ESQ Esquire Financial Holdings Inc

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

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FORM 8-K

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CURRENT REPORT

PURSUANT TO SECTION 13 OR 15(d) OF THE

SECURITIES EXCHANGE ACT OF 1934

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Date of report (Date of earliest event reported): January 25, 2024

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Esquire Financial Holdings, Inc.

(Exact name of the registrant as specified in its charter)

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(516) 535-2002

(Registrant’s telephone number)

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N/A

(Former name or former address, if changed since last report)

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Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions (See General Instruction A.2. below):

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Securities registered pursuant to Section 12(b) of the Act:

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Indicate by check mark whether the registrant is an emerging growth company as defined in Rule 405 of the Securities Act of 1933 (17 CFR §230.405) or Rule 12b-2 of the Securities Exchange Act of 1934 (17 CFR §240.12b-2).

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Emerging growth company ☐

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If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

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Item 2.02Results of Operations and Financial Condition.

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On January 25, 2024, Esquire Financial Holdings, Inc. (the “Company”), the holding company for Esquire Bank, National Association (“Esquire Bank”), issued a press release announcing its earnings for the quarter and year ended December 31, 2023. A copy of the press release is attached as Exhibit 99.1 hereto and incorporated herein by reference.

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The information contained in this Item 2.02 and Exhibit 99.1 shall not be deemed to be “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, or otherwise subject to the liability of that section, and shall not be incorporated by reference into any filings made by the Company under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended, except as expressly set forth by specific reference in such filing.

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Item 7.01Regulation FD Disclosure.

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Esquire Financial Holdings, Inc. (the “Company”) intends to distribute and make available to investors, and to post on its website, the written presentation attached hereto as Exhibit 99.2. The presentation is furnished in this Current Report on Form 8-K, pursuant to this Item 7.01, as Exhibit 99.2, and is incorporated herein by reference.

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The information contained in this Item 7.01 and Exhibit 99.2 shall not be deemed to be “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, or otherwise subject to the liability of that section, and shall not be incorporated by reference into any filings made by the Company under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended, except as expressly set forth by specific reference in such filing.

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Item 9.01Financial Statements and Exhibits.

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(d) Exhibits.

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SIGNATURES

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Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, hereunto duly authorized.

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Exhibit 99.1

ESQUIRE FINANCIAL HOLDINGS, INC.

REPORTS FOURTH QUARTER AND FULL YEAR 2023 RESULTS

Strong Commercial Growth Coupled with Relationship Banking Drives Record Earnings and Returns for 2023

Jericho, NY – January 25, 2024 – Esquire Financial Holdings, Inc. (NASDAQ: ESQ) (the “Company”), the financial holding company for Esquire Bank, National Association (“Esquire Bank” or the “Bank”), (collectively “Esquire”) today announced its operating results for the fourth quarter and full year 2023. Significant achievements and key performance metrics during the current quarter and year include:

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“Coupling growth in our national platforms with strong balance sheet management, including credit quality, core relationship banking, liquidity and capital, has led us to consistently being named one of the top performing financial institutions in the country in 2023 as well as over the last several years,” stated Tony Coelho, Chairman of the Board.  “We continually focus on building long-term stakeholder value rather than focusing on short-term quarterly earnings.”  

“Strong commercial loan growth from our national platform was not only comprised of new originations but significant draws on existing facilities during the current quarter,” stated Andrew C. Sagliocca, Vice Chairman, CEO, and President. “We believe that these draws may temper first quarter loan growth while our current loan pipeline will allow us to grow loans in 2024 commensurate to prior years. We anticipate 2024 loan growth to be funded by core relationship deposits.  Finally, we anticipate the recent investment in our fintech, Payzli, should directly benefit fee income in early 2025 as we currently focus on building out this technology for select direct merchant verticals.”

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Fourth Quarter Earnings

Net income for the quarter ended December 31, 2023 was $9.9 million, or $1.18 per diluted share, compared to $9.1 million, or $1.10 per diluted share for the same period in 2022. Returns on average assets and equity for the current quarter were 2.59% and 20.78%, respectively, compared to 2.80% and 23.89% for the same period of 2022.

Net interest income for the fourth quarter of 2023 increased $4.3 million, or 23.6%, to $22.7 million, due to growth in average interest earning assets (funded with core deposits) totaling $217.3 million, or 17.3%, to $1.5 billion as well as a 31 basis point increase in our net interest margin to 6.12% when compared to the same period in 2022. Our net interest margin was positively impacted by growth in higher yielding variable rate commercial loans and increases in short-term interest rates. The average yield on loans increased 54 basis points to 7.81%, primarily driven by higher yielding variable rate commercial loan growth (approximately 60% of our portfolio is tied to prime as of December 31, 2023). Average loans in the quarter increased $269.0 million, or 29.9%, to $1.2 billion when compared to the fourth quarter of 2022, primarily due to growth in our national commercial lending platform and, to a lesser extent, our regional multi-family real estate loan portfolio. Loan income increased $6.5 million, or 39.5%, to $23.0 million with the increases in average loan balances (primarily commercial) accounting for $5.5 million of the increase and $1.0 million representing increases in average rate (primarily commercial). Our loan-to-deposit ratio was 85.8% as our low-cost deposit base increased $179.1 million, or 14.6%, primarily due to growth in our longer duration escrow (interest on lawyer trust accounts or “IOLTA”) deposit banking relationships. Our deposit cost-of-funds, excluding demand deposits, increased 95 basis points in the current quarter when compared to 2022 due to increases in short-term interest rates as well as management pro-actively increasing rates on IOLTA accounts in the various states where we operate.  Deposit expense increased $2.2 million to $2.9 million with increases in average deposit balances accounting for $768 thousand (primarily core relationship money market deposits) of the increase and $1.4 million representing increases in average rate (primarily core IOLTA relationship deposits). Average securities in the quarter increased $4.7 million to $218.1 million and yields increased 42 basis points to 2.62%, primarily due to reinvestment of portfolio cash flows into securities at current market rates. The movement in short-term interest rates increased yields and interest income on our interest earning cash balances. In the third quarter 2023, management elected to close out its reverse repurchase agreements and reinvest these funds into higher yielding loans.

The provision for credit losses was $1.5 million for the fourth quarter of 2023, a $150 thousand increase from the fourth quarter 2022 provision. As of December 31, 2023, our allowance to loans ratio was 1.38% as compared to 1.29% as of December 31, 2022. 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.

Noninterest income totaled $6.3 million for the fourth quarter of 2023 as compared to $6.8 million in the same period for 2022.  Payment processing income was $5.4 million for the fourth quarter of 2023, a $239 thousand decrease from the same period in 2022, primarily due to the anticipated ISO customer turnover and change in our overall merchant risk profile. Payment processing volumes and transactions for the credit and debit card processing platform increased $1.2 billion, or 15.8%, to $8.5 billion and 15.8 million, or 11.3%, to 155.7 million transactions, respectively, for the quarter ended December 31, 2023 as compared to the same period in 2022. 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. The Company utilizes proprietary and industry leading technology to ensure card brand and regulatory compliance, support multiple processing platforms, manage daily risk across 84,000 small business merchants in all 50 states, and perform commercial treasury clearing services. ASP fee income decreased $443 thousand to $580 thousand for the fourth quarter of 2023. ASP fee income is directly impacted by the average balances of off-balance sheet sweep funds as well as current short-term market interest rates.

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Noninterest expense increased $2.5 million, or 22.2%, to $13.9 million for the fourth quarter of 2023, as compared to the same period in 2022. This increase was primarily due to increases in employee compensation and benefits, data processing, advertising and marketing, and travel and business relations, partially offset by decreases in professional services costs. Employee compensation and benefits costs increased $1.9 million, or 28.4%, due to increases in employees to support growth as well as the impact of year end salary, bonus and stock-based compensation increases. In 2023, we hired six regional managing directors/senior 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/corporate secretary. Data processing costs increased $352 thousand 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 $255 thousand 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 $174 thousand, 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 $114 thousand primarily due to our hiring of a chief legal officer as well as a reduction in costs associated with our CECL implementation in the fourth quarter of 2022.

The Company’s efficiency ratio was 48.0% for the three months ended December 31, 2023, as compared to 45.3% in 2022, primarily due to our significant increase in resources including, but not limited to, people and technology to support growth, risk management, and compliance. Our strong efficiency ratio is a result of our continued revenue growth driven by our core national platforms. These

national platforms have benefited from our investments in technology, digital marketing, employees, and other branchless infrastructure that support our industry leading returns.

The effective tax rate was 27.0% for the fourth quarter of 2023, as compared to 26.5% for the same period in 2022. The effective tax rate in the fourth quarter of 2022 was impacted by certain discrete tax benefits related to share-based compensation, specifically voluntary stock option exercises.

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Full Year Earnings

Net income for the year ended December 31, 2023 was $41.0 million, or $4.91 per diluted share, compared to $28.5 million, or $3.47 per diluted share for the same period in 2022. Returns on average assets and equity for the year ended December 31, 2023 were 2.89% and 23.20%, respectively, compared to 2.31% and 19.44% for the same period of 2022. Excluding the pretax gain of $5.3 million on our Litify investment and the $1.3 million equity method loss on our investment in a third party sponsored NFL consumer post settlement loan fund, adjusted⁽¹⁾ net income, diluted earnings per share, return on average assets, and return on average common equity for the year ended December 31, 2023 would have been $38.1 million, $4.56, 2.68% and 21.54%, respectively.

Net interest income for the year ended 2023 increased $24.4 million, or 41.2%, to $83.8 million, due to growth in average interest earning assets (funded with core deposits) totaling $185.9 million, or 15.6%, to $1.4 billion as well as a 110 basis point increase in our net interest margin to 6.09% when compared to the same period in 2022. Our net interest margin was positively impacted by growth in higher yielding variable rate commercial loans and increases in short-term interest rates. The average yield on loans increased 132 basis points to 7.72%, primarily driven by higher yielding variable rate commercial loan growth. Average loans for the year ended December 31, 2023 increased $207.5 million, or 24.6%, to $1.1 billion when compared to the year ended December 31, 2022, primarily due to growth in our national commercial lending platform and, to a lesser extent, our regional multi-family real estate loans. Loan income increased $27.2 million, or 50.0%, to $81.2 million with the increases in average loan balances (primarily commercial) accounting for $16.5 million of the increase and $10.7 million representing increases in average rate (primarily commercial).  Average securities for the year ended December 31, 2023 increased $6.3 million to $210.8 million as yields increased 35 basis points to 2.38%, primarily due to reinvestment of portfolio cash flows into securities at current market interest rates, increasing interest income $860 thousand to $5.0 million for the year ended December 31, 2023. The movement in short-term interest rates increased yields and interest income on our reverse repurchase agreements and interest earning cash balances. Our deposit cost-of-funds, excluding demand deposits, increased 83 basis points due to increases in short-term interest rates as well as management pro-actively increasing rates on IOLTA accounts in the various states where we operate. For the full year 2023, deposit expense increased $6.5 million to $8.1 million with increases in average deposit balances accounting for $541 thousand of the increase and $5.9 million representing increases in the average rate (both increases were primarily core IOLTA and, to a lesser extent, money market relationship deposits).

The provision for credit losses was $4.5 million for the year ended December 31, 2023, a $1.0 million increase from the same period in 2022. As of December 31, 2023, our allowance to loans ratio was 1.38% as compared to 1.29% as of December 31, 2022. 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.

Noninterest income increased to $29.8 million for the year ended December 31, 2023, as compared to $24.9 million in same period in 2022.  Payment processing income was $22.3 million for the year ended December 31, 2023, a $372 thousand increase from the same period in 2022. Payment processing volumes and transactions for the credit and debit card processing platform increased $5.0 billion, or 17.8%, to $33.0 billion and 76.8 million, or 14.3%, to 612.8 million transactions, respectively, for the year ended December 31, 2023 as compared to the same period in 2022. These increases were due to the expansion of sales channels through ISOs, the increased number of merchants, volume increases, and were facilitated by our focus on technology and other resources in the payments vertical. ASP fee income totaled $2.5 million for the year ended December 31, 2023, consistent with the year ended December 21, 2022 as we managed approximately $1.5 billion in gross mass tort/class action depository funds (qualified settlement funds or “QSFs”) in 2023.  In 2023, Litify was reorganized into a partnership and an unrelated third party acquired a majority ownership in the reorganized entity. As party to the reorganization and sale transaction, the Company’s partnership interest was exchanged for cash and noncash consideration, resulting in a gain on its investment of $5.3 million in 2023. The Company also recognized an equity method loss of $1.3 million on its investment in a third party sponsored NFL consumer post settlement loan fund, extending the expected weighted average life of the underlying assets by approximately one year.  The Company presents this investment in other assets with a carrying amount of $10.6 million.

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Noninterest expense increased $11.1 million, or 26.5%, to $53.1 million for the year ended December 31, 2023, as compared to the same period in 2022. This increase was primarily due to increases in employee compensation and benefits, professional services costs, data processing, travel and business relations, advertising and marketing, and occupancy and equipment. Employee compensation and benefits costs increased $6.7 million, or 26.0%, due to increases in employees to support growth as well as the impact of year end salary, bonus and stock-based compensation increases. As previously noted, we have made a significant investment in people in almost all areas of our Company to support future growth, client-centric relationship banking, and overall compliance and risk management across all verticals. Professional services costs increased $2.1 million with $1.0 million representing costs associated with the retention of a global executive search firm to expand our regional national sales capabilities (senior BDOs), senior commercial underwritings, and senior payment processing risk management. The remaining $1.0 million increase in professional services costs was primarily due to incremental increases in insurance, legal, accounting, risk management, and compliance costs. Data processing costs increased $943 thousand due to increased processing volume, primarily driven by our core banking platform, and additional costs related to our technology implementations. Travel and business relations costs increased $419 thousand, 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. Advertising and marketing costs increased $361 thousand, as we continued to grow our brand and expand our thought leadership through digital marketing efforts in our national verticals and support our new regional BDOs. Occupancy and equipment costs increased $127 thousand due to amortization of our investments in internally developed software to support our digital platform and additional office space to support our growth.

The Company’s efficiency ratio was 46.8% for the year ended December 31, 2023, as compared to 49.8% in 2022, despite our investment in resources as noted above. The adjusted⁽¹⁾ efficiency ratio was 48.5% excluding the $4.0 million net pre-tax gain on certain equity investments previously noted. Our national platforms that drive our growth should continue to benefit from our investments in people, technology, digital marketing, and other branchless infrastructure that support our industry leading returns.

The effective tax rate for the year ended December 31, 2023 was 26.6%, as compared to 26.5% for the same period in 2022.

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Asset Quality

At December 31, 2023, the nonperforming loan totaling $10.9 million consisted of one multifamily loan with no associated specific reserve. As of period end, the allowance for credit losses was $16.6 million, or 1.38% of total loans, as compared to $12.2 million, or 1.29% of total loans at December 31, 2022. The nonperforming loan to total loans and total assets were 0.91% and 0.68%, respectively. The allowance for credit losses to the nonperforming loan was 152%. 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. As of January 1, 2023, the Company adopted the CECL Standard which increased its allowance for credit losses as a percentage of loans by 2 basis points, or $283 thousand, which was reflected as an adjustment to retained earnings. As part of the adoption of the CECL Standard, management established a credit reserve for unfunded loan commitments of $500 thousand which is classified in other liabilities on the Statement of Financial Condition and reflected as an adjustment to retained earnings.

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Balance Sheet

At December 31, 2023, total assets were $1.6 billion, reflecting a $221.2 million, or 15.9% increase from December 31, 2022. This increase was primarily attributable to growth in loans totaling $260.1 million, or 27.4%, to $1.2 billion. Our higher yielding variable rate commercial loans increased $185.8 million, or 33.7%, during this same period. As a component of this growth, net draws on existing commercial facilities totaled $64.3 million in the current quarter. Our commercial relationship banking sales pipeline remains robust, anchored by our national platforms and supported by our competitive advantages in data, analytics and digital marketing. This coupled with our regional BDOs and related employees should continue to drive growth across our national commercial platforms. Our available-for-sale securities portfolio increased $12.8 million to $122.1 million as compared to December 31, 2022 driven by purchases partially offset by paydowns. Our held-to-maturity securities portfolio decreased $1.4 million to $77.0 million as compared to December 31, 2022. In the third quarter, management elected to close out its reverse repurchase agreements and reinvest these funds into higher yielding loans.

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The following table provides information regarding the composition of our loan portfolio for the periods presented:

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Total deposits were $1.4 billion as of December 31, 2023, a $179.1 million, or 14.6%, increase from December 31, 2022. This was primarily due to a $161.9 million, or 21.2%, increase in Savings, NOW and Money Market deposits, driven primarily by our IOLTA and other escrow deposits and, to a lesser extent, our commercial relationship money market deposits (primarily our mass tort/class action funds). 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 IOLTA, escrow and claimant trust settlement deposits represent $684.2 million, or 48.6%, of total deposits. These law firm escrow accounts, as well as other fiduciary deposit accounts, are for the benefit of the law firm’s clients (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. As of December 31, 2023, uninsured deposits were $381.6 million, or 27%, of our total deposits of $1.4 billion, excluding $5.5 million of affiliate deposits held by the Bank. Approximately 85% 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.

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 December 31, 2023, off-balance sheet sweep funds totaled approximately $278.0 million, of which approximately $132.9 million, or 47.8%, was available to be swept onto our balance sheet as reciprocal client relationship deposits. During 2023, we managed approximately $1.5 billion in gross mass tort/class action depository funds or QSFs and our pipeline of these opportunities remains robust as we look towards 2024. Our deposit growth and off-balance sheet funds continue to demonstrate our highly efficient branchless and technology enabled deposit platforms.

At December 31, 2023, we had the ability to borrow up to $284.2 million from the FHLB of New York and $58.0 million from the FRB of New York discount window.  No borrowing amounts were outstanding in 2023. Historically, we have not leveraged our balance sheet to generate earnings and have always utilized core client deposits to fund our asset growth and related earnings. Additionally, the Company has access to the Federal Reserve Bank Term Funding Program.

Stockholders’ equity increased $40.4 million to $198.6 million as of December 31, 2023 when compared to December 31, 2022. This increase was primarily due to net income, other comprehensive income, and amortization of share-based compensation, partially offset by the following items: dividends declared to common stockholders; a January 1, 2023 reduction attributable to the adoption of the CECL standard; and the repurchase of 8,000 shares of common stock.

Esquire Bank remains well above bank regulatory “Well Capitalized” standards.

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About Esquire Financial Holdings, Inc.

Esquire Financial Holdings, Inc. is a financial holding company headquartered in Jericho, New York, with one branch office in Jericho, New York and an administrative office in Boca Raton, Florida. Its wholly-owned subsidiary, Esquire Bank, National Association, is a full-service commercial bank dedicated to serving the financial needs of the litigation industry and small businesses nationally, as well as commercial and retail clients in the New York metropolitan area. The Bank offers tailored financial and payment processing solutions to the litigation community and their clients as well as dynamic and flexible payment processing solutions to small business owners. For more information, visit www.esquirebank.com.

Cautionary Note Regarding Forward-Looking Statements

This press release includes “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995 relating to future results of the Company. Forward-looking statements are subject to many risks and uncertainties, including, but not limited to: changes in business plans as circumstances warrant; changes in general economic, business and political conditions, including changes in the financial markets; and other risks detailed in the “Cautionary Note Regarding Forward-Looking Statements,” “Risk Factors” and other sections of the Company’s Annual Report on Form 10-K and Quarterly Reports on Form 10-Q as filed with the Securities and Exchange Commission. The forward-looking statements included in this press release are not a guarantee of future events, and that actual events may differ materially from those made in or suggested by the forward-looking statements. Forward-looking statements generally can be identified by the use of forward-looking terminology such as “may,” “might,” “should,” “could,” “predict,” “potential,” “believe,” “expect,” “attribute,” “continue,” “will,” “anticipate,” “seek,” “estimate,” “intend,” “plan,” “projection,” “goal,” “target,” “outlook,” “aim,” “would,” “annualized” and “outlook,” or similar terminology. Any forward-looking statements presented herein are made only as of the date of this press release, and the Company does not undertake any obligation to update or revise any forward-looking statements to reflect changes in assumptions, the occurrence of unanticipated events, or otherwise, except as may be required by law.

Contact Information:

Eric S. Bader

Executive Vice President and Chief Operating Officer

Esquire Financial Holdings, Inc.

(516) 535-2002

eric.bader@esqbank.com

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ESQUIRE FINANCIAL HOLDINGS, INC.

Consolidated Statement of Condition (unaudited)

(dollars in thousands except per share data)

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NM – Not meaningful

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ESQUIRE FINANCIAL HOLDINGS, INC.

Consolidated Income Statement (unaudited)

(dollars in thousands except per share data)

ESQUIRE FINANCIAL HOLDINGS, INC.

Consolidated Average Balance Sheets and Average Yield/Cost (unaudited)

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ESQUIRE FINANCIAL HOLDINGS, INC.

Consolidated Average Balance Sheets and Average Yield/Cost (unaudited)

(dollars in thousands)