Esquire Financial Holdings Inc

Previous wording

Management’s discussion and analysis of financial condition at March 31, 2024 and December 31, 2023 and results of operations for the three months ended March 31, 2024 and 2023 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 notes thereto appearing in Part I, Item 1, of this quarterly report on Form 10-Q and the audited Consolidated Financial Statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2023.

Current wording

Management’s discussion and analysis of financial condition at June 30, 2024 and December 31, 2023 and results of operations for the three and six months ended June 30, 2024 and 2023 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 notes thereto appearing in Part I, Item 1, of this quarterly report on Form 10-Q and the audited Consolidated Financial Statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2023.

Previous wording

We currently have clients in 30 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) 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 10% variable rate asset yield on these commercial loans for the quarter ended March 31, 2024. More importantly, since our commercial banking platform is focused on full service

Current wording

We currently have lending clients in 30 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) 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 10% variable rate asset yield on these commercial loans for the quarter ended June 30, 2024. More importantly, since our commercial banking platform is focused on full service

Previous wording

relationship banking, for every $1.00 we advance on these loans we receive on average $1.71 of low-cost (our cost of funds for the quarter ended March 31, 2024 is 96 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 $709.5 million, or 50%, 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 $466.6 million at March 31, 2024, makes this litigation vertical a highly desirable core low-cost funding platform fueling growth in other lending areas.

Current wording

relationship banking, for every $1.00 we advance on these loans we receive on average $1.68 of low-cost (our cost of funds for the quarter ended June 30, 2024 is 87 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 $813.6 million, or 55%, 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 $408.0 million at June 30, 2024, makes this litigation vertical a highly desirable core low-cost funding platform fueling growth in other lending areas.

Previous wording

Other Commercial Banking. In addition to our Litigation Commercial Banking business, commercial loans are also 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 payment processing customers. The balance of these loans totaled $119.9 million at March 31, 2024 and represented approximately 9.8% of our total loans.

Current wording

Other Commercial Banking. In addition to our Litigation Commercial Banking business, commercial loans are also 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 payment processing customers. The balance of these loans totaled $117.9 million at June 30, 2024 and represented approximately 9.3% of our total loans.

Previous wording

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 approximately 12% on a compound annual growth rate from 2019 to 2022 with payment volumes or TAM of $10.3 trillion according to company records on U.S. payment industry trends. Couple this with the fact that there are less than approximately 100 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 85,000 small business merchants in all 50 states, and perform commercial treasury clearing services for approximately $9 billion in credit and debit card processing volume across 151 million transactions in the quarter ended March 31, 2024.

Current wording

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 approximately 12% on a compound annual growth rate from 2019 to 2022 with payment volumes or TAM of $10.3 trillion according to company records on U.S. payment industry trends. Couple this with the fact that there are less than approximately 100 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 83,000 small business merchants in all 50 states, and perform commercial treasury clearing services for approximately $9 billion in credit and debit card processing volume across 156 million transactions in the quarter ended June 30, 2024.

Previous wording

The success of our national litigation and payment processing verticals coupled with our branchless technology has led to industry leading performance. For the quarter ended March 31, 2024, we have produced industry leading returns including, but not limited to, a return on average assets and average equity of 2.59% and 20.14%, respectively; an industry leading net interest margin of 6.06%; a strong efficiency ratio of 49.8%; and a diversified revenue stream as demonstrated by a strong net interest margin and stable fee income representing 22% of total revenue (our payment processing vertical has a compound annual growth rate of 22% since 2019). Coupling these performance metrics with strong balance sheet management including, but not limited to, loan portfolio diversification, an asset sensitive balance sheet with 60% of our loans being variable rate tied to prime, interest rate floors in place on 90% of our variable rate loan portfolio, solid credit metrics with no nonperforming assets, a stable low cost deposit base, and strong available liquidity of $822.6 million, or 57% of deposits, with no outstanding borrowings ensures that our Company is poised for future growth and success.

Current wording

The success of our national litigation and payment processing verticals coupled with our branchless technology has led to industry leading performance. For the quarter ended June 30, 2024, we have produced industry leading returns including, but not limited to, a return on average assets and average equity of 2.58% and 20.16%, respectively; an industry leading net interest margin of 6.19%; a strong efficiency ratio of 49.8%; and a diversified revenue stream as demonstrated by a strong net interest margin and stable fee income representing 21% of total revenue (our payment processing vertical has a compound annual growth rate of 19% since 2019). Coupling these performance metrics with strong balance sheet management including, but not limited to, loan portfolio diversification, an asset sensitive balance sheet with 62% of our loans being variable rate tied to prime, interest rate floors in place on 90% of our variable rate loan portfolio, solid credit metrics with no nonperforming assets, a stable low cost deposit base, and strong available liquidity of $823.0 million, or 55% of deposits, with no outstanding borrowings ensures that our Company is poised for future growth and success.

Previous wording

Assets. Our total assets were $1.65 billion at March 31, 2024, an increase of $37.4 million, or 2.3%, from $1.62 billion at December 31, 2023, due to growth in loans held for investment of $20.8 million, or 1.7%, and securities available-

Current wording

Assets. Our total assets were $1.72 billion at June 30, 2024, an increase of $98.8 million, or 6.1%, from $1.62 billion at December 31, 2023, due to growth in loans held for investment of $53.6 million, or 4.4%, and securities available-

Previous wording

for-sale of $20.1 million, or 16.4%, partially offset by a decrease in cash and cash equivalents of $7.0 million, or 4.2%, as we deployed our strong liquidity into high yielding commercial loans and agency securities.

Current wording

for-sale of $54.7 million, or 44.8%, partially offset by a decrease in cash and cash equivalents of $12.5 million, or 7.6%, as we deployed our strong liquidity into high yielding commercial loans and agency securities.

Previous wording

Loan Portfolio Analysis. At March 31, 2024, loans, net of deferred fees and unearned premiums, were $1.23 billion, or 85.6% of total deposits, compared to $1.21 billion, or 85.8% of total deposits, at December 31, 2023. The growth in loans was primarily driven by net production in commercial loans, and to a lesser extent, consumer loans. Commercial loans increased $16.4 million, or 2.2%, to $754.3 million at March 31, 2024 from $737.9 million at December 31, 2023, driven by our litigation related loans. Consumer loans increased $4.5 million, or 30.8%, to $19.0 million at March 31, 2024 from $14.5 million at December 31, 2023.

Current wording

Loan Portfolio Analysis. At June 30, 2024, loans, net of deferred fees and unearned premiums, were $1.26 billion, or 84.8% of total deposits, compared to $1.21 billion, or 85.8% of total deposits, at December 31, 2023. The growth in loans was primarily driven by net production in commercial loans, and to a lesser extent, consumer loans. Commercial loans increased $48.7 million, or 6.6%, to $786.6 million at June 30, 2024 from $737.9 million at December 31, 2023, driven by our litigation related loans. Consumer loans increased $4.5 million, or 31.2%, to $19.0 million at June 30, 2024 from $14.5 million at December 31, 2023.

Previous wording

At March 31, 2024, our Litigation-Related loans, which include commercial loans to law firms and consumer lending to plaintiffs/claimants and attorneys, totaled $636.6 million, or 51.8% of our total loan portfolio, compared to $614.9 million, or 50.9% of our total loan portfolio at December 31, 2023. We remain focused on prudently growing our Litigation-Related loan portfolio. We also had Commercial Litigation-Related committed and uncommitted undrawn lines of credit totaling $91.7 million and $462.5 million, respectively, at March 31, 2024.

Current wording

At June 30, 2024, our Litigation-Related loans, which include commercial loans to law firms and consumer lending to plaintiffs/claimants and attorneys, totaled $671.3 million, or 53.2% of our total loan portfolio, compared to $614.9 million, or 50.9% of our total loan portfolio at December 31, 2023. We remain focused on prudently growing our Litigation-Related loan portfolio. We also had Commercial Litigation-Related committed and uncommitted undrawn lines of credit totaling $85.6 million and $477.8 million, respectively, at June 30, 2024.

Previous wording

Debt Securities Portfolio. Securities available-for-sale increased $20.1 million, or 16.4%, to $142.2 million at March 31, 2024 from $122.1 million at December 31, 2023, driven by purchases of $25.0 million, partially offset by paydowns of $3.3 million and unrealized losses of $1.6 million. Securities held-to-maturity decreased $1.8 million, or 2.3%, to $75.2 million at March 31, 2024 from $77.0 million at December 31, 2023, driven by paydowns of $1.7 million and premium amortization of $24 thousand.

Current wording

Debt Securities Portfolio. Securities available-for-sale increased $54.7 million, or 44.8%, to $176.8 million at June 30, 2024 from $122.1 million at December 31, 2023, due to management proactively increasing the investment portfolio to approximately 15% of total assets as part of our balance sheet management strategy, while simultaneously moderating multifamily and commercial real estate (“CRE”) growth due to the current economic and interest rate environment. The increase was driven by purchases of $65.2 million, partially offset by paydowns of $9.0 million and unrealized losses of $1.4 million. Securities held-to-maturity decreased $3.9 million, or 5.1%, to $73.1 million at June 30, 2024 from $77.0 million at December 31, 2023, driven by paydowns of $3.9 million and net premium amortization of $48 thousand.

Previous wording

Funding**.** Total deposits increased $26.8 million, or 1.9%, to $1.43 billion at March 31, 2024 from $1.41 billion at December 31, 2023. We continue to focus on the acquisition and expansion of core deposit relationships. Core deposits, which we define as total deposits excluding time deposits, totaled $1.42 billion at March 31, 2024, or 99.0% of total deposits, compared to $1.40 billion or 99.4% of total deposits at December 31, 2023. Litigation and payment processing deposits represent $1.24 billion, or 87%, of total deposits at March 31, 2024. Savings, NOW and money market deposits increased $20.8 million, or 2.2%, to $947.1 million at March 31, 2024.

Current wording

Funding**.** Total deposits increased $79.6 million, or 5.7%, to $1.49 billion at June 30, 2024 from $1.41 billion at December 31, 2023. We continue to focus on the acquisition and expansion of core deposit relationships. Core deposits, which we define as total deposits excluding time deposits, totaled $1.47 billion at June 30, 2024, or 99.2% of total deposits, compared to $1.40 billion or 99.4% of total deposits at December 31, 2023. Litigation and payment processing deposits represent $1.27 billion, or 85.7%, of total deposits at June 30, 2024. Savings, NOW and money market deposits increased $65.7 million, or 7.1%, to $992.0 million at June 30, 2024.

Previous wording

Core commercial relationship banking clients in our two national verticals represent approximately 87% of our $1.43 billion deposit base at March 31, 2024. These relationship banking clients are derived from coupling lending facilities, payment processing, and other unique custodial banking needs with commercial cash management depository services. Our deposit strategy primarily focuses on developing full service commercial banking relationships with our clients through lending facilities, payment processing, and other unique commercial cash management services in our two national verticals, rather than competing with other institutions on rate. Our longer duration interest on lawyer trust accounts (“IOLTA”), escrow and claimant trust settlement deposits represent $709.5 million, or 49.5%, of total deposits. As of March 31, 2024, uninsured deposits were $369.4 million, or 26%, of our total deposits of $1.43 billion, excluding $10.6 million of affiliate deposits held by the Bank. Approximately 80% of our uninsured deposits represent clients with full relationship banking (loans, payment processing, and other service-oriented relationships) including, but not limited to, law firm operating accounts, law firm IOLTA/escrow accounts, merchant reserves, ISO reserves, ACH processing, and custodial accounts.

Current wording

Core commercial relationship banking clients in our two national verticals represent approximately 84% of our $1.49 billion deposit base at June 30, 2024. These relationship banking clients are derived from coupling lending facilities, payment processing, and other unique custodial banking needs with commercial cash management depository services. Our deposit strategy primarily focuses on developing full service commercial banking relationships with our clients through lending facilities, payment processing, and other unique commercial cash management services in our two national verticals, rather than competing with other institutions on rate. Our longer duration interest on lawyer trust accounts (“IOLTA”), escrow and claimant trust settlement deposits represent $813.6 million, or 54.7%, of total deposits. As of June 30, 2024, uninsured deposits were $455.7 million, or 31%, of our total deposits of $1.49 billion, excluding $11.1 million of affiliate deposits held by the Bank. Approximately 80% of our uninsured deposits represent clients with full relationship banking (loans, payment processing, and other service-oriented relationships) including, but not limited to, law firm operating accounts, law firm IOLTA/escrow accounts, merchant reserves, ISO reserves, ACH processing, and custodial accounts.

Previous wording

Due to the nature of our larger mass tort and class action settlements related to the litigation vertical, we participate in FDIC insured sweep programs as well as treasury secured money market funds. As of March 31, 2024, off-balance sheet sweep funds totaled approximately $466.6 million, of which approximately $290.9 million, or 62.3%, was available to be swept onto our balance sheet as reciprocal client relationship deposits. Our deposit growth and off-balance sheet funds continue to demonstrate our highly efficient branchless and technology enabled deposit platforms.

Current wording

Due to the nature of our larger mass tort and class action settlements related to the litigation vertical, we participate in FDIC insured sweep programs as well as treasury secured money market funds. As of June 30, 2024, off-balance sheet sweep funds totaled approximately $408.0 million, of which approximately $273.6 million, or 67.1%, was available to be swept onto our balance sheet as reciprocal client relationship deposits. Our deposit growth and off-balance sheet funds continue to demonstrate our highly efficient branchless and technology enabled deposit platforms.

Previous wording

At March 31, 2024, we had the ability to borrow a total of $300.1 million from the Federal Home Loan Bank of New York. We also had an available line of credit with the Federal Reserve Bank of New York discount window of $55.9 million. No borrowing amounts were outstanding as of March 31, 2024. Historically, we have never leveraged our balance sheet to generate earnings and have always utilized core client deposits to fund our asset growth and related earnings.

Current wording

At June 30, 2024, we had the ability to borrow a total of $324.8 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 $54.4 million. No borrowing amounts were outstanding as of June 30, 2024. Historically, we have never leveraged our balance sheet to generate earnings and have always utilized core client deposits to fund our asset growth and related earnings.

Previous wording

Stockholders’ Equity. Total stockholders’ equity increased $8.5 million to $207.1 million at March 31, 2024, from $198.6 million at December 31, 2023, primarily due to net income of $10.1 million and amortization of share-based compensation of $967 thousand, partially offset by dividends declared to common stockholders of $1.2 million and other comprehensive loss of $1.1 million due to the decrease in fair value of our available-for-sale securities portfolio.

Current wording

Stockholders’ Equity. Total stockholders’ equity increased $18.9 million to $217.4 million at June 30, 2024, from $198.6 million at December 31, 2023, primarily due to net income of $20.5 million and amortization of share-based compensation of $1.9 million, partially offset by dividends declared to common stockholders of $2.5 million and other comprehensive loss of $1.0 million due to the decrease in fair value of our available-for-sale securities portfolio.

Previous wording

Asset Quality. Nonperforming assets consisted of one multifamily loan totaling $10.9 million as of March 31, 2024 and December 31, 2023. We had no exposure to commercial office space, no construction loans, and only $15.3 million in performing loans to the hospitality industry. The allowance for credit losses was $17.5 million, or 1.43% of total loans, as of March 31, 2024, as compared to $16.6 million, or 1.38% of total loans at December 31, 2023. The increase in the allowance as a percentage of loans was general reserve driven considering loan growth and qualitative factors associated with the current uncertain economic environment including, but not limited to, its potential impact on the New York Metro commercial real estate market. At March 31, 2024, special mention and substandard loans totaled $4.0 million and $10.9 million, respectively, substantially unchanged from December 31, 2023. The ratio of nonperforming loans to total loans and total assets was 0.89% and 0.66%, respectively, as of March 31, 2024, as compared to 0.91% and 0.68%, respectively, as of December 31, 2023. The allowance for credit losses to the nonperforming loans was 160% as of March 31, 2024, as compared to 152% as of December 31, 2023.

Current wording

Asset Quality. Nonperforming assets consisted of one multifamily loan totaling $10.9 million as of June 30, 2024 and December 31, 2023. We had no exposure to commercial office space, no construction loans, and only $15.0 million in performing loans to the hospitality industry. The allowance for credit losses was $18.5 million, or 1.47% of total loans, as of June 30, 2024, as compared to $16.6 million, or 1.38% of total loans at December 31, 2023. The increase in the allowance as a percentage of loans was general reserve driven considering loan growth and qualitative factors associated with the current short-term interest rate environment as well as the current uncertain economic environment including, but not limited to, its potential impact on the New York Metro multifamily and commercial real estate market. At June 30, 2024, special mention and substandard loans totaled $4.0 million and $10.9 million, respectively, substantially unchanged from December 31, 2023. The ratio of nonperforming loans to total loans and total assets was 0.87% and 0.64%,

Previous wording

Our net interest margin increased 3 basis points, which was positively impacted by growth in higher yielding variable rate commercial loans, to 6.06% for the three months ended March 31, 2024 from 6.03% for the three months ended March 31, 2023.

Current wording

Our net interest margin increased 17 basis points, which was positively impacted by growth in higher yielding variable rate commercial loans and low-cost litigation-based deposits, to 6.19% for the three months ended June 30, 2024 from 6.02% for the three months ended June 30, 2023.

Previous wording

Interest Income. Interest income increased $5.7 million, or 28.0%, to $26.1 million for the three months ended March 31, 2024 from $20.4 million for the three months ended March 31, 2023 and was attributable to increases in loan, securities and interest earning cash and other interest income, and partially offset by a decrease in reverse repurchase interest income.

Current wording

Interest Income. Interest income increased $5.3 million, or 24.2%, to $27.4 million for the three months ended June 30, 2024 from $22.1 million for the three months ended June 30, 2023 and was attributable to increases in loan, securities and interest earning cash and other interest income, and partially offset by a decrease in reverse repurchase interest income.

Previous wording

Securities purchased under agreements to resell interest income decreased $653 thousand as management elected to close out its reverse repurchase agreements and reinvest funds into higher yielding commercial loans.

Current wording

Securities purchased under agreements to resell interest income decreased $715 thousand as management elected to close out its reverse repurchase agreements and reinvest funds into higher yielding commercial loans.

Previous wording

Interest Expense. Interest expense increased $2.1 million, or 198.3%, to $3.2 million for the three months ended March 31, 2024 from $1.1 million for the three months ended March 31, 2023, primarily attributable to increases in average rate (primarily IOLTA relationship deposits) accounting for $1.4 million of the increase and increases related to average deposit balances accounting for $719 thousand (primarily relationship money market deposits) of the increase. Average interest bearing deposit balances (primarily IOLTA relationship deposits) increased $213.6 million, or 32.5%, when compared to March 31, 2023. Our deposit cost-of-funds, excluding demand deposits, increased 82 basis points for the three months ended March 31, 2024 as compared to the three months ended March 31, 2023, due to increases in short-term interest rates as well as management pro-actively increasing rates on escrow accounts in the various states we operate.

Current wording

Interest Expense. Interest expense increased $1.1 million, or 55.8%, to $3.1 million for the three months ended June 30, 2024 from $2.0 million for the three months ended June 30, 2023, primarily attributable to increases in average rate (primarily IOLTA) comprising $756 thousand and an increase of $340 thousand (primarily IOLTA) attributable to average deposit balances. Average interest bearing deposit balances (primarily IOLTA) increased $221.7 million, or 32.2%, when compared to June 30, 2023. Our deposit cost-of-funds, excluding demand deposits, increased 21 basis points for the three months ended June 30, 2024 as compared to the three months ended June 30, 2023, due to increases in short-term interest rates as well as management pro-actively increasing rates on IOLTA accounts in the various states we operate.

Previous wording

Provision for Credit Losses. Our provision for credit losses was $1.0 million for the three months ended March 31, 2024, an increase of $500 thousand from the $500 thousand provision for the three months ended March 31, 2023. As of March 31, 2024, our allowance to loans ratio was 1.43% as compared to 1.34% as of March 31, 2023. The increase in the allowance as a percentage of loans was general reserve driven considering loan growth and qualitative factors associated with the current uncertain economic environment including, but not limited to, its potential impact on the New York Metro commercial real estate market.

Current wording

Provision for Credit Losses. Our provision for credit losses was $1.0 million for the three months ended June 30, 2024, a decrease of $325 thousand from the $1.3 million provision for the three months ended June 30, 2023. As of June 30, 2024, our allowance to loans ratio was 1.47% as compared to 1.34% as of June 30, 2023. The increase in the allowance as a percentage of loans was general reserve driven considering loan growth and qualitative factors associated with the current short-term interest rate environment as well as the current uncertain economic environment including, but not limited to, its potential impact on the New York Metro multifamily and commercial real estate market.

Previous wording

Employee compensation and benefits costs increased due to increases in employees to support growth and excellence in client service as well as the impact of year end salary, bonus and stock-based compensation increases. Our

Current wording

Employee compensation and benefits costs increased due to increases in employees to support growth and excellence in client service as well as the impact of year end salary, bonus and stock-based compensation increases. Our overall staffing levels increased by eight employees, or 6%, year-over-year to 141 full-time equivalents as we expanded our sales, lending, and risk management areas. Advertising and marketing costs increased as we continued to grow our digital marketing platform, expand our thought leadership in our national verticals, and support our regional Business

Previous wording

Income Tax Expense. We recorded an income tax expense of $3.6 million for the three months ended March 31, 2024, reflecting an effective tax rate of 26.5%, compared to $4.4 million, or 26.5%, for the three months ended March 31, 2023.

Current wording

Income Tax Expense. We recorded an income tax expense of $3.9 million for the three months ended June 30, 2024, reflecting an effective tax rate of 27.0%, compared to $3.4 million, or 27.0%, for the three months ended June 30, 2023.

Previous wording

General. Net income decreased $2.1 million, or 17.4%, to $10.1 million for the three months ended March 31, 2024 from $12.2 million for the three months ended March 31, 2023. The decrease resulted from a $3.9 million decrease in noninterest income, which was primarily attributable to a $4.0 million nonrecurring gain on our equity investment in a litigation fintech company in the first quarter of 2023, and an increase of $2.1 million in noninterest expense, partially offset by an increase in net interest income of $3.6 million.

Current wording

General. Net income decreased $747 thousand, or 3.5%, to $20.5 million for the six months ended June 30, 2024 from $21.3 million for the six months ended June 30, 2023. The decrease resulted from a $4.3 million decrease in noninterest income, which was primarily attributable to a $4.0 million nonrecurring gain on our equity investment in a litigation fintech company in the first quarter of 2023, and an increase of $4.3 million in noninterest expense, partially offset by an increase in net interest income of $7.8 million.

Previous wording

Loan interest income increased $5.8 million, or 32.8%, to $23.4 million for the three months ended March 31, 2024 from $17.6 million for the three months ended March 31, 2023. This increase was attributable to a $256.5 million, or 26.9%, increase in the average loan balance primarily due to growth in our national commercial lending platform and, to a lesser extent, our regional real estate loans and a 28 basis point increase in loan yields to 7.78%. Our commercial loan platform drove a $4.9 million increase in interest income, of which, $4.7 million was due to increased volume and $199 thousand was due to increases in yields, driving an approximate portfolio yield of 10.00%. Additionally, our real estate platform contributed $1.2 million to the increase in interest income, of which, $785 thousand was due to increased volume and $393 thousand was due to increases in yields, driving an approximate portfolio yield of 4.20%. Approximately 60% of our loan portfolio is comprised of variable rate commercial loans tied to prime that were positively impacted by increases in short-term interest rates.

Current wording

Loan interest income increased $10.9 million, or 29.5%, to $47.6 million for the six months ended June 30, 2024 from $36.8 million for the six months ended June 30, 2023. This increase was attributable to a $251.8 million, or 25.9%, increase in the average loan balance primarily due to growth in our national commercial lending platform and, to a lesser extent, our regional multifamily loan portfolio during 2023, and a 20 basis point increase in loan yields to 7.82%. Our commercial loan platform drove a $9.2 million increase in interest income, of which, $9.1 million was due to increased volume and $149 thousand was due to increases in yields, driving an approximate portfolio yield of 10.00%. Additionally, our multifamily platform contributed $2.2 million to the increase in interest income, of which, $1.5 million was due to increased volume and $746 thousand was due to increases in yields, driving an approximate portfolio yield of 4.24%. Approximately 62% of our loan portfolio is comprised of variable rate commercial loans tied to prime that were positively impacted by increases in short-term interest rates.

Previous wording

Interest earning cash interest income increased $136 thousand to $1.1 million for the three months ended March 31, 2024 from $943 thousand for the three months ended March 31, 2023, attributable to a 97 basis point increase in yields which was positively impacted by increases in short-term interest rates, partially offset by a $6.5 million, or 7.3%, decrease in the average balance of interest earning cash.

Current wording

Interest earning cash interest income increased $268 thousand to $2.2 million for the six months ended June 30, 2024 from $2.0 million for the six months ended June 30, 2023, attributable to a 77 basis point increase in yields which was positively impacted by increases in short-term interest rates, partially offset by a $2.7 million, or 3.1%, decrease in the average balance of interest earning cash.

Previous wording

Payment processing volumes and transactions for the credit and debit card processing platform increased $937 million, or 12.2%, to $8.6 billion and 7.6 million, or 5.3%, to 150.5 million transactions, respectively, for the quarter ended March 31, 2024, as compared to the same period in 2023. These increases were due to the expansion of sales channels through ISOs, an increased number of merchants, volume increases, and were facilitated by our focus on technology and other resources in the payments vertical. Administrative service income increased $217 thousand, or 41.0%, to $746 thousand for the first quarter of 2024. Off-balance sheet sweep funds totaled $466.6 million at March 31, 2024, demonstrating the continued strength of our branchless core business model. Other income decreased $4.0 million due to a nonrecurring gain on our Litify fintech investment in the first quarter of 2023. In February 2023, Litify, Inc. (“Litify”) was reorganized into a partnership and an unrelated third party acquired a majority ownership in the reorganized entity. As an equity holder and party to the reorganization and sale transaction, a majority of the Company’s partnership interests were exchanged for cash and undiscounted noncash consideration of approximately $5.4 million. As a result, the Company recognized a gain on its investment of $4.0 million in the first quarter of 2023.

Current wording

Payment processing volumes and transactions for the credit and debit card processing platform increased $1.7 billion, or 10.8%, to $17.9 billion and 6.4 million, or 2.1%, to 306.1 million transactions, respectively, for the six months ended June 30, 2024, as compared to the same period in 2023. These increases were due to the expansion of sales channels through ISOs, an increased number of merchants, volume increases, and were facilitated by our focus on technology and other resources in the payments vertical. Administrative service income increased $98 thousand, or 7.7%, to $1.4 million for the six months ended June 30, 2024. Off-balance sheet sweep funds totaled $408.0 million at June 30, 2024, demonstrating the continued strength of our branchless core business model. Other income increased $295 thousand, or 76.6%, to $680 thousand primarily due to increases in client loan related fees. Net gain on equity investments decreased $4.0 million due to a nonrecurring gain on our Litify fintech investment in the first quarter of 2023. In February 2023, Litify, Inc. (“Litify”) was reorganized into a partnership and an unrelated third party acquired a majority ownership in the reorganized entity. As an equity holder and party to the reorganization and sale transaction, a majority of the Company’s partnership interests were exchanged for cash and undiscounted noncash consideration of approximately $5.4 million. As a result, the Company recognized a gain on its investment of $4.0 million in the first quarter of 2023. During the second quarter of 2024, the Company received cash consideration resulting in a realized gain on its Litify investment of approximately $500 thousand, offset by an equity method loss of approximately $500 thousand recognized on its investment in a third party sponsored NFL consumer post settlement loan fund.

Previous wording

overall staffing levels increased by 21 employees, or 18%, year-over-year to 139 full time equivalents as of March 31, 2024, primarily from our hiring of six regional managing directors/senior business development officers (“BDOs”), resources within our commercial underwriting/lending area, sales support staff, operational staff to support Esquire’s growth plans as well as our risk management and compliance areas, and our new chief legal officer throughout 2023. Data processing costs increased due to increased processing volume, primarily driven by our core banking platform, and additional costs related to our technology implementations. Advertising and marketing costs increased as we continued to grow our digital marketing platform, expand our thought leadership in our national verticals, and support our new regional BDOs. Travel and business relations costs increased as a result of our high touch marketing and sales efforts which complement our digital marketing efforts and additional travel related to our newly hired regional BDOs. Professional services costs decreased due to the costs associated with a global executive search firm in 2023. Our investment in current resources (people, technology, and digital marketing) should continue to support our long-term growth goals.

Current wording

Employee compensation and benefits costs increased due to increases in employees to support growth and excellence in client service as well as the impact of year end salary, bonus and stock-based compensation increases. In 2024, we experienced the full year impact of our 2023 key hires including, but not limited to, our regional senior BDOs, sales support, lending/lending support, and risk management staffing initiatives. Advertising and marketing costs increased as we continued to grow our digital marketing platform, expand our thought leadership in our national verticals, and support our regional BDOs. 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 due to amortization of our investments in internally developed software to support our digital platform and additional office space to support our growth. Professional services costs decreased due to the hiring costs associated with our executive search firm in 2023. Our investment in current resources (people, technology, and digital marketing) will continue to support our long-term growth goals.

Previous wording

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.

Current wording

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

Previous wording

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.

Current wording

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

Previous wording

Our most liquid assets are cash and cash equivalents. The levels of these assets are dependent on our operating, financing, lending and investing activities during any given period. At March 31, 2024, cash and cash equivalents totaled $158.2 million.

Current wording

Our most liquid assets are cash and cash equivalents. The levels of these assets are dependent on our operating, financing, lending and investing activities during any given period. At June 30, 2024, cash and cash equivalents totaled $152.7 million.

Previous wording

At March 31, 2024, through pledging of our securities and certain loans, we had the ability to borrow up to $300.1 million from the FHLB of New York and $55.9 million from the FRB of New York discount window. At March 31, 2024, we also had $17.5 million in aggregated unsecured lines of credit with unaffiliated correspondent banks. No amounts were outstanding on any of the aforementioned lines as of March 31, 2024.

Current wording

At June 30, 2024, through pledging of our securities and certain loans, we had the ability to borrow up to $324.8 million from the FHLB of New York and $54.4 million from the FRB of New York discount window. At June 30, 2024, we also had $17.5 million in aggregated unsecured lines of credit with unaffiliated correspondent banks. No amounts were outstanding on any of the aforementioned lines as of June 30, 2024. Subsequent to June 30, 2024, through the pledging of additional loans, we increased our FHLB borrowing capacity $59.2 million to $384.0 million.

Previous wording

At March 31, 2024, our off-balance sheet sweeps funds totaled $466.6 million, of which $290.9 million, or 62.3%, was able to be swept onto our balance sheet as reciprocal client relationship deposits.

Current wording

At June 30, 2024, our off-balance sheet sweeps funds totaled $408.0 million, of which $273.6 million, or 67.1%, was able to be swept onto our balance sheet as reciprocal client relationship deposits.

Previous wording

Our overall liquidity position (cash, borrowing capacity, and available reciprocal client sweep balances) totaled $822.6 million at March 31, 2024, or 57% of total deposits, creating a highly liquid and unlevered balance sheet.

Current wording

Our overall liquidity position (cash, borrowing capacity, and available reciprocal client sweep balances) totaled $823.0 million at June 30, 2024, or 55% of total deposits, creating a highly liquid and unlevered balance sheet.

Previous wording

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”. For the current period, the Bank has elected to continue to utilize the generally applicable leverage and risk based requirements and not apply the community bank leverage ratio.

Current wording

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”. For the current period, the Bank has elected to continue to utilize the generally applicable leverage and risk based requirements and not apply the community bank leverage ratio.