EFSC 10-Q Quarterly Report June 30, 2022

ENTERPRISE FINANCIAL SERVICES CORP

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efsc-20220630

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D. C. 20549

FORM 10-Q


☒						Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the quarterly period ended June 30, 2022.


☐						Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the transition period from ______ to ______

Commission file number 001-15373

ENTERPRISE FINANCIAL SERVICES CORP

Incorporated in the State of Delaware

I.R.S. Employer Identification # 43-1706259

Address: 150 North Meramec

Clayton, MO 63105

Telephone: (314) 725-5500

___________________

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

Title of each class

Trading Symbol(s)

Name of each exchange on which registered

Common Stock, par value $0.01 per share

EFSC

Nasdaq Global Select Market

Depositary Shares, each representing a 1/40th interest in a share of 5.00% Fixed Rate Non-Cumulative Perpetual Preferred Stock, Series A

EFSCP

Nasdaq Global Select Market

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See definitions of “large accelerated filer”, “accelerated filer”, “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer

☒

Accelerated filer

☐

Non-accelerated filer

☐

Smaller reporting company

☐

Emerging growth company

☐

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. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act)

Yes ☐ No ☒

As of July 27, 2022, the Registrant had 37,219,597 shares of outstanding common stock, $0.01 par value per share.

This document is also available through our website at http://www.enterprisebank.com.

ENTERPRISE FINANCIAL SERVICES CORP AND SUBSIDIARIES

TABLE OF CONTENTS


						Page
PART I - FINANCIAL INFORMATION

Item 1. Financial Statements

Condensed Consolidated Balance Sheets (Unaudited)						1

Condensed Consolidated Statements of Operations (Unaudited)						2

Condensed Consolidated Statements of Comprehensive Income (Unaudited)						3

Condensed Consolidated Statements of Shareholders’ Equity (Unaudited)						4

Condensed Consolidated Statements of Cash Flows (Unaudited)						6

Notes to Condensed Consolidated Financial Statements (Unaudited)						7

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations						29

Item 3. Quantitative and Qualitative Disclosures About Market Risk						49

Item 4. Controls and Procedures						51

PART II - OTHER INFORMATION

Item 1. Legal Proceedings						51

Item 1A. Risk Factors						51

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds						52

Item 3. Defaults Upon Senior Securities						52

Item 4. Mine Safety Disclosures						52

Item 5. Other Information						52

Item 6. Exhibits						52

Signatures						55

Glossary of Acronyms, Abbreviations and Entities

The acronyms and abbreviations identified below are used in various sections of this Form 10-Q, including “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” in Item 2 and the Condensed Consolidated Financial Statements and the Notes to Condensed Consolidated Financial Statements in Item 1 of this Form 10-Q.

ACL

Allowance for Credit Losses

FASB

Financial Accounting Standards Board

ASU

Accounting Standards Update

FCBP

First Choice Bancorp

Bank

Enterprise Bank & Trust

FHLB

Federal Home Loan Bank

C&I

Commercial and Industrial

GAAP

Generally Accepted Accounting Principles (United States)

CCB

Capital Conservation Buffer

LIBOR

London Interbank Offered Rate

CECL

Current Expected Credit Loss

NIM

Net Interest Margin

Company

Enterprise Financial Services Corp

PPP

Paycheck Protection Program

CRE

Commercial Real Estate

SBA

Small Business Administration

EFSC

Enterprise Financial Services Corp

SEC

Securities and Exchange Commission

Enterprise

Enterprise Financial Services Corp

PART 1 - ITEM 1 - FINANCIAL STATEMENTS

ENTERPRISE FINANCIAL SERVICES CORP AND SUBSIDIARIES

Condensed Consolidated Balance Sheets (Unaudited)


(in thousands, except share and per share data)	June 30, 2022		December 31, 2021
Assets
Cash and due from banks	$	271,763	$	209,177
Federal funds sold	1,398		1,356
Interest-earning deposits (including $135 and $14,595 pledged as collateral, respectively)	671,643		1,811,156
Total cash and cash equivalents	944,804		2,021,689
Interest-earning deposits greater than 90 days	7,302		6,996
Securities available-for-sale	1,493,277		1,366,006
Securities held-to-maturity, net	617,767		429,681
Loans held-for-sale	4,615		6,389
Loans	9,269,176		9,017,642
Allowance for credit losses on loans	(140,546)		(145,041)
Total loans, net	9,128,630		8,872,601


Other investments	61,274		59,896
Fixed assets, net	46,028		47,915




Goodwill	365,164		365,164
Intangible assets, net	19,528		22,286

Other assets	396,117		338,735
Total assets	$	13,084,506	$	13,537,358

Liabilities and Shareholders' Equity
Noninterest-bearing demand accounts	$	4,746,478	$	4,578,436
Interest-bearing demand accounts	2,197,957		2,465,884
Money market accounts	2,726,024		2,890,976
Savings accounts	836,958		800,210
Certificates of deposit:
Brokered	129,064		128,970
Other	456,137		479,323
Total deposits	11,092,618		11,343,799
Subordinated debentures and notes	155,164		154,899
FHLB advances	50,000		50,000
Other borrowings	226,695		353,863



Other liabilities	112,617		105,681
Total liabilities	$	11,637,094	$	12,008,242

Commitments and contingent liabilities (Note 5)

Shareholders' equity:
Preferred stock, $0.01 par value; 5,000,000 shares authorized; 75,000 shares issued and outstanding ($1,000 per share liquidation preference)	71,988		71,988
Common stock, $0.01 par value; 75,000,000 shares authorized; 37,205,524 shares issued and outstanding and 39,799,615 shares issued, respectively	372		398
Treasury stock, at cost; 1,980,093 shares	—		(73,528)
Additional paid in capital	976,684		1,018,799
Retained earnings	506,849		492,682
Accumulated other comprehensive (loss) income	(108,481)		18,777
Total shareholders' equity	1,447,412		1,529,116
Total liabilities and shareholders' equity	$	13,084,506	$	13,537,358

The accompanying notes are an integral part of these consolidated financial statements.

ENTERPRISE FINANCIAL SERVICES CORP AND SUBSIDIARIES

Condensed Consolidated Statements of Operations (Unaudited)


	Three months ended June 30,				Six months ended June 30,
(in thousands, except per share data)	2022		2021		2022		2021
Interest income:
Loans	$	102,153	$	79,064	$	198,276	$	156,037
Debt securities:
Taxable	6,553		4,318		11,904		8,858
Nontaxable	4,526		3,394		8,468		6,473

Interest-earning deposits	2,495		237		3,312		426
Dividends on equity securities	342		388		690		567
Total interest income	116,069		87,401		222,650		172,361
Interest expense:




Deposits	3,850		2,467		6,709		5,130
Subordinated debentures and notes	2,257		2,847		4,477		5,666
FHLB advances	197		197		392		392
Other borrowings	152		152		294		312
Total interest expense	6,456		5,663		11,872		11,500
Net interest income	109,613		81,738		210,778		160,861
Provision (benefit) for credit losses	658		(2,669)		(3,410)		(2,623)
Net interest income after provision (benefit) for credit losses	108,955		84,407		214,188		163,484
Noninterest income:
Deposit service charges	4,749		3,862		8,912		6,946
Wealth management revenue	2,533		2,516		5,155		4,999
Card services revenue	3,514		2,975		6,554		5,471


Tax credit income	1,186		1,370		3,794		329


Other income	2,212		5,481		8,420		9,749
Total noninterest income	14,194		16,204		32,835		27,494
Noninterest expense:
Employee compensation and benefits	36,028		28,132		71,855		57,694
Occupancy	4,309		3,529		8,895		7,280
Data processing	3,111		2,850		6,371		5,740
Professional fees	1,542		1,300		2,719		2,288



Merger-related expenses	—		1,949		—		5,091
Other expense	20,434		14,696		38,384		27,247
Total noninterest expense	65,424		52,456		128,224		105,340

Income before income tax expense	57,725		48,155		118,799		85,638
Income tax expense	12,576		9,750		25,957		17,307
Net income	$	45,149	$	38,405	$	92,842	$	68,331
Dividends on preferred stock	938		—		2,167		—
Net income available to common shareholders	$	44,211	$	38,405	$	90,675	$	68,331

Earnings per common share
Basic	$	1.19	$	1.23	$	2.42	$	2.19
Diluted	1.19		1.23		2.41		2.18

The accompanying notes are an integral part of these consolidated financial statements.

ENTERPRISE FINANCIAL SERVICES CORP AND SUBSIDIARIES

Condensed Consolidated Statements of Comprehensive Income (Unaudited)


	Three months ended June 30,				Six months ended June 30,
(in thousands)	2022		2021		2022		2021
Net income	$	45,149	$	38,405	$	92,842	$	68,331
Other comprehensive income (loss), after-tax:
Change in unrealized gain (loss) on available-for-sale securities	(49,242)		2,850		(128,595)		(8,070)

Reclassification of gain on held-to-maturity securities	(701)		(837)		(1,405)		(1,986)
Change in unrealized gain (loss) on cash flow hedges arising during the period	535		(205)		2,286		642
Reclassification of loss on cash flow hedges	187		287		456		566
Total other comprehensive income (loss), after-tax	(49,221)		2,095		(127,258)		(8,848)
Comprehensive income (loss)	$	(4,072)	$	40,500	$	(34,416)	$	59,483

The accompanying notes are an integral part of these consolidated financial statements.

ENTERPRISE FINANCIAL SERVICES CORP AND SUBSIDIARIES

Condensed Consolidated Statements of Shareholders’ Equity (Unaudited)


Three and six months ended June 30, 2022
	Preferred Stock			Common Stock
(in thousands, except per share data)	Shares	Amount		Shares	Amount		Treasury Stock		Additional Paid in Capital		Retained Earnings		Accumulated Other Comprehensive Income (Loss)		Total Shareholders’ Equity
Balance at March 31, 2022	75	$	71,988	37,516	$	395	$	(73,528)	$	1,010,446	$	523,136	$	(59,260)	$	1,473,177
Net income	—	—		—	—		—		—		45,149		—		45,149





Other comprehensive loss	—	—		—	—		—		—		—		(49,221)		(49,221)

Common stock dividends ($0.22 per share)	—	—		—	—		—		—		(8,185)		—		(8,185)
Preferred stock dividends ($12.50 per share)	—			—	—		—		—		(938)		—		(938)
Repurchase of common stock	—	—		(349)	(3)		—		(9,410)		(6,536)		—		(15,949)
Issuance under equity compensation plans, net	—	—		39	—		—		1,266		(7)		—		1,259

Share-based compensation	—	—		—	—		—		2,120		—		—		2,120
Retirement of treasury stock (1,980 shares)	—	—		—	(20)		73,528		(27,738)		(45,770)		—		—




Balance at June 30, 2022	75	$	71,988	37,206	$	372	$	—	$	976,684	$	506,849	$	(108,481)	$	1,447,412

Balance at December 31, 2021	75	$	71,988	37,820	$	398	$	(73,528)	$	1,018,799	$	492,682	$	18,777	$	1,529,116
Net income	—	—		—	—		—		—		92,842		—		92,842





Other comprehensive loss	—	—		—	—		—		—		—		(127,258)		(127,258)

Common stock dividends ($0.43 per share)	—	—		—	—		—		—		(16,100)		—		(16,100)
Preferred stock dividends ($28.889 per share)	—	—		—	—		—		—		(2,167)		—		(2,167)
Repurchase of common stock	—	—		(700)	(7)		—		(18,867)		(14,049)		—		(32,923)
Issuance under equity compensation plans, net	—	—		86	1		—		684		(589)		—		96

Share-based compensation	—	—		—	—		—		3,806		—		—		3,806
Retirement of treasury stock (1,980 shares)	—	—		—	(20)		73,528		(27,738)		(45,770)		—		—




Balance at June 30, 2022	75	$	71,988	37,206	$	372	$	—	$	976,684	$	506,849	$	(108,481)	$	1,447,412


Three and six months ended June 30, 2021
	Common Stock
(in thousands, except per share data)		Shares	Amount		Treasury Stock		Additional Paid in Capital		Retained Earnings		Accumulated Other Comprehensive Income (Loss)		Total Shareholders’ Equity
Balance at March 31, 2021		31,259	$	332	$	(73,528)	$	698,005	$	441,511	$	26,177	$	1,092,497
Net income			—		—		—		38,405		—		38,405

Other comprehensive loss			—		—		—		—		2,095		2,095

Common stock dividends ($0.18 per share)			—		—		—		(5,634)		—		(5,634)
Repurchase of common stock		(252)	(2)		—		(11,831)		—		—		(11,833)



Issuance under equity compensation plans, net		45	—		—		1,263		—		—		1,263

Share-based compensation			—		—		1,508		—		—		1,508



Balance at June 30, 2021		31,052	$	330	$	(73,528)	$	688,945	$	474,282	$	28,272	$	1,118,301

Balance at December 31, 2020		31,210	$	332	$	(73,528)	$	697,839	$	417,212	$	37,120	$	1,078,975
Net income			—		—		—		68,331		—		68,331

Other comprehensive income			—		—		—		—		(8,848)		(8,848)

Common stock dividends ($0.36 per share)			—		—		—		(11,261)		—		(11,261)
Repurchase of common stock		(252)	(2)		—		(11,831)		—		—		(11,833)



Issuance under equity compensation plans, net		94	—		—		154		—		—		154

Share-based compensation			—		—		2,783		—		—		2,783



Balance at June 30, 2021		31,052	$	330	$	(73,528)	$	688,945	$	474,282	$	28,272	$	1,118,301

The accompanying notes are an integral part of these consolidated financial statements.

ENTERPRISE FINANCIAL SERVICES CORP AND SUBSIDIARIES

Condensed Consolidated Statements of Cash Flows (Unaudited)


	Six months ended June 30,
(in thousands, except share data)	2022		2021
Cash flows from operating activities:
Net income	$	92,842	$	68,331
Adjustments to reconcile net income to net cash provided by operating activities
Depreciation	2,891		3,044
Benefit for credit losses	(3,410)		(2,623)
Deferred income taxes	4,644		4,025
Net amortization of debt securities	3,157		3,926
Net accretion on loan discount/premiums	(633)		(1,386)
Amortization of intangible assets	2,758		2,726
Amortization of servicing assets	1,693		234
Mortgage loans originated-for-sale	(43,352)		(87,299)
Proceeds from mortgage loans sold	44,789		94,327
Loss (gain) on:

Sale of other real estate	71		(596)

Sale of state tax credits	(41)		(96)


Share-based compensation	3,806		2,783




Changes in other assets and liabilities, net	5,534		(22,401)







Net cash provided by operating activities	114,749		64,995
Cash flows from investing activities:

Net increase in loans	(251,381)		(9,370)


Proceeds received from:

Paydown or maturity of debt securities, available-for-sale	127,119		131,948
Paydown or maturity of debt securities, held-to-maturity	8,671		32,698
Redemption of other investments	3,376		2,213
Sale of state tax credits held for sale	3,641		4,262
Sale of other real estate	1,834		5,542
Settlement of bank-owned life insurance policies	534		—
Payments for the purchase of:
Available-for-sale debt securities	(544,909)		(316,743)
Held-to-maturity debt securities	(83,283)		—
Other investments	(19,437)		(4,729)

State tax credits held for sale	(7,352)		(3,285)
Fixed assets	(1,004)		(847)
Net cash used in investing activities	(762,191)		(158,311)
Cash flows from financing activities:
Net increase in noninterest-bearing deposit accounts	168,042		399,753
Net (decrease) increase in interest-bearing deposit accounts	(419,223)		254,362




Repayments of notes payable	(2,857)		(4,286)




Net decrease in other borrowings	(124,311)		(62,285)



Repurchase of common stock	(32,923)		(11,833)
Cash dividends paid on common stock	(16,100)		(11,261)
Cash dividends paid on preferred stock	(2,167)		—
Other	96		154



Net cash (used in) provided by financing activities	(429,443)		564,604
Net (decrease) increase in cash and cash equivalents	(1,076,885)		471,288
Cash and cash equivalents, beginning of period	2,021,689		537,703
Cash and cash equivalents, end of period	$	944,804	$	1,008,991
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest	$	11,873	$	11,897
Income taxes	14,889		34,571
Noncash investing and financing transactions:
Transfer to other real estate owned in settlement of loans	$	—	$	3,227
Sales of other real estate financed	—		228
Right-of-use assets obtained in exchange for lease obligations	4,178		—


Transfer of securities from available-for-sale to held-to-maturity	116,927		—

The accompanying notes are an integral part of these consolidated financial statements.

ENTERPRISE FINANCIAL SERVICES CORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Unaudited)

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

The significant accounting policies used by Enterprise Financial Services Corp in the preparation of the condensed consolidated financial statements are summarized below:

Business and Consolidation

Enterprise is a financial holding company that provides a full range of banking and wealth management services to individuals and corporate customers primarily located in Arizona, California, Kansas, Missouri, Nevada, and New Mexico through its banking subsidiary, Enterprise Bank & Trust.

Operating results for the three and six months ended June 30, 2022 are not necessarily indicative of the results that may be expected for any other interim period or for the year ending December 31, 2022. For further information, refer to the consolidated financial statements and footnotes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2021, as filed with the SEC.

Basis of Financial Statement Presentation

The accompanying unaudited condensed consolidated financial statements of the Company and its subsidiaries have been prepared in accordance with GAAP for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Except as disclosed herein, there has been no material change in the information disclosed in the Notes to Consolidated Financial Statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2021.

The condensed consolidated financial statements include the accounts of the Company and its subsidiaries, all of which are wholly owned. All intercompany accounts and transactions have been eliminated.

In the opinion of management, the consolidated financial statements contain all adjustments (consisting of normal recurring accruals) considered necessary for the fair presentation of the statements of financial position, results of operations, and cash flow for the interim periods.

Recent Accounting Pronouncements

FASB ASU 2021-01, Reference Rate Reform (Topic 848): Scope (ASU 2021-01). ASU 2021-01 was issued in January 2021 and provided optional expedients and exceptions in ASC 848 to contracts, hedging relationships, and other transactions affected by reference rate reform if certain criteria are met. The amendment only applies to contracts, hedging relationships, and other transactions that reference LIBOR or another reference rate expected to be discontinued because of reference rate reform. The expedients and exceptions provided by the amendments will not apply to contract modifications made and hedging relationships entered into or evaluated after December 31, 2022, except for hedging relationships existing as of December 31, 2022, that an entity has elected certain optional expedients for and that are retained through the end of the hedging relationship. The amendments in this update were effective immediately upon issuance and did not have a material effect on the consolidated financial statements.

FASB ASU 2022-02, Financial Instruments–Credit Losses (Topic 326); Troubled Debt Restructurings and Vintage Disclosures. ASU 2022-02 was issued in March 2022 and eliminates the accounting guidance on troubled debt restructurings for creditors in ASC 310-40 and amends the guidance on “vintage disclosures” to require disclosure of current-period gross write-offs by year of origination. The ASU also updates the requirements related to accounting for credit losses under ASC 326 and adds enhanced disclosures for creditors with respect to loan refinancings and restructurings for borrowers experiencing financial difficulty. The amendments in this update will

be effective for fiscal years beginning after December 15, 2022 for entities that have adopted the amendments in ASU 2016-13, Financial Instruments–Credit Losses (Topic 326) Measurement of Credit Losses on Financial Instruments. The Company is evaluating the accounting and disclosure requirements of ASU 2022-02 and does not expect them to have a material effect on the consolidated financial statements.

FASB ASU 2022-03, Fair Value Measurement of Equity Securities Subject to Contractual Sale Restrictions. ASU 2022-03 was issued in June 2022 to (1) to clarify the guidance in Topic 820, Fair Value Measurement, when measuring the fair value of an equity security subject to contractual restrictions that prohibit the sale of an equity security, (2) to amend a related illustrative example, and (3) to introduce new disclosure requirements for equity securities subject to contractual sale restrictions that are measured at fair value in accordance with Topic 820. The amendments in this update are effective for fiscal years beginning after December 15, 2023, and interim periods within those fiscal years. The Company is evaluating the accounting and disclosure requirements of ASU 2022-03 and does not expect them to have a material effect on the consolidated financial statements.

Acquisitions and Divestitures

Acquisitions and business combinations are accounted for using the acquisition method of accounting. The assets and liabilities of the acquired entities have been recorded at their estimated fair values at the date of acquisition. Goodwill represents the excess of the purchase price over the fair value of net assets acquired, including the amount assigned to identifiable intangible assets.

The purchase price allocation process requires an estimation of the fair values of the assets acquired and the liabilities assumed. When a business combination agreement provides for an adjustment to the cost of the combination contingent on future events, the Company includes an estimate of the acquisition-date fair value as part of the cost of the combination. To determine the fair values, the Company relies on third party valuations, such as appraisals, or internal valuations based on discounted cash flow analyses or other valuation techniques. Fair values are considered preliminary until final fair values are determined, or the measurement period has passed, which is no later than one year from the date of acquisition.

The results of operations of the acquired business are included in the Company’s consolidated financial statements from the date of acquisition. Merger-related expenses include costs directly related to merger or acquisition activity and include legal and professional fees, system consolidation and conversion costs, and compensation costs such as severance and retention incentives for employees impacted by acquisition activity. The Company accounts for merger-related expenses in the periods in which the costs are incurred and the services are received.

For divestitures, the Company measures an asset (disposal group) classified as held-for-sale at the lower of its carrying value at the date the asset is initially classified as held-for-sale or its fair value less costs to sell. The Company reports the results of operations of an entity or group of components that either has been disposed of or held-for-sale as discontinued operations only if the disposal of that component represents a strategic shift that has or will have a major effect on an entity’s operations and financial results.

Any incremental direct costs incurred to transact the sale are allocated against the gain or loss on the sale. These costs typically include items such as legal fees, title transfer fees, broker fees, etc. Any goodwill and intangible assets associated with the portion of the reporting unit to be disposed of is included in the carrying amount of the business in determining the gain or loss on the sale.

NOTE 2 - EARNINGS PER SHARE

Basic earnings per common share data is calculated by dividing net income available to common shareholders by the weighted average number of common shares outstanding during the period. Diluted earnings per common share gives effect to all dilutive potential common shares outstanding during the period using the treasury stock method.

The following table presents a summary of per common share data and amounts for the periods indicated.


	Three months ended June 30,				Six months ended June 30,
(in thousands, except per share data)	2022		2021		2022		2021
Net income available to common shareholders	$	44,211	$	38,405	$	90,675	$	68,331








Weighted average common shares outstanding	37,243		31,265		37,514		31,256

Additional dilutive common stock equivalents	39		47		58		49
Weighted average diluted common shares outstanding	37,282		31,312		37,572		31,305

Basic earnings per common share:	$	1.19	$	1.23	$	2.42	$	2.19
Diluted earnings per common share:	1.19		1.23		$	2.41	$	2.18

For the three and six months ended June 30, 2022 common stock equivalents of approximately 363,000 and 319,000, respectively, were excluded from the earnings per share calculations because their effect would have been anti-dilutive. Comparatively, there were 154,000 and 133,000 common stock equivalents excluded in the prior year periods, respectively.

NOTE 3 - INVESTMENTS

The following tables present the amortized cost, gross unrealized gains and losses, allowance for credit losses and fair value of securities available for sale and held to maturity:


	June 30, 2022
(in thousands)	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
Available-for-sale securities:
Obligations of U.S. Government-sponsored enterprises	$	250,833	$	—	$	(19,160)	$	231,673
Obligations of states and political subdivisions	510,047		21		(93,233)		416,835
Agency mortgage-backed securities	686,957		34		(50,203)		636,788
U.S. Treasury bills	196,825		35		(2,232)		194,628
Corporate debt securities	13,750		37		(434)		13,353
Total securities available for sale	$	1,658,412	$	127	$	(165,262)	$	1,493,277
Held-to-maturity securities:

Obligations of states and political subdivisions	$	433,212	$	57	$	(65,422)	$	367,847
Agency mortgage-backed securities	60,042		—		(4,763)		55,279
Corporate debt securities	125,220		136		(10,907)		114,449
Total securities held-to-maturity	$	618,474	$	193	$	(81,092)	$	537,575
Allowance for credit losses	(707)
Total securities held-to-maturity, net	$	617,767


	December 31, 2021
(in thousands)	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
Available-for-sale securities:
Obligations of U.S. Government-sponsored enterprises	$	175,409	$	3	$	(1,901)	$	173,511
Obligations of states and political subdivisions	571,587		5,907		(2,410)		575,084
Agency mortgage-backed securities	509,243		8,485		(3,869)		513,859
U.S. Treasury Bills	90,971		220		(21)		91,170
Corporate debt securities	11,750		632		—		12,382
Total securities available for sale	$	1,358,960	$	15,247	$	(8,201)	$	1,366,006
Held-to-maturity securities:

Obligations of states and political subdivisions	$	236,379	$	1,794	$	(730)	$	237,443
Agency mortgage-backed securities	68,105		940		(666)		68,379
Corporate debt securities	125,811		3,039		—		128,850
Total securities held to maturity	$	430,295	$	5,773	$	(1,396)	$	434,672
Allowance for credit losses	(614)
Total securities held-to-maturity, net	$	429,681

During the six months ended June 30, 2022, the Company transferred $116.9 million of securities from available-for-sale to held-to-maturity. The Company believes the held-to-maturity category is consistent with the Company’s intent for these securities. The transfer of securities was made at fair value at the time of transfer. The unamortized portion of the unrealized holding gain at the time of transfer is retained in accumulated other comprehensive income and in the carrying value of held-to-maturity securities. The balance of held-to-maturity securities in the “Amortized Cost” column in the table above includes a cumulative net unamortized unrealized gain of $19.4 million and $21.0 million at June 30, 2022 and December 31, 2021, respectively. Such amounts are amortized over the remaining life of the securities.

At June 30, 2022 and December 31, 2021, there were no holdings of securities of any one issuer in an amount greater than 10% of shareholders’ equity, other than U.S. Government agencies and sponsored enterprises. The agency mortgage-backed securities are all issued by U.S. Government agencies and sponsored enterprises. Securities having a fair value of $680.1 million and $752.7 million at June 30, 2022 and December 31, 2021, respectively, were pledged as collateral to secure deposits of public institutions and for other purposes as required by law or contract provisions.

The amortized cost and estimated fair value of debt securities at June 30, 2022, by contractual maturity, are shown below. Expected maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. The weighted average life of the mortgage-backed securities is approximately 5 years.


	Available for sale				Held to maturity
(in thousands)	Amortized Cost		Estimated Fair Value		Amortized Cost		Estimated Fair Value
Due in one year or less	$	99,932	$	99,696	$	890	$	891
Due after one year through five years	318,870		301,463		24,065		23,081
Due after five years through ten years	64,599		59,319		156,468		143,490
Due after ten years	488,054		396,011		377,009		314,834
Agency mortgage-backed securities	686,957		636,788		60,042		55,279

	$	1,658,412	$	1,493,277	$	618,474	$	537,575

The following tables presents a summary of available-for-sale investment securities in an unrealized loss position:


	June 30, 2022
	Less than 12 months				12 months or more				Total
(in thousands)	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
Obligations of U.S. Government-sponsored enterprises	$	210,225	$	17,108	$	21,448	$	2,052	$	231,673	$	19,160
Obligations of states and political subdivisions	389,067		86,331		22,140		6,902		411,207		93,233
Agency mortgage-backed securities	581,194		41,640		49,116		8,563		630,310		50,203
U.S. Treasury bills	187,738		2,232		—		—		187,738		2,232
Corporate debt securities	11,316		434		—		—		11,316		434
	$	1,379,540	$	147,745	$	92,704	$	17,517	$	1,472,244	$	165,262


	December 31, 2021
	Less than 12 months				12 months or more				Total
(in thousands)	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
Obligations of U.S. Government-sponsored enterprises	$	163,634	$	1,775	$	4,874	$	126	$	168,508	$	1,901
Obligations of states and political subdivisions	242,188		2,361		1,776		49		243,964		2,410
Agency mortgage-backed securities	259,047		3,685		6,467		184		265,514		3,869
U.S. Treasury bills	60,961		21		—		—		60,961		21

	$	725,830	$	7,842	$	13,117	$	359	$	738,947	$	8,201

The unrealized losses at both June 30, 2022 and December 31, 2021 were attributable primarily to changes in market interest rates after the securities were purchased. At each of June 30, 2022 and December 31, 2021, the Company had not recorded an ACL on available-for-sale securities.

Accrued interest receivable on held-to-maturity debt securities totaled $4.4 million and $3.4 million at June 30, 2022 and December 31 2021, respectively, and is excluded from the estimate of expected credit losses. The estimate of expected credit losses considers historical credit loss information adjusted for current conditions and reasonable and supportable forecasts. The ACL on held-to-maturity securities was $0.7 million at June 30, 2022 and $0.6 million at December 31, 2021.

There were no sales of available-for-sale investment securities during the three months ended June 30, 2022 or 2021.

Other Investments

At June 30, 2022 and December 31, 2021, other investments totaled $61.3 million and $59.9 million, respectively. As a member of the FHLB system administered by the Federal Housing Finance Agency, the Bank is required to maintain a minimum investment in capital stock with the FHLB consisting of membership stock and activity-based stock. The FHLB capital stock of $12.0 million and $12.1 million at June 30, 2022 and December 31, 2021, respectively, is recorded at cost, which represents redemption value, and is included in other investments in the consolidated balance sheets. The remaining amounts in other investments primarily include investments in SBICs, CDFIs, private equity investments, and the Company’s investment in unconsolidated trusts used to issue trust preferred securities to third parties.

NOTE 4 - LOANS

The following table presents a summary of loans by category:


(in thousands)	June 30, 2022		December 31, 2021
Commercial and industrial	$	3,597,225	$	3,396,590
Real estate:
Commercial - investor owned	2,173,640		2,141,143
Commercial - owner occupied	2,120,735		2,035,785
Construction and land development	724,163		734,073
Residential	413,727		454,052
Total real estate loans	5,432,265		5,365,053
Other	246,298		265,137
Loans, before unearned loan fees	9,275,788		9,026,780
Unearned loan fees, net	(6,612)		(9,138)
Loans, including unearned loan fees	$	9,269,176	$	9,017,642

PPP loans totaled $49.7 million at June 30, 2022, or $49.2 million net of deferred fees of $0.5 million. The loan balance at June 30, 2022 includes a net premium on acquired loans of $12.6 million. At June 30, 2022, loans of $2.7 billion were pledged to FHLB and the Federal Reserve Bank.

PPP loans totaled $276.2 million at December 31, 2021, or $272.0 million net of deferred fees of $4.2 million. The loan balance includes a net premium on acquired loans of $11.9 million at December 31, 2021. At December 31, 2021, loans of $2.5 billion were pledged to FHLB and the Federal Reserve Bank.

Accrued interest receivable totaled $30.0 million and $30.6 million at June 30, 2022 and December 31, 2021, respectively, and was reported in “Other Assets” on the consolidated balance sheets.

A summary of the activity in the ACL on loans by category for the three and six months ended June 30, 2022 is as follows:


(in thousands)	Commercial and industrial		CRE - investor owned		CRE - owner occupied		Construction and land development		Residential real estate		Other		Total
Allowance for credit losses on loans:







Balance at March 31, 2022	$	60,975	$	36,194	$	17,038	$	12,983	$	7,109	$	4,913	$	139,212
Provision (benefit) for credit losses	4,562		(2,680)		(1,066)		183		307		(147)		1,159
Charge-offs	(97)		(200)		(25)		—		(418)		(88)		(828)
Recoveries	206		24		209		14		480		70		1,003
Balance at June 30, 2022	$	65,646	$	33,338	$	16,156	$	13,180	$	7,478	$	4,748	$	140,546



(in thousands)	Commercial and industrial		CRE - investor owned		CRE - owner occupied		Construction and land development		Residential real estate		Other		Total
Allowance for credit losses on loans:
Balance at December 31, 2021	$	63,825	$	35,877	$	17,560	$	14,536	$	7,927	$	5,316	$	145,041

Provision (benefit) for credit losses	3,081		(2,559)		(1,648)		(1,391)		(149)		(483)		(3,149)
Charge-offs	(2,256)		(200)		(205)		—		(1,305)		(174)		(4,140)
Recoveries	996		220		449		35		1,005		89		2,794
Balance at June 30, 2022	$	65,646	$	33,338	$	16,156	$	13,180	$	7,478	$	4,748	$	140,546

The ACL on sponsor finance loans, which is included in the categories above, represented $20.5 million and $18.2 million, respectively, as of June 30, 2022 and December 31, 2021.

A summary of the activity in the ACL on loans by category for the three and six months ended June 30, 2021 is as follows:


(in thousands)	Commercial and industrial		CRE - investor owned		CRE - owner occupied		Construction and land development		Residential real estate		Other		Total
Allowance for credit losses on loans:







Balance at March 31, 2021	$	55,941	$	33,105	$	20,219	$	14,557	$	4,305	$	3,400	$	131,527
Provision for credit losses	(1,839)		2,859		(4,449)		(2,957)		255		3,658		(2,473)
Charge-offs	(1,451)		—		(216)		—		(44)		(121)		(1,832)
Recoveries	700		39		10		32		161		21		963
Balance at June 30, 2021	$	53,351	$	36,003	$	15,564	$	11,632	$	4,677	$	6,958	$	128,185



(in thousands)	Commercial and industrial		CRE - investor owned		CRE - owner occupied		Construction and land development		Residential real estate		Other		Total
Allowance for credit losses on loans:
Balance at December 31, 2020	$	58,812	$	32,062	$	17,012	$	21,413	$	4,585	$	2,787	$	136,671



Provision for credit losses	(1,298)		6,240		(1,223)		(10,048)		103		4,256		(1,970)
Charge-offs	(5,190)		(2,372)		(244)		—		(315)		(185)		(8,306)
Recoveries	1,027		73		19		267		304		100		1,790
Balance at June 30, 2021	$	53,351	$	36,003	$	15,564	$	11,632	$	4,677	$	6,958	$	128,185

The CECL methodology incorporates various economic scenarios. The Company utilizes three forecasts in the model: Moody’s baseline, a stronger near-term growth upside and a moderate recession downside forecast. The Company weights these scenarios at 40%, 30%, and 30%, respectively, which added approximately $13.6 million to the ACL over the baseline model. These forecasts incorporate an expectation that government stimulus will decline, the Federal Reserve will wind down its treasury and mortgage-backed securities portfolio and continue raising the federal funds rate, that the pandemic will begin to slowly recede, that the Russia-Ukraine military conflict will have a limited disruption on the economy and the risk of a period of stagflation. The Company has also recognized the risk posed by loans that have received multiple deferrals of principal and interest payments, including the hospitality sector, by allocating additional reserves to those segments. Some of the key risks to the forecasts that could result in future provision for credit losses are additional shutdowns and self-quarantines from another significant wave of COVID-19, continued or worsening supply-chain disruptions, labor shortages and declines in job growth, or a tightening of financial market conditions.

In addition to the CECL methodology, the Company incorporates qualitative adjustments into the ACL on loans to capture credit risks inherent within the loan portfolio that are not captured in the discounted cash flow (DCF) model. Included in these risks are 1) changes in lending policies and procedures, 2) actual and expected changes in business and economic conditions, 3) changes in the nature and volume of the portfolio, 4) changes in lending management, 5) changes in volume and the severity of past due loans, 6) changes in the quality of the loan review system, 7) changes in the value of underlying collateral, 8) the existence and effect of concentrations of credit and 9) other factors such as the regulatory, legal and competitive environments and events such as natural disasters and pandemics. At June 30, 2022, the ACL on loans included a qualitative adjustment of approximately $40.8 million. Of this amount, approximately $7.3 million was allocated to sponsor finance loans due to their unsecured nature.

The following tables present the recorded investment in nonperforming loans by category:


	June 30, 2022
(in thousands)	Nonaccrual		Restructured, accruing		Loans over 90 days past due and still accruing interest		Total nonperforming loans		Nonaccrual loans with no allowance
Commercial and industrial	$	16,323	$	—	$	3	$	16,326	$	2,113
Real estate:
Commercial - investor owned	1,150		—		—		1,150		1,150
Commercial - owner occupied	1,212		—		—		1,212		1,212

Residential	776		74		—		850		776
Other	1		—		21		22		—
Total	$	19,462	$	74	$	24	$	19,560	$	5,251


	December 31, 2021
(in thousands)	Nonaccrual		Restructured, accruing		Loans over 90 days past due and still accruing interest		Total nonperforming loans		Nonaccrual loans with no allowance
Commercial and industrial	$	17,052	$	2,783	$	1,703	$	21,538	$	5,685
Real estate:
Commercial - investor owned	1,575		—		—		1,575		168
Commercial - owner occupied	2,839		—		—		2,839		2,550

Residential	1,971		76		1		2,048		1,348
Other	12		—		12		24		—
Total	$	23,449	$	2,859	$	1,716	$	28,024	$	9,751

The total nonperforming loan balances at June 30, 2022 and December 31, 2021 exclude government guaranteed balances of $6.1 million and $6.5 million, respectively.

No interest income was recognized on nonaccrual loans during the three and six months ended June 30, 2022 or 2021.

The amortized cost basis of collateral-dependent nonperforming loans by class of loan is presented as of the dates indicated:


	June 30, 2022
	Type of Collateral
(in thousands)	Commercial Real Estate		Residential Real Estate		Blanket Lien
Commercial and industrial	$	4,271	$	37	$	5,676
Real estate:
Commercial - investor owned	1,193		1,150		—
Commercial - owner occupied	—		19		—

Residential	—		850		—

Total	$	5,464	$	2,056	$	5,676


	December 31, 2021
	Type of Collateral
(in thousands)	Commercial Real Estate		Residential Real Estate		Blanket Lien
Commercial and industrial	$	4,271	$	209	$	9,312
Real estate:
Commercial - investor owned	169		1,200		—
Commercial - owner occupied	2,807		32		—

Residential	—		2,048		—

Total	$	7,247	$	3,489	$	9,312

There were no loans restructured during the three or six months ended June 30, 2022 or 2021.

No troubled debt restructurings subsequently defaulted during the three or six months ended June 30, 2022 or 2021.

The aging of the recorded investment in past due loans by class is presented as of the dates indicated.


	June 30, 2022
(in thousands)	30-89 Days Past Due		90 or More Days Past Due		Total Past Due		Current		Total
Commercial and industrial	$	10,960	$	5,227	$	16,187	$	3,580,514	$	3,596,701
Real estate:
Commercial - investor owned	5,856		—		5,856		2,167,784		2,173,640
Commercial - owner occupied	6,052		199		6,251		2,114,484		2,120,735
Construction and land development	—		—		—		724,163		724,163
Residential	578		454		1,032		412,695		413,727
Other	22		21		43		240,167		240,210
Total	$	23,468	$	5,901	$	29,369	$	9,239,807	$	9,269,176


	December 31, 2021
(in thousands)	30-89 Days Past Due		90 or More Days Past Due		Total Past Due		Current		Total
Commercial and industrial	$	24,447	$	14,158	$	38,605	$	3,353,770	$	3,392,375
Real estate:
Commercial - investor owned	3,880		—		3,880		2,137,263		2,141,143
Commercial - owner occupied	10,070		289		10,359		2,025,426		2,035,785
Construction and land development	24		—		24		734,049		734,073
Residential	3,181		1,305		4,486		449,566		454,052
Other	37		11		48		260,166		260,214
Total	$	41,639	$	15,763	$	57,402	$	8,960,240	$	9,017,642

The Company categorizes loans into risk categories based on relevant information about the ability of borrowers to service their debt, such as current financial information, payment experience, credit documentation, and current economic factors among other factors. This analysis is performed on a quarterly basis. The Company uses the following definitions for risk ratings:

•Grades 1, 2, and 3 – Includes loans to borrowers with a continuous record of strong earnings, sound balance sheet condition and capitalization, ample liquidity with solid cash flow, and whose management team has experience and depth within their industry.

•Grade 4 – Includes loans to borrowers with positive trends in profitability, satisfactory capitalization and balance sheet condition, and sufficient liquidity and cash flow.

•Grade 5 – Includes loans to borrowers that may display fluctuating trends in sales, profitability, capitalization, liquidity, and cash flow.

•Grade 6 – Includes loans to borrowers where an adverse change or perceived weakness has occurred, but may be correctable in the near future. Alternatively, this rating category may also include circumstances where the borrower is starting to reverse a negative trend or condition, or has recently been upgraded from a 7, 8, or 9 rating.

•Grade 7 – Watch credits are borrowers that have experienced financial setback of a nature that is not determined to be severe or influence ‘ongoing concern’ expectations. Although possible, no loss is anticipated at this time, due to strong collateral and/or guarantor support.

•Grade 8 – Substandard credits include those borrowers characterized by significant losses and sustained downward trends in balance sheet condition, liquidity, and cash flow. Repayment reliance may have shifted to secondary sources. Collateral exposure may exist and additional reserves may be warranted.

•Grade 9 – Doubtful credits include borrowers that may show deteriorating trends that are unlikely to be corrected. Collateral values may appear insufficient for full recovery, therefore requiring a partial charge-off, or debt renegotiation with the borrower. The borrower may have declared bankruptcy or bankruptcy is likely in the near term. All doubtful rated credits will be on nonaccrual.

The recorded investment by risk category of loans by class and year of origination is presented in the following tables as of the dates indicated:


	June 30, 2022
	Term Loans by Origination Year
(in thousands)	2022		2021		2020		2019		2018		Prior		Revolving Loans Converted to Term Loans		Revolving Loans		Total
Commercial and industrial
Pass (1-6)	$	772,231	$	871,166	$	365,734	$	215,249	$	81,055	$	116,448	$	2,756	$	953,568	$	3,378,207
Watch (7)	25,384		16,809		18,519		2,121		8,315		10,578		360		76,292		158,378
Classified (8-9)	6,131		12,518		4,440		3,839		1,350		284		121		13,065		41,748
Total Commercial and industrial	$	803,746	$	900,493	$	388,693	$	221,209	$	90,720	$	127,310	$	3,237	$	1,042,925	$	3,578,333

Commercial real estate-investor owned
Pass (1-6)	$	329,489	$	599,145	$	398,097	$	283,247	$	142,431	$	264,598	$	595	$	49,606	$	2,067,208
Watch (7)	18,755		14,058		30,767		10,811		78		14,338		—		—		88,807
Classified (8-9)	2,317		—		198		824		333		5,292		50		—		9,014
Total Commercial real estate-investor owned	$	350,561	$	613,203	$	429,062	$	294,882	$	142,842	$	284,228	$	645	$	49,606	$	2,165,029

Commercial real estate-owner occupied
Pass (1-6)	$	280,474	$	571,629	$	399,477	$	251,344	$	136,528	$	307,517	$	—	$	53,056	$	2,000,025
Watch (7)	3,272		9,596		14,412		4,590		13,986		9,145		—		800		55,801
Classified (8-9)	977		128		568		10,379		15,975		13,650		—		94		41,771
Total Commercial real estate-owner occupied	$	284,723	$	581,353	$	414,457	$	266,313	$	166,489	$	330,312	$	—	$	53,950	$	2,097,597

Construction real estate
Pass (1-6)	$	169,592	$	310,168	$	144,451	$	32,339	$	23,588	$	12,255	$	—	$	8,460	$	700,853
Watch (7)	16,431		—		501		—		1,181		2,236		—		—		20,349
Classified (8-9)	—		—		—		12		413		17		—		—		442
Total Construction real estate	$	186,023	$	310,168	$	144,952	$	32,351	$	25,182	$	14,508	$	—	$	8,460	$	721,644

Residential real estate
Pass (1-6)	$	30,367	$	89,475	$	59,283	$	23,991	$	11,825	$	97,936	$	518	$	92,605	$	406,000
Watch (7)	116		856		—		81		357		1,363		—		24		2,797
Classified (8-9)	159		402		—		56		795		1,425		—		6		2,843
Total residential real estate	$	30,642	$	90,733	$	59,283	$	24,128	$	12,977	$	100,724	$	518	$	92,635	$	411,640

Other
Pass (1-6)	$	4,150	$	96,456	$	63,634	$	20,203	$	21,965	$	19,695	$	—	$	10,978	$	237,081
Watch (7)	—		—		—		—		2		2,341		—		—		2,343
Classified (8-9)	—		—		—		7		7		13		—		1		28
Total Other	$	4,150	$	96,456	$	63,634	$	20,210	$	21,974	$	22,049	$	—	$	10,979	$	239,452

Total loans classified by risk category	$	1,659,845	$	2,592,406	$	1,500,081	$	859,093	$	460,184	$	879,131	$	4,400	$	1,258,555	$	9,213,695
Total loans classified by performing status																	55,481
Total loans																	$	9,269,176


	December 31, 2021
	Term Loans by Origination Year
(in thousands)	2021		2020		2019		2018		2017		Prior		Revolving Loans Converted to Term Loans		Revolving Loans		Total
Commercial and industrial
Pass (1-6)	$	1,180,601	$	477,374	$	317,869	$	132,851	$	116,738	$	82,846	$	11,648	$	854,102	$	3,174,029
Watch (7)	35,005		17,502		9,404		9,880		12,217		10,979		4,037		53,595		152,619
Classified (8-9)	14,917		3,530		3,840		1,689		2,988		813		787		10,996		39,560
Total Commercial and industrial	$	1,230,523	$	498,406	$	331,113	$	144,420	$	131,943	$	94,638	$	16,472	$	918,693	$	3,366,208

Commercial real estate-investor owned
Pass (1-6)	$	651,740	$	476,946	$	346,245	$	146,107	$	112,043	$	217,808	$	3,625	$	68,236	$	2,022,750
Watch (7)	16,871		35,908		32,755		1,003		502		17,478		300		2,062		106,879
Classified (8-9)	1,376		3,135		835		817		1,159		4,141		—		50		11,513
Total Commercial real estate-investor owned	$	669,987	$	515,989	$	379,835	$	147,927	$	113,704	$	239,427	$	3,925	$	70,348	$	2,141,142

Commercial real estate-owner occupied
Pass (1-6)	$	604,975	$	423,263	$	278,830	$	164,210	$	140,515	$	235,973	$	250	$	48,349	$	1,896,365
Watch (7)	12,825		13,585		4,301		16,774		10,274		15,764		—		300		73,823
Classified (8-9)	2,048		556		9,181		17,016		6,432		6,959		—		—		42,192
Total Commercial real estate-owner occupied	$	619,848	$	437,404	$	292,312	$	198,000	$	157,221	$	258,696	$	250	$	48,649	$	2,012,380

Construction real estate
Pass (1-6)	$	310,140	$	229,396	$	70,531	$	35,936	$	14,860	$	7,180	$	568	$	2,992	$	671,603
Watch (7)	28,947		15,348		60		1,199		11,068		2,330		—		—		58,952
Classified (8-9)	—		—		387		419		—		22		—		—		828
Total Construction real estate	$	339,087	$	244,744	$	70,978	$	37,554	$	25,928	$	9,532	$	568	$	2,992	$	731,383

Residential real estate
Pass (1-6)	$	116,352	$	66,481	$	21,356	$	14,841	$	24,778	$	103,840	$	9,980	$	87,146	$	444,774
Watch (7)	2,425		2		622		1,157		248		1,305		—		79		5,838
Classified (8-9)	414		169		554		—		12		2,024		—		—		3,173
Total residential real estate	$	119,191	$	66,652	$	22,532	$	15,998	$	25,038	$	107,169	$	9,980	$	87,225	$	453,785

Other
Pass (1-6)	$	108,209	$	68,806	$	22,684	$	23,145	$	6,924	$	13,832	$	1,500	$	9,166	$	254,266
Watch (7)	—		—		—		4		—		2,440		—		1		2,445
Classified (8-9)	—		—		10		10		—		16		—		2		38
Total Other	$	108,209	$	68,806	$	22,694	$	23,159	$	6,924	$	16,288	$	1,500	$	9,169	$	256,749

Total loans classified by risk category	$	3,086,845	$	1,832,001	$	1,119,464	$	567,058	$	460,758	$	725,750	$	32,695	$	1,137,076	$	8,961,647
Total loans classified by performing status																	55,995
Total loans																	$	9,017,642

In the tables above, loan originations in 2022 and 2021 with a classification of watch or classified primarily represent renewals or modifications initially underwritten and originated in prior years.

For certain loans, primarily credit cards, the Company evaluates credit quality based on the aging status.

The following tables present the recorded investment on loans based on payment activity as of the dates indicated:


	June 30, 2022
(in thousands)	Performing		Non Performing		Total
Commercial and industrial	$	18,365	$	3	$	18,368
Real estate:
Commercial - investor owned	8,611		—		8,611
Commercial - owner occupied	23,138		—		23,138
Construction and land development	2,519		—		2,519
Residential	2,087		—		2,087
Other	737		21		758
Total	$	55,457	$	24	$	55,481


	December 31, 2021
(in thousands)	Performing		Non Performing		Total
Commercial and industrial	$	26,166	$	1	$	26,167
Real estate:
Commercial - investor owned	1		—		1
Commercial - owner occupied	23,405		—		23,405
Construction and land development	2,690		—		2,690
Residential	267		—		267
Other	3,453		12		3,465
Total	$	55,982	$	13	$	55,995

NOTE 5 - COMMITMENTS AND CONTINGENCIES

The Company issues financial instruments with off balance sheet risk in the normal course of the business of meeting the financing needs of its customers. These financial instruments include commitments to extend credit and standby letters of credit. These instruments may involve, to varying degrees, elements of credit and interest rate risk in excess of the amounts recognized in the consolidated balance sheets.

The Company’s extent of involvement and maximum potential exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit and standby letters of credit is represented by the contractual amount of these instruments.

The Company uses the same credit policies in making commitments and conditional obligations as it does for financial instruments included on its consolidated balance sheets.

The contractual amounts of off-balance-sheet financial instruments are as follows:


(in thousands)	June 30, 2022		December 31, 2021
Commitments to extend credit	$	2,619,588	$	2,481,173
Letters of credit	66,739		77,314

Off-Balance Sheet Credit Risk

Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments usually have fixed expiration dates or other termination clauses, may have significant usage restrictions, and may require payment of a fee. Of the total commitments to extend credit at June 30, 2022 and December 31, 2021, approximately $257.5 million and $238.7 million, respectively, represent fixed rate loan commitments. Since certain of the commitments may expire without being drawn upon or may be revoked, the total commitment amounts do not necessarily represent future cash requirements. The Company evaluates each customer’s credit worthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Company upon extension of credit, is based on management’s credit evaluation of the borrower. Collateral held varies, but may include accounts receivable, inventory, premises and equipment, and real estate. Other liabilities includes $8.1 million and $7.6 million for estimated losses attributable to the unadvanced commitments at June 30, 2022 and December 31, 2021, respectively.

Standby letters of credit are conditional commitments issued by the Company to guarantee the performance or payment of a customer to a third party. These standby letters of credit are issued to support contractual obligations of the Company’s customers. The credit risk involved in issuing letters of credit is essentially the same as the risk involved in extending loans to customers. As of June 30, 2022, the approximate remaining terms of standby letters of credit range from 1 month to 11 years.

Contingencies

The Company and its subsidiaries are, from time to time, parties to various legal proceedings arising out of their businesses. Management believes there are no such proceedings pending or threatened against the Company or its subsidiaries which, if determined adversely, would have a material adverse effect on the business, consolidated financial condition, results of operations or cash flows of the Company or any of its subsidiaries.

NOTE 6 - DERIVATIVE FINANCIAL INSTRUMENTS

Risk Management Objective of Using Derivatives

The Company is exposed to certain risks arising from both its business operations and economic conditions. The Company principally manages its exposures to a wide variety of business and operational risks through management of its core business activities. The Company manages economic risks, including interest rate, liquidity, and credit risk primarily by managing the amount, sources, and duration of its assets and liabilities and the use of derivative financial instruments. Specifically, the Company enters into derivative financial instruments to manage exposures that arise from business activities that result in the receipt or payment of future known and uncertain cash amounts, the value of which are determined by interest rates. The Company’s derivative financial instruments are used to manage differences in the amount, timing, and duration of the Company’s known or expected cash receipts and its known or expected cash payments principally related to the Company’s borrowings. The Company does not enter into derivative financial instruments for trading purposes.

Cash Flow Hedges of Interest Rate Risk

The Company’s objectives in using interest rate derivatives are to add stability to interest expense and to manage its exposure to interest rate movements. To accomplish this objective, the Company primarily uses interest rate swaps as part of its interest rate risk management strategy. Interest rate swaps designated as cash flow hedges involve the receipt of variable amounts from a counterparty in exchange for the Company making fixed-rate payments over the life of the agreements without exchange of the underlying notional amount. These derivatives were used to hedge the variable cash flows associated with existing variable-rate debt. The Company has executed a series of cash flow hedges to fix the effective interest rate for payments due on $62.0 million of LIBOR-based junior subordinated debentures to a weighted-average-fixed rate of 2.62%.

Select terms of the hedges are as follows:


(in thousands)
Notional		Fixed Rate		Maturity Date
$	15,465	2.60	%	March 15, 2024
$	14,433	2.60	%	March 30, 2024
$	18,558	2.64	%	March 15, 2026
$	13,506	2.64	%	March 17, 2026

The gain or loss on derivatives designated and qualified as cash flow hedges of interest rate risk are recorded in accumulated other comprehensive income and subsequently reclassified into interest expense in the same period(s) during which the hedged transaction affects earnings. Amounts reported in accumulated other comprehensive income related to derivatives will be reclassified to interest expense as interest payments are paid on the Company’s variable-rate debt. During the next twelve months, the Company estimates an additional $0.3 million will be reclassified as a decrease to interest expense.

Non-designated Hedges

Derivatives not designated as hedges are not considered speculative and result from a service the Company provides to certain customers. The Company executes interest rate swaps with commercial banking customers to facilitate their respective risk management strategies. Those interest rate swaps are simultaneously hedged by offsetting derivatives the Company executes with a third party, such that the Company minimizes its net risk exposure resulting from such transactions. As the interest rate derivatives associated with this program do not meet the strict hedge accounting requirements, changes in the fair value of both the customer derivatives and the offsetting derivatives are recognized directly in earnings as a component of other noninterest income.

The table below presents the fair value of the Company’s derivative financial instruments:


	Notional Amount				Derivative Assets				Derivative Liabilities
(in thousands)	June 30, 2022		December 31, 2021		June 30, 2022		December 31, 2021		June 30, 2022		December 31, 2021
Derivatives Designated as Hedging Instruments:
Interest rate swap	$	61,962	$	61,962	$	755	$	—	$	—	$	2,911


Derivatives not Designated as Hedging Instruments:
Interest rate swap	$	901,995	$	918,698	$	12,559	$	12,869	$	12,589	$	12,883



Derivative assets are classified on the balance sheet in other assets. Derivative liabilities are classified on the balance sheet in other liabilities.

The table below presents a gross presentation, the effects of offsetting, and a net presentation of the Company’s financial instruments that are subject to offsetting. The gross amounts of assets or liabilities can be reconciled to the tabular disclosure of fair value. The fair value table above provides the location that financial assets and liabilities are presented on the Balance Sheet.


As of June 30, 2022
							Gross Amounts Not Offset in the Statement of Financial Position
(in thousands)	Gross Amounts Recognized		Gross Amounts Offset in the Statement of Financial Position		Net Amounts of Assets presented in the Statement of Financial Position		Financial Instruments		Fair Value Collateral Received/ Pledged		Net Amount
Assets:
Interest rate swap	$	13,314	$	—	$	13,314	$	373	$	12,773	$	168

Liabilities:
Interest rate swap	$	12,589	$	—	$	12,589	$	373	$	—	$	12,216
Securities sold under agreements to repurchase	206,695		—		206,695		—		206,695		—

As of December 31, 2021
							Gross Amounts Not Offset in the Statement of Financial Position
(in thousands)	Gross Amounts Recognized		Gross Amounts Offset in the Statement of Financial Position		Net Amounts of Assets presented in the Statement of Financial Position		Financial Instruments		Fair Value Collateral Received/ Pledged		Net Amount
Assets:
Interest rate swap	$	12,869	$	—	$	12,869	$	1,033	$	—	$	11,836

Liabilities:
Interest rate swap	$	15,794	$	—	$	15,794	$	1,033	$	14,031	$	730
Securities sold under agreements to repurchase	331,006		—		331,006		—		331,006		—

As of June 30, 2022, the fair value of derivatives in a net liability position was $12.6 million, which includes accrued interest but excludes any adjustment for nonperformance risk. The Company has minimum collateral posting thresholds with certain of its derivative counterparties and posts collateral related to derivatives in a net liability position. Furthermore, the Company has received cash collateral from derivative counterparties on contracts that were in a net asset position as noted in the tables above.

NOTE 7 - FAIR VALUE MEASUREMENTS

The following table summarizes financial instruments measured at fair value on a recurring basis segregated by the level of the valuation inputs within the fair value hierarchy utilized to measure fair value:


	June 30, 2022
(in thousands)	Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Total Fair Value
Assets
Securities available for sale
Obligations of U.S. Government-sponsored enterprises	$	—	$	231,673	$	—	$	231,673
Obligations of states and political subdivisions	—		416,835		—		416,835
Agency mortgage-backed securities	—		636,788		—		636,788
U.S. Treasury bills	—		194,628		—		194,628
Corporate debt securities	—		13,353		—		13,353
Total securities available for sale	—		1,493,277		—		1,493,277

Other investments	—		2,734		—		2,734

Derivatives	—		13,314		—		13,314
Total assets	$	—	$	1,509,325	$	—	$	1,509,325

Liabilities
Derivatives	$	—	$	12,589	$	—	$	12,589
Total liabilities	$	—	$	12,589	$	—	$	12,589


	December 31, 2021
(in thousands)	Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Total Fair Value
Assets
Securities available for sale
Obligations of U.S. Government-sponsored enterprises	$	—	$	173,511	$	—	$	173,511
Obligations of states and political subdivisions	—		575,084		—		575,084
Residential mortgage-backed securities	—		513,859		—		513,859
U.S. Treasury bills	—		91,170		—		91,170
Corporate debt securities	—		12,382		—		12,382
Total securities available-for-sale	—		1,366,006		—		1,366,006

Other investments	—		3,012		—		3,012

Derivative financial instruments	—		12,869		—		12,869
Total assets	$	—	$	1,381,887	$	—	$	1,381,887

Liabilities
Derivatives	$	—	$	15,794	$	—	$	15,794
Total liabilities	$	—	$	15,794	$	—	$	15,794

From time to time, the Company measures certain assets at fair value on a nonrecurring basis. These include assets measured at the lower of cost or fair value that were recognized at fair value below cost at the end of the period. The amounts reported in the following tables include balances measured at fair value during the reporting period and still held as of the reporting date.




	June 30, 2022
(in thousands)	Total Fair Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)

Other real estate	$	280	$	—	$	—	$	280
Loan servicing asset	3,413		—		3,413		—
Total	$	3,693	$	—	$	3,413	$	280


	December 31, 2021
(in thousands)	Total Fair Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Nonaccrual loans	$	6,406	$	—	$	—	$	6,406
Other real estate	632		—		—		632
Loan servicing asset	3,146		—		3,146		—
Total	$	10,184	$	—	$	3,146	$	7,038

The following table presents the losses recorded in earnings in relation to assets measured on a nonrecurring basis and still held as of the reporting date.




	Three months ended				Six months ended
(in thousands)	June 30, 2022		June 30, 2021		June 30, 2022		June 30, 2021
Nonaccrual loans	$	—	$	—	$	(1,781)	$	(1,742)
Other real estate	(40)		—		(161)		—
Loan servicing asset	(276)		—		(120)		—
Total	$	(316)	$	—	$	(2,062)	$	(1,742)

Following is a summary of the carrying amounts and fair values of certain financial instruments:


	June 30, 2022					December 31, 2021
(in thousands)	Carrying Amount		Estimated fair value		Level	Carrying Amount		Estimated fair value		Level
Balance sheet assets




Securities held-to-maturity, net	$	617,767	$	537,575	Level 2	$	429,681	$	434,672	Level 2
Other investments	58,540		58,540		Level 2	56,884		56,884		Level 2
Loans held for sale	4,615		4,615		Level 2	6,389		6,389		Level 2

Loans, net	9,128,630		9,008,274		Level 3	8,872,601		8,869,891		Level 3
State tax credits, held for sale	31,746		34,168		Level 3	27,994		30,686		Level 3

Servicing asset	5,022		5,127		Level 2	6,714		6,714		Level 2

Balance sheet liabilities
Certificates of deposit	$	585,201	$	571,337	Level 3	$	608,293	$	606,177	Level 3
Subordinated debentures and notes	155,164		154,453		Level 2	154,899		155,972		Level 2
FHLB advances	50,000		49,977		Level 2	50,000		51,527		Level 2
Other borrowings and notes payable	226,695		226,695		Level 2	353,863		353,863		Level 2

For information regarding the methods and assumptions used to estimate the fair value of each class of financial instruments refer to Note 19 – Fair Value Measurements in the Company’s Annual Report on Form 10-K for the year ended December 31, 2021, as filed with the SEC.

NOTE 8 - SHAREHOLDERS’ EQUITY

Share Repurchases/Retirement

The Company periodically adopts share repurchase plans that authorize open market repurchases of common stock. Shares acquired through the repurchase plan are classified as treasury stock or the shares are immediately retired upon settlement, depending on plan authorization. When shares are retired, the excess of repurchase price over par is allocated between additional paid in capital and retained earnings. The amount allocated to additional paid in capital is limited to the pro rata portion of additional paid in capital at the time of repurchase.

In the second quarter 2022, the Company retired 1,980,093 shares of treasury stock. The transaction decreased additional paid in capital by $27.7 million and retained earnings by $45.8 million.

Shareholders’ Equity

Accumulated Other Comprehensive Income (Loss)

The following tables present the changes in accumulated other comprehensive income after-tax by component:


Three months ended
(in thousands)	Net Unrealized Gain (Loss) on Available-for-Sale Securities		Unamortized Gain (Loss) on Held-to-Maturity Securities		Net Unrealized Gain (Loss) on Cash Flow Hedges		Total
Balance, March 31, 2022	$	(74,279)	$	15,177	$	(158)	$	(59,260)
Net change	$	(49,242)	$	(701)	$	722	$	(49,221)

Balance, June 30, 2022	$	(123,521)	$	14,476	$	564	$	(108,481)

Balance, March 31, 2021	$	11,400	$	18,159	$	(3,382)	$	26,177
Net change	$	2,850	$	(837)	$	82	$	2,095

Balance, June 30, 2021	$	14,250	$	17,322	$	(3,300)	$	28,272

Six months ended
(in thousands)	Net Unrealized Gain (Loss) on Available-for-Sale Debt Securities		Unamortized Gain (Loss) on Held-to-Maturity Securities		Net Unrealized Gain (Loss) on Cash Flow Hedges		Total
Balance, December 31, 2021	$	5,271	$	15,684	$	(2,178)	$	18,777
Net change	(128,595)		(1,405)		2,742		(127,258)
Transfer from available-for-sale to held-to-maturity	$	(197)	$	197	$	—	$	—
Balance, June 30, 2022	$	(123,521)	$	14,476	$	564	$	(108,481)

Balance, December 31, 2020	$	22,320	$	19,308	$	(4,508)	$	37,120
Net change	$	(8,070)	$	(1,986)	$	1,208	$	(8,848)

Balance, June 30, 2021	$	14,250	$	17,322	$	(3,300)	$	28,272

The following tables present the pre-tax and after-tax changes in the components of other comprehensive income:


	Three months ended June 30,
	2022						2021
(in thousands)	Pre-tax		Tax effect		After-tax		Pre-tax		Tax effect		After-tax
Change in unrealized gain (loss) on available-for-sale debt securities	$	(65,832)	$	(16,590)	$	(49,242)	$	3,795	$	945	$	2,850

Reclassification of gain on held-to-maturity securities(a)	(937)		(236)		(701)		(1,115)		(278)		(837)
Change in unrealized gain (loss) on cash flow hedges arising during the period	715		180		535		(273)		(68)		(205)
Reclassification of loss on cash flow hedges(a)	250		63		187		382		95		287
Total other comprehensive income (loss)	$	(65,804)	$	(16,583)	$	(49,221)	$	2,789	$	694	$	2,095

	Six months ended June 30,
	2022						2021
(in thousands)	Pre-tax		Tax effect		After-tax		Pre-tax		Tax effect		After-tax
Change in unrealized loss on available-for-sale debt securities	$	(171,918)	$	(43,323)	$	(128,595)	$	(10,746)	$	(2,676)	$	(8,070)

Reclassification of gain on held-to-maturity securities(a)	(1,879)		(474)		(1,405)		(2,644)		(658)		(1,986)
Change in unrealized gain on cash flow hedges arising during the period	3,056		770		2,286		855		213		642
Reclassification of loss on cash flow hedges(a)	609		153		456		754		188		566
Total other comprehensive loss	$	(170,132)	$	(42,874)	$	(127,258)	$	(11,781)	$	(2,933)	$	(8,848)


(a)The pre-tax amount is reported in interest income/expense in the Consolidated Statements of Operations

NOTE 9 - SUPPLEMENTAL FINANCIAL INFORMATION

The following table presents miscellaneous income and other expense components that exceed one percent of the aggregate of total interest income and other income in one or more of the periods indicated:


	Three months ended June 30,				Six months ended June 30,
(in thousands)	2022		2021		2022		2021
Other income:
Bank-owned life insurance	$	748	$	728	$	1,782	$	1,452
Private equity fund distribution	240		2,015		428		2,565


Other income	1,224		2,738		6,210		5,732
Total other noninterest income	$	2,212	$	5,481	$	8,420	$	9,749

Other expense:
Amortization of intangibles	$	1,328	$	1,312	$	2,758	$	2,727
Banking expense	1,911		1,536		3,412		2,730
Deposit costs	5,905		3,441		10,165		5,783
FDIC and other insurance	1,623		1,368		3,478		2,331
Loan, legal expenses	2,502		1,727		4,235		3,310

Outside services	1,366		1,251		2,628		2,488
Other expense	5,799		4,061		11,708		7,878
Total other noninterest expense	$	20,434	$	14,696	$	38,384	$	27,247

ITEM 2: MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND

RESULTS OF OPERATIONS

Forward Looking Statements

This Quarterly Report on Form 10-Q contains information and statements that are considered “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Such forward-looking statements are based on management’s current expectations and beliefs concerning future developments and their potential effects on the Company, and include, without limitation, statements about the Company’s plans, strategies, goals, objectives, expectations, or consequences of statements about the future performance, operations, products and services of the Company and its subsidiaries, as well as statements about the Company’s expectations regarding revenue and asset growth, financial performance and profitability, loan and deposit growth, yields and returns, loan diversification and credit management, products and services, shareholder value creation and the impact of the FCBP acquisition and other acquisitions. Forward-looking statements are typically identified with the use of terms such as “may,” “might,” “will,” “would,” “should,” “expect,” “plan,” “anticipate,” “believe,” “estimate,” “predict,” “potential,” “could,” “continue,” “intend,” and the negative and other variations of these terms and similar words and expressions, although some forward-looking statements may be expressed differently. Forward-looking statements are inherently subject to risks and uncertainties and our ability to predict results or the actual effect of future plans or strategies is inherently uncertain. You should be aware that our actual results could differ materially from those contained in the forward-looking statements.

Given the ongoing and dynamic nature of the COVID-19 pandemic, the ultimate extent of the impacts on our business, financial position, results of operations, liquidity and prospects remain uncertain. Continued deterioration in general business and economic conditions, including the tight labor market, supply chain disruptions, inflationary pressures, or turbulence in domestic or global financial markets could adversely affect our revenues and the values of our assets and liabilities, reduce the availability of funding, lead to a tightening of credit, and further increase stock price volatility. Changes to statutes, regulations, or regulatory policies or practices as a result of, or in response to COVID-19, could affect us in substantial and unpredictable ways. While there is no assurance that any list of risks and uncertainties or risk factors is complete, other important factors that could cause actual results to differ materially from those in the forward-looking statements include the following, without limitation: our ability to efficiently integrate acquisitions, including the FCBP acquisition, into our operations, retain the customers of these businesses and grow the acquired operations; credit risk; changes in the appraised valuation of real estate securing impaired loans; our ability to recover our investment in loans; fluctuations in the fair value of collateral underlying loans; outcomes of litigation and other contingencies; exposure to general and local economic and market conditions, high unemployment rates, higher inflation and its impacts, U.S. fiscal debt, budget and tax matters, and any slowdown in global economic growth; risks associated with rapid increases or decreases in prevailing interest rates; changes in business prospects that could impact goodwill estimates and assumptions; consolidation within the banking industry; competition from banks and other financial institutions; the ability to attract and retain relationship officers and other key personnel; burdens imposed by federal and state regulation; changes in legislative or regulatory requirements, as well as current, pending or future legislation or regulation that could have a negative effect on our revenue and businesses, including rules and regulations relating to bank products and financial services; changes in accounting policies and practices or accounting standards; changes in the method of determining LIBOR and the phase-out of LIBOR; natural disasters; terrorist activities, war and geopolitical matters (including the war in Ukraine and the imposition of additional sanctions and export controls in connection therewith), or pandemics, including the COVID-19 pandemic, and their effects on economic and business environments in which we operate, including the ongoing disruption to the financial market and other economic activity caused by the continuing COVID-19 pandemic; and other risks discussed under the caption “Risk Factors” under Part 1, Item 1A of our 2021 Annual Report on Form 10-K, and other reports filed with the SEC, all of which could cause the Company’s actual results to differ from those set forth in the forward-looking statements. The Company cautions that the preceding list is not exhaustive of all possible risk factors and other factors could also adversely affect the Company’s results.

Readers are cautioned not to place undue reliance on our forward-looking statements, which reflect management’s analysis and expectations only as of the date of such statements. Forward-looking statements speak only as of the

date they are made, and the Company does not intend, and undertakes no obligation, to publicly revise or update forward-looking statements after the date of this report, whether as a result of new information, future events or otherwise, except as required by federal securities law. You should understand that it is not possible to predict or identify all risk factors. Readers should carefully review all disclosures we file from time to time with the SEC which are available on our website at www.enterprisebank.com under “Investor Relations.”

Introduction

The following discussion describes the significant changes to the financial condition of the Company that have occurred during the first six months of 2022 compared to the financial condition as of December 31, 2021. In addition, this discussion summarizes the significant factors affecting the results of operations of the Company for the three months ended June 30, 2022, compared to the linked first quarter (“linked quarter”) in 2022 and the results of operations, liquidity and cash flows for the six months ended June 30, 2022 compared to the same period in 2021. In light of the nature of the Company’s business, which is not seasonal, the Company’s management believes that the comparison to the linked quarter is the most relevant to understand the financial results from management’s perspective. For purposes of the Quarterly Report on Form 10-Q, the Company is presenting a comparison to the corresponding year-to-date period in 2021. This discussion should be read in conjunction with the accompanying condensed consolidated financial statements included in this report and our Annual Report on Form 10-K for the year ended December 31, 2021.

Critical Accounting Policies and Estimates

The Company’s critical accounting policies are considered important to the understanding of the Company’s financial condition and results of operations. These accounting policies require management’s most difficult, subjective and complex judgments about matters that are inherently uncertain. Because these estimates and judgments are based on current circumstances, they may change over time or prove to be inaccurate based on actual experience. If different assumptions or conditions were to prevail, and depending upon the severity of such changes, the possibility of a materially different financial condition and/or results of operations could reasonably be expected.

A full description of our critical accounting policies and the impact and any associated risks related to those policies on our business operations are discussed throughout “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” where such policies affect our reported and expected financial results. For a detailed discussion on the application of these and other accounting policies, see the Company’s Annual Report on Form 10-K for the year ended December 31, 2021.

The Company has prepared the consolidated financial information in this report in accordance with GAAP. The Company makes estimates and assumptions that affect the reported amount of assets and liabilities, disclosure of contingent assets and liabilities at the date of the consolidated financial statements, and the reported amounts of revenue and expenses during the reporting period. Such estimates include the valuation of loans, goodwill, intangible assets, and other long-lived assets, along with assumptions used in the calculation of income taxes, among others. These estimates and assumptions are based on management’s best estimates and judgment. Management evaluates its estimates and assumptions on an ongoing basis using loss experience and other factors, including the current economic environment, which management believes to be reasonable under the circumstances. We adjust such estimates and assumptions when facts and circumstances dictate. As future events and their effects cannot be determined with precision, actual results could differ significantly from these estimates. Changes in estimates resulting from continuing changes in the economic environment will be reflected in the financial statement in future periods. There can be no assurances that actual results will not differ from those estimates.

Allowance for Credit Losses

Utilizing the CECL methodology, the Company maintains separate allowances for funded loans, unfunded loans, and held-to-maturity securities, collectively the ACL. The ACL is a valuation account to adjust the cost basis to the amount expected to be collected, based on management’s estimate of experience, current conditions, and reasonable

and supportable forecasts. For purposes of determining the allowance for funded and unfunded loans, the portfolios are segregated into pools that share similar risk characteristics that are then further segregated by credit grades. Loans that do not share similar risk characteristics are evaluated on an individual basis and are not included in the collective evaluation. The Company estimates the amount of the allowance based on loan loss experience, adjusted for current and forecasted economic conditions, including unemployment, changes in GDP, and commercial and residential real estate prices. The Company’s forecast of economic conditions uses internal and external information and considers a weighted average of a baseline, upside, and downside scenarios. Because economic conditions can change and are difficult to predict, the anticipated amount of estimated loan defaults and losses, and therefore the adequacy of the allowance, could change significantly and have a direct impact on the Company’s credit costs. The Company’s allowance for credit losses on loans was $140.5 million at June 30, 2022 based on the weighting of the different economic scenarios. As a hypothetical example, if the Company had only used the upside scenario, the allowance would have decreased $3.2 million. Conversely, the allowance would have increased $48.4 million using only the downside scenario.

Executive Summary

The Company closed its acquisition of FCBP on July 21, 2021. The results of operations of FCBP are included in our results from this date forward.

Below are highlights of the Company’s financial performance for the periods indicated.


(in thousands, except per share data)	Three months ended									At or for the six months ended
	June 30, 2022			March 31, 2022			June 30, 2021			June 30, 2022			June 30, 2021
EARNINGS
Total interest income	$	116,069		$	106,581		$	87,401		$	222,650		$	172,361
Total interest expense	6,456			5,416			5,663			11,872			11,500
Net interest income	109,613			101,165			81,738			210,778			160,861
Provision (benefit) for credit losses	658			(4,068)			(2,669)			(3,410)			(2,623)
Net interest income after provision (benefit) for credit losses	108,955			105,233			84,407			214,188			163,484
Total noninterest income	14,194			18,641			16,204			32,835			27,494
Total noninterest expense	65,424			62,800			52,456			128,224			105,340
Income before income tax expense	57,725			61,074			48,155			118,799			85,638
Income tax expense	12,576			13,381			9,750			25,957			17,307
Net income	$	45,149		$	47,693		$	38,405		$	92,842		$	68,331
Preferred stock dividends	938			1,229			—			2,167			—
Net income available to common shareholders	$	44,211		$	46,464		$	38,405		$	90,675		$	68,331

Basic earnings per share	$	1.19		$	1.23		$	1.23		$	2.42		$	2.19
Diluted earnings per share	$	1.19		$	1.23		$	1.23		$	2.41		$	2.18

Return on average assets	1.34		%	1.42		%	1.50		%	1.38		%	1.36		%
Return on average common equity	12.65		%	12.87		%	13.79		%	12.76		%	12.45		%
Return on average tangible common equity1	17.44		%	17.49		%	18.44		%	17.46		%	16.71		%
Net interest margin (tax equivalent)	3.55		%	3.28		%	3.46		%	3.41		%	3.48		%

Efficiency ratio	52.84		%	52.42		%	53.56		%	52.63		%	55.93		%
Core efficiency ratio1	52.81		%	52.43		%	51.86		%	52.62		%	53.38		%
Book value per common share	$	36.97		$	37.35		$	35.86
Tangible book value per common share1	$	26.63		$	27.06		$	26.85

ASSET QUALITY
Net charge-offs (recoveries)	$	(175)		$	1,521		$	869		$	1,346		$	6,516
Nonperforming loans	19,560			21,160			42,252
Classified assets	96,801			93,199			100,063
Nonperforming loans to total loans	0.21		%	0.23		%	0.58		%
Nonperforming assets to total assets	0.16		%	0.17		%	0.44		%
ACL on loans to total loans	1.52		%	1.54		%	1.77		%
Net charge-offs (recoveries) to average loans (annualized)	(0.01)		%	0.07		%	0.05		%	0.03		%	0.18		%

(1) A non-GAAP measure. A reconciliation has been included in this section under the caption “Use of Non-GAAP Financial Measures.”

Financial results and other notable items include:

•The Company was active in continuing to support its customers in the PPP. Details of PPP loans are noted in the following table:


	Quarter ended									At or for the six months ended
(in thousands)	June 30, 2022			March 31, 2022			Jun 30, 2021			June 30, 2022			June 30, 2021
PPP loans outstanding, net of deferred fees	$	49,175		$	134,084		$	396,660		$	49,175		$	396,660


Average PPP loans outstanding, net	89,152			194,382			664,375			141,476			678,268
PPP interest and fee income recognized	1,557			2,858			7,940			4,415			16,415
PPP deferred fees remaining	524			1,851			12,243			524			12,243
PPP average yield	7.01		%	5.96		%	4.79		%	6.29		%	4.88		%

PPP has impacted the Company’s financial metrics in all periods since the Company began participating in April 2020. Loan and deposit growth, earnings per share, and return on assets all increased due to the PPP. Conversely, the allowance coverage ratio, the leverage ratio and the ratio of tangible common equity to tangible assets all decreased. The net interest margin has benefited in quarters where loan forgiveness has been approved by the SBA and related loan fees have been accelerated into income. Since the PPP loans are guaranteed by the SBA, CET1, Tier 1 and total risk-based capital are not impacted by PPP loan balances.

•Pre-provision net revenue1 (“PPNR”) of $58.4 million in the second quarter 2022 increased $1.4 million from the linked quarter PPNR of $57.0 million. PPNR of $115.4 million for the six months ended June 30, 2022 increased $27.3 million from $88.1 million in the prior year period. The increase from the linked quarter was primarily due to an increase in net interest income from an increase in market interest rates, partially offset by a decline in noninterest income and an increase in noninterest expense. The increase from the prior year quarter was primarily due to the acquisition of FCBP in the third quarter 2021, partially offset by a decline in PPP income.

1 PPNR is a non-GAAP measure. Refer to discussion and reconciliation of these measures in the accompanying financial tables.

•Net interest income of $109.6 million for the second quarter 2022 increased $8.4 million from $101.2 million in the linked quarter. Net interest margin (“NIM”) was 3.55% for the second quarter 2022, compared to 3.28% for the linked quarter. Net interest income and NIM benefited from an increase in market interest rates, organic loan growth and a reallocation of excess liquidity into the investment portfolio. Net interest income of $210.8 million for the six months ended June 30, 2022 increased $49.9 million from $160.9 million in the prior year period. The year-to-date increase over the prior year was due primarily to the acquisition of FCBP, an increase in market interest rates, and growth in the loan and investment portfolios, partially offset by a decline in PPP income.

•Noninterest income of $14.2 million for the second quarter 2022 decreased $4.4 million from $18.6 million in the linked quarter. A decline in tax credit income from a seasonally strong linked quarter and a decline in other income were the primary drivers of the linked quarter decrease. Noninterest income of $32.8 million for the six months ended June 30, 2022 increased $5.3 million from $27.5 million in the prior year period. The year-to-date increase over the prior period was due primarily to an increase in noninterest income from the FCBP acquisition and higher tax credit income due to a low volume quarter in the prior year.

Balance sheet highlights:

•Loans – Total loans increased $251.5 million to $9.3 billion at June 30, 2022, compared to $9.0 billion at December 31, 2021. PPP loans declined $222.8 million. Excluding PPP, loans grew $474.3 million, or 11%, on an annualized basis from December 31, 2021. Loan growth was well-distributed between the geographic regions and the specialty lending niches. Average loans totaled $9.1 billion for the six months ended June 30, 2022 compared to $7.3 billion for the six months ended June 30, 2021.

•Deposits – Total deposits decreased $251.2 million, to $11.1 billion at June 30, 2022 from $11.3 billion at December 31, 2021. The decline in deposits was concentrated in interest-bearing demand and money market accounts that were not relationship-based and reflects a shift in our deposit mix aligned with our disciplined focus on relationship-based, lower-cost deposits. Average deposits totaled $11.5 billion for the six months ended June 30, 2022, compared to $8.4 billion for the six months ended June 30, 2021. Noninterest deposit accounts represented 42.8% of total deposits and the loan to deposit ratio was 83.6% at June 30, 2022.

•Asset quality – The allowance for credit losses on loans to total loans was 1.52% at June 30, 2022, compared to 1.61% at December 31, 2021. Nonperforming assets to total assets was 0.16% at June 30, 2022 compared to 0.23% at December 31, 2021. Due to the improvement in credit quality and macroeconomic forecasts, a provision benefit of $3.4 million was recorded in the first six months of 2022, compared to a provision benefit of $2.6 million in the comparable prior year period. Loan growth and the provision benefit in the first six months of 2022 contributed to the decline in the ratio of allowance for credit losses to total loans.

•Shareholders’ equity – Total shareholders’ equity was $1.45 billion at June 30, 2022, compared to $1.53 billion at December 31, 2021, and the tangible common equity to tangible assets ratio2 was 7.80% at June 30, 2022 compared to 8.13% at December 31, 2021. The decline in the tangible common equity ratio was primarily due to a $127.3 million decrease in accumulated other comprehensive income, mainly from a decrease in the fair value of the available-for-sale investment portfolio. The Company and the Bank’s regulatory capital ratios exceeded the “well-capitalized” level at June 30, 2022. In June 2022, the Company retired 1,980,093 shares of treasury stock and returned them to authorized and unissued shares.

The Company repurchased 700,473 shares totaling $32.9 million in the first six months of 2022 for an average price of $47.00 per share. The shares acquired in 2022 complete the share repurchase plan authorized by the Board of Directors on April 29, 2021. On May 4, 2022, the Board of Directors approved a new plan that authorized the repurchase of up to 2,000,000 shares of common stock. No shares have been repurchased under the recently-approved plan.

The Company’s Board of Directors approved a quarterly dividend of $0.23 per common share, payable on September 30, 2022 to shareholders of record as of September 15, 2022, an increase of $0.01, or 5.0%, compared to the second quarter 2022. The Board of Directors also declared a cash dividend of $12.50 per share of Series A Preferred Stock (or $0.3125 per depositary share) representing a 5% per annum rate for the period commencing (and including) June 15, 2022 to (but excluding) September 15, 2022. The dividend will be payable on September 15, 2022 to shareholders of record on August 31, 2022.

2 Tangible common equity to tangible assets ratio is a non-GAAP measure. Refer to discussion and reconciliation of these measures in the accompanying financial tables.

RESULTS OF OPERATIONS

Net Interest Income

Average Balance Sheet

The following tables present, for the periods indicated, certain information related to our average interest-earning assets and interest-bearing liabilities, as well as the corresponding interest rates earned and paid, all on a tax equivalent basis.


	Three months ended June 30,						Three months ended March 31,						Three months ended June 30,
	2022						2022						2021
(in thousands)	Average Balance		Interest Income/Expense		Average Yield/ Rate		Average Balance		Interest Income/Expense		Average Yield/ Rate		Average Balance		Interest Income/Expense		Average Yield/ Rate
Assets
Interest-earning assets:




Total loans1, 2	$	9,109,131	$	102,328	4.51	%	$	9,005,875	$	96,301	4.34	%	$	7,306,471	$	79,162	4.35	%
Taxable securities	1,209,498		6,894		2.29		1,151,743		5,699		2.01		856,439		4,706		2.20
Non-taxable securities2	858,621		6,050		2.83		772,226		5,270		2.77		646,143		4,520		2.81
Total securities	2,068,119		12,944		2.51		1,923,969		10,969		2.31		1,502,582		9,226		2.46
Interest-earning deposits	1,401,961		2,496		0.71		1,781,272		817		0.19		806,928		237		0.12
Total interest-earning assets	12,579,211		117,768		3.76		12,711,116		108,087		3.45		9,615,981		88,625		3.70
Noninterest-earning assets	949,263						902,887						665,363



Total assets	$	13,528,474					$	13,614,003					$	10,281,344

Liabilities and Shareholders' Equity
Interest-bearing liabilities:
Interest-bearing demand accounts	$	2,329,431	$	659	0.11	%	$	2,505,319	$	536	0.09	%	$	1,985,811	$	336	0.07	%
Money market accounts	2,767,595		2,270		0.33		2,872,302		1,460		0.21		2,344,871		988		0.17
Savings	854,860		70		0.03		817,431		66		0.03		718,193		52		0.03
Certificates of deposit	591,091		851		0.58		607,133		797		0.53		522,633		1,091		0.84
Total interest-bearing deposits	6,542,977		3,850		0.24		6,802,185		2,859		0.17		5,571,508		2,467		0.18
Subordinated debentures	155,092		2,257		5.84		154,959		2,220		5.81		203,849		2,847		5.60
FHLB advances	50,000		197		1.58		50,000		195		1.58		50,000		197		1.58
Securities sold under agreements to repurchase	202,537		41		0.08		262,252		60		0.09		209,062		58		0.11
Other borrowed funds	21,413		111		2.08		22,841		82		1.46		27,147		94		1.39
Total interest-bearing liabilities	6,972,019		6,456		0.37		7,292,237		5,416		0.30		6,061,566		5,663		0.37
Noninterest bearing liabilities:
Demand deposits	4,987,455						4,692,027						3,008,703
Other liabilities	94,733						93,518						94,106
Total liabilities	12,054,207						12,077,782						9,164,375
Shareholders' equity	1,474,267						1,536,221						1,116,969
Total liabilities & shareholders' equity	$	13,528,474					$	13,614,003					$	10,281,344
Net interest income			$	111,312					$	102,671					$	82,962
Net interest spread					3.39	%					3.15	%					3.33	%
Net interest margin					3.55	%					3.28	%					3.46	%

1 Average balances include nonaccrual loans. Interest income includes loan fees of $4.2 million, $5.2 million, and $7.6 million for the three months ended June 30, 2022, March 31, 2022, and June 30, 2021, respectively.

2 Non-taxable income is presented on a fully tax-equivalent basis using a 25.2% tax rate. The tax-equivalent adjustments were $1.7 million, $1.5 million, and $1.2 million for the three months ended June 30, 2022, March 31, 2022, and June 30, 2021, respectively.



	Six months ended June 30,
	2022						2021
(in thousands)	Average Balance		Interest Income/Expense		Average Yield/ Rate		Average Balance		Interest Income/Expense		Average Yield/ Rate
Assets
Interest-earning assets:




Total loans1, 2	$	9,057,788	$	198,629	4.42	%	$	7,249,938	$	156,234	4.35	%
Taxable securities	1,180,780		12,593		2.15		852,802		9,425		2.23
Non-taxable securities2	815,662		11,320		2.80		607,377		8,619		2.86
Total securities	1,996,442		23,913		2.42		1,460,179		18,044		2.49
Interest-earning deposits	1,590,569		3,313		0.42		743,645		426		0.12
Total interest-earning assets	12,644,799		225,855		3.60		9,453,762		174,704		3.73
Noninterest-earning assets	926,203						657,879



Total assets	$	13,571,002					$	10,111,641

Liabilities and Shareholders' Equity
Interest-bearing liabilities:
Interest-bearing demand accounts	$	2,416,889	$	1,194	0.10	%	$	1,936,707	$	664	0.07	%
Money market accounts	2,819,659		3,730		0.27		2,347,716		1,963		0.17
Savings	836,249		137		0.03		686,603		100		0.03
Certificates of deposit	599,067		1,648		0.55		529,860		2,403		0.91
Total interest-bearing deposits	6,671,864		6,709		0.20		5,500,886		5,130		0.19
Subordinated debentures	155,026		4,477		5.82		203,772		5,666		5.61
FHLB advances	50,000		392		1.58		50,000		392		1.58
Securities sold under agreements to repurchase	232,229		101		0.09		220,233		118		0.11
Other borrowed funds	22,123		193		1.76		27,894		194		1.40
Total interest-bearing liabilities	7,131,242		11,872		0.34		6,002,785		11,500		0.39
Noninterest bearing liabilities:
Demand deposits	4,840,558						2,893,939
Other liabilities	94,129						108,135
Total liabilities	12,065,929						9,004,859
Shareholders' equity	1,505,073						1,106,782
Total liabilities & shareholders' equity	$	13,571,002					$	10,111,641
Net interest income			$	213,983					$	163,204
Net interest spread					3.26	%					3.34	%
Net interest margin					3.41	%					3.48	%

1 Average balances include nonaccrual loans. Interest income includes loan fees of $9.3 million and $15.6 million for the six months ended June 30, 2022 and June 30, 2021, respectively.

2 Non-taxable income is presented on a fully tax-equivalent basis using a 25.2% tax rate. The tax-equivalent adjustments were $3.2 million and $2.3 million for the six months ended June 30, 2022 and June 30, 2021, respectively.

Rate/Volume

The following table sets forth, on a tax-equivalent basis for the periods indicated, a summary of the changes in interest income and interest expense resulting from changes in yield/rates and volume.


	Three months ended June 30, 2022						Six months ended June 30, 2022
	compared to						compared to
	Three months ended March 31, 2022						Six months ended June 30, 2021
	Increase (decrease) due to						Increase (decrease) due to
(in thousands)	Volume(1)		Rate(2)		Net			Volume(1)		Rate(2)		Net
Interest earned on:



Loans(3)	1,381		4,646		6,027			39,603		2,792		42,395
Taxable securities	316		879		1,195			3,509		(341)		3,168
Non-taxable securities(3)	653		127		780			2,895		(194)		2,701
Interest-earning deposits	(213)		1,892		1,679			871		2,016		2,887
Total interest-earning assets	$	2,137	$	7,544	$	9,681		$	46,878	$	4,273	$	51,151

Interest paid on:
Interest-bearing demand accounts	$	(30)	$	153	$	123		$	191	$	339	$	530
Money market accounts	(55)		865		810			454		1,313		1,767
Savings	4		—		4			24		13		37
Certificates of deposit	(21)		75		54			283		(1,038)		(755)
Subordinated debentures	5		32		37			(1,401)		212		(1,189)
FHLB advances	—		2		2			—		—		—
Securities sold under agreements to repurchase	(12)		(7)		(19)			6		(23)		(17)
Other borrowings	(5)		34		29			(44)		43		(1)
Total interest-bearing liabilities	(114)		1,154		1,040			(487)		859		372
Net interest income	$	2,251	$	6,390	$	8,641		$	47,365	$	3,414	$	50,779

(1) Change in volume multiplied by yield/rate of prior period.

(2) Change in yield/rate multiplied by volume of prior period.

(3) Nontaxable income is presented on a tax equivalent basis.

NOTE: The change in interest due to both rate and volume has been allocated to rate and volume changes in proportion to the relationship of the absolute dollar amounts of the change in each.

Net interest income (on a tax equivalent basis) of $111.3 million for the three months ended June 30, 2022 increased $8.6 million, from $102.7 million in the linked quarter. The increase in net interest income from the linked quarter was primarily due to an increase in the earning asset yield from an increase in market interest rates that was further enhanced by a stronger earning asset mix. The Federal Open Markets Committee increased the target federal funds rate by 125 basis points in the second quarter of 2022. Net interest income has benefited from interest rate increases due to the asset-sensitive position of the balance sheet. The Company also continued to redeploy part of its excess liquidity into the investment portfolio during the second quarter, increasing investments $244.2 million over the linked quarter, when excluding mark-to-market fluctuations.

Net interest income (on a tax equivalent basis) for the six months ended June 30, 2022 of $214.0 million increased $50.8 million, over $163.2 million in the prior year period. The year-to-date increase over the prior year was primarily due to the FCBP acquisition and an increase in market interest rates, including a 150 basis point increase in the target federal funds rate during the first six months of 2022. Organic growth in the loan portfolio and the continued increase in the investment portfolio has also benefited net interest income.

The current quarter and year-to-date increases in net interest income were partially offset by a decline in PPP income. PPP income in the second quarter 2022 was $1.6 million, compared to $2.9 million in the linked quarter. PPP income was $4.4 million for the six months ended June 30, 2022, compared to $16.4 million in the comparable prior year period.

NIM was 3.55% for the second quarter 2022, an increase of 27 basis points from 3.28% in the linked quarter. The increase in NIM from the linked quarter was primarily due to higher yields on loans, investments and interest-earning deposits due to an increase in market interest rates, including the 125 basis point increase in the federal funds rate. The average loan yield was 4.51% in the second quarter 2022, an increase of 17 basis points from 4.34% in the linked quarter. The average loan yield increased due to the repricing of variable-rate loans and the origination of new loans at an average rate of 4.71% (as of June 30, 2022). Approximately 20% of the variable-rate loan portfolio reprices on the first day of each quarter and did not increase with the current quarter’s rate movement, but these loan rates will reset early in the third quarter 2022. The average investment yield was 2.51%, an increase of 20 basis points from the linked quarter. The investment yield increased due to the purchase of new investments at higher yields due to the expansion of the investment portfolio and the reinvestment of cash flows. Investments purchased in the second quarter 2022 had a tax equivalent average yield of 2.99%.

NIM was 3.41% for the six months ended June 30, 2022, a decrease of seven basis points, from 3.48% in the prior year period. The decrease in NIM over the prior year period was primarily due to excess liquidity from deposit growth and PPP that increased the ratio of interest-earning deposits to interest earning assets.

Noninterest Income

The following table presents a comparative summary of the major components of noninterest income for the periods indicated.


	Linked quarter comparison								Prior year comparison
	Quarter ended								Six months ended
(in thousands)	June 30, 2022		March 31, 2022		Increase (decrease)				June 30, 2022		June 30, 2021		Increase (decrease)
Deposit service charges	$	4,749	$	4,163	$	586	14	%	$	8,912	$	6,946	$	1,966	28	%
Wealth management revenue	2,533		2,622		(89)		(3)	%	5,155		4,999		156		3	%
Card services revenue	3,514		3,040		474		16	%	6,554		5,471		1,083		20	%
Tax credit income	1,186		2,608		(1,422)		(55)	%	3,794		329		3,465		1,053	%

Other income	2,212		6,208		(3,996)		(64)	%	8,420		9,749		(1,329)		(14)	%

Total noninterest income	$	14,194	$	18,641	$	(4,447)	(24)	%	$	32,835	$	27,494	$	5,341	19	%

Total noninterest income for the second quarter 2022 was $14.2 million, a decrease of $4.4 million from $18.6 million in the linked quarter. The decrease from the linked quarter was primarily due to decreases in tax credit and other income. Tax credit income is typically higher in the fourth and first quarter of each year and experiences a seasonal decline during the second and third quarters. Certain tax credit investment projects are carried at fair value. Rising interest rates also reduced tax credit income due to the impact on tax credit projects carried at fair value. An increase in interest rates will increase the discount rate used in the fair value of these investments, resulting in a lower fair value. Future rate increases may result in fair value changes that will lower tax credit income.

Other income in the current quarter included a combined $0.3 million of income from community development investments and swap income. This compares to $2.2 million of fees from community development investments and $1.2 million of swap income in the linked quarter. Income from community development investments and customer swap fees are not consistent sources and will vary among periods.

Total noninterest income for the six months ended June 30, 2022 was $32.8 million, an increase of $5.3 million from $27.5 million in the prior year period. The increase was primarily due to tax credit income, deposit service charges, and card services. Tax credit project activity and card services volumes have been stronger in 2022 compared to the same period in 2021. The FCBP acquisition also contributed $2.9 million to the overall noninterest income increase in 2022 compared to the prior year period, primarily in deposit service charges. Other income in the first six months of 2022 decreased primarily due to lower private equity fund distributions and lower mortgage banking revenue due to a decline in activity.

Noninterest Expense

The following table presents a comparative summary of the major components of noninterest expense for the periods indicated.


	Linked quarter comparison											Prior year comparison
	Quarter ended											Six months ended
(in thousands)	June 30, 2022			March 31, 2022			Increase (decrease)					June 30, 2022			June 30, 2021			Increase (decrease)
Employee compensation and benefits	$	36,028		$	35,827		$	201		1	%	$	71,855		$	57,694		$	14,161		25	%
Occupancy	4,309			4,586			(277)			(6)	%	8,895			7,280			1,615			22	%
Data processing	3,111			3,260			(149)			(5)	%	6,371			5,740			631			11	%
Professional fees	1,542			1,177			365			31	%	2,719			2,288			431			19	%



Merger-related expenses	—			—			—			—	%	—			5,091			(5,091)			(100)	%
Other expense	20,434			17,950			2,484			14	%	38,384			27,247			11,137			41	%
Total noninterest expense	$	65,424		$	62,800		$	2,624		4	%	$	128,224		$	105,340		$	22,884		22	%

Efficiency ratio	52.84		%	52.42		%	0.42		%			52.63		%	55.93		%	(3.30)		%
Core efficiency ratio1	52.81		%	52.43		%	0.38		%			52.62		%	53.38		%	(0.57)		%

1 Core efficiency ratio is a non-GAAP measure. Refer to discussion and reconciliation of this measure in the accompanying financial tables.
NM - Not meaningful

Noninterest expense was $65.4 million for the second quarter 2022, an increase of $2.6 million from $62.8 million in the linked quarter. Employee compensation and benefits increased $0.2 million from the linked quarter, which included a $1.2 million increase in ongoing compensation expense that was offset by a $1.2 million decline in payroll taxes. The compensation trend in the linked quarter was primarily driven by performance-based incentive accruals. Other expense and professional fees increased $2.7 million from the linked quarter primarily due to a $1.6 million increase in deposit costs and a $0.8 million increase in loan and legal expenses due to growth in the loan portfolio.

Noninterest expense of $128.2 million for the six months ended June 30, 2022, increased $22.9 million, from $105.3 million in the prior year period. The increase was primarily due to the FCBP acquisition that added $12.8 million in noninterest expense, an increase in employee compensation and benefits from merit increases in 2021, and higher deposit servicing costs. Certain deposit specialty accounts receive an earnings credit that pays costs used to service the customer. These costs are recorded as noninterest expense and will fluctuate with the amount of the underlying deposit balances and the related earnings credit rate. Excluding FCBP, these costs increased $3.3 million to $10.2 million in the six months ended June 30, 2022, compared to $5.8 million in the prior year period. The increase was primarily due to continued success in generating new customer activity in the deposit specialties. Offsetting these increases was a decline of $5.1 million in merger expenses that were recognized in the prior year on the acquisitions of Seacoast Commerce Banc Holdings and FCBP.

Income Taxes

The Company’s effective tax rate was 21.8 % for the second quarter 2022, compared to 21.9% in the linked quarter. The tax rate was relatively stable in the second quarter 2022 compared to the linked quarter. The effective tax rate was 21.8% and 20.2% for the six months ended June 30, 2022 and 2021, respectively. The Company’s effective tax for the first half of 2022 rate has increased over the prior year period due to growth of pre-tax income and the further expansion and diversification of the Company’s geographic footprint which has affected state tax apportionment.

Summary Balance Sheet


(in thousands)	June 30, 2022		December 31, 2021		Increase (decrease)
Total cash and cash equivalents	$	944,804	$	2,021,689	$	(1,076,885)	(53)	%
Securities	2,111,044		1,795,687		315,357		18	%
Loans (excluding PPP)	9,220,001		8,745,684		474,317		5	%
PPP loans, net	49,175		271,958		(222,783)		(82)	%
Total assets	13,084,506		13,537,358		(452,852)		(3)	%
Deposits	11,092,618		11,343,799		(251,181)		(2)	%
Total liabilities	11,637,094		12,008,242		(371,148)		(3)	%
Total shareholders’ equity	1,447,412		1,529,116		(81,704)		(5)	%

Total assets were $13.1 billion at June 30, 2022, a decrease of $425.9 million from December 31, 2021. Cash and cash equivalents declined $1.1 billion, primarily due to organic loan growth, the deployment of excess liquidity into the investment portfolio and managed outflows in the deposit portfolio. New loan production and an increase in line utilization increased the loan portfolio, net of PPP. Total liabilities of $11.6 billion, decreased $371.1 million from December 31, 2021. A decrease in deposits was primarily driven from the Company’s focus on relationship-based, low-cost accounts that resulted in certain deposit account outflows.

Loans by Type

The Company has a diversified loan portfolio, with no concentration of credit in any one economic sector; however, a substantial portion of the portfolio, including the C&I category, is secured by real estate. The ability of the Company’s borrowers to honor their contractual obligations is partially dependent upon the local economy and its effect on the real estate market.

The following table summarizes the composition of the Company’s loan portfolio:


(in thousands)	June 30, 2022		December 31, 2021		Increase (decrease)
Commercial and industrial	$	3,596,701	$	3,392,375	$	204,326	6	%
Commercial real estate - investor owned	2,173,640		2,141,143		32,497		2	%
Commercial real estate - owner occupied	2,120,735		2,035,785		84,950		4	%
Construction and land development	724,163		734,073		(9,910)		(1)	%
Residential real estate	413,727		454,052		(40,325)		(9)	%
Other	240,210		260,214		(20,004)		(8)	%
Loans held for investment	$	9,269,176	$	9,017,642	$	251,534	3	%

The following table illustrates the change in loans:



(in thousands)	June 30, 2022		December 31, 2021		Increase (decrease)
C&I	$	1,702,081	$	1,538,155	$	163,926	11	%
CRE investor owned	1,977,806		1,955,087		22,719		1	%
CRE owner occupied	1,118,895		1,112,463		6,432		1	%
SBA Loans*	1,284,279		1,241,449		42,830		3	%
Sponsor finance*	647,180		508,469		138,711		27	%
Life insurance premium financing*	688,035		593,562		94,473		16	%
Tax credits*	550,662		486,881		63,781		13	%
SBA PPP loans	49,175		271,958		(222,783)		(82)	%
Residential real estate	391,867		430,985		(39,118)		(9)	%
Construction and land development	626,577		625,526		1,051		—	%
Other	232,619		253,107		(20,488)		(8)	%
Total loans	$	9,269,176	$	9,017,642	$	251,534	3	%


*Specialty loan category

Loans totaled $9.3 billion at June 30, 2022 compared to $9.0 billion at December 31, 2021. PPP loans declined $222.8 million to $49.2 million from continued PPP forgiveness by the SBA. All specialty loan categories increased in the first six months of 2022, particularly sponsor finance loans. Average line draw utilization was 41.9% for the first six months of 2022, compared to 38.5% for the full year of 2021.

Specialty lending products, including sponsor finance, life insurance premium financing, and tax credits, consist primarily of C&I loans. These loans are sourced through relationships developed with estate planning firms and private equity funds and are not bound geographically by our markets. These specialized loan products offer opportunities to expand and diversify geographically by entering new markets. The Company continues to focus on originating high-quality C&I relationships, as they typically have variable interest rates and allow for cross selling opportunities involving other banking products. Life insurance premium financing and tax credits are typically lower risk products due to the high collateral value securing the loans.

SBA loans are also generated on a national basis, and primarily consist of loans collateralized by first lien, owner-occupied real estate properties. These loans predominantly have a 75% guarantee from the SBA. However, the guarantee was temporarily increased to 90% for loans issued between December 27, 2020 and September 30, 2021 as part of the Economic Aid Act. Occasionally, the Company may sell the guaranteed portion of the loan and retain servicing rights.

Provision and Allowance for Credit Losses

The following table presents the components of the provision for credit losses:


	Quarter ended				Six months ended June 30,
(in thousands)	June 30, 2022		March 31, 2022		2022		2021
Provision (benefit) for credit losses on loans	$	1,159	$	(4,308)	$	(3,149)	$	(1,970)
Provision (benefit) for off-balance sheet commitments	(212)		725		513		(332)
Provision (benefit) for held-to-maturity securities	149		(56)		93		—
Recovery of accrued interest	(438)		(429)		(867)		(321)
Provision (benefit) for credit losses	$	658	$	(4,068)	$	(3,410)	$	(2,623)

The provision for credit losses, which includes a provision for losses on unfunded commitments, is a charge to earnings to maintain the ACL at a level consistent with management’s assessment of expected losses in the loan

portfolio at the balance sheet date. The Company also records reversals of interest on nonaccrual loans and interest recoveries directly through the provision of credit losses.

A provision for credit losses of $0.7 million was recognized for the second quarter 2022, compared to a benefit of $4.1 million for the linked quarter. While asset quality metrics have remained strong, loan growth and a weakening economic forecast used to calculate the allowance resulted in a provision expense in the second quarter 2022. For the six months ended June 30, 2022 and 2021, a provision benefit was recognized of $3.4 million and $2.6 million, respectively. The net provision benefits during those periods was primarily the result of improved economic forecasts as the economy strengthened and recovered from the COVID-19 pandemic.

The following table summarizes the allocation of the ACL:


	June 30, 2022				December 31, 2021
(in thousands)	Allowance		Percent of loans in each category to total loans		Allowance		Percent of loans in each category to total loans
Commercial and industrial	$	65,646	38.8	%	$	63,825	37.6	%
Real estate:
Commercial	49,494		46.3	%	53,437		46.3	%
Construction and land development	13,180		7.8	%	14,536		8.1	%
Residential	7,478		4.5	%	7,927		5.1	%
Other	4,748		2.6	%	5,316		2.9	%
Total	$140,546		100.0	%	$145,041		100.0	%

The ACL on loans was 1.52% of loans at June 30, 2022, compared to 1.61% of loans at December 31, 2021. Loan growth, net charge-offs and the net provision benefit in 2022 drove the decrease in the ACL to total loans ratio. Excluding guaranteed loans, the ACL to total loans was 1.69% at June 30, 2022, compared to 1.84% at December 31, 2021.

The following table is a summary of net charge-offs (recoveries) to average loans for the periods indicated:


	Quarter ended
	June 30, 2022						March 31, 2022
(in thousands)	Net Charge-offs (Recoveries)		Average Loans(1)		Net Charge-offs (Recoveries)/Average Loans		Net Charge-offs (Recoveries)		Average Loans(1)		Net Charge-offs (Recoveries)/Average Loans
Commercial and industrial	$	(109)	$	3,478,438	(0.01)	%	$	1,369	$	3,389,243	0.16	%
Real estate:
Commercial	(8)		4,239,384		—	%	(256)		4,202,934		(0.02)	%
Construction and land development	(14)		754,106		(0.01)	%	(21)		738,329		(0.01)	%
Residential	(62)		391,013		(0.06)	%	362		415,786		0.35	%
Other	18		244,131		0.03	%	67		256,033		0.11	%
Total	$	(175)	$	9,107,072	(0.01)	%	$	1,521	$	9,002,325	0.07	%

(1) Excludes loans held for sale.


	Six months ended
	June 30, 2022						June 30, 2021
(in thousands)	Net Charge-offs (Recoveries)		Average Loans(1)		Net Charge-offs (Recoveries)/Average Loans		Net Charge-offs (Recoveries)		Average Loans(1)		Net Charge-offs (Recoveries)/Average Loans
Commercial and industrial	$	1,260	$	3,432,543	0.07	%	$	4,163	$	3,026,452	0.28	%
Real estate:
Commercial	(264)		4,221,415		(0.01)	%	2,523		3,129,044		0.16	%
Construction and land development	(35)		748,233		(0.01)	%	(267)		549,322		(0.10)	%
Residential	300		402,748		0.15	%	12		307,788		0.01	%
Other	85		250,049		0.07	%	85		229,457		0.07	%
Total	$	1,346	$	9,054,988	0.03	%	$	6,516	$	7,242,063	0.18	%

(1) Excludes loans held for sale.

To the extent the Company does not recognize charge-offs and economic forecasts improve in future periods, the Company could recognize provision reversals. Conversely, if economic conditions and the Company’s forecast worsens, the Company could recognize elevated levels of provision for credit losses. The provision is also reflective of charge-offs in the period.

Nonperforming assets

The following table presents the categories of nonperforming assets and other ratios, excluding government guaranteed portions, as of the dates indicated.


(in thousands)	June 30, 2022			December 31, 2021
Nonaccrual loans	$	19,462		$	23,449
Loans past due 90 days or more and still accruing interest	24			1,716
Troubled debt restructurings	74			2,859
Total nonperforming loans	19,560			28,024
Other real estate	955			3,493

Total nonperforming assets	$	20,515		$	31,517

Total assets	$	13,084,506		$	13,537,358
Total loans	9,269,176			9,017,642

Total allowance for credit losses	140,546			145,041

ACL to nonaccrual loans	722		%	619		%
ACL to nonperforming loans	719		%	518		%
ACL to total loans	1.52		%	1.61		%
Nonaccrual loans to total loans	0.21		%	0.26		%
Nonperforming loans to total loans	0.21		%	0.31		%

Nonperforming assets to total assets	0.16		%	0.23		%

Nonperforming loans based on loan type were as follows:



(in thousands)	June 30, 2022		December 31, 2021
Commercial and industrial	$	16,326	$	21,538
Commercial real estate	2,362		4,414

Residential real estate	850		2,048
Other	22		24
Total	$	19,560	$	28,024

The following table summarizes the changes in nonperforming loans:


	Six months ended
(in thousands)	June 30, 2022



Nonperforming loans, beginning of period	$	28,024
Additions to nonaccrual loans	2,707


Charge-offs	(4,140)
Principal payments	(7,031)



Nonperforming loans, end of period	$	19,560

Deposits


(in thousands)	June 30, 2022			December 31, 2021			Increase (decrease)
Noninterest-bearing demand accounts	$	4,746,478		$	4,578,436		$	168,042	4	%
Interest-bearing demand accounts	2,197,957			2,465,884			(267,927)		(11)	%
Money market accounts	2,726,024			2,890,976			(164,952)		(6)	%
Savings accounts	836,958			800,210			36,748		5	%
Certificates of deposit:
Brokered	129,064			128,970			94		—	%
Other	456,137			479,323			(23,186)		(5)	%
Total deposits	$	11,092,618		$	11,343,799		$	(251,181)	(2)	%


Demand deposits / total deposits	43		%	40		%

The following table shows the average balance and average rate of the Company’s deposits by type:


	Three months ended
	June 30, 2022				March 31, 2022				June 30, 2021
(in thousands)	Average Balance		Average Rate Paid		Average Balance		Average Rate Paid		Average Balance		Average Rate Paid
Noninterest-bearing deposit accounts	$	4,987,455	—	%	$	4,692,027	—	%	$	3,008,703	—	%

Interest-bearing demand accounts	2,329,431		0.11		2,505,319		0.09		1,985,811		0.07
Money market accounts	2,767,595		0.33		2,872,302		0.21		2,344,871		0.17
Savings accounts	854,860		0.03		817,431		0.03		718,193		0.03
Certificates of deposit	591,091		0.58		607,133		0.53		522,633		0.84
Total interest-bearing deposits	$	6,542,977	0.24		$	6,802,185	0.17		$	5,571,508	0.18

Total average deposits	$	11,530,432	0.13		$	11,494,212	0.10		$	8,580,211	0.12

Core deposits, defined as total deposits excluding certificates of deposits, were $10.5 billion at June 30, 2022, a decrease of $228.1 million from December 31, 2021. The decrease was primarily in interest-bearing transaction and money market accounts that declined $430.0 million due to the managed run-off of certain interest-rate sensitive, large balance accounts. This reflects a shift in our deposit mix aligned with our disciplined focus on relationship-based, lower-cost deposits. Noninterest-bearing deposit accounts increased $168.0 million from December 31, 2021, principally due to growth in the specialty deposit group. The Company has a specialty deposit portfolio focusing on property management, community associations, and escrow industries, in addition to deposits related to its specialty lending products. These deposits totaled $2.4 billion at June 30, 2022 and $2.2 billion at December 31, 2021.

As rates increase, deposit balances may decline or the composition of the deposit portfolio may shift to higher-yielding deposit products, such as money market accounts or certificates of deposit.

The total cost of deposits was 0.13% for the current quarter, compared to 0.10% for the linked quarter.

Shareholders’ Equity

Shareholders’ equity totaled $1.4 billion at June 30, 2022, a decrease of $81.7 million from December 31, 2021. Significant activity during the first six months of 2022 was as follows:

•increase from net income of $92.8 million,

•net decrease in fair value of securities and cash flow hedges of $127.3 million,

•decrease from shares repurchased of $32.9 million, and

•decrease from dividends paid on common and preferred stock of $18.3 million.

Liquidity and Capital Resources

Liquidity

The objective of liquidity management is to ensure we have the ability to generate sufficient cash or cash equivalents in a timely and cost-effective manner to meet our commitments as they become due. Typical demands on liquidity are changes in deposit levels, maturing time deposits which are not renewed, and fundings under credit commitments to customers. Funds are available from a number of sources, such as the core deposit base and loan and security repayments and maturities.

Additionally, liquidity is provided from lines of credit with the FHLB, the Federal Reserve, and correspondent banks; the ability to acquire large and brokered deposits, sales of the securities portfolio, and the ability to sell loan participations to other banks. These alternatives are an important part of our liquidity plan and provide flexibility and efficient execution of the asset-liability management strategy.

The Company’s Asset-Liability Management Committee oversees our liquidity position, the parameters of which are approved by the Bank’s Board of Directors. Our liquidity position is monitored daily. Our liquidity management framework includes measurement of several key elements, such as the loan to deposit ratio, a liquidity ratio, and a dependency ratio. The Company’s liquidity framework also incorporates contingency planning to assess the nature and volatility of funding sources and to determine alternatives to these sources. While core deposits and loan and investment repayments are principal sources of liquidity, funding diversification is another key element of liquidity management and is achieved by strategically varying depositor types, terms, funding markets, and instruments.

Liquidity from assets is available primarily from cash balances and the investment portfolio. Cash and interest-bearing deposits with other banks totaled $952.1 million at June 30, 2022 and $2.0 billion at December 31, 2021. The low interest rate environment, coupled with an uncertain outlook and government stimulus, such as the PPP, has increased liquidity within the banking industry, including the Company. The Company continued to redeploy part of its excess liquidity into the investment portfolio during the six months ended June 30, 2022. Investment securities are another important tool to the Company’s liquidity objectives. Securities totaled $2.0 billion at June 30,

2022, and included $680 million pledged as collateral for deposits of public institutions, treasury, loan notes, and other requirements. The remaining $1.3 billion could be pledged or sold to enhance liquidity, if necessary.

Liability liquidity funding sources are available to increase financial flexibility. In addition to amounts borrowed, at June 30, 2022, the Company could borrow an additional $778 million from the FHLB of Des Moines under blanket loan pledges, and has an additional $1.4 billion available from the Federal Reserve Bank under a pledged loan agreement. The Company has unsecured federal funds lines with six correspondent banks totaling $90 million.

In the normal course of business, the Company enters into certain forms of off-balance sheet transactions, including unfunded loan commitments and letters of credit. These transactions are managed through the Company’s various risk management processes. Management considers both on-balance sheet and off-balance sheet transactions in its evaluation of the Company’s liquidity. The Company has $2.7 billion in unused commitments to extend credit as of June 30, 2022. While this commitment level would exhaust the majority the Company’s current liquidity resources, the nature of these commitments is such that the likelihood of funding them in the aggregate at any one time is low.

At the holding company level, the primary funding sources are dividends and payments from the Bank and proceeds from the issuance of equity (i.e. stock option exercises, stock offerings) and debt instruments. The main use of this liquidity is to provide the funds necessary to pay dividends to shareholders, service debt, invest in subsidiaries as necessary, and satisfy other operating requirements. The holding company maintains a revolving line of credit for an aggregate amount up to $25 million, all of which is available at June 30, 2022. The line of credit has a one-year term and was renewed in February 2022 for an additional one-year term. The proceeds can be used for general corporate purposes.

The Company has an effective automatic shelf registration statement on Form S-3 allowing for the issuance of various forms of equity and debt securities. The Company’s ability to offer securities pursuant to the registration statement depends on market conditions and the Company’s continuing eligibility to use the Form S-3 under rules of the SEC.

Strong capital ratios, credit quality and core earnings are essential to retaining cost-effective access to the wholesale funding markets. Deterioration in any of these factors could have a negative impact on the Company’s ability to access these funding sources and, as a result, these factors are monitored on an ongoing basis as part of the liquidity management process. The Bank is subject to regulations and, among other things, may be limited in its ability to pay dividends or transfer funds to the parent company. Accordingly, consolidated cash flows as presented in the consolidated statements of cash flows may not represent cash immediately available for the payment of cash dividends to the Company’s shareholders or for other cash needs.

Through the normal course of operations, the Company has entered into certain contractual obligations and other commitments. Such obligations relate to funding of operations through deposits or debt issuances, as well as leases for premises and equipment. As a financial services provider, the Company routinely enters into commitments to extend credit. While contractual obligations represent future cash requirements of the Company, a significant portion of commitments to extend credit may expire without being drawn upon. Such commitments are subject to the same credit policies and approval process accorded to loans made by the Company. The Company also enters into derivative contracts under which the Company either receives cash from or pays cash to counterparties depending on changes in interest rates. Derivative contracts are carried at fair value on the consolidated balance sheet with the fair value representing the net present value of expected future cash receipts or payments based on market interest rates as of the balance sheet date. The fair value of these contracts changes daily as market interest rates change.

Capital Resources

The Company and the Bank are subject to various regulatory capital requirements administered by the Federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possible additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the financial

statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company and its bank affiliate must meet specific capital guidelines that involve quantitative measures of assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices. The banking affiliate’s capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings and other factors.

Quantitative measures established by regulation to ensure capital adequacy require the Company and the Bank to maintain minimum amounts and ratios (set forth in the following table) of total, Tier 1, and common equity tier 1 capital to risk-weighted assets, and of Tier 1 capital to average assets. To be categorized as “well capitalized”, banks must maintain minimum total risk-based (10%), Tier 1 risk-based (8%), common equity tier 1 risk-based (6.5%), and Tier 1 leverage ratios (5%). As of June 30, 2022, and December 31, 2021, the Company and the Bank met all capital adequacy requirements to which they are subject and exceeded the amounts required to be “well capitalized”.

The following table summarizes the Company’s various capital ratios:


	June 30, 2022						December 31, 2021
(in thousands)	EFSC			Bank			EFSC			Bank			To Be Well-Capitalized		Minimum Ratio with CCB
Common Equity Tier 1 Capital to Risk Weighted Assets	10.9		%	12.0		%	11.3		%	12.5		%	6.5	%	7.0	%
Tier 1 Capital to Risk Weighted Assets	12.5		%	12.1		%	13.0		%	12.5		%	8.0	%	8.5	%
Total Capital to Risk Weighted Assets	14.2		%	13.1		%	14.7		%	13.5		%	10.0	%	10.5	%
Leverage Ratio (Tier 1 Capital to Average Assets)	9.8		%	9.4		%	9.7		%	9.3		%	5.0	%	4.0	%
Tangible common equity to tangible assets1	7.8		%				8.1		%
Common equity tier 1 capital	$	1,130,152		$	1,242,083		$	1,091,823		$	1,201,340
Tier 1 capital	1,295,791			1,242,134			1,257,462			1,201,391
Total risk-based capital	1,469,579			1,352,672			1,423,036			1,303,715

1 Not a required regulatory capital ratio

The Company believes the tangible common equity ratio is an important measure of capital strength, even though it is considered a non-GAAP measure. A reconciliation has been included in this section under the caption “Use of Non-GAAP Financial Measures.”

Use of Non-GAAP Financial Measures:

The Company’s accounting and reporting policies conform to generally accepted accounting principles in the United States (“GAAP”) and the prevailing practices in the banking industry. However, the Company provides other financial measures, such as tangible common equity, PPNR, core efficiency ratio, and the tangible common equity ratio, in this release that are considered “non-GAAP financial measures.” Generally, a non-GAAP financial measure is a numerical measure of a company’s financial performance, financial position, or cash flows that exclude (or include) amounts that are included in (or excluded from) the most directly comparable measure calculated and presented in accordance with GAAP.

The Company considers its tangible common equity, PPNR, core efficiency ratio, and the tangible common equity ratio, collectively “core performance measures,” presented in this earnings release and the included tables as important measures of financial performance, even though they are non-GAAP measures, as they provide supplemental information by which to evaluate the impact of certain non-comparable items, and the Company’s operating performance on an ongoing basis. Core performance measures exclude certain other income and expense items, such as merger-related expenses, facilities charges, and the gain or loss on sale of investment securities, the Company believes to be not indicative of or useful to measure the Company’s operating performance on an ongoing

basis. The attached tables contain a reconciliation of these core performance measures to the GAAP measures. The Company believes that the tangible common equity ratio provides useful information to investors about the Company’s capital strength even though it is considered to be a non-GAAP financial measure and is not part of the regulatory capital requirements to which the Company is subject.

The Company believes these non-GAAP measures and ratios, when taken together with the corresponding GAAP measures and ratios, provide meaningful supplemental information regarding the Company’s performance and capital strength. The Company’s management uses, and believes that investors benefit from referring to, these non-GAAP measures and ratios in assessing the Company’s operating results and related trends and when forecasting future periods. However, these non-GAAP measures and ratios should be considered in addition to, and not as a substitute for or preferable to, ratios prepared in accordance with GAAP. In the attached tables, the Company has provided a reconciliation of, where applicable, the most comparable GAAP financial measures and ratios to the non-GAAP financial measures and ratios, or a reconciliation of the non-GAAP calculation of the financial measures for the periods indicated.

Core Performance Measures


	Three months ended				Six months ended
(in thousands)	June 30, 2022		March 31, 2022		June 30, 2021		June 30, 2022		June 30, 2021


Net interest income	109,613		101,165		81,738		210,778		160,861

Noninterest income	14,194		18,641		16,204		32,835		27,494



Less gain (loss) on sale of other real estate	(90)		19		549		(71)		549


Core noninterest income	14,284		18,622		15,655		32,906		26,945

Total core revenue	123,897		119,787		97,393		243,684		187,806



Noninterest expense	65,424		62,800		52,456		128,224		105,340




Less merger-related expenses	—		—		1,949		—		5,091



Core noninterest expense	65,424		62,800		50,507		128,224		100,249













Core efficiency ratio	52.81	%	52.43	%	51.86	%	52.62	%	53.38	%

Tangible Common Equity Ratio


(in thousands)	June 30, 2022			December 31, 2021
Shareholders' equity	$	1,447,412		$	1,529,116
Less preferred stock	71,988			71,988
Less goodwill	365,164			365,164
Less intangible assets	19,528			22,286
Tangible common equity	$	990,732		$	1,069,678

Total assets	$	13,084,506		$	13,537,358
Less goodwill	365,164			365,164
Less intangible assets, net	19,528			22,286
Tangible assets	$	12,699,814		$	13,149,908

Tangible common equity to tangible assets	7.80		%	8.13		%

Average Shareholders’ Equity and Average Tangible Common Equity


	For the three months ended
(in thousands)	June 30, 2022		March 31, 2022		June 30, 2021
Average shareholder’s equity	$	1,474,267	$	1,536,221	$	1,116,969
Less average preferred stock	71,988		71,988		—
Less average goodwill	365,164		365,164		260,567
Less average intangible assets	20,175		21,540		20,997
Average tangible common equity	$	1,016,940	$	1,077,529	$	835,405

PPNR


	Quarter ended				Six months ended
(in thousands)	Jun 30, 2022		Mar 31, 2022			Jun 30, 2021		Jun 30, 2022		Jun 30, 2021

Net interest income	$	109,613	$	101,165		$	81,738	$	210,778	$	160,861
Noninterest income	14,194		18,641			16,204		32,835		27,494
Less noninterest expense	65,424		62,800			52,456		128,224		105,340

Merger-related expenses	—		—			1,949		—		5,091
PPNR	$	58,383	$	57,006		$	47,435	$	115,389	$	88,106

ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The disclosures set forth in this item are qualified by the cautionary language regarding forward-looking statements in the introduction to Item 2 of Part 1 of this Quarterly Report on Form 10-Q and other cautionary statements set forth elsewhere in this report.

Interest Rate Risk

Our interest rate risk management practices are aimed at optimizing net interest income, while guarding against deterioration that could be caused by certain interest rate scenarios. Interest rate sensitivity varies with different types of interest-earning assets and interest-bearing liabilities. We attempt to maintain interest-earning assets, comprised primarily of both loans and investments, and interest-bearing liabilities, comprised primarily of deposits, maturing or repricing in similar time horizons in order to manage any impact from market interest rate changes according to our risk tolerances. The Company uses an earnings simulation model to measure earnings sensitivity to changing rates.

The Company determines the sensitivity of its short-term future earnings to a hypothetical plus or minus 100 to 300 basis point parallel rate shock through the use of simulation modeling. The simulation of earnings includes the modeling of the balance sheet as an ongoing entity. Future business assumptions involving administered rate products, prepayments for future rate-sensitive balances, and the reinvestment of maturing assets and liabilities are included. These items are then modeled to project net interest income based on a hypothetical change in interest rates. The resulting net interest income for the next 12-month period is compared to the net interest income amount calculated using flat rates. The difference represents the Company’s earning sensitivity to a positive or negative 100 basis points parallel rate shock.

The following table summarizes the expected impact of interest rate shocks on net interest income at June 30, 2022:


Rate Shock			Annual % change in net interest income
+ 300 bp			17.4%
+ 200 bp			11.6%
+ 100 bp			5.8%
- 100 bp			(8.4)%
- 200 bp			(14.6)%

In addition to the rate shocks shown in the table above, the Company models net interest income under various dynamic interest rate scenarios. In general, changes in interest rates are positively correlated with changes in net interest income.

The Company occasionally uses interest rate derivative instruments as an asset/liability management tool to hedge mismatches in interest rate exposure indicated by the net interest income simulation described above. They are used to modify the Company’s exposures to interest rate fluctuations and provide more stable spreads between loan yields and the rate on their funding sources. At June 30, 2022, the Company had $62.0 million in derivative contracts used to manage interest rate risk. Derivative financial instruments are also discussed in “Item 1. Note 6 – Derivative Financial Instruments.”

The FCA has announced that the most common USD LIBOR settings (overnight, 1-month. 3-month, 6-month and 12-month) will cease publication after June 30, 2023. LIBOR is the most liquid and common interest rate index in the world and is commonly referenced in financial instruments. The Federal Reserve’s Alternative Reference Rates Committee has proposed that SOFR replace LIBOR. The Company expects to select a replacement index and provide customer notification in early 2023, prior to the cessation of the USD LIBOR settings. While a replacement index has not yet been selected, the Company ceased using LIBOR and ICE swap rates in new contracts and began issuing SOFR based loans in December 2021.

We have exposure to LIBOR in various financial contracts. Instruments that may be impacted include loans, securities, debt instruments and derivatives, among other financial contracts indexed to LIBOR. We also have loans that are indirectly linked to LIBOR through reference to the ICE swap rate. We have an internal working group composed of members from legal, credit, finance, operations, risk and audit to monitor developments, develop policies and procedures, assess the impact to the Company, consider relevant options and to determine an appropriate replacement index for affected contracts that expire after the expected discontinuation of LIBOR on June 30, 2023. We are actively working to amend and address impacted contracts to allow for a replacement index. However, amending certain contracts indexed to LIBOR may require consent from the counterparties which could be difficult and costly to obtain in certain circumstances. As of June 30, 2022, the Company’s financial contracts indexed to LIBOR included $1.9 billion in loans (including $560 million indirectly linked to LIBOR through reference to an ICE swap rate), $119 million in borrowings, and $768 million (notional) in derivatives.

In addition, LIBOR is used in the Company’s analysis of the fair value of tax credits and may be referenced in other financial contracts not included in the discussion above.

The Company had $5.9 billion in variable rate loans at June 30, 2022. Of these loans, $3.5 billion have an interest rate floor and 89% of those loans were at or above the floor.

The Company maintains an available-for-sale investment securities portfolio that totaled $1.5 billion at June 30, 2022. This portfolio consists primarily of fixed-rate securities that are subject to changes in market value due to changes in interest rates. At June 30, 2022, the available-for-sale investment portfolio had a net unrealized loss of $165.3 million.

ITEM 4: CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

Under the supervision and with the participation of the Company’s Chief Executive Officer (CEO) and the Chief Financial Officer (CFO), management has evaluated the effectiveness of the design and operation of the Company’s disclosure controls and procedures pursuant to Exchange Act Rule 13a-15, as of June 30, 2022. Disclosure controls and procedures include without limitation, controls and procedures designed to ensure that information required to be disclosed by an issuer in the reports that it files or submits under the Securities Exchange Act of 1934, as amended, is accumulated and communicated to the issuer’s management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.

Based on that evaluation, the CEO and CFO concluded the Company’s disclosure controls and procedures were effective as of June 30, 2022 to provide reasonable assurance of the achievement of the objectives described above.

Changes to Internal Controls

There were no changes during the period covered by this Quarterly Report on Form 10-Q in the Company’s internal controls over financial reporting that have materially affected, or are reasonably likely to materially affect, those controls.

PART II - OTHER INFORMATION

ITEM 1: LEGAL PROCEEDINGS

The Company and its subsidiaries are, from time to time, parties to various legal proceedings arising out of their businesses. Management believes there are no such legal proceedings pending or threatened against the Company or its subsidiaries, if determined adversely, would have a material adverse effect on the business, consolidated financial condition, results of operations or cash flows of the Company or any of its subsidiaries.

ITEM 1A: RISK FACTORS

For information regarding risk factors affecting the Company, please see the cautionary language regarding forward-looking statements in the introduction to Item 2 of Part I of this Quarterly Report on Form 10-Q, and Part I, Item 1A of our Report on Form 10-K for the fiscal year ended December 31, 2021. There have been no material changes to the risk factors described in such Annual Report on Form 10-K for the fiscal year ended December 31, 2021.

ITEM 2: UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS



Period	Total number of shares purchased (a)	Weighted-average price paid per share		Total number of shares purchased as part of publicly announced plans or programs	Maximum number of shares that may yet be purchased under the plans or programs
April 1, 2022 through April 30, 2022	344,666	$	45.67	344,666	4,717
May 1, 2022 through May 31, 2022	4,717	44.30		4,717	2,000,000
June 1, 2022 through June 30, 2022	—	—		—	2,000,000
Total	349,383	$	45.65	349,383	2,000,000

(a) In April 2021, the Company’s board of directors authorized the repurchase of up to two million shares of the Company’s common stock. As of May 2022, this plan was depleted. In May 2022, the Company’s board of directors authorized the repurchase of up to two million shares of the Company’s common stock. The repurchases may be made from time to time in the open market or through privately negotiated transactions.

ITEM 3: DEFAULTS UPON SENIOR SECURITIES

None.

ITEM 4: MINE SAFETY DISCLOSURES

Not applicable.

ITEM 5: OTHER INFORMATION

None.

ITEM 6: EXHIBITS

Exhibit No. Description

2.1 Agreement and Plan of Merger, dated April 26, 2021, by and among Enterprise Financial Services Corp, Enterprise Bank & Trust, First Choice Bancorp and First Choice Bank (incorporated herein by reference to Exhibit 2.1 to Registrant’s Current Report on Form 8-K filed on April 26, 2021 (File No. 001-15373)).

2.2 Agreement and Plan of Merger, dated August 20, 2020, by and among Enterprise Financial Services Corp, Enterprise Bank & Trust, Seacoast Commerce Banc Holdings and Seacoast Commerce Bank (incorporated herein by reference to Exhibit 2.1 to Registrant’s Current Report on Form 8-K filed on August 21, 2020 (File No. 001-15373)).

3.1 Certificate of Incorporation of Registrant, (incorporated herein by reference to Exhibit 3.1 of Registrant's Registration Statement on Form S-1 filed on December 16, 1996 (File No. 333-14737)).

3.2 Amendment to the Certificate of Incorporation of Registrant (incorporated herein by reference to Exhibit 4.2 to Registrant's Registration Statement on Form S-8 filed on July 1, 1999 (File No. 333-82087)).

3.3 Amendment to the Certificate of Incorporation of Registrant (incorporated herein by reference to Exhibit 3.1 to Registrant's Quarterly Report on Form 10-Q for the period ending September 30, 1999 (File No. 001-15373)).

3.4 Amendment to the Certificate of Incorporation of Registrant (incorporated herein by reference to Exhibit 99.2 to Registrant's Current Report on Form 8-K filed on April 30, 2002 (File No. 001-15373)).

3.5 Amendment to the Certificate of Incorporation of Registrant (incorporated herein by reference to Appendix A to Registrant's Proxy Statement on Form 14-A filed on November 20, 2008 (File No. 001-15373)).

3.6 Amendment to the Certificate of Incorporation of Registrant (incorporated herein by reference to Exhibit 3.1 to the Registrant's Quarterly Report on Form 10-Q for the period ending June 30, 2014 (File No. 001-15373)).

3.7 Amendment to the Certificate of Incorporation of Registrant (incorporated herein by reference to Exhibit 3.8 to Registrant’s Quarterly Report on Form 10-Q filed on July 26, 2019 (File No. 001-15373)).

3.8 Amendment to Certificate of Incorporation of Registrant (incorporated herein by reference to Exhibit 3.9 to Registrant's Quarterly Report on Form 10-Q filed on July 30, 2021 (File No. 001-15373)).

3.9 Certificate of Designations of Registrant for Fixed Rate Cumulative Perpetual Preferred Stock, Series A, dated December 17, 2008 (incorporated herein by reference to Exhibit 3.1 to Registrant's Current Report on Form 8-K filed on December 23, 2008 (File No. 001-15373)).

3.10 Certificate of Elimination of Registrant’s Certificate of Designation, Preferences, and Rights of the Fixed Rate Cumulative Perpetual Preferred Stock, Series A, dated November 9, 2021 (incorporated herein by reference to Exhibit 3.1 to Registrant’s Current Report on Form 8-K filed on November 9, 2021 (File No. 001-15373)).

3.11 Certificate of Designation of Registrant of Fixed Rate Non-Cumulative Perpetual Preferred Stock, Series A, dated November 16, 2021 (incorporated herein by reference to Exhibit 3.1 to Registrant’s Current Report on Form 8-K filed on November 17, 2021 (File No. 001-15373)).

3.12 Amended and Restated Bylaws of Registrant (incorporated herein by reference to Exhibit 3.1 to Registrant's Current Report on Form 8-K filed on June 12, 2015 (File No. 001-15373)).

4.1 Long-term borrowing instruments are omitted pursuant to Item 601(b)(4)(iii) of Regulation S-K. The Company undertakes to furnish copies of such instruments to the Securities and Exchange Commission upon request.

*31.1 Chief Executive Officer’s Certification required by Rule 13(a)-14(a).

*31.2 Chief Financial Officer’s Certification required by Rule 13(a)-14(a).

**32.1 Chief Executive Officer Certification pursuant to 18 U.S.C. § 1350, as adopted pursuant to section § 906 of the Sarbanes-Oxley Act of 2002.

**32.2 Chief Financial Officer Certification pursuant to 18 U.S.C. § 1350, as adopted pursuant to section § 906 of the Sarbanes-Oxley Act of 2002.

101.INS XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document.

101.SCH Inline XBRL Taxonomy Extension Schema Document.

101.CAL Inline XBRL Taxonomy Extension Calculation Linkbase Document.

101.LAB Inline XBRL Taxonomy Extension Label Linkbase Document.

101.PRE Inline XBRL Taxonomy Extension Presentation Linkbase Document.

101.DEF Inline XBRL Taxonomy Extension Definitions Linkbase Document.

104 The cover page of Enterprise Financial Services Corp’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2022, formatted in Inline XBRL (contained in Exhibit 101).

* Filed herewith

** Furnished herewith. Notwithstanding any incorporation of this Quarterly Statement on Form 10-Q in any other filing by the Registrant, Exhibits furnished herewith and designated with two (**) shall not be deemed incorporated by reference to any other filing unless specifically otherwise set forth herein or therein.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Clayton, State of Missouri, on the day of July 29, 2022.


			ENTERPRISE FINANCIAL SERVICES CORP

			By:			/s/ James B. Lally
						James B. Lally
						Chief Executive Officer

			By:			/s/ Keene S. Turner
						Keene S. Turner
						Chief Financial Officer

TABLE OF CONTENTS

Part 1 - Item 1 - Financial Statements Note 1 - Summary Of Significant Accounting Policies Note 2 - Earnings Per Share Note 3 - Investments Note 4 - Loans Note 5 - Commitments and Contingencies Note 6 - Derivative Financial Instruments Note 7 - Fair Value Measurements Note 8 - Shareholders Equity Note 9 - Supplemental Financial Information Item 2: Management S Discussion and Analysis Of Financial Condition and Item 3: Quantitative and Qualitative Disclosures About Market Risk Item 4: Controls and Procedures Part II - Other Information Item 1: Legal Proceedings Item 1A: Risk Factors Item 2: Unregistered Sales Of Equity Securities and Use Of Proceeds Item 3: Defaults Upon Senior Securities Item 4: Mine Safety Disclosures Item 5: Other Information Item 6: Exhibits

Exhibits

EFSC 10-Q Quarter ended June 30, 2022

Exhibits