tax consequences attributable to differences between the financial statement carrying amounts of existing
assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted rates
expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or
settled. The effect on deferred taxes of a change in tax rates is recognized in income in the period the change occurs.
Deferred tax assets are reduced, through a valuation allowance, if necessary, by the amount of such benefits that are not
expected to be realized based on current available evidence.
A tax position is recognized as a benefit only if it is “more likely than not” that the tax position would be sustained in
a tax examination, with a tax examination being presumed to occur. The amount recognized is the largest amount of tax
benefit that is greater than 50% likely of being realized on examination. For tax positions not meeting the “more likely
than not” test, no tax benefit is recorded. The Company recognizes interest and/or penalties related to income tax matters
in income tax expense on the Consolidated Statements of Income.
Earnings per Share
Basic earnings per share is net earnings allocated to stock divided by the weighted average number of shares
outstanding during the period. Any outstanding preferred shares are considered participating securities for computation of
basic earnings per share. Diluted earnings per share include the dilutive effect of additional potential shares issuable under
stock options and restricted stock awards.
Share-Based Payment
Share based payment guidance requires the Company to recognize the grant-date fair value of stock options and other
equity-based compensation issued to employees and non-employees in the Consolidated Statements of Income. A Black-
Scholes model is utilized to estimate the fair value of stock options. Compensation cost for stock options are recognized
76
ESQUIRE FINANCIAL HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2022 and 2021
(Dollars in thousands, except per share data)
as noninterest expense in the Consolidated Statement of Income on a straight-line basis over the vesting period of each
stock option grant.
Compensation expense for restricted stock awards is based on the fair value of the award on the measurement date,
which is the date of grant, and the expense is recognized ratably over the service period of the award.
At December 31, 2022, no equity-based compensation had vesting conditions linked to the performance of the
Company or market conditions.
Segment Reporting
The Company’s operations are exclusively in the financial services industry and include the provision of traditional
banking services. Management evaluates the performance of the Company based on only one business segment, that of
community banking. In the opinion of management, the Company does not have any other reportable segments as defined
by Accounting Standards Codification (“ASC”) Topic 280, “Disclosure about Segments of an Enterprise and Related
Information.”
Reclassifications
Some items in the prior year financial statements were reclassified to conform to the current presentation. The
reclassifications are immaterial and had no effect on prior year net income or stockholders’ equity.
Comprehensive Income
Comprehensive income consists of net income and other comprehensive (loss) income which includes unrealized
gains and losses on securities available-for-sale.
Fair Value of Financial Instruments
Fair values of financial instruments are estimated using relevant market information and other assumptions, as more
fully disclosed in a separate note. Fair value estimates involve uncertainties and matters of significant judgment regarding
interest rates, credit risk, prepayments, and other factors, especially in the absence of broad markets for particular items.
Changes in assumptions or in market conditions could significantly affect the estimates.
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
In June 2016, the FASB issued Accounting Standards Update (“ASU”) 2016-13, “Financial Instruments — Credit
Losses (Topic 326): Measurement of Credit Losses on Financial Instruments”. 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 on January 1, 2023, using the required modified retrospective
method with a cumulative effect adjustment as of the beginning of the reporting period. The Company is in the process of
finalizing its CECL calculation for adoption and does not expect the adoption adjustment to have a material impact to
stockholders’ equity or Esquire Bank’s capital position.
77
ESQUIRE FINANCIAL HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2022 and 2021
(Dollars in thousands, except per share data)
In March 2020, the FASB issued ASU 2020-04, “Reference Rate Reform (Topic 848): Facilitation of the Effects of
Reference Rate Reform on Financial Reporting.” ASU 2020-04 provides optional expedients and exceptions for
accounting related to contracts, hedging relationships and other transactions affected by reference rate reform if certain
criteria are met. ASU 2020-04 applies only to contracts, hedging relationships, and other transactions that reference LIBOR
or another reference rate expected to be discontinued because of reference rate reform and do not apply to contract
modifications made and hedging relationships entered into or evaluated after December 31, 2022, except for hedging
relationships existing as of December 31, 2022, that an entity has elected certain optional expedients for and that are
retained through the end of the hedging relationship. ASU 2020-04 was effective upon issuance and generally can be
applied through December 31, 2022. Adoption of the standard did not have an impact on the Company’s operating results
or financial condition as there are no LIBOR based financial instruments in its portfolio.
In March 2022, the FASB issued ASU 2022-02, “Financial Instruments — Credit Losses (Topic 326): Troubled Debt
Restructuring and Vintage Disclosures”. ASU 2022-02 eliminates the accounting guidance for TDRs by creditors in
Subtopic 310-40, “Receivables — Troubled Debt Restructurings by Creditors”, while enhancing disclosure requirements
for certain loan refinancing and restructurings by creditors when a borrower is experiencing financial difficulty.
Additionally, the amendments in this ASU require that public business entities disclose current-period gross write-offs by
year of origination for financing receivables and net investments in leases within the scope of ASU 326-20, “Financial
Instruments — Credit Losses: Measured at Amortized Cost”. The Company is in the process of evaluating the ASU in
conjunction with its adoption of CECL on January 1, 2023.
In March 2022, the SEC issued Staff Accounting Bulletin (“SAB”) No. 121 which provides interpretive guidance for
the accounting and disclosure of obligations to safeguard crypto-assets held for platform users effective the first interim
or annual period ending after June 15, 2022. This guidance does not have an impact on the Company’s financial statements
as no crypto-asset related activities are conducted by the Company.
78
ESQUIRE FINANCIAL HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2022 and 2021
(Dollars in thousands, except per share data)
NOTE 2 — Debt Securities
The following tables summarize the major categories of securities as of the dates indicated:
Securities available-for-sale:
Mortgage-backed securities – agency . . . . . . . . . . . . . . . . . . . . . . .
Collateralized mortgage obligations ("CMOs") – agency . . . . . . .
Total available-for-sale . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 111,445
18,675
$ 130,120
$
$
— $ (18,500) $ 92,945
—
16,324
— $ (20,851) $ 109,269
(2,351)
December 31, 2022
Gross
Amortized Unrealized
Cost
Gains
Gross
Unrealized
Losses
Fair
Value
Gross
Amortized Unrecognized Unrecognized
Gains
Losses
Gross
Cost
Fair
Value
Securities held-to-maturity:
CMOs – agency . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total held-to-maturity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 78,377
$ 78,377
$
$
— $
— $
(9,031) $ 69,346
(9,031) $ 69,346
December 31, 2021
Gross
Amortized Unrealized
Cost
Gains
Gross
Unrealized
Losses
Fair
Value
Securities available-for-sale:
Mortgage-backed securities – agency . . . . . . . . . . . . . . . . . . . . . . .
CMOs – agency . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total available-for-sale . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 122,258
27,316
$ 149,574
$
$
673 $
237
910 $
(2,050) $ 120,881
27,503
(2,100) $ 148,384
(50)
At December 31, 2021, there were no securities held-to-maturity.
Mortgage-backed securities included all pass-through certificates guaranteed by FHLMC, FNMA, or GNMA and the
CMOs are backed by government agency pass-through certificates. CMOs, by virtue of the underlying residential collateral
or structure, are fixed rate current pay sequentials or planned amortization classes (“PACs”). As actual maturities may
differ from contractual maturities because certain borrowers have the right to call or prepay certain obligations, these
securities are not considered to have a single maturity date.
There were no sales or calls of securities in 2022, 2021 and 2020.
At December 31, 2022, securities having a carrying value of $150,538 were pledged to the FHLB for borrowing
capacity totaling $135,135. At December 31, 2021, securities having a fair value of $121,504 were pledged to the FHLB
for borrowing capacity totaling $115,364. At December 31, 2022 and 2021, the Company had no outstanding FHLB
advances.
At December 31, 2022, securities having a fair value of $37,110 were pledged to the FRB of New York for borrowing
capacity totaling $36,147. At December 31, 2021, securities having a fair value of $26,880 were pledged to the FRB of
New York for borrowing capacity totaling $26,072. At December 31, 2022 and 2021, the Company had no outstanding
FRB borrowings.
79
ESQUIRE FINANCIAL HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2022 and 2021
(Dollars in thousands, except per share data)
The following table provides the gross unrealized and unrecognized losses and fair value, aggregated by investment
category and length of time the individual securities have been in a continuous unrealized or unrecognized loss position,
as of December 31:
Less Than 12 Months
Gross
Unrealized
Losses
Fair
Value
December 31, 2022
12 Months or Longer
Gross
Unrealized
Losses
Fair
Value
Total
Gross
Unrealized
Losses
Fair
Value
Securities available-for-sale:
Mortgage-backed securities – agency . . $
CMOs – agency . . . . . . . . . . . . . . . . . . . .
8,902
11,798
Total temporarily impaired securities . $ 20,700
$
$
(725) $ 84,043
4,526
(992)
(1,717) $ 88,569
$ (17,775) $ 92,945 $ (18,500)
(2,351)
16,324
$ (19,134) $ 109,269 $ (20,851)
(1,359)
Less Than 12 Months
Gross
Unrecognized
Losses
Fair
Value
12 Months or Longer
Gross
Unrecognized
Losses
Fair
Value
Total
Fair
Value
Gross
Unrecognized
Losses
Securities held-to-maturity:
CMOs – agency . . . . . . . . . . . . . . . . . . . . $ 69,346
Total temporarily impaired securities . $ 69,346
$
$
(9,031) $ — $
(9,031) $ — $
— $ 69,346 $
— $ 69,346 $
(9,031)
(9,031)
Less Than 12 Months
Gross
Unrealized
Losses
Fair
Value
December 31, 2021
12 Months or Longer
Gross
Unrealized
Losses
Fair
Value
Total
Gross
Unrealized
Losses
Fair
Value
Securities available-for-sale:
Mortgage-backed securities - agency . . $ 101,235
7,416
CMOs - agency . . . . . . . . . . . . . . . . . . . .
Total temporarily impaired securities . $ 108,651
$
$
(1,813) $ 4,503
—
(1,863) $ 4,503
(50)
$
$
(237) $ 105,738 $
—
7,416
(237) $ 113,154 $
(2,050)
(50)
(2,100)
Management reviews the investment portfolio on a quarterly basis to determine the cause, magnitude and duration of
declines in the fair value of each security. In estimating other-than-temporary impairment (OTTI), management considers
many factors including: (1) the length of time and extent that fair value has been less than cost, (2) the financial condition
and near term prospects of the issuer, (3) whether the market decline was affected by macroeconomic conditions, and
(4) whether the Company has the intent to sell the security or more likely than not will be required to sell the security
before its anticipated recovery. If either of the criteria regarding intent or requirement to sell is met, the entire difference
between amortized cost and fair value is recognized as impairment through earnings. For 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 December 31, 2022, securities in unrealized or unrecognized loss positions were issuances from government
sponsored entities. Due to the decline in fair value attributable to changes in interest rates, not credit quality and because
the Company does not have the intent to sell the securities and it is likely that it will not be required to sell the securities
before their anticipated recovery, the Company does not consider the securities to be other-than-temporarily impaired at
December 31, 2022.
80
ESQUIRE FINANCIAL HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2022 and 2021
(Dollars in thousands, except per share data)
No impairment charges were recorded in 2022, 2021 and 2020.
NOTE 3 — Loans
The composition of loans by class is summarized as follows at December 31:
Real estate:
Multifamily . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Commercial real estate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1 – 4 family . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Construction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total real estate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . .
Commercial . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consumer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total loans held for investment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred fees and unearned premiums, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Allowance for loan losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Loans held for investment, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2022
2021
$
$
262,489 $
91,837
25,565
—
379, 891
552,082
16,580
948,553
(1,258)
(12,223)
935,072 $
254,852
48,589
40,753
—
344,194
432,108
8,681
784,983
(466)
(9,076)
775,441
At December 31, 2021, commercial loan balances included $4,249 of SBA PPP loans. There were no PPP loans
outstanding at December 31, 2022.
The following tables present the activity in the allowance for loan losses by class for the years ending December 31,
2022, 2021 and 2020:
Commercial
Multifamily Real Estate 1‑4 Family Construction Commercial Consumer
Total
December 31, 2022
Allowance for loan losses:
Beginning balance . . . . . . . . . . . . $
Provision (credit) for loan losses .
Recoveries . . . . . . . . . . . . . . . . . . .
Loans charged-off . . . . . . . . . . . . .
Total ending allowance balance . . $
1,789
389
17
(178)
2,017
December 31, 2021
Allowance for loan losses:
Beginning balance . . . . . . . . . . . . $
Provision (credit) for loan losses .
Recoveries . . . . . . . . . . . . . . . . . . .
Loans charged-off . . . . . . . . . . . . .
Total ending allowance balance . . $
1,278
511
—
—
1,789
December 31, 2020
Allowance for loan losses:
Beginning balance . . . . . . . . . . . . $
Provision (credit) for loan losses .
Recoveries . . . . . . . . . . . . . . . . . . .
Loans charged-off . . . . . . . . . . . . .
Total ending allowance balance . . $
1,048
230
—
—
1,278
$
$
$
$
$
$
— $ 6,319 $
—
—
—
— $ 8,645 $
2,358
32
(64)
131
366
—
(150)
347
$ 9,076
3,490
49
(392)
$ 12,223
— $ 5,003 $ 4,182
5,119
1,427
—
—
—
—
(9,170)
—
(111)
131
— $ 6,319 $
$ 11,402
6,955
—
(9,281)
$ 9,076
$ 4,048 $
161
828
(161)
957
5,189
—
—
—
(1,835)
(2)
—
— $ 5,003 $ 4,182
$ 6,989
6,250
—
(1,837)
$ 11,402
285
(93)
—
—
192
342
(57)
—
—
285
344
(2)
—
—
342
$
$
$
$
$
$
$
$
$
$
$
$
552
470
—
—
1,022
597
(45)
—
—
552
560
37
—
—
597
81
ESQUIRE FINANCIAL HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2022 and 2021
(Dollars in thousands, except per share data)
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 December 31, 2022 and 2021:
Commercial
Multifamily Real Estate 1‑4 Family Construction Commercial Consumer
Total
December 31, 2022
Allowance for loan losses:
Ending allowance balance
attributable to loans:
Individually evaluated for
impairment . . . . . . . . . . . . . . . . . . $
Collectively evaluated for
impairment . . . . . . . . . . . . . . . . . .
— $
— $ — $
— $
— $
— $
—
2,017
1,022
192
—
8,645
347
12,223
Total ending allowance balance . . . $ 2,017 $
1,022 $
192 $
— $
8,645 $
347 $ 12,223
Loans:
Loans individually evaluated for
impairment . . . . . . . . . . . . . . . . . . . $
Loans collectively evaluated for
impairment . . . . . . . . . . . . . . . . . . . 262,489
— $
— $ — $
— $
— $
— $
—
91,837
25,565
— 552,082 16,580
948,553
Total ending loans balance . . . . . . . $ 262,489 $ 91,837 $ 25,565 $
— $ 552,082 $ 16,580 $ 948,553
Commercial
Multifamily Real Estate 1‑4 Family Construction Commercial Consumer
Total
December 31, 2021
Allowance for loan losses:
Ending allowance balance
attributable to loans:
Individually evaluated for
impairment . . . . . . . . . . . . . . . . . . $
Collectively evaluated for
impairment . . . . . . . . . . . . . . . . . .
— $
— $
— $
— $
— $
— $
—
1,789
552
285
—
6,319
131
9,076
Total ending allowance balance . . . $ 1,789 $
552 $
285 $
— $
6,319 $
131 $
9,076
Loans:
Loans individually evaluated for
impairment . . . . . . . . . . . . . . . . . . . $
Loans collectively evaluated for
impairment . . . . . . . . . . . . . . . . . . .
— $
— $
— $
— $
— $
— $
—
254,852
48,589
40,753
— 432,108 8,681
784,983
Total ending loans balance . . . . . . . $ 254,852 $ 48,589 $ 40,753 $
— $ 432,108 $ 8,681 $ 784,983
82
ESQUIRE FINANCIAL HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2022 and 2021
(Dollars in thousands, except per share data)
The following tables provide an analysis of the impaired loans by segment as of December 31, 2022 and 2021. There
was no related allowance recorded on any impaired loans as of the periods indicated:
Multifamily . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Commercial real estate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1 – 4 family . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Construction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Commercial . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consumer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
December 31,
2022
Unpaid
December 31,
2021
$
Recorded Principal
Investment Balance
— $
—
—
—
—
—
— $
— $
—
—
—
—
—
— $
Unpaid
Recorded Principal
Investment Balance
— $ —
—
—
—
—
—
—
—
—
—
—
— $ —
$
The following tables provide an analysis of the recorded investment and interest income recognized on impaired loans
by segment for the periods presented:
2022
Average
Recorded
Investment
Interest
Income
Recognized
Multifamily . . . . . . . . . . . . . $
Commercial real estate . . . .
1 – 4 family . . . . . . . . . . . . .
Construction . . . . . . . . . . . .
Commercial . . . . . . . . . . . .
Consumer . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . $
158 $
—
—
—
1,363
2
1,523 $
— $
—
—
—
—
—
— $
Average
Recorded
Investment
111
—
—
—
—
1,580
1,691
Years Ended December 31,
2021
Interest
Income
Recognized
Average
Recorded
Investment
2020
Interest
Income
Recognized
—
—
—
—
—
—
—
— $
—
—
—
—
1,381
1,381 $
$
$
— $
—
—
—
—
—
— $
The following tables present the aging of the recorded investment in past due loans by class of loans as of
December 31, 2022 and 2021:
30-59
Days
60-89
Days
Past Due Past Due
Greater than
90 Days
Past Due
Total Past
Due &
Nonaccrual Nonaccrual Loans Not
Loans
Past Due
Loans
December 31, 2022
Multifamily . . . . . . . . . . . . . . . . . $
Commercial real estate . . . . . . . . .
1 – 4 family . . . . . . . . . . . . . . . . . .
Construction . . . . . . . . . . . . . . . . .
Commercial . . . . . . . . . . . . . . . . . .
Consumer . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . $
— $ — $
—
—
—
—
36
36 $
—
—
—
—
8
8
$
— $
—
—
—
—
—
— $
— $
—
—
—
—
4
4
$
— $ 262,489
91,837
—
25,565
—
—
—
— 552,082
48
16,532
48 $ 948,505
83
Total
$ 262,489
91,837
25,565
—
552,082
16,580
$ 948,553
ESQUIRE FINANCIAL HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2022 and 2021
(Dollars in thousands, except per share data)
30-59
Days
60-89
Days
Past Due Past Due
Greater than
90 Days
Past Due
Total Past
Due &
Nonaccrual Nonaccrual Loans Not
Loans
Past Due
Loans
Total
December 31, 2021
Multifamily . . . . . . . . . . . . . . . . . $ 1,034 $ — $
Commercial real estate . . . . . . . . .
1 – 4 family . . . . . . . . . . . . . . . . . .
Construction . . . . . . . . . . . . . . . . .
Commercial . . . . . . . . . . . . . . . . . .
Consumer . . . . . . . . . . . . . . . . . . .
—
—
—
—
21
—
—
—
—
10
10 $
Total . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,055 $
Credit Quality Indicators
— $
—
—
—
—
—
— $
— $
—
—
—
—
6
6 $
1,034 $ 253,818 $ 254,852
48,589
48,589
—
40,753
40,753
—
—
—
—
432,108
— 432,108
8,681
8,644
37
1,071 $ 783,912 $ 784,983
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.
Based on the most recent analysis performed, the risk category of loans by class of loans is as follows:
Pass
Special Mention Substandard Doubtful
December 31, 2022
Multifamily . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Commercial real estate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1 – 4 family . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Construction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Commercial . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consumer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$258,413
88,019
25,565
—
547,412
14,692
$934,101
$
$
3,355 $
3,818
—
—
4,670
1,888
13,731 $
721
—
—
—
—
—
721
$ —
—
—
—
—
—
$ —
84
ESQUIRE FINANCIAL HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2022 and 2021
(Dollars in thousands, except per share data)
Pass
Special Mention Substandard Doubtful
December 31, 2021
Multifamily . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Commercial real estate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1 – 4 family . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Construction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Commercial . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consumer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$254,131
44,771
37,738
—
410,548
8,681
$755,869
$
$
— $
3,818
3,015
—
17,977
—
24,810 $
721
—
—
—
3,583
—
4,304
$ —
—
—
—
—
—
$ —
The Company considers the performance of the loan portfolio and its impact on the allowance for loan losses. For
smaller dollar commercial and consumer loan classes, the Company evaluates credit quality based on the aging status of
the loan, which was previously presented, and by payment activity.
The Company has no loans identified as troubled debt restructurings at December 31, 2022 and 2021. Furthermore,
there were no loan modifications during 2022, 2021 and 2020 that were troubled debt restructurings. In order to determine
whether a borrower is experiencing financial difficulty, an evaluation is performed of the probability that the borrower
will be in payment default on any of its debt in the foreseeable future without the modification.
Related Party Loans
Loans to related parties include loans to directors, their related companies and executive officers of the Company.
Loans to principal officers, directors, and their affiliates during 2022 were as follows:
Beginning balance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
New advances . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Repayments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Ending balance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
5,583
—
(1,553)
4,030
Pledged Loans
At December 31, 2022, loans totaling $20,565 were pledged to the FHLB of New York for borrowing capacity totaling
$14,245. At December 31, 2021, loans totaling $33,861 were pledged to the FHLB of New York for borrowing capacity
totaling $26,001.
NOTE 4 — Premises and Equipment
The following is a summary of premises and equipment at December 31:
Leasehold improvements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Furniture, fixtures and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Fixed assets in progress . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Less: accumulated depreciation and amortization . . . . . . . . . . . . . . . . . . .
Total premises and equipment, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2022
2021
$ 2,800 $ 2,800
3,912
656
7,368
4,034
$ 2,704 $ 3,334
4,633
8
7,441
4,737
85
ESQUIRE FINANCIAL HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2022 and 2021
(Dollars in thousands, except per share data)
Depreciation and amortization of premises and equipment, reflected as a component of occupancy and equipment, net
in the Consolidated Statements of Income, was $703, $687 and $568 for the periods ended December 31, 2022, 2021 and
2020, respectively.
NOTE 5 — Deposits
As of December 31, 2022, deposits of $1,228,236, was comprised of core deposit relationships of $1,208,678 and
certificates of deposit of $19,558. Core deposits are defined as all deposits except certificates of deposits which include
demand, savings, NOW, and money market deposit accounts. Our noninterest bearing demand deposits are presented as
demand deposits and all core interest bearing deposits are presented as savings, NOW and money market deposits on the
Consolidated Statements of Financial Condition. Certificates of deposit are presented as time deposits on the Consolidated
Statements of Financial Condition.
The contractual maturities of certificates of deposit as of December 31, 2022, are as follows:
2023 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2024 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
$
Total
18,734
824
19,558
As of December 31, 2022 and 2021, certificates of deposits greater than $250 were $554 and $7,616, respectively.
Certificates of deposits include deposits insured through the certificate of deposit account registry service (“CDARS”)
totaling $16,119 and $8,304 for the year ended December 31, 2022 and 2021, respectively.
Deposits from principal officers, directors, and their affiliates at year-end 2022 and 2021 were $11,326 and $9,001,
respectively.
NOTE 6 — Borrowings
The Company had a secured borrowing of $46 and $48 as of December 31, 2022 and 2021, respectively, relating to
certain loan participations sold by the Company that did not qualify for sales treatment.
At December 31, 2022 and 2021, we had the ability to borrow a total of $149,380 and $141,365, respectively, from
the FHLB of New York. We also had a borrowing capacity with the FRB of New York discount window of $36,147 and
$26,072 at December 31, 2022 and 2021, respectively. These borrowings are collateralized by loans and securities. At
December 31, 2022 and 2021, we also had lines of credit with other financial institutions totaling $67,500. No amounts
were outstanding on any of the aforementioned lines as of December 31, 2022 and 2021.
NOTE 7 — Noninterest Income
The majority of the Company’s revenue-generating transactions are not subject to ASC 606, including revenue
generated from financial instruments, such as loans, letters of credit, and investment securities. Descriptions of revenue-
generating activities that are within the scope of ASC 606, and are presented in the accompanying Consolidated Statements
of Income as components of noninterest income, are as follows:
86
ESQUIRE FINANCIAL HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2022 and 2021
(Dollars in thousands, except per share data)
For the Years Ended
December 31,
2022
2021
Payment processing fees:
Payment processing income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . $ 21,101
843
ACH income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
21,944
Total payment processing fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 20,040
816
20,856
Customer related fees, service charges and other:
Administrative service income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Gain (loss) on loans held for sale (1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total customer related fees, service charges and other . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2,534
88
359
2,981
Total noninterest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 24,925
29
(295)
434
168
$ 21,024
(1) Represents a valuation adjustment on loans held for sale, not within the scope of ASC 606.
The Company has made no significant judgments in applying the revenue guidance prescribed in ASC 606 that affect
the determination of the amount and timing of revenue from the above-described contracts with customers.
• Payment processing income – We provide payment processing services as an acquiring bank through the
third-party or 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 FRB 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.
87
ESQUIRE FINANCIAL HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2022 and 2021
(Dollars in thousands, except per share data)
NOTE 8 — Income Taxes
The following summarizes components of income tax expense for the years ended December 31:
Current:
Federal expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
State and city expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total current tax expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2022
2021
2020
$ 8,795
2,821
11,616
$ 3,442 $ 4,203
1,301
5,504
688
4,130
Deferred:
Federal (benefit) expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
State and city (benefit) expense . . . . . . . . . . . . . . . . . . . . . . . . . .
Total deferred tax (benefit) expense . . . . . . . . . . . . . . . . . . . . . .
Income tax expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(807)
(526)
(1,333)
$ 10,283
248
405
653
(641)
(314)
(955)
$ 4,783 $ 4,549
The following is a reconciliation of the Company’s statutory federal income tax rate of 21% to its effective tax rate at
December 31:
Federal tax expense at statutory rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
State and local income taxes, net of federal income tax benefit . . . . . . .
Incentive stock options . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ..
Stock-based compensation excess tax benefit. . . . . . . . . . . . . . . . . . . . . .
Research and development tax credits . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income tax expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2022
2020
2021
$ 8,148 $ 4,769 $ 3,605
974
53
(85)
(77)
79
$ 10,283 $ 4,783 $ 4,549
929
69
(1,036)
(100)
152
1,948
63
(317)
(100)
541
The following summarizes the components of the Company’s deferred tax assets and deferred tax liabilities at
December 31:
2022
2021
Deferred tax assets:
Net operating loss carry forwards . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Stock based compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Allowance for loan loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred loan fees, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Unrealized loss on securities available-for-sale . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total deferred tax assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
142 $
985
3,330
386
5,733
684
11,260
213
938
2,496
141
339
548
4,675
Deferred tax liabilities:
Fixed assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Investment in partnership . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ..
Total deferred tax liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred tax asset, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(1,135)
(553)
(1,688)
(1,272)
(558)
(1,830)
$ 9,572 $ 2,845
The Company has New York state and city net operating loss carryforwards of $1,790 and $135, respectively, as of
December 31, 2022. The net operating losses are available to reduce future taxable income and begin to expire in 2026.
88
ESQUIRE FINANCIAL HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2022 and 2021
(Dollars in thousands, except per share data)
Realization of deferred tax assets is dependent upon the generation of future taxable income. A valuation allowance
is provided when it is more likely than not that some portion of the deferred tax asset will not be realized. Based on its
evaluation, the Company has determined that it is more likely than not that the deferred tax asset as of December 31, 2022
and 2021, will be realized.
The Company does not have any unrecognized tax benefits at December 31, 2022 and 2021, and does not expect this
to increase in the next twelve months. There were no interest and penalties recorded in the Consolidated Statements of
Income for the years ended December 31, 2022, 2021 and 2020. The Company is subject to U.S. federal income tax as
well as income tax in ten state and local jurisdictions. The Company is no longer subject to examination by taxing
authorities for years before 2019.
NOTE 9 — Employee Benefits
401(k) Plan
A savings plan is maintained under section 401(k) of the Internal Revenue Code and covers substantially all current
full-time employees. Newly hired employees can elect to participate in the savings plan after completing one month of
service. The Company matched 100% of employee contributions up to 2% of their salary, resulting in total expenses of
$218, $189 and $150 in 2022, 2021 and 2020, respectively.
Share Based Payment Plans
The Company issues incentive and non-statutory 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.
The Company’s 2007 Stock Option Plan allowed for a maximum of 270,000 shares of common stock to be issued. As
of December 31, 2022, 269,500 shares have been issued. The 2007 Stock Option Plan expired in May of 2017 and no new
options can be granted from the plan.
The Company’s 2011 Stock Compensation Plan allows for a maximum of 754,607 shares of common stock to be
issued. The 2011 Stock Compensation Plan expired in May of 2021, and no new awards can be granted from the plan.
The Company’s 2017 Equity Incentive Plan allows for a maximum of 300,000 shares of common stock to be issued.
As of December 31, 2022, all shares under the 2017 plan have been issued.
The Company’s 2019 Equity Incentive Plan allows for a maximum of 300,000 shares of common stock to be issued.
As of December 31, 2022, 35 shares remain available for grant.
The Company’s 2021 Equity Incentive Plan allows for a maximum of 400,000 shares of common stock to be issued.
A total of 164,530 shares remain available for grant under the 2021 Equity Incentive Plan of which 127,280 can be granted
as restricted shares.
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.
89
ESQUIRE FINANCIAL HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2022 and 2021
(Dollars in thousands, except per share data)
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.
The fair value of options granted was determined using the following weighted-average assumptions as of grant date.
For the Years Ended December 31,
2021
2020
2022
Risk-free interest rate . . . . . . . . . . . . . . . . . . . . . . .
Expected term . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Expected stock price volatility . . . . . . . . . . . . . . . .
Dividend yield . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Weighted average fair value . . . . . . . . . . . . . . . . .
3.67 %
1.43 %
0.61 %
84 months
84 months
84 months
26.5 %
1.01 %
13.63
$
34.7 %
0.00 %
$
11.99
52.4 %
0.00 %
10.99
$
The following table presents a summary of the activity related to options for the year ended December 31, 2022:
Outstanding at beginning of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Granted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Exercised . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Forfeited . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Expired . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Outstanding at end of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Vested or expected to vest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Exercisable at end of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
For the Year Ended December 31, 2022
Weighted
Average
Remaining
Contractual
Life (Years)
Options
Weighted
Average
Exercise
Price
16.66
42.30
16.02
25.50
—
18.61
18.61
15.20
649,600 $
52,500
(51,831)
(16,285)
—
633,984 $
633,984 $
522,372 $
4.92
4.92
3.99
The Company recognized compensation expense related to options of $463, $483 and $492 for the years ended
December 31, 2022, 2021 and 2020, respectively. At December 31, 2022, unrecognized compensation cost related to non-
vested options was approximately $1,361 and is expected to be recognized over a weighted average period of 2.34 years.
The intrinsic value for outstanding options, net of expected forfeitures was $15,628. The intrinsic value for exercisable
options at December 31, 2022 was $14,659.
The following table presents information related to stock options exercises for the years ended December 31:
For the Years Ended December 31,
2021
2022
2020
Intrinsic value of options exercised . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash received from option exercises . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Excess tax benefit from option exercises . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
$
1,312
333
273
6,313 $
27
1,433
943
401
107
90
ESQUIRE FINANCIAL HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2022 and 2021
(Dollars in thousands, except per share data)
The following table presents a summary of the activity related to restricted stock for the year ended December 31,
2022:
Outstanding at beginning of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Granted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Vested . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Forfeited . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Outstanding at end of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
For the Year Ended December 31, 2022
Weighted Average
Shares
482,750 $
88,720
(54,495)
(13,750)
503,225 $
Grant Date
Fair Value
24.59
42.30
22.81
24.31
27.92
The Company recognized compensation expense related to restricted stock of $1,981, $1,482 and $1,048 for the years
ended December 31, 2022, 2021 and 2020, respectively. As of December 31, 2022, there was $10,000 of total
unrecognized compensation cost related to non-vested shares granted under the plan. The cost is expected to be recognized
over a weighted-average period of 4.62 years.
NOTE 10 — Earnings per Share
The factors used in the earnings per share computation follow:
For the Years Ended December 31,
2020
2021
2022
Basic:
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Weighted average shares outstanding . . . . . . . . . . . . . . . . . . . . . . . . . .
Basic earnings per share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
28,518 $
7,638,423
3.73 $
Diluted:
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Weighted average shares outstanding for basic earnings per share . .
Add: Dilutive effects of share based awards . . . . . . . . . . . . . . . . . . . .
Weighted average shares and dilutive potential shares . . . . . . . . . . . .
Diluted earnings per share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
28,518 $
7,638,423
575,271
8,213,694
3.47 $
17,925 $
12,618
7,469,907 7,412,131
1.70
2.40 $
17,925 $
12,618
7,469,907 7,412,131
231,692
477,077
7,946,984 7,643,823
1.65
2.26 $
Share based awards totaling 201,920, 100,737 and 394,266 shares of stock were not considered in computing diluted
earnings per share for 2022, 2021 and 2020, respectively, because they were anti-dilutive.
91
ESQUIRE FINANCIAL HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2022 and 2021
(Dollars in thousands, except per share data)
NOTE 11 — Commitments and Contingent Liabilities
Change-In-Control Arrangements
Certain key executive officers have arrangements that provide for the payment of a multiple of base salary, should a
change-in control, as defined, occur. These payments are limited under guidelines for deductibility pursuant to the Internal
Revenue Code.
Credit Related Commitments
The Company provides off-balance sheet financial products to customers in the form of commitments to extend credit
which are agreements to lend to customers in accordance with contractual provisions. These commitments usually have
fixed expiration dates or other termination clauses and may require the payment of a fee. Total commitments outstanding
do not necessarily represent future cash flow requirements as many commitments expire without being funded.
Each customer’s creditworthiness is evaluated prior to issuing these commitments and may require the customer to
pledge certain collateral (i.e., inventory, income-producing property) prior to the extension of credit. Fixed rate
commitments are subject to interest rate risk based on changes in prevailing rates during the commitment period. The
Company is also subject to credit risk in the event that the commitments are drawn upon and the customer is unable to
repay the obligation.
Letters of credit are irrevocable commitments issued at the request of customers. They authorize the beneficiary to
draw drafts for payment in accordance with the stated terms and conditions. Letters of credit substitute the Company’s
creditworthiness for that of the customer and are issued for a fee commensurate with the risk.
The Company can issue two types of letters of credit: commercial (documentary) letters of credit and standby letters
of credit. Commercial letters of credit are commonly issued to finance the purchase of goods and are typically short-term
in nature. Standby letters of credit are issued to back financial or performance obligations of a Bank customer and are
typically issued for periods up to one year. Due to their long-term nature, standby letters of credit require adequate
collateral in the form of cash or other liquid assets. In most instances, standby letters of credit expire without being drawn
upon.
The credit risk involved in issuing letters of credit is essentially the same as extending credit facilities to comparable
customers.
For the Years Ended December 31,
2022
2021
Unused lines of credit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Standby letters of credit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total credit related commitments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Fixed
Rate
$
15
7,945
$ 7,960
Variable
Rate
Fixed
Rate
20
4,591
$ 17,223 $ 4,611
$ 17,223 $
—
Variable
Rate
$ 14,003
—
$ 14,003
The fixed rate credit related loan commitments have interest rates ranging from 8.00% to 18.00% and maturities
ranging from 1 month to 4 years.
Litigation
The Company and its subsidiary are subject to certain pending and threatened legal actions that arise out of the normal
course of business. In the opinion of management at the present time, the resolution of any pending or threatened litigation
will not have a material adverse effect on its Consolidated Financial Statements.
92
ESQUIRE FINANCIAL HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2022 and 2021
(Dollars in thousands, except per share data)
NOTE 12 — Leases
The Company recognizes the present value of its operating lease payments related to its office facilities and retail
branch as operating lease assets and corresponding lease liabilities on the Consolidated Statements of Financial Condition.
These operating lease assets represent the Company’s right to use an underlying asset for the lease term, and the lease
liability represents the Company’s obligation to make lease payments over the lease term. As these leases do not provide
an implicit rate, the Company used its incremental borrowing rate, the rate of interest to borrow on a collateralized basis
for a similar term, at the lease commencement date in order to determine present value.
Short-term lease payments, those leases with original terms of 12 months or less, are recognized in the Consolidated
Statements of Income, on a straight-line basis over the lease term. Certain leases may include one or more options to
renew. The exercise of lease renewal options is typically at the Company’s discretion and are included in the operating
lease liability if it is reasonably certain that the renewal option will be exercised. Certain real estate leases may contain
lease and non-lease components, such as common area maintenance charges, real estate taxes, and insurance, which are
generally accounted for separately and are not included in the measurement of the lease liability since they are generally
able to be segregated. The Company does not sublease any of its leased properties. The Company does not lease properties
from any related parties.
As of December 31, 2022, right of use (“ROU”) lease assets and related lease liabilities were $2,291 and $2,810,
respectively. As of December 31, 2021, ROU lease assets and related lease liabilities were $2,374 and $2,988, respectively.
ROU assets are included within Other assets and related lease liabilities are included within Accrued expenses and other
liabilities on the Consolidated Statements of Financial Condition.
As of December 31, 2022, the Company was obligated under several non-cancelable leases for certain premises and
equipment. The minimum annual rental commitments, exclusive of taxes and other charges, under non-cancelable lease
agreements for premises at December 31, 2022, are summarized as follows:
2023 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
2024 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2025 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2026 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2027 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Thereafter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total operating lease payments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Less: interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Present value of operating lease liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Operating Lease
Liabilities
712
784
803
754
—
—
3,053
243
2,810
As of December 31,
2021
2022
3.92 years
3.28 %
4.88 years
3.06 %
Weighted-average remaining lease term . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Weighted-average discount rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
93
ESQUIRE FINANCIAL HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2022 and 2021
(Dollars in thousands, except per share data)
The components of total lease cost are as follows:
Operating lease cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Short-term lease cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total lease cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
$
560 $
74
634 $
568
13
581
$
$
For the Years Ended
December 31,
2021
2022
2020
563
66
629
These leases contain periodic escalation clauses and all expiring leases are evaluated for extensions at renewal. Rent
expense for the years ended December 31, 2022, 2021, and 2020 amounted to $634, $581 and $629, respectively.
NOTE 13 — Fair Value Measurements
Fair value is the exchange price that would be received for an asset or paid to transfer a liability (exit price) in the
principal or most advantageous market for the asset or liability in an orderly transaction between market participants on
the measurement date. There are three levels of inputs that may be used to measure fair values.
Level 1 — Quoted prices (unadjusted) for identical assets or liabilities in active markets that the entity has the ability
to access as of the measurement date.
Level 2 — Significant other observable inputs other than Level 1 prices such as quoted prices for similar assets or
liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by
observable market data.
Level 3 — Significant unobservable inputs that reflect a company’s own assumptions about the assumptions that
market participants would use in pricing an asset or liability.
For available-for-sale securities where quoted prices are not available, fair values are calculated based on market
prices of similar securities (Level 2).
94
ESQUIRE FINANCIAL HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2022 and 2021
(Dollars in thousands, except per share data)
Assets and liabilities measured at fair value on a recurring basis are summarized below:
Fair Value Measurements Using
Significant
Other
Observable
Inputs
(Level 2)
Quoted Prices
In Active
Markets For
Identical Assets
(Level 1)
Significant
Unobservable
Inputs
(Level 3)
December 31, 2022
Assets
Securities available-for-sale
Mortgage-backed securities – agency . . . . . . . . . . . . . .
CMOs – agency . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
December 31, 2021
Assets
Securities available-for-sale
Mortgage-backed securities – agency . . . . . . . . . . . . . .
CMOs – agency . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
$
$
$
— $ 92,945 $
—
— $ 109,269 $
16,324
— $ 120,881 $
—
— $ 148,384 $
27,503
—
—
—
—
—
—
There were no transfers between Level 1 and Level 2 during the year.
There were no assets or liabilities measured at fair value on a nonrecurring basis as of December 31, 2022.The legacy
NFL consumer loan portfolio was measured on a nonrecurring basis and assigned a Level 3 fair value of $14.1 million as
of December 31, 2021, as the loans are accounted for at the lower of cost or fair value. The fair value was determined
using the discounted cash flow method under the income approach where the significant unobservable inputs include the
cash flows and related timing, and an approximately 8% discount rate applied which reflects the rate of return market
participants would expect to earn on investments of equivalent risk.
Estimated Fair Value of Financial Instruments
Fair value estimates are made at specific points in time and are based on existing on-and off-balance sheet financial
instruments. Such estimates are generally subjective in nature and dependent upon a number of significant assumptions
associated with each financial instrument or group of financial instruments, including estimates of discount rates, risks
associated with specific financial instruments, estimates of future cash flows, and relevant available market information.
Changes in assumptions could significantly affect the estimates. In addition, fair value estimates do not reflect the value
of anticipated future business, premiums or discounts that could result from offering for sale at one time the Company’s
entire holdings of a particular financial instrument, or the tax consequences of realizing gains or losses on the sale of
financial instruments.
The Company used the following method and assumptions in estimating the fair value of its financial instruments:
Debt Securities: The fair values for debt securities are determined by quoted market prices in active markets, if
available (Level 1). For securities where quoted prices are not available, fair values are calculated based on market prices
of similar securities (Level 2), using matrix pricing. Matrix pricing is a mathematical technique commonly used to price
debt securities that are not actively traded, values debt securities without relying exclusively on quoted prices for the
specific securities but rather by relying on the securities’ relationship to other benchmark quoted securities with observable
transactions (Level 2 inputs).
95
ESQUIRE FINANCIAL HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2022 and 2021
(Dollars in thousands, except per share data)
The following table presents the carrying amounts and fair values (represents exit price) of the Company’s financial
instruments not carried at fair value:
Fair Value Measurement at December 31, 2022, Using:
Carrying
Value
(Level 1)
(Level 2)
(Level 3)
Total
Financial Assets:
Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . $ 164,122 $ 164,122 $
Securities purchased under agreements to resell, at cost .
Securities, held-to-maturity . . . . . . . . . . . . . . . . . . . . . . . .
Securities, restricted, at cost . . . . . . . . . . . . . . . . . . . . . . . .
Loans held for investment, net . . . . . . . . . . . . . . . . . . . . . .
Accrued interest receivable . . . . . . . . . . . . . . . . . . . . . . . . .
49,567
78,377
2,810
935,072
5,768
N/A
—
—
— $
49,567
—
—
—
— 69,346
N/A
N/A
— 927,481
5,319
449
— $ 164,122
49,567
69,346
N/A
927,481
5,768
Financial Liabilities:
Time deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Demand and other deposits . . . . . . . . . . . . . . . . . . . . . . . . .
Secured borrowings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accrued interest payable . . . . . . . . . . . . . . . . . . . . . . . . . . .
Financial Assets:
Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . .
Securities purchased under agreements to resell, at cost .
Securities, restricted, at cost . . . . . . . . . . . . . . . . . . . . . . . .
Loans held for investment, net . . . . . . . . . . . . . . . . . . . . . .
Accrued interest receivable . . . . . . . . . . . . . . . . . . . . . . . . .
Financial Liabilities:
Time deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Demand and other deposits . . . . . . . . . . . . . . . . . . . . . . . . .
Secured borrowings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
NOTE 14 — Capital
19,558
1,208,678
46
30
— 19,459
—
—
30
1,208,678
—
—
—
—
46
—
19,459
1,208,678
46
30
Fair Value Measurement at December 31, 2021, Using:
Carrying
Value
(Level 1)
(Level 2)
(Level 3)
Total
$ 149,156 $ 149,156 $
50,271
2,680
775,441
4,197
—
N/A
—
—
— $
50,271
—
N/A
N/A
— 774,114
3,945
252
— $ 149,156
50,271
N/A
774,114
4,197
19,312
1,009,097
48
— 19,330
—
—
1,009,097
—
—
—
48
19,330
1,009,097
48
Banks are subject to regulatory capital requirements administered by federal banking agencies. Capital adequacy
guidelines and additionally for banks, prompt corrective action regulations, involve quantitative measures of assets,
liabilities and certain off-balance sheet items calculated under regulatory accounting practices. Capital amounts and
classifications are also subject to qualitative judgments by regulators. Failure to meet capital requirements can initiate
regulatory action. The final rules of implementing the Basel Committee on Banking Supervision’s capital guidelines for
U.S. Banks (Basel III rules) became effective for the Company on January 1, 2015, with full compliance with all of the
requirements being phased in over a multi-year schedule, and fully phased in on January 1, 2019. The net unrealized gain
or loss on available-for-sale securities and certain deferred tax assets are not included in computing regulatory capital.
Management believes as of December 31, 2022, the Bank met all capital adequacy requirements to which it is subject.
Prompt corrective action regulations provide five classifications: well capitalized, adequately capitalized,
undercapitalized, significantly undercapitalized and critically undercapitalized, although these terms are not used to
represent overall financial condition. If adequately capitalized, regulatory approval is required to accept brokered deposits.
If undercapitalized, capital distributions are limited, as is asset growth and expansion, and capital restoration plans are
required.
96
ESQUIRE FINANCIAL HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2022 and 2021
(Dollars in thousands, except per share data)
As of December 31, 2022, the most recent notification from the Federal Deposit Insurance Corporation categorized
the Bank as “well capitalized” under the regulatory framework for prompt corrective action. To be categorized as “well
capitalized,” the Bank must maintain minimum total risk-based, Tier 1 risk-based and Tier 1 leverage ratios as set forth in
the table below. Since that notification, there are no conditions or events that management believes have changed the
institution’s category.
Required
For Capital
Adequacy Purposes
Ratio Amount Ratio Amount
For Capital
Adequacy Purposes
Including Capital
Conservation Buffer
To be Well
Capitalized Under
Prompt Corrective
Action Regulations
Ratio Amount Ratio
Actual
Amount
December 31, 2022
Total capital to risk weighted
assets . . . . . . . . . . . . . . . . . . . . $ 153,230 15.44 % $ 79,377
Tier 1 (core) capital to risk
weighted assets . . . . . . . . . . . .
Tier 1 (common) capital to
risk weighted assets . . . . . . . . .
Tier 1 (core) capital to
adjusted total assets . . . . . . . . .
141,006 14.21
141,006 14.21
141,006 10.98
59,533
51,355
44,650
December 31, 2021
Total capital to risk weighted
assets . . . . . . . . . . . . . . . . . . . . $ 131,137 15.89 % $ 66,039
Tier 1 (core) capital to risk
weighted assets . . . . . . . . . . . .
Tier 1 (common) capital to
risk weighted assets . . . . . . . . .
Tier 1 (core) capital to
adjusted total assets . . . . . . . . .
122,059 14.79
122,059 14.79
122,059 11.46
49,530
37,147
42,619
8.00 % $ 104,182
10.50 % $ 99,221
10.00 %
6.00
4.50
4.00
84,338
8.50
79,377
8.00
69,455
7.00
64,494
6.50
51,355
4.00
64,194
5.00
8.00 % $ 86,677
10.50 % $ 82,549
10.00 %
6.00
4.50
4.00
70,167
8.50
66,039
8.00
57,785
7.00
53,657
6.50
42,619
4.00
53,273
5.00
97
ESQUIRE FINANCIAL HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2022 and 2021
(Dollars in thousands, except per share data)
NOTE 15 — Parent Company Only Condensed Financial Information
Condensed financial information of Esquire Financial Holdings, Inc. follows:
CONDENSED STATEMENTS OF FINANCIAL CONDITION
ASSETS:
Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . .
Investment in banking subsidiary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Loans held for sale . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Loans held for investment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Equity investment without readily determinable fair value . . . . . . . . . . . . . . . . . . . . . . .
Equity investment in variable interest entity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
LIABILITIES AND STOCKHOLDERS' EQUITY:
Other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total stockholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total liabilities and equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
$
$
$
CONDENSED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
At December 31,
2022
2021
10,467
126,031
—
1,967
2,410
12,636
4,986
158,497
339
158,158
158,497
$
$
$
$
695
121,297
14,100
—
2,410
—
5,461
143,963
228
143,735
143,963
Net interest (expense) income . . . . . . . . . . . . . . . . . . . . . . .
Gain (loss) on loans held for sale . . . . . . . . . . . . . . . . . . . .
Other income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Dividends from subsidiaries . . . . . . . . . . . . . . . . . . . . . . . .
Other expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income before income tax and undistributed
subsidiary income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income tax benefit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Equity in undistributed subsidiary income. . . . . . . . . . . . .
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Comprehensive income . . . . . . . . . . . . . . . . . . . . . . . . . . . .
For the Years Ended December 31,
2020
2021
2022
$
(111)
88
14
12,000
3,369
8,622
895
19,001
$ 28,518
$ 14,251
$
167 $
(295)
—
8,000
2,575
86
—
—
5,000
2,138
5,297
635
11,993
2,948
544
9,126
$ 17,925 $ 12,618
$ 15,667 $ 13,640
98
ESQUIRE FINANCIAL HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2022 and 2021
(Dollars in thousands, except per share data)
CONDENSED STATEMENTS OF CASH FLOWS
Cash flows from operating activities:
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Adjustments:
Stock compensation expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . .
(Gain) loss on loans held for sale . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . .
Equity in undistributed subsidiary income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Change in other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Change in other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net cash provided by operating activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash flows from investing activities:
Investment in loans held for sale . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . .
Net change in other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Payments on loans held for sale, previously classified as held for investment .
Net cash provided by (used in) investing activities . . . . . . . . . . . . . . . . . . . . . . . .
Cash flows from financing activities:
Exercise of stock options . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . .
Tax withholding payments for vested equity awards . . . . . . . . . . . . . . . . . . . . . .
Cash dividends paid to common stockholders . . . . . . . . . . . . . . . . . . . . . . . . . . .
Purchase of common stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net cash (used in) provided by financing activities . . . . . . . . . . . . . . . . . . . . . . . .
Net change in cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Beginning cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Ending cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. .
NOTE 16 — Accumulated Other Comprehensive (Loss) Income
For the Years Ended December 31,
2020
2021
2022
$ 28,518 $ 17,925
$ 12,618
2,444
(88)
(19,001)
299
(933)
11,239
1,965
295
(11,993)
(737)
(31)
7,424
—
—
688
688
(14,584)
(459)
189
(14,854)
333
(339)
(2,149)
—
(2,155)
9,772
695
$ 10,467 $
27
—
—
—
27
(7,403)
8,098
695
$
1,540
—
(9,126)
(573)
(120)
4,339
—
(1,646)
—
(1,646)
401
—
—
(567)
(166)
2,527
5,571
8,098
The following is changes in accumulated other comprehensive (loss) income by component, net of tax, for the years
ending December 31, 2022, 2021, and 2020:
Unrealized (Losses) Gains on Securities Available-for-Sale
Beginning balance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other comprehensive (loss) income before reclassifications, net of tax . . . . . . . . . .
Amounts reclassified from accumulated other comprehensive (loss) income . . . . .
Net current period other comprehensive (loss) income . . . . . . . . . . . . . . . . . . . . . . .
Ending balance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
2022
For the Years Ended December 31,
2020
2021
Unrealized (Losses) Gains on
Available-for-Sale Securities
(850) $ 1,408
(2,258)
—
(2,258)
(850)
(14,267)
—
(14,267)
$ (15,117) $
386
1,022
—
1,022
$ 1,408
$
There were no reclassifications out of accumulated other comprehensive (loss) income for the years presented.
99
ESQUIRE FINANCIAL HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2022 and 2021
(Dollars in thousands, except per share data)
NOTE 17 — Subsequent Event
As discussed in Note 1, the Company has an equity investment without a readily determinable fair value in Litify, Inc.
as of December 31, 2022. In February 2023, Litify, Inc. was reorganized into a partnership and an unrelated third party
acquired a majority ownership in the reorganized entity. As party to the reorganization and sale transaction, 63% of the
Company’s partnership interests were exchanged for cash and undiscounted noncash consideration of approximately $5.4
million. As a result, the Company expects to recognize a gain on its investment of approximately $4,000 in the first quarter
of 2023.
100
ITEM 9.
Changes In and Disagreements With Accountants on Accounting and Financial Disclosure
None.
ITEM 9A.
Controls and Procedures
Disclosure 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 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 December 31, 2022. Based on that evaluation, the Company’s Principal
Executive Officer and Principal Financial Officer concluded that the Company’s disclosure controls and procedures were
effective as of the end of the period covered by the annual report.
Report by Management on Internal Control Over Financial Reporting
Management is responsible for establishing and maintaining an effective system of internal control over financial
reporting. The Company’s system of internal control over financial reporting is designed to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of financial statements for external purposes in
accordance with generally accepted accounting principles. There are inherent limitations in the effectiveness of any system
of internal control over financial reporting, including the possibility of human error and circumvention or overriding of
controls. Accordingly, even an effective system of internal control over financial reporting can provide only reasonable
assurance with respect to financial statement preparation. Projections of any evaluation of effectiveness to future periods
are subject to the risks that controls may become inadequate because of changes in conditions or that the degree of
compliance with the policies or procedures may deteriorate.
Management has assessed the Company’s internal control over financial reporting as of December 31, 2022. This
assessment was based on criteria for effective internal control over financial reporting described in Internal Control -
Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based
on this assessment, management believes that, as of December 31, 2022, the Company maintained effective internal
control over financial reporting based on those criteria.
Crowe LLP, the independent registered public accounting firm, audited the consolidated financial statements of the
Company included in this Annual Report on Form 10-K. Their report is included in Part II, Item 8. Financial Statements
and Supplementary Data under the heading “Report of Independent Registered Public Accounting Firm.” The Annual
Report on Form 10-K does not include an attestation report on the Company’s internal control over financial reporting
from the Company’s independent registered public accounting firm as the rules of the Securities and Exchange
Commission permit the Company to provide only management’s report in this Annual Report.
Changes in Internal Control Over Financial Reporting
There has been no change in the Company’s internal control over financial reporting during the quarter ended
December 31, 2022, that has materially affected, or is reasonably likely to materially affect, the Company’s internal control
over financial reporting.
ITEM 9B.
Other Information
None.
ITEM 9C.
Disclosure Regarding Foreign Jurisdictions that Prevent Inspections
Not applicable.
101
ITEM 10.
Directors, Executive Officers and Corporate Governance
PART III
Esquire Financial has adopted a Code of Ethics that applies to its principal executive officer, principal financial officer
and principal accounting officer or controller or persons performing similar functions. A copy of the Code is available on
Esquire Financial’s website at www.esquirebank.com under “Investor Relations — Governance Documents.”
The information contained under the section captioned “Proposal I — Election of Directors” in the Company’s
definitive Proxy Statement for the 2023 Annual Meeting of Stockholders (the “Proxy Statement”) is incorporated herein
by reference.
ITEM 11.
Executive Compensation
The information required by this item is incorporated herein by reference to the section captioned “Proposal I —
Election of Directors — Executive Officer Compensation” of the Proxy Statement.
ITEM 12.
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder
Matters
The information required by this item is incorporated herein by reference to the section captioned “Voting Securities
and Principal Holders” of the Proxy Statement.
ITEM 13.
Certain Relationships and Related Transactions, and Director Independence
The information required by this item is incorporated herein by reference to the sections captioned “Proposal I —
Election of Directors — Transactions with Certain Related Persons,” “— Board Independence” and “— Meetings and
Committees of the Board of Directors” of the Proxy Statement.
ITEM 14.
Principal Accountant Fees and Services
Our independent registered public accounting firm is Crowe LLP, New York, New York, Auditor Firm ID: 173. The
information required by this item is incorporated herein by reference to the section captioned “Proposal II — Ratification
of Appointment of Independent Registered Public Accounting Firm” of the Proxy Statement.
102
ITEM 15.
Exhibits and Financial Statement Schedules
PART IV
3.1
3.2
4.1
4.2
10.1
10.2
10.3
10.4
10.5
10.6
10.7
10.8
Articles of Incorporation of Esquire Financial Holdings, Inc. (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)
Bylaws of Esquire Financial Holdings, Inc. (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)
Form of Common Stock Certificate of Esquire Financial Holdings, Inc. (incorporated by reference to Exhibit 4
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)
Description of Esquire Financial Holdings, Inc. Common Stock (incorporated by reference to Exhibit 4.2 in
the Annual Report on Form 10-K (File No. 001-38131) originally filed by the Company on March 12, 2020)
Employment Agreement by and among Esquire Financial Holdings, Inc., Esquire Bank and Andrew C.
Sagliocca (incorporated by reference to Exhibit 10.4 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)†
Employment Agreement by and among Esquire Financial Holdings, Inc., Esquire Bank and Eric Bader
(incorporated by reference to Exhibit 10.5 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)†
Employment Agreement by and among Esquire Financial Holdings, Inc., Esquire Bank and Ari Kornhaber
(incorporated by reference to Exhibit 10.6 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)†
Esquire Financial Holdings, Inc. 2011 Stock Compensation Plan, as amended (incorporated by reference to
Exhibit 10.8 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)†
Esquire Financial Holdings, Inc. 2017 Equity Incentive Plan (incorporated by reference to Appendix A to the
proxy statement for the Annual Meeting of Stockholders of Esquire Financial Holdings, Inc. (File
No. 001-38131), filed by the Company with the Commission on Schedule 14A under the Exchange Act on
October 3, 2017)†
First Amendment to the Employment Agreement by and among Esquire Financial Holdings, Inc., Esquire
Bank and Eric Bader dated December 19, 2018 (incorporated by reference to Exhibit 10.10 in the Annual
Report on Form 10-K (File No. 001-38131) originally filed by the Company on March 14, 2019)†
Esquire Financial Holdings, Inc. 2019 Equity Incentive Plan (incorporated by reference to Appendix A to the
proxy statement for the Annual Meeting of Stockholders of Esquire Financial Holdings, Inc. (File No. 001-
38131), filed by the Company with the Commission on Schedule 14A under the Exchange Act on June 6,
2019)†
Esquire Financial Holdings, Inc. 2021 Equity Incentive Plan (incorporated by reference to Appendix A to the
proxy statement for the Annual Meeting of Stockholders of Esquire Financial Holdings, Inc. (File No. 001-
38131), filed by the Company with the Commission on Schedule 14A under the Exchange Act on April 16,
2021)†
21
23
Subsidiaries of Registrant
Consent of Crowe LLP
103
31.1
31.2
32
101
Certification of Chief Executive Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934,
as amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
Certification of Chief Financial Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as
amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
The following materials from the Company’s Annual Report on Form 10-K for the year ended December 31,
2022, formatted in Inline XBRL: (i) Consolidated Statements of Financial Condition, (ii) Consolidated
Statements of Income, (iii) Consolidated Statements of Comprehensive Income, (iv) Consolidated Statements
of Changes in Stockholders’ Equity (v) Consolidated Statements of Cash Flows and (v) Notes to the
Consolidated Financial Statements
104
The cover page from the Company’s Annual Report on Form 10-K for the year ended December 31, 2022,
formatted in Inline XBRL
† Management contract or compensation plan or arrangement.
ITEM 16.
Form 10-K Summary
None.
104
Pursuant to the requirements of Section 13 or 15(d) 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.
SIGNATURES
Date: March 27, 2023
ESQUIRE FINANCIAL HOLDINGS, INC.
By:
/s/ Andrew C. Sagliocca
Andrew C. Sagliocca
President, Chief Executive Officer and Director
(Duly Authorized Representative)
Pursuant to the requirements of the Securities Exchange of 1934, this report has been signed below by the following
persons on behalf of the Registrant and in the capacities and on the dates indicated.
Signatures
/s/ Andrew C. Sagliocca
Andrew C. Sagliocca
/s/ Michael Lacapria
Michael Lacapria
/s/ Anthony Coelho
Anthony Coelho
/s/ Todd Deutsch
Todd Deutsch
/s/ Marc D. Grossman
Marc D. Grossman
/s/ Russ M. Herman
Russ M. Herman
/s/ Joseph Melohn
Joseph Melohn
/s/ Robert J. Mitzman
Robert J. Mitzman
/s/ Richard T. Powers
Richard T. Powers
/s/ Kevin C. Waterhouse
Kevin C. Waterhouse
/s/ Selig Zises
Selig Zises
Title
Date
President and Chief Executive Officer and Director
March 27, 2023
March 27, 2023
March 27, 2023
March 27, 2023
March 27, 2023
March 27, 2023
March 27, 2023
March 27, 2023
March 27, 2023
March 27, 2023
March 27, 2023
(Principal Executive Officer)
Senior Vice President and Chief Financial Officer
(Principal Financial and Accounting Officer)
Chairman
Director
Director
Director
Director
Director
Director
Director
Director
105
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CORPORATE INFORMATION
SENIOR MANAGEMENT
Andrew Cohen
Senior Vice President,
Chief Administrative Officer
of Merchant Services
Thomas Ehrhardt
Senior Vice President,
Chief Lending Officer
Fred Horn
Senior Vice President,
Director of Merchant Services
Martin Korn
Senior Vice President,
Chief Technology Officer
Frank Lonardo
Senior Vice President,
Chief Revenue Officer
Kyall Mai
Senior Vice President,
Chief Innovation Officer
Sean Miller
Senior Vice President,
Retail Director
Nicholas Parrinelli
Senior Vice President,
Corporate Controller
Ann Marie Tarantino
Senior Vice President,
Chief Compliance Officer &
Risk Officer
DIRECTORS
Anthony Coelho
Chairman of the Board
Andrew C. Sagliocca
Chief Executive Officer,
President & Director
Todd Deutsch
Marc Grossman
Russ M. Herman
Joseph Melohn
Robert J. Mitzman
Richard T. Powers
Kevin C. Waterhouse
Selig A. Zises
EXECUTIVE OFFICERS
Andrew C. Sagliocca
Chief Executive Officer,
President & Director
Eric S. Bader
Executive Vice President,
Chief Operating Officer &
Corporate Secretary
Ari P. Kornhaber
Executive Vice President,
Head of Corporate Development
Michael Lacapria
Senior Vice President,
Chief Financial Officer
INVESTOR INFORMATION
Corporate Headquarters
100 Jericho Quadrangle, Suite 100
Jericho, New York 11753
(800) 996-0213
www.esquirebank.com
Special Counsel
Luse Gorman, PC
5335 Wisconsin Ave., N.W., Suite 780
Washington, D.C. 20015
(202) 274-2000
Transfer Agent
American Stock Transfer &
Trust Company, LLC
6201 15th Avenue
Brooklyn, New York 11219
(800) 937-5449
Independent Registered
Public Accounting Firm
Crowe LLP
485 Lexington Avenue, Floor 11
New York, New York 10017
(212) 572-5500
ANNUAL MEETING
The Annual Meeting of the Stockholders
will be held on May 25, 2023, at 10:00
a.m. Eastern time, at the executive
offices of Esquire Financial Holdings,
Inc. located at 100 Jericho Quadrangle,
Suite 100, Jericho, New York 11753.
GENERAL INQUIRIES
A copy of our Annual Report to the
SEC may be obtained without charge
by written request of stockholders
to Eric Bader or by calling us at
(800) 996-0213. The Annual Report
is also available on our website at
www.esquirebank.com. Our Code
of Ethics, Audit Committee Charter,
Corporate Gov er nance and
Nominating Committee Charter,
Compensation Committee Charter,
and Beneficial Ownership reports of
our directors and executive officers
are also available on our website.
ESQUIRE FINANCIAL HOLDINGS, INC.
100 JERICHO QUADRANGLE, SUITE 100
JERICHO, NEW YORK 11753
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