Esquire Financial Holdings Inc

Previous 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.

Current wording

Management’s discussion and analysis of financial condition at September 30, 2024 and December 31, 2023 and results of operations for the three and nine months ended September 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

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

Current wording

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. 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, U.S. tort actions alone are estimated to consume approximately 2.1% of U.S. GDP annually, 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 decades, extensive in-house experience, deep relationships with respected firms nationally, and unique products tailored to commercial law firms’ needs and wants.

Previous 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

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 September 30, 2024. More importantly, since our commercial banking platform is focused on full

Previous 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.

Current wording

service relationship banking, for every $1.00 we advance on these loans we receive on average $1.52 of low-cost (our cost-of-funds for the quarter ended September 30, 2024 is 88 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 $828.9 million, or 54%, 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 $488.0 million at September 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 $117.9 million at June 30, 2024 and represented approximately 9.3% 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 $97.7 million at September 30, 2024 and represented approximately 7.5% 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 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.

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 10% on a compound annual growth rate from 2019 to 2023 with payment volumes or TAM of $10.9 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 decades, 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 84,000 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 152 million transactions in the quarter ended September 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 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.

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 September 30, 2024, we have produced industry leading returns including, but not limited to, a return on average assets and average equity of 2.62% and 20.29%, respectively; an industry leading net interest margin of 6.16%; a strong efficiency ratio of 48.1%; and a diversified revenue stream as demonstrated by a strong net interest margin and stable fee income representing 19% 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 64% of our loans being variable rate tied to prime, interest rate floors in place on 83% of our variable rate loan portfolio, solid credit metrics with limited nonperforming assets, a stable low cost deposit base, and strong available liquidity of $972.4 million, or 63% of deposits, with no outstanding borrowings ensures that our Company is poised for future growth and success.

Previous wording

Assets. Our total assets were $1.72 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-

Current wording

Assets. Our total assets were $1.78 billion at September 30, 2024, an increase of $165.6 million, or 10.2%, from $1.62 billion at December 31, 2023, due to growth in loans held for investment of $90.0 million, or 7.5%, and securities available-for-sale of $89.4 million, or 73.2%, partially offset by a decrease in cash and cash equivalents of $17.5 million, or 10.6%, as we deployed our strong liquidity into higher yielding commercial loans and agency securities.

Previous 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.

Current wording

Loan Portfolio Analysis. At September 30, 2024, loans, net of deferred fees and unearned premiums, were $1.30 billion, or 84.4% 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 $87.5 million, or 11.9%, to $825.4 million at September 30, 2024 from $737.9 million at December 31, 2023, driven by our litigation related loans. Consumer loans increased $4.4 million, or 30.2%, to $18.9 million at September 30, 2024 from $14.5 million at December 31, 2023.

Previous 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.

Current wording

$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 as our regional Business Development Officers (“BDOs”) and related support staff continue to drive growth across our national commercial platform. We also had Commercial Litigation-Related committed and uncommitted undrawn lines of credit totaling $91.1 million and $577.3 million, respectively, at September 30, 2024.

Previous 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.

Current wording

Debt Securities Portfolio. Securities available-for-sale increased $89.4 million, or 73.2%, to $211.5 million at September 30, 2024 from $122.1 million at December 31, 2023, due to our current balance sheet management strategy of deploying funds in short duration agency mortgage-backed securities at peak market interest rates, 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 $102.7 million, and unrealized gains of $4.0 million, partially offset by paydowns of $17.2 million. Securities held-to-maturity decreased $6.2 million, or 8.1%, to $70.8 million at September 30, 2024 from $77.0 million at December 31, 2023, driven by paydowns of $6.1 million and net premium amortization of $77 thousand.

Previous 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.

Current wording

Funding**.** Total deposits increased $129.1 million, or 9.2%, to $1.54 billion at September 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 $1.52 billion at September 30, 2024, or 99.1% 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 82.9%, of total deposits at September 30, 2024. Savings, NOW and money market deposits increased $56.6 million, or 6.1%, to $982.8 million at September 30, 2024.

Previous 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.

Current wording

Core commercial relationship banking clients in our two national verticals represent approximately 80% of our $1.54 billion deposit base at September 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 $828.9 million, or 54.0%, of total deposits. As of September 30, 2024, uninsured deposits were $458.9 million, or 30%, of our total deposits of $1.54 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.

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 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.

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 September 30, 2024, off-balance sheet sweep funds totaled approximately $488.0 million, of which approximately $356.5 million, or 73.1%, 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 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.

Current wording

At September 30, 2024, we had the ability to borrow a total of $395.8 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 $54.9 million. No borrowing amounts were outstanding as of September 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 $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.

Current wording

Stockholders’ Equity. Total stockholders’ equity increased $34.0 million to $232.6 million at September 30, 2024, from $198.6 million at December 31, 2023, primarily due to net income of $31.9 million and decreases in other comprehensive losses of $2.9 million, as unrealized losses on our securities available-for-sale declined due to current short-term market interest rates, and amortization of share-based compensation of $2.9 million, partially offset by dividends declared to common stockholders of $3.7 million.

Previous 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%,

Current wording

million in performing loans to the hospitality industry. The allowance for credit losses was $19.5 million, or 1.50% of total loans, as of September 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 September 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 0.84% and 0.61%, respectively, as of September 30, 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 178% as of September 30, 2024, as compared to 152% as of December 31, 2023.

Previous wording

Due to increases in short-term interest rates associated with the current inflationary environment since 2022, management enhanced its ongoing credit risk management including risk management of its commercial real estate loan portfolio. The following is a brief summary of our ongoing risk management for our multifamily and CRE portfolios as of June 30, 2024:

Current wording

Due to the interest rate environment since 2022, management enhanced its ongoing credit risk management monitoring and testing of its commercial real estate loan portfolio. The following is a brief summary of our risk management results for our multifamily and CRE portfolios as of September 30, 2024:

Previous wording

General. Net income increased $1.4 million, or 15.1%, to $10.5 million for the three months ended June 30, 2024 from $9.1 million for the three months ended June 30, 2023. The increase resulted from a $4.2 million increase in net interest income, partially offset by an increase of $2.3 million in noninterest expense and a decrease of $420 thousand in noninterest income.

Current wording

General. Net income increased $1.5 million, or 15.5%, to $11.4 million for the three months ended September 30, 2024 from $9.8 million for the three months ended September 30, 2023. The increase resulted from a $4.1 million increase in net interest income, partially offset by an increase of $1.6 million in noninterest expense and a decrease of $466 thousand in noninterest income.

Previous wording

Net Interest Income. Net interest income increased $4.2 million, or 21.1%, to $24.3 million for the three months ended June 30, 2024 from $20.1 million for the three months ended June 30, 2023, due to a $5.3 million increase in interest income, partially offset by a $1.1 million increase in interest expense.

Current wording

Net Interest Income. Net interest income increased $4.1 million, or 19.0%, to $25.9 million for the three months ended September 30, 2024 from $21.7 million for the three months ended September 30, 2023, due to a $5.2 million increase in interest income, partially offset by a $1.1 million increase in interest expense.

Previous wording

Our net interest margin increased 11 basis points, which was positively impacted by growth in higher yielding variable rate commercial loans and low-cost litigation-based deposits, to 6.13% for the six months ended June 30, 2024 from 6.02% for the six months ended June 30, 2023.

Current wording

Our net interest margin decreased 3 basis points, and was negatively impacted by an 18 basis point increase in our cost-of-funds, partially offset by growth in higher yielding variable rate commercial loans and low-cost escrow or IOLTA deposits, to 6.16% for the three months ended September 30, 2024 from 6.19% for the three months ended September 30, 2023.

Previous 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.

Current wording

Interest Income. Interest income increased $5.2 million, or 21.9%, to $29.1 million for the three months ended September 30, 2024 from $23.9 million for the three months ended September 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

Loan interest income increased $5.1 million, or 26.5%, to $24.2 million for the three months ended June 30, 2024 from $19.1 million for the three months ended June 30, 2023. This increase was attributable to a $247.2 million, or 24.9%, 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 12 basis point increase in loan yields to 7.85%. Our commercial loan platform drove a $4.3 million increase in interest income, of which, $4.4 million was due to increased volume, offset slightly by a $199 thousand decrease due to yields decreasing 3 basis points. Commercial loans had an approximate portfolio yield of 10.00%. Additionally, our multifamily platform contributed $1.0 million to the increase in interest income, of which, $678 thousand was due to increased volume and $354 thousand was due to a 47 basis point increase in yields, driving an approximate portfolio yield of 4.26%.

Current wording

Loan interest income increased $3.7 million, or 17.3%, to $25.1 million for the three months ended September 30, 2024 from $21.4 million for the three months ended September 30, 2023. This increase was attributable to a $180.4 million, or 16.5%, increase in the average loan balance primarily due to growth in our higher yielding national commercial lending platform and, to a lesser extent, our regional multifamily loan portfolio during the latter part of 2023, and an 8 basis point increase in loan yields to 7.87%. Our commercial loan platform drove a $3.3 million increase in interest income, of which, $3.6 million was due to increased volume, offset slightly by a $275 thousand decrease due to yields decreasing 17 basis points. Commercial loans had a portfolio yield of 9.72%. Additionally, our multifamily platform contributed $561 thousand to the increase in interest income, of which, $337 thousand was due to increased volume and $224 thousand was due to a 27 basis point increase in yields, driving a portfolio yield of 4.33%.

Previous wording

Securities interest income increased $834 thousand, or 70.1%, to $2.0 million for the three months ended June 30, 2024 from $1.2 million for the three months ended June 30, 2023. This increase was primarily attributable to management proactively increasing the investment portfolio as part of our balance sheet management strategy, at current peak interest rates, to approximately 15% of total assets, while simultaneously moderating multifamily and CRE growth due to the current economic and interest rate environment. Average securities increased $45.1 million, or 21.7%, and yields increased 92 basis points to 3.21%.

Current wording

Securities interest income increased $1.2 million, or 93.0%, to $2.4 million for the three months ended September 30, 2024 from $1.2 million for the three months ended September 30, 2023. This increase was primarily attributable to our current balance sheet management strategy of deploying funds in short duration agency mortgage-backed securities at peak market interest rates, while simultaneously moderating multifamily and CRE growth due to the current economic and interest rate environment. Average securities increased $71.9 million, or 34.6%, and yields increased 104 basis points to 3.40%.

Previous wording

Interest earning cash interest income increased $132 thousand to $1.1 million for the three months ended June 30, 2024 from $1.0 million for the three months ended June 30, 2023, attributable to a 57 basis point increase in yields which was positively impacted by increases in short-term interest rates, and a $1.0 million, or 1.2%, increase in the average balance of interest earning cash.

Current wording

Interest earning cash interest income increased $523 thousand to $1.6 million for the three months ended September 30, 2024 from $1.1 million for the three months ended September 30, 2023, attributable to a 21 basis point increase in yields which was positively impacted by increases in short-term interest rates, and a $35.7 million, or 42.2%, increase in the average balance of interest earning cash.

Previous 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.

Current wording

Securities purchased under agreements to resell interest income decreased $158 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 $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.

Current wording

Interest Expense. Interest expense increased $1.1 million, or 50.4%, to $3.3 million for the three months ended September 30, 2024 from $2.2 million for the three months ended September 30, 2023, primarily attributable to increases in average rate (primarily IOLTA) comprising $681 thousand and an increase of $460 thousand (primarily IOLTA) attributable to average deposit balances. Average interest bearing deposit balances (primarily IOLTA) increased $211.9 million, or 28.6%, when compared to September 30, 2023. Our deposit cost-of-funds, excluding demand deposits, increased 21 basis points for the three months ended September 30, 2024 as compared to the three months ended September 30, 2023, due to increases in short-term interest rates as well as management proactively 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 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.

Current wording

Provision for Credit Losses. Our provision for credit losses was $1.0 million for the three months ended September 30, 2024, a decrease of $200 thousand from the $1.2 million provision for the three months ended September 30, 2023. As of September 30, 2024, our allowance to loans ratio was 1.50% as compared to 1.38% as of September 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

Payment processing volumes for the credit and debit card processing platform increased $810 million, or 9.6%, to $9.3 billion and transactions decreased 1.2 million, or 0.8%, to 155.6 million, for the quarter ended June 30, 2024, as compared to the same period in 2023. We continue to focus on the expansion of sales channels through ISOs, prudently managing risk while increasing the number of merchants, growing volumes, and expanding our technology and other resources in the payments vertical. Administrative service income decreased $119 thousand, or 16.1%, to $620 thousand for the second quarter of 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 $141 thousand, or 73.4%, to $333 thousand due to increases in client loan related fees. 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.

Current wording

Payment processing income was $5.2 million for the quarter ended September 30, 2024, a $452 thousand decrease from the same period in 2023, primarily due to anticipated ISO and merchant attrition and changes in the volumes of our overall merchant risk profile. Payment processing volumes for the credit and debit card processing platform increased $839 million, or 10.0%, to $9.2 billion and transactions decreased 5.4 million, or 3.4%, to 152.0 million, for the quarter ended September 30, 2024, as compared to the same period in 2023. We continue to focus on the expansion of sales channels through ISOs, prudently managing risk while focusing on new merchant originations, increasing overall volumes as well as risk profiles, and expanding our technology and other resources in the payments vertical. Administrative service income increased $39 thousand, or 6.3%, to $658 thousand for the third quarter of 2024. Off-balance sheet sweep funds totaled $488.0 million at September 30, 2024, demonstrating the continued strength of our branchless core business model. Other income decreased $67 thousand, or 22.2%, to $235 thousand due to decreases in loan and other banking fees.

Previous wording

Development Officers (“BDOs”) recently hired in 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. 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 costs in 2023 associated with our executive search firm. Our investments in current resources (people, technology, and digital marketing) will 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. 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 hired in 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. 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 investments in compliance and risk management in the payment processing division in 2023. Our investments in current resources, including employees, technology, and digital marketing, continue to support our long-term growth goals.

Previous wording

Income Tax Expense. We recorded an income tax expense of $7.5 million for the six months ended June 30, 2024, reflecting an effective tax rate of 26.75%, compared to $7.8 million, or 26.71%, for the six months ended June 30, 2023.

Current wording

Income Tax Expense. We recorded an income tax expense of $4.2 million for the three months ended September 30, 2024, reflecting an effective tax rate of 27.0%, compared to $3.5 million, or 26.0%, for the three months ended September 30, 2023, resulting from certain discrete tax benefits related to stock-based compensation.

Previous wording

Comparison of Operating Results for the Six Months Ended June 30, 2024 and 2023

Current wording

Comparison of Operating Results for the Nine Months Ended September 30, 2024 and 2023

Previous 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.

Current wording

General. Net income increased $776 thousand, or 2.5%, to $31.9 million for the nine months ended September 30, 2024 from $31.1 million for the nine months ended September 30, 2023. The increase resulted from an $11.9 million increase in net interest income, partially offset by an increase of $5.9 million in noninterest expense and a decrease of $4.8 million 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.

Previous 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.

Current wording

Our net interest margin increased 6 basis points, which was positively impacted by growth in higher yielding variable rate commercial loans and low-cost escrow or IOLTA deposits, to 6.14% for the nine months ended September 30, 2024 from 6.08% for the nine months ended September 30, 2023.

Previous wording

Interest Income. Interest income increased $11.0 million, or 26.0%, to $53.5 million for the six months ended June 30, 2024 from $42.4 million for the six 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.

Current wording

Interest Income. Interest income increased $16.3 million, or 24.5%, to $82.6 million for the nine months ended September 30, 2024 from $66.3 million for the nine months ended September 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

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.

Current wording

Loan interest income increased $14.6 million, or 25.0%, to $72.7 million for the nine months ended September 30, 2024 from $58.2 million for the nine months ended September 30, 2023. This increase was attributable to a $227.5 million, or 22.5%, increase in the average loan balance primarily due to growth in our higher yielding national commercial lending platform and, to a lesser extent, our regional multifamily loan portfolio during the latter part of 2023, and a 15 basis point increase in loan yields to 7.83%. Our commercial loan platform drove a $12.5 million increase in interest income, of which $12.6 million was due to increased volume, offset by a $114 thousand decrease due to a yield decrease of 3 basis points, driving a portfolio yield of 9.79%. Additionally, our multifamily platform contributed $2.7 million to the increase in interest income, of which, $1.8 million was due to increased volume and $958 thousand was due to a 41 basis point increase in yields, driving a portfolio yield of 4.27%. Approximately 64% 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

Securities interest income increased $1.3 million, or 54.8%, to $3.6 million for the six months ended June 30, 2024 from $2.3 million for the six months ended June 30, 2023. This increase was primarily attributable to management proactively increasing the investment portfolio as part of our balance sheet management strategy, at current peak interest rates, to approximately 15% of total assets, while simultaneously moderating multifamily and CRE growth due to the current economic and interest rate environment. Average securities increased $31.2 million, or 15.0%, and yields increased 77 basis points to 3.04%.

Current wording

Securities interest income increased $2.4 million, or 68.0%, to $6.0 million for the nine months ended September 30, 2024 from $3.6 million for the nine months ended September 30, 2023. This increase was primarily attributable to our current balance sheet management strategy, of deploying funds in short duration agency mortgage-backed securities at peak market interest rates, while simultaneously moderating multifamily and CRE growth due to the current economic and interest rate environment. Average securities increased $44.9 million, or 21.6%, and yields increased 87 basis points to 3.17%.

Previous 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.

Current wording

Interest earning cash interest income increased $791 thousand to $3.8 million for the nine months ended September 30, 2024 from $3.1 million for the nine months ended September 30, 2023, attributable to a 60 basis point increase in yields which was positively impacted by increases in short-term interest rates, as well as a $10.2 million, or 11.8%, increase in the average balance of interest earning cash.

Previous wording

Securities purchased under agreements to resell interest income decreased $1.4 million 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 $1.5 million 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 $3.2 million, or 106.2%, to $6.3 million for the six months ended June 30, 2024 from $3.0 million for the six months ended June 30, 2023, primarily attributable to increases in average rate (primarily IOLTA and to a lesser extent money market deposits) comprising $2.2 million of the increase and the remaining increase of $1.1 million (primarily IOLTA and to a lesser extent money market deposits) attributable to average deposit balances. Average interest bearing deposit balances (primarily IOLTA) increased $217.6 million, or 32.3%, when compared to June 30, 2023. Our deposit cost-of-funds, excluding demand deposits, increased 51 basis points for the six months ended June 30, 2024 as compared to the six 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.

Current wording

Interest Expense. Interest expense increased $4.3 million, or 82.9%, to $9.5 million for the nine months ended September 30, 2024 from $5.2 million for the nine months ended September 30, 2023, primarily attributable to increases in average rate (primarily IOLTA) comprising $2.9 million of the increase and the remaining increase of $1.4 million (primarily IOLTA) attributable to average deposit balances. Average interest bearing deposit balances (primarily IOLTA) increased $215.6 million, or 31.0%, when compared to September 30, 2023. Our deposit cost-of-funds, excluding demand deposits, increased 40 basis points for the nine months ended September 30, 2024 as compared to the nine months ended September 30, 2023, due to increases in short-term interest rates as well as management proactively increasing rates on IOLTA accounts in the various states we operate.