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



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

Caution Regarding Forward-Looking Statements

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

? statements of our objectives, intentions and expectations;

? statements regarding our business plans, prospects, growth and


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

? estimates of our risks and future costs and benefits.

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

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

? our ability to manage our operations under current economic conditions

nationally and in our market area;

? adverse changes in the financial industry, securities, credit and

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 depending on the

legal and “litigation” market;

? the impact of any potential strategic transaction;

? our ability to successfully enter new markets and capitalize on growth



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significant increases in our loan losses, in particular due to our

? inability to resolve classified and non-performing assets or reduce risk

associated with our loans, and management’s assumptions in determining the

the adequacy of the allowance for loan losses;

? fluctuations in interest rates, which could adversely affect our


external economic and/or market factors, such as changes in monetary and fiscal policies

policies and laws, including board interest rate policies

? Governors of the Federal Reserve System (“FRB”), inflation or deflation,

variations in loan demand and fluctuations in consumer spending,

borrowing and saving habits, which can have a negative impact on our financial situation.


continued or increasing competition from other financial institutions,

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

regulations different from ours;

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

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

provision for loan losses;

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

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

financial products;

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

with whom we do business;

? our ability to effectively manage the risks associated with our payment processing


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

members of the board of directors and members of the advisory board;

changes in interest rates generally, including changes in

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

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

? fluctuations in loan demand;

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

? changes in consumer spending, borrowing and saving habits;

? the decline in the return on our assets resulting from a low interest rate


the decline in our payment processing revenue due to reduced demand,

competition and changes in laws or government regulations or policies affecting

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

? could lead, among other things, to an increase in deposit insurance premiums and

valuations, capital requirements, regulatory fees and compliance costs,

including the new capital regulations, and the resources we have

to cope with these changes;

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

? regulatory bodies, Financial Accounting Standards Boardthe titles

and Exchange fee or the Public Company Accounting Oversight Council;

? delinquent loans and changes in the underlying cash flows of our borrowers;


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? depreciation of our investment securities;

? our ability to control costs and expenses, in particular those related to

operating as a publicly traded company;

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

? political instability;

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

including global pandemics;

competition and innovation in financial products and services through

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

businesses and technology companies;

? changes in our organization and management and our ability to maintain or develop

our management team and board of directors, as required;

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

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

regulatory or governmental inquiries or inquiries, and/or

results of reviews and regulatory reviews;

? the ability of major third-party service providers to fulfill their obligations

ours; and

other economic, competitive, governmental, regulatory and operational factors

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

this quarterly report on Form 10-Q.

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

Summary of Significant Accounting Policies

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

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



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

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

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

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


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

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

COVID-19 Pandemic Programs

We elected to participate in the Paycheck Protection Program administered by the
SBA with the intention to provide our customer base access to this critical
program. The PPP provides borrower guarantees for lenders, as well as loan
forgiveness incentives for borrowers that utilize the loan proceeds to cover
employee compensation-related costs and other qualifying business costs. As of
March 31, 2022, we have been fully repaid on our PPP loan portfolio cumulatively
totaling $45.5 million.

In 2020, management implemented a customer payment deferral program (principal
and interest) under the CARES Act to assist business borrowers and certain
consumers that may have been experiencing financial hardship due to COVID-19
related challenges. As of March 31, 2022, there were no participants in our
payment deferral program.


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Comparison of the financial situation at March 31, 2022 and December 31, 2021

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

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

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

                                                  (Dollars in thousands)
Real estate:
Multifamily                        $  262,465       32.1 %     $  254,852       32.5 %
Commercial real estate                 62,447        7.6           48,589        6.1
1 - 4 family                           33,468        4.1           40,753        5.2
Total real estate                     358,380       43.8          344,194       43.8
Commercial                            451,930       55.2          427,859       54.6
PPP                                         -          -            4,249        0.5
Consumer                                8,281        1.0            8,681        1.1

Total loans held for investment purposes $818,591 100.0% $784,983

    100.0 %
Deferred loan fees and unearned
premiums, net                           (594)                       (466)
Allowance for loan losses             (9,491)                     (9,076)
Loans held for investment, net     $  808,506                  $  775,441

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

The following table shows the composition of our litigation loan portfolio held for investment by loan type as of the dates indicated:

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

                                                     (Dollars in thousands)
Litigation-Related Loans
Commercial Litigation-Related:
Working capital lines of credit        $ 207,700       52.6 %     $ 210,148
      54.4 %
Case cost lines of credit                131,803       33.3         127,859       33.1
Term loans                                53,208       13.5          45,415       11.8

Total Commercial disputes 392,711 99.4 383,422


Consumer Litigation-Related:
Post-settlement consumer loans             2,460        0.6           2,451


Structured settlement loans                   92        0.0             116


Total Consumer Litigation-Related          2,552        0.6           2,567


Total litigation loans $395,263 100.0% $385,989

     100.0 %


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

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

Funding. Total deposits increased $61.5 million, or 6.0%, to $1.1 billion at
March 31, 2022 from $1.0 billion at December 31, 2021. We continue to focus on
the acquisition and expansion of core deposit relationships, which we define as
all deposits except for certificates of deposit. Core deposits totaled $1.1
billion at March 31, 2022, or 98.2% of total deposits at that date, compared to
$1.0 billion or 98.1% of total deposits at December 31, 2021. Demand deposits
(noninterest bearing) increased $79.6 million, or 19.4%, to $489.0 million,
representing 44.9% of total deposits.

In addition to our core deposits as a source of funding, the Company continues
to prudently manage its balance sheet through deposit sweep programs,
maintaining off-balance sheet funds totaling $618.0 million at March 31, 2022
which is a $80.5 million, or 15.0%, increase from the December 31, 2021 balance
of $537.5 million.

At March 31, 2022, we had the ability to borrow a total of $154.9 million from
the Federal Home Loan Bank of New York. We also had an available line of credit
with the Federal Reserve Bank of New York discount window of $23.8 million. At
March 31, 2022, we also had $67.5 million in aggregate unsecured lines of credit
with unaffiliated correspondent banks. No amounts were outstanding on any of the
aforementioned lines of credit at March 31, 2022.

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

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

Average balances and rate/volume analysis

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



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

                                                      For the Three Months Ended March 31,
                                                  2022                                       2021

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

NONINTEREST EARNING ASSETS            50,832                                    30,843

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


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

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