ESQ

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How ESQ rewrote its risk factors

10-K ITEM 1A · FY2024 → FY2025

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Risk Factors Summary of Risk Factors The following is a summary of some of the material risks and uncertainties that could have an adverse effect on our business. ● Risks Related to Our Lending Activities o Because we intend to continue to increase our commercial loans, our credit risk may increase. o A substantial portion of our loan portfolio consists of multifamily real estate loans and commercial real estate loans, which have a higher degree of risk than other types of loans. o We may increase our purchases or originations of consumer loans, and such loans generally carry greater risk than loans secured by owner-occupied, 1 – 4 family real estate, and these risks will increase as we continue to increase originations of these types of loans. o A substantial majority of our loans and operations are in New York, and therefore our business is particularly vulnerable to a downturn in the New York City economy. o If the allowance for credit losses is not sufficient to cover actual credit losses, earnings could decrease. o Our loan portfolio is unseasoned. o We may not be able to adequately measure and limit the credit risk associated with our loan portfolio, which could adversely affect our profitability. o Our New York City multifamily loan portfolio could be adversely impacted by changes in policy legislation or regulation which, in turn, could have a material adverse effect on our financial condition and results of operations. ● Risks Related to Our Business o We have experienced significant growth, which makes it difficult to forecast our revenue and evaluate our business and future prospects. o The merger with Signature and any future acquisitions could disrupt the Company’s business and adversely affect our results of operations, financial condition and cash flows. o A substantial portion of our business is dependent on the prospects of the legal industry and changes in the legal industry may adversely affect our growth and profitability. o A lack of liquidity could adversely affect the Company’s financial condition and results of operations. o The loss of our deposit clients or substantial reduction of our deposit balances could force us to fund our business with more expensive and less stable funding sources. o The Bank has deposit accounts whose ownership is based on a fiduciary relationship, which management evaluates to identify an appropriate estimate of FDIC insurance coverage, and such estimates may underreport the amount of the Bank’s uninsured deposits. o Reputational risk and social factors may impact our results and damage our brand. o We may incur losses related to our exposure to NFL consumer post-settlement loans through our equity method investment in a third party sponsored variable interest entity. o As a business operating in the financial services industry, our business and operations may be adversely affected in numerous and complex ways by weak economic conditions. o Artificial Intelligence presents risks and challenges that may adversely affect our business. o Interruption of our customers’ supply chains and federal funding could negatively impact their business and operations and impact their ability to repay their loans. o We may not be able to grow, and if we do we may have difficulty managing that growth. o Our ten largest deposit clients account for 25.1% of our total deposits. ● Risks Related to Market Interest Rates o Interest rate shifts may reduce net interest income and otherwise negatively impact our financial condition and results of operations. ● Risks Related to Operations o Inflation can have an adverse impact on our business and on our customers. o We are exposed to the risks of natural disasters and global market disruptions. o We rely heavily on our management team and our business could be adversely affected by the unexpected loss of one or more of our officers. o We are subject to certain operational risks, including, but not limited to, customer or employee fraud and data processing system failures and errors. o The Company’s controls and procedures may fail or be circumvented. o We face risks related to our operational, technological and organizational infrastructure. o A failure in our operational systems or infrastructure, or those of third parties, could impair our liquidity, disrupt our businesses, result in the unauthorized disclosure of confidential information, damage our reputation and cause financial losses. o The occurrence of fraudulent activity, breaches or failures of our information security controls or cybersecurity-related incidents could have a material adverse effect on our business, financial condition and results of operations. o If our risk management framework is not effective at mitigating risk and loss to us, we could suffer unexpected losses and our results of operations could be materially adversely affected. ● Risks Related to Competitive Matters o We operate in a highly competitive industry and face significant competition from other financial institutions and financial services providers, which may decrease our growth or profits. ● Risks Related to Our Payment Processing Business o Our merchants or ISOs may be unable to satisfy obligations for which we may ultimately be liable. o Fraud by merchants or others could have a material adverse effect on our business and financial condition. o Changes in card network rules, standards or fees could adversely affect our business or operations. ● Risks Related to Laws and Regulation and Their Enforcement o As a bank holding company, the sources of funds available to us are limited. o Our business, financial condition, results of operations and future prospects could be adversely affected by the highly regulated environment and the laws and regulations that govern our operations, corporate governance, executive compensation and accounting principles, or changes in any of them. o Federal regulators periodically examine our business, and we may be required to remediate adverse examination findings. o We are subject to the Community Reinvestment Act and fair lending laws, and failure to comply with these laws could lead to material penalties. o The fiscal, monetary and regulatory policies of the federal government and its agencies could have an adverse effect on our results of operations. o We face a risk of noncompliance and enforcement action with the Bank Secrecy Act and other anti-money laundering statutes and regulations. o We could be adversely affected by the soundness of other financial institutions and other third parties we rely on. ● Risks Related to Accounting Matters o Changes in accounting standards could materially impact our financial statements. o Our accounting estimates rely on analytics, models and assumptions, which may not accurately predict events. ● Risks Related to Our Common Stock o The Company’s stock price can be volatile. o Anti-takeover provisions could negatively impact our shareholders. The material risks that management believes affect the Company are described below.
At December 31, 2025, our commercial loans totaled $1.25 billion, or 70.8% of our total loans, including $1.18 billion of Commercial Litigation-Related Loans, which represented 94.6% of our commercial loans.
At December 31, 2025, we had $372.8 million of multifamily loans and $107.3 million of commercial real estate loans.
Multifamily and commercial real estate loans represented 27.3% of our total loan portfolio at December 31, 2025.
At December 31, 2025, our consumer loans held for investment totaled $22.8 million, or 1.3% of our total loan portfolio, of which $3.1 million, or 13.8%, were post-settlement consumer loans.
As of December 31, 2025, 36.7% of our loan portfolio was in New York and our loan portfolio had concentrations of 27.8% in New York City.
At December 31, 2025, our allowance for credit losses as a percentage of total loans, net of unearned income, was 1.37%.
Nonperforming assets totaled $8.6 million as of December 31, 2025, and consisted of one multifamily loan totaling $7.8 million and one commercial loan (a small business merchant uncorrelated to our primary commercial litigation lending platform and other commercial loans) totaling $736 thousand.
At December 31, 2025, the weighted average age of our loans was 8.03 years, 3.69 years, 3.26 years, 3.57 years and 4.26 years for our 1 – 4 family loans, multifamily loans, commercial real estate loans, commercial loans and consumer loans, respectively.
At December 31, 2025, the weighted average age of our loan portfolio was 3.61 years, however, the average customer relationship is of a longer term.
Our New York City multifamily loan portfolio could be adversely impacted by changes in policy legislation or regulation which, in turn, could have a material adverse effect on our financial condition and results of operations. On June 14, 2019, the New York State legislature passed the New York Housing Stability and Tenant Protection Act of 2019.
As a result, the value of the collateral located in New York State securing the Company’s multifamily loans or the future net operating income of such properties could potentially become impaired which, in turn, could have a material adverse effect on our financial condition and results of operations. Additionally, new potential policy changes could affect the city’s multifamily housing market.
The current New York City administration has expressed support for rent freezes and expanded tenant protections, which, if enacted, may reduce rental income and property values across multifamily properties.
These market dynamics could adversely impact the credit quality of our borrowers.
Lower property cash flows may impair borrowers’ ability to service existing debt.
In addition, a sustained decline in collateral values could elevate loan-to-value ratios and reduce recovery prospects in the event of foreclosure. Risks Related to our Business We have experienced significant growth, which makes it difficult to forecast our revenue and evaluate our business and future prospects.
From 2016 through 2025, we experienced significant growth following our initial public offering, a capital raise and the conversion from a savings and loan holding company with a savings bank subsidiary to a bank holding company with a national bank subsidiary.
On March 12, 2026, the Company announced the entry into a merger agreement with Signature that, if approved, will nearly double the size of the Company.
The merger with Signature and any future acquisitions could disrupt the Company’s business and adversely affect our results of operations, financial condition and cash flows.
On March 12, 2026, the Company announced that it has entered into a merger agreement with Signature.
The Company may choose to expand in the future by making additional acquisitions, including other financial institutions, branches or fee-based businesses, that could be material to its business, results of operations, financial condition and cash flows.
Acquisitions, including the merger with Signature, involve many risks, including, but not limited to, the following: ● an acquisition may negatively affect the Company’s results of operations, financial condition or cash flows because it may require us to incur charges or assume substantial debt or other liabilities, may cause adverse tax consequences or unfavorable accounting treatment, may expose us to claims and disputes by third parties, or may not generate sufficient financial return to offset additional costs and expenses related to the acquisition; ● the Company may encounter difficulties or unforeseen expenditures in integrating the operations of any company that it acquires, particularly if key personnel of the acquired company decide not to work for us; ● an acquisition may disrupt our ongoing business, divert resources, increase our expenses and distract our management; ● an acquisition, and in particular the merger, will involve the entry into geographic or business markets in which the Company has little or no prior experience or where competitors have stronger market positions; ● if the Company incurs debt to fund such acquisition, such debt may subject us to material restrictions on our ability to conduct our business as well as financial maintenance covenants; and ● the Company will issue a significant amount of equity securities to the Signature shareholders in connection with the merger transaction, such that existing shareholders will be diluted and earnings per share may decrease.
The occurrence of any of these risks could have a material adverse effect on the Company’s business, results of operations, financial condition and cash flows.
Other primary sources of funds consist of cash flows from operations, maturities and sales of investment securities and/or loans, brokered deposits, borrowings from the FHLB and/or FRB discount window, and unsecured borrowings.
As of December 31, 2025, approximately $685.1 million, or 33%, of our total Bank deposits of $2.06 billion, were not FDIC insured.
This excludes $11.8 million of the Company’s deposits held by the Bank.
As of December 31, 2025, the Company had approximately $1.23 billion of law firm escrow (or trust) deposits that were evaluated by management to identify an appropriate estimate of FDIC insurance coverage that passes through each deposit account to the beneficial owner of the funds held in the account.
As of December 31, 2025, the carrying amount of our investment in the Fund and our total exposure is $9.0 million, with a remaining life of 3.3 years.
Artificial Intelligence presents risks and challenges that may adversely affect our business.
Many companies in the finance industry including us and our vendors have begun incorporating artificial intelligence (AI) software and applications into our business activities in order to increase productivity.
The AI industry worldwide is developing rapidly, as is the legal and regulatory environment around its use.
Reliance on AI therefore presents risks and challenges as we adapt to evolving rules and regulations, concerns regarding data privacy and misuse of intellectual property, and data biases and accuracy of responses to inquiries during use.
These potential issues could raise compliance costs and increase security and liability concerns, which may reduce any productivity gained through its use.
The complexity surrounding AI use makes it difficult to know the expected impact on our business.
Our business strategy is to continue to grow our assets and expand our operations, including through strategic acquisitions, such as our announced merger with Signature.
Our ten largest deposit clients account for 25.1% of our total deposits.
As of December 31, 2025, our ten largest bank depositors accounted for, in the aggregate, 25.1% of our total deposits.
These could have a material adverse effect on our business, financial condition or results of operations. Risks Related to Our Common Stock The Company’s stock price can be volatile.

Gone since FY2024

Risk Factors The material risks that management believes affect the Company are described below.
At December 31, 2024, our commercial loans totaled $920.6 million, or 65.9% of our total loans, including $835.8 million of Commercial Litigation-Related Loans, which represented 90.8% of our commercial loans.
At December 31, 2024, we had $355.2 million of multifamily loans and $87.0 million of commercial real estate loans.
Multifamily and commercial real estate loans represented 31.7% of our total loan portfolio at December 31, 2024.
At December 31, 2024, our consumer loans held for investment totaled $19.3 million, or 1.4% of our total loan portfolio, of which $2.7 million, or 14.0%, were post-settlement consumer loans.
As of December 31, 2024, 44.8% of our loan portfolio was in New York and our loan portfolio had concentrations of 34.2% in New York City.
At December 31, 2024, our allowance for credit losses as a percentage of total loans, net of unearned income, was 1.50%.
We had one nonperforming multifamily loan totaling $10.9 million at December 31, 2024.
The estimation of expected credit losses under current US GAAP may create volatility in earnings as compared to previous models which may have a material impact on its financial condition or results of operations.
In June 2016, the FASB issued an accounting standard update, “Financial Instruments – Credit Losses (Topic 326), Measurement of Credit Losses on Financial Instruments,” which replaced the current “incurred loss” model for recognizing credit losses with an “expected loss” model referred to as the CECL model.
Under the CECL model, the Company is required to present certain financial assets carried at amortized cost, such as loans held for investment and held-to-maturity debt securities, at the net amount expected to be collected.
The measurement of expected credit losses is based on information about past events, including historical experience, current conditions, and reasonable and supportable forecasts that affect the collectability of the reported amount.
This measurement takes place at the time the financial asset is first entered into and periodically thereafter.
This differs significantly from the “incurred loss” model previously required under current GAAP, which delays recognition until it is probable a loss has been incurred.
The CECL model may create more volatility in the level of the allowance for credit losses (“ACL”).
If the Company is required to materially increase its level of the ACL for any reason, such increase could adversely affect its business, financial condition and results of operations. Our loan portfolio is unseasoned.
At December 31, 2024, the weighted average age of our loans was 7.64 years, 3.27 years, 3.16 years, 3.76 years and 2.50 years for our 1 – 4 family loans, multifamily loans, commercial real estate loans, commercial loans and consumer loans, respectively.
At December 31, 2024, the weighted average age of our loan portfolio was 3.62 years, however, the average customer relationship is of a longer term.
Our New York City multifamily loan portfolio could be adversely impacted by changes in legislation or regulation which, in turn, could have a material adverse effect on our financial condition and results of operations. On June 14, 2019, the New York State legislature passed the New York Housing Stability and Tenant Protection Act of 2019.
As a result, the value of the collateral located in New York State securing the Company’s multifamily loans or the future net operating income of such properties could potentially become impaired which, in turn, could have a material adverse effect on our financial condition and results of operations. Risks Related to our Business We have experienced significant growth, which makes it difficult to forecast our revenue and evaluate our business and future prospects.
From 2016 through 2024, we experienced significant growth following our initial public offering, a capital raise and the conversion from a savings and loan holding company with a savings bank subsidiary to a bank holding company with a national bank subsidiary.
Other primary sources of funds consist of cash flows from operations, maturities and sales of investment securities and/or loans, brokered deposits, borrowings from the FHLB of New York and/or FRB discount window, and unsecured borrowings.
As of December 31, 2024, approximately $463.9 million, or 28%, of our total Bank deposits of $1.64 billion, were not FDIC insured.
This excludes $12.4 million of the Company’s deposits held by the Bank.
As of December 31, 2024, the Company had approximately $979.0 million of law firm escrow (or trust) deposits that were evaluated by management to identify an appropriate estimate of FDIC insurance coverage that passes through each deposit account to the beneficial owner of the funds held in the account.
As of December 31, 2024, the carrying amount of our investment in the Fund and our total exposure is $9.4 million, with a remaining life of 4.3 years.
Our business strategy is to continue to grow our assets and expand our operations, including through potential strategic acquisitions.
Our ten largest deposit clients account for 25.9% of our total deposits.
As of December 31, 2024, our ten largest bank depositors accounted for, in the aggregate, 25.9% of our total deposits.
These could have a material adverse effect on our business, financial condition or results of operations.
Risks Related to Our Common Stock The Company’s stock price can be volatile.

Sentence-level comparison of Item 1A in the two most recent 10-Ks (FY2024 ↗, FY2025 ↗). A reworded sentence counts as one dropped and one added, so heavy edits read as low “kept”. Headings and page furniture are stripped; nothing is summarised by a model.

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