ENTERPRISE FINANCIAL SERVICES CORP - Quarter Report: 2021 September (Form 10-Q)

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 September 30, 2021.


☐						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

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 November 2, 2021, the Registrant had 38,372,237 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)						5

Notes to Condensed Consolidated Financial Statements (Unaudited)						6

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations						30

Item 3. Quantitative and Qualitative Disclosures About Market Risk						51

Item 4. Controls and Procedures						52

PART II - OTHER INFORMATION

Item 1. Legal Proceedings						52

Item 1A. Risk Factors						52

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds						53

Item 3. Defaults Upon Senior Securities						53

Item 4. Mine Safety Disclosures						53

Item 5. Other Information						53

Item 6. Exhibits						53

Signatures						56

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

FCBP

First Choice Bancorp

ASU

Accounting Standards Update

FHLB

Federal Home Loan Bank

Bank

Enterprise Bank & Trust

GAAP

Generally Accepted Accounting Principles (United States)

C&I

Commercial and Industrial

LIBOR

London Interbank Offered Rate

CECL

Current Expected Credit Loss

MD&A

Management’s Discussion and Analysis of Financial Condition and Results of Operations

Company

Enterprise Financial Services Corp

NIM

Net Interest Margin

CRE

Commercial Real Estate

PCD

Purchased Credit Deteriorated

EFSC

Enterprise Financial Services Corp

PPP

Paycheck Protection Program

Enterprise

Enterprise Financial Services Corp

SBA

Small Business Administration

FASB

Financial Accounting Standards Board

Seacoast

Seacoast Commerce Banc Holdings

FCB

First Choice Bank

SEC

Securities and Exchange Commission

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)	September 30, 2021		December 31, 2020
Assets
Cash and due from banks	$	179,826	$	99,760
Federal funds sold	3,398		1,519
Interest-earning deposits (including $21,075 and $36,525 pledged as collateral, respectively)	1,206,063		436,424
Total cash and cash equivalents	1,389,287		537,703
Interest-earning deposits greater than 90 days	7,009		7,626
Securities available-for-sale	1,219,814		912,429
Securities held-to-maturity, net	438,472		487,610
Loans held-for-sale	5,068		13,564
Loans	9,116,583		7,224,935
Allowance for credit losses on loans	(152,096)		(136,671)
Total loans, net	8,964,487		7,088,264


Other investments	59,156		48,764
Fixed assets, net	48,697		53,169




Goodwill	365,415		260,567
Intangible assets, net	23,777		23,084

Other assets	366,834		318,791
Total assets	$	12,888,016	$	9,751,571

Liabilities and Shareholders' Equity
Noninterest-bearing deposit accounts	$	4,375,713	$	2,711,828
Interest-bearing transaction accounts	2,253,639		1,768,497
Money market accounts	2,822,259		2,327,066
Savings accounts	748,993		627,903
Certificates of deposit:
Brokered	128,923		50,209
Other	498,248		499,886
Total deposits	10,827,775		7,985,389
Subordinated debentures and notes	204,103		203,637
FHLB advances	50,000		50,000
Other borrowings	219,484		271,081
Notes payable	24,286		30,000


Other liabilities	122,733		132,489
Total liabilities	$	11,448,381	$	8,672,596

Commitments and contingent liabilities (Note 7)

Shareholders' equity:
Preferred stock, $0.01 par value; 5,000,000 shares authorized; 0 shares issued and outstanding	—		—
Common stock, $0.01 par value; 75,000,000 and 45,000,000 shares authorized, respectively; 40,352,097 and 33,190,306 shares issued, respectively	404		332
Treasury stock, at cost; 1,980,093 shares	(73,528)		(73,528)
Additional paid in capital	1,031,146		697,839
Retained earnings	461,711		417,212
Accumulated other comprehensive income	19,902		37,120
Total shareholders' equity	1,439,635		1,078,975
Total liabilities and shareholders' equity	$	12,888,016	$	9,751,571

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 September 30,				Nine months ended September 30,
(in thousands, except per share data)	2021		2020		2021		2020
Interest income:
Interest and fees on loans	$	94,353	$	62,648	$	250,390	$	194,295
Interest on debt securities:
Taxable	4,435		5,554		13,293		19,698
Nontaxable	3,585		2,241		10,058		5,542

Interest on interest-earning deposits	480		113		906		500
Dividends on equity securities	375		231		942		631
Total interest income	103,228		70,787		275,589		220,666
Interest expense:




Deposits	2,740		3,712		7,870		17,983
Subordinated debentures and notes	2,855		2,826		8,521		7,061
FHLB advances	212		720		604		2,070
Notes payable and other borrowings	148		175		460		997
Total interest expense	5,955		7,433		17,455		28,111
Net interest income	97,273		63,354		258,134		192,555
Provision for credit losses	19,668		14,080		17,045		55,935
Net interest income after provision for credit losses	77,605		49,274		241,089		136,620
Noninterest income:
Deposit service charges	4,520		2,798		11,466		8,557
Wealth management revenue	2,573		2,456		7,572		7,283
Card services revenue	3,186		2,498		8,657		6,970


Tax credit income	3,325		748		3,654		2,563


Miscellaneous income	4,015		4,129		13,764		10,624
Total noninterest income	17,619		12,629		45,113		35,997
Noninterest expense:
Employee compensation and benefits	33,722		22,040		91,416		66,114
Occupancy	4,496		3,408		11,776		9,940
Data processing	3,328		2,167		9,068		6,393
Professional fees	901		755		3,189		2,904


Branch-closure expenses	3,441		—		3,441		—
Merger-related expenses	14,671		1,563		19,762		1,563
Other	16,326		9,591		43,573		29,195
Total noninterest expense	76,885		39,524		182,225		116,109

Income before income tax expense	18,339		22,379		103,977		56,508
Income tax expense	4,426		4,428		21,733		11,055
Net income	$	13,913	$	17,951	$	82,244	$	45,453

Earnings per common share
Basic	$	0.38	$	0.68	$	2.48	$	1.73
Diluted	0.38		0.68		2.48		1.73

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 September 30,				Nine months ended September 30,
(in thousands)	2021		2020		2021		2020
Net income	$	13,913	$	17,951	$	82,244	$	45,453
Other comprehensive income (loss), after-tax:
Change in unrealized gain (loss) on available-for-sale debt securities	(7,870)		94		(15,941)		21,642
Reclassification adjustment for realized gain on sale of available-for-sale debt securities	—		(314)		—		(317)
Reclassification of gain on held-to-maturity securities	(805)		(705)		(2,791)		(1,190)
Change in unrealized gain (loss) on cash flow hedges arising during the period	9		110		651		(6,247)
Reclassification of loss on cash flow hedges	296		514		863		871
Total other comprehensive income (loss), after-tax	(8,370)		(301)		(17,218)		14,759
Comprehensive income	$	5,543	$	17,650	$	65,026	$	60,212

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 nine months ended September 30, 2021
(in thousands, except per share data)	Common Stock		Treasury Stock		Additional paid in capital		Retained earnings		Accumulated other comprehensive income (loss)		Total shareholders’ equity
Balance at June 30, 2021	$	330	$	(73,528)	$	688,945	$	474,282	$	28,272	$	1,118,301
Net income	—		—		—		13,913		—		13,913





Other comprehensive loss	—		—		—		—		(8,370)		(8,370)

Cash dividends paid on common shares, $0.19 per share	—		—		—		(7,305)		—		(7,305)
Repurchase of common shares	(4)		—		(3,412)		(17,820)		—		(21,236)
Issuance under equity compensation plans, 13,234 shares, net	—		—		1,376		(649)		—		727

Share-based compensation	—		—		1,325		—		—		1,325

Shares issued in connection with acquisition of First Choice Bancorp, 7,777,272 shares, net (gross issuance of 7,808,459 shares)	78		—		342,912		(710)		—		342,280


Balance at September 30, 2021	$	404	$	(73,528)	$	1,031,146	$	461,711	$	19,902	$	1,439,635

Balance at December 31, 2020	$	332	$	(73,528)	$	697,839	$	417,212	$	37,120	$	1,078,975
Net income	—		—		—		82,244		—		82,244





Other comprehensive loss	—		—		—		—		(17,218)		(17,218)

Cash dividends paid on common shares, $0.55 per share	—		—		—		(18,566)		—		(18,566)
Repurchase of common shares	(6)		—		(15,243)		(17,820)		—		(33,069)
Issuance under equity compensation plans, 106,568 shares, net	—		—		1,530		(649)		—		881

Share-based compensation	—		—		4,108		—		—		4,108

Shares issued in connection with acquisition of First Choice Bancorp, 7,777,272 shares, net (gross issuance of 7,808,459 shares)	78		—		342,912		(710)		—		342,280


Balance at September 30, 2021	$	404	$	(73,528)	$	1,031,146	$	461,711	$	19,902	$	1,439,635

Three and nine months ended September 30, 2020
(in thousands, except per share data)	Common Stock		Treasury Stock		Additional paid in capital		Retained earnings		Accumulated other comprehensive income (loss)		Total shareholders’ equity
Balance at June 30, 2020	$	281	$	(73,528)	$	527,734	$	380,667	$	32,809	$	867,963
Net income	—		—		—		17,951		—		17,951

Other comprehensive loss	—		—		—		—		(301)		(301)

Cash dividends paid on common shares, $0.18 per share	—		—		—		(4,718)		—		(4,718)




Issuance under equity compensation plans, 13,583 shares, net	1		—		331		—		—		332

Share-based compensation	—		—		1,040		—		—		1,040



Balance at September 30, 2020	$	282	$	(73,528)	$	529,105	$	393,900	$	32,508	$	882,267

Balance at December 31, 2019	$	281	$	(58,181)	$	526,599	$	380,737	$	17,749	$	867,185
Net income	—		—		—		45,453		—		45,453

Other comprehensive income	—		—		—		—		14,759		14,759

Cash dividends paid on common shares, $0.54 per share	—		—		—		(14,176)		—		(14,176)
Repurchase of common shares	—		(15,347)		—		—		—		(15,347)



Issuance under equity compensation plans, 122,583 shares, net	1		—		(563)		—		—		(562)

Share-based compensation	—		—		3,069		—		—		3,069


Reclassification for the adoption of ASU 2016-13 (CECL)	—		—		—		(18,114)		—		(18,114)
Balance at September 30, 2020	$	282	$	(73,528)	$	529,105	$	393,900	$	32,508	$	882,267

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)


	Nine months ended September 30,
(in thousands, except share data)	2021		2020
Cash flows from operating activities:
Net income	$	82,244	$	45,453
Adjustments to reconcile net income to net cash provided by operating activities
Depreciation	4,609		4,573
Provision for credit losses	17,045		55,935
Deferred income taxes	(8,813)		(9,609)
Net amortization of debt securities	5,704		4,775
Net accretion on loan premiums	(1,672)		(5,976)
Amortization of intangible assets	4,199		4,256
Amortization of servicing assets	690		—
Mortgage loans originated-for-sale	(120,700)		(164,151)
Proceeds from mortgage loans sold	128,687		157,377
Loss (gain) on:
Sale of investment securities	—		(421)
Sale of other real estate	(931)		13

Sale of state tax credits	(437)		(290)
Asset impairment	3,441		—

Share-based compensation	4,108		3,069




Changes in other assets and liabilities, net	(12,544)		5,243







Net cash provided by operating activities	105,630		100,247
Cash flows from investing activities:
Proceeds from acquisition, net	212,642		—
Net decrease (increase) in loans	42,865		(800,812)


Proceeds received from:
Sale of debt securities, available-for-sale	27,135		20,221
Paydown or maturity of debt securities, available-for-sale	222,993		234,267
Paydown or maturity of debt securities, held-to-maturity	42,874		25,833
Redemption of other investments	16,952		26,350
Sale of state tax credits held for sale	5,534		5,621
Sale of other real estate	5,915		652
Settlement of bank-owned life insurance policies	—		1,993
Payments for the purchase of:
Available-for-sale debt securities	(547,526)		(274,677)
Other investments	(7,629)		(40,714)

State tax credits held for sale	(6,688)		(11,026)
Fixed assets, net	(1,635)		(1,633)
Net cash provided by (used in) investing activities	13,432		(813,925)
Cash flows from financing activities:
Net increase in noninterest-bearing deposit accounts	666,480		602,192
Net increase in interest-bearing deposit accounts	335,477		303,011

Net increase (decrease) in FHLB advances	(160,000)		27,700


Repayments of notes payable	(5,714)		(4,286)



Proceeds from issuance of subordinated debentures, net	—		61,953
Net decrease in other borrowings	(51,597)		(21,848)



Payments for the repurchase of common stock	(33,069)		(15,347)
Cash dividends paid on common stock	(18,566)		(14,176)

Other	(489)		(562)



Net cash provided by financing activities	732,522		938,637
Net increase in cash and cash equivalents	851,584		224,959
Cash and cash equivalents, beginning of period	537,703		167,256
Cash and cash equivalents, end of period	$	1,389,287	$	392,215
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest	$	16,679	$	26,858
Income taxes	45,230		7,514
Noncash transactions:
Transfer to other real estate owned in settlement of loans	$	3,227	$	261
Sales of other real estate financed	228		48
Right-of-use assets obtained in exchange for lease obligations	4,319		200
Common shares issued in connection with acquisition	343,650		—

Transfer of securities from available for sale to held to maturity	—		163,592

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 (the “Company,” “EFSC,” or “Enterprise”) 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 nine months ended September 30, 2021 are not necessarily indicative of the results that may be expected for any other interim period or for the year ending December 31, 2021. 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, 2020, 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, 2020.

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 2020-04, “Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting.” In March 2020, the FASB issued “Reference Rate Reform (Topic 848)” which provides optional expedients and exceptions for contracts, hedging relationships, and other transactions that reference LIBOR or another reference rate expected to be discontinued because of reference rate reform. The guidance is effective for contract modifications as of March 12, 2020 through December 31, 2022. The Company is actively working to amend and address impacted contracts to allow for a replacement index. Additionally, the Company is currently evaluating the optional expedients and exceptions and has not yet determined the impact this standard may have on its consolidated financial statements.

NOTE 2 - ACQUISITION

The acquisition noted below has been accounted for as a business combination using the acquisition method of accounting which requires assets acquired and liabilities assumed to be recognized at fair value as of the acquisition date. Goodwill arising from the acquisitions consist largely of the synergies and economies of scale expected from combining the operations into Enterprise. None of the goodwill recognized is expected to be deductible for income tax purposes.

Acquisition of First Choice Bancorp

On July 21, 2021, the Company closed its acquisition of 100% of FCBP and its wholly-owned subsidiary, FCB, which operated eight full-service branches in California.

FCBP shareholders received 0.6603 shares of EFSC common stock for each FCBP common share and cash in lieu of any fractional shares. In connection with the merger, Enterprise issued approximately 7.8 million shares of EFSC Common Stock valued at $44.01 per share, which was the closing price of Enterprise common stock on July 21, 2021. The value of the transaction consideration was approximately $346 million, which includes approximately $2.1 million payable to holders of FCBP stock options. For the three and nine months ended September 30, 2021, the Company recognized $14.7 million and $16.6 million, respectively, of merger-related costs recorded in noninterest expense in the statement of operations related to the FCBP acquisition.

The following tables present the assets acquired and liabilities assumed. The consideration exchanged, assets acquired and liabilities assumed of FCBP were recorded at estimated fair value on the date of acquisition. 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.


(in thousands)	As Recorded by First Choice		Adjustments			As Recorded by EFSC
Assets acquired:
Cash and cash equivalents	$	214,794	$	—		$	214,794

Securities	34,533		(44)		(a)	34,489
Loans	1,937,635		5,508		(b)	1,943,143

Allowance	(19,626)		12,620		(b)	(7,006)
Other investments	19,178		138		(c)	19,316
Fixed assets	1,869		(820)		(c)	1,049
Accrued interest receivable	7,131		(242)		(c)	6,889
Goodwill	73,425		(73,425)		(d)	—
Intangible assets	4,517		375		(e)	4,892
Deferred tax assets	7,558		(2,440)		(c)	5,118
Other assets	23,024		2,103		(c)	25,127
Total assets acquired	$	2,304,038	$	(56,227)		$	2,247,811

Liabilities assumed:
Deposits	$	1,840,716	$	(287)	(c)	$	1,840,429

FHLB advances	160,000		—			160,000
Accrued interest payable	124		—			124
Other liabilities	8,464		(2,160)		(c)	6,304
Total liabilities assumed	$	2,009,304	$	(2,447)		$	2,006,857

Net assets acquired	$	294,734	$	(53,780)		$	240,954

Consideration paid:
Cash						$	2,152
Common stock1						343,650
Total consideration paid						$	345,802

Goodwill						$	104,848

1 Common stock consideration was $342,280, net of $1,370 for shares withheld on the settlement of share-based awards of FCBP employees.

(a)Fair value adjustments based on the Company’s evaluation of the acquired securities portfolio.

(b)Fair value adjustments based on the Company’s evaluation of the acquired loan portfolio, write-off of net deferred loan costs and elimination of the allowance for loan losses recorded by FCBP.

(c)Other miscellaneous fair value adjustments.

(d)Adjustment to eliminate goodwill.

(e)Eliminate acquired intangibles and record the core deposit intangible asset on the acquired core deposit accounts. Amount to be amortized using a sum-of-years digits method over a useful life of 10 years.

The following table provides the unaudited pro forma information for the results of operations for the nine months ended September 30, 2021 and 2020, as if the acquisition had occurred on January 1, 2020. The pro forma results combine the historical results of FCBP with the Company’s Consolidated Statements of Income, adjusted for the impact of the application of the acquisition method of accounting including amortization and accretion of fair value adjustments. The pro forma results have been prepared for comparative purposes only and are not necessarily indicative of the results that would have been obtained had the acquisition actually occurred on January 1, 2020. No assumptions have been applied to the pro forma results of operations regarding possible revenue enhancements, expense efficiencies or asset dispositions. Only the acquisition-related expenses that have been incurred as of September 30, 2021 are included in net income in the table below.



	Nine months ended September 30,
(in thousands, except per share data)		2021		2020
Total revenues (net interest income plus noninterest income)		$	363,426	$	296,148
Net income		135,920		28,776
Diluted earnings per common share		3.49		0.84

For the three and nine months ended September 30, 2021, total revenue and pre-tax net income from FCBP of $18.1 million and $11.2 million (excluding the provision for credit losses of $25.4 million on the acquired loan portfolio and unfunded loan commitments) were included in the Company’s consolidated results.

NOTE 3 - EARNINGS PER SHARE

Basic earnings per common share data is calculated by dividing net income 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 September 30,				Nine months ended September 30,
(in thousands, except per share data)	2021		2020		2021		2020
Net income as reported	$	13,913	$	17,951	$	82,244	$	45,453








Weighted average common shares outstanding	36,898		26,217		33,158		26,290

Additional dilutive common stock equivalents	49		11		47		21
Weighted average diluted common shares outstanding	36,947		26,228		33,205		26,311

Basic earnings per common share:	$	0.38	$	0.68	$	2.48	$	1.73
Diluted earnings per common share:	0.38		0.68		$	2.48	$	1.73

For the three and nine months ended September 30, 2021 common stock equivalents of approximately 151,000 and 153,000, respectively, were excluded from the earnings per share calculations because their effect would have been anti-dilutive. Comparatively, there were 132,000 and 139,000 common stock equivalents excluded in the prior year periods, respectively.

NOTE 4 - 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:


	September 30, 2021
(in thousands)	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
Available-for-sale securities:
Obligations of U.S. Government-sponsored enterprises	$	115,567	$	35	$	(665)	$	114,937
Obligations of states and political subdivisions	516,659		3,641		(4,884)		515,416
Agency mortgage-backed securities	496,330		12,166		(2,730)		505,766
U.S. Treasury bills	70,987		308		(3)		71,292
Corporate debt securities	11,750		653		—		12,403
Total securities available for sale	$	1,211,293	$	16,803	$	(8,282)	$	1,219,814
Held-to-maturity securities:

Obligations of states and political subdivisions	$	238,031	$	1,302	$	(1,634)	$	237,699
Agency mortgage-backed securities	74,972		1,303		(318)		75,957
Corporate debt securities	126,109		4,860		—		130,969
Total securities held-to-maturity	$	439,112	$	7,465	$	(1,952)	$	444,625
Allowance for credit losses	(640)
Total securities held-to-maturity, net	$	438,472


	December 31, 2020
(in thousands)	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
Available-for-sale securities:
Obligations of U.S. Government-sponsored enterprises	$	14,978	$	186	$	(3)	$	15,161
Obligations of states and political subdivisions	335,271		8,994		(33)		344,232
Agency mortgage-backed securities	506,703		20,190		(321)		526,572
U.S. Treasury Bills	10,980		486		—		11,466
Corporate debt securities	14,750		248		—		14,998
Total securities available for sale	$	882,682	$	30,104	$	(357)	$	912,429
Held-to-maturity securities:

Obligations of states and political subdivisions	$	248,324	$	2,814	$	—	$	251,138
Agency mortgage-backed securities	112,742		2,295		(496)		114,541
Corporate debt securities	126,993		8,851		—		135,844
Total securities held to maturity	$	488,059	$	13,960	$	(496)	$	501,523
Allowance for credit losses	(449)
Total securities held-to-maturity, net	$	487,610

At September 30, 2021 and December 31, 2020, 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 $582.3 million and $525.8 million at September 30, 2021 and December 31, 2020, 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 September 30, 2021, 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 4 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	$	71,157	$	71,191	$	209	$	214
Due after one year through five years	93,074		93,129		12,942		13,250
Due after five years through ten years	53,898		54,375		142,672		147,389
Due after ten years	496,834		495,353		208,317		207,815
Agency mortgage-backed securities	496,330		505,766		74,972		75,957

	$	1,211,293	$	1,219,814	$	439,112	$	444,625

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


	September 30, 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	$	102,905	$	665	$	—	$	—	$	102,905	$	665
Obligations of states and political subdivisions	323,227		4,871		557		13		323,784		4,884
Agency mortgage-backed securities	205,761		2,710		1,647		20		207,408		2,730
U.S. Treasury bills	59,983		3		—		—		59,983		3

	$	691,876	$	8,249	$	2,204	$	33	$	694,080	$	8,282


	December 31, 2020
	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	$	4,997	$	3	$	—	$	—	$	4,997	$	3
Obligations of states and political subdivisions	4,079		33		—		—		4,079		33
Agency mortgage-backed securities	65,986		321		—		—		65,986		321


	$	75,062	$	357	$	—	$	—	$	75,062	$	357

The unrealized losses at both September 30, 2021 and December 31, 2020 were primarily attributable to changes in market interest rates after the securities were purchased. At September 30, 2021 and December 31, 2020, the Company had not recorded an ACL on available-for-sale securities.

Accrued interest receivable on held-to-maturity debt securities totaled $3.5 million and $3.6 million at September 30, 2021 and December 31 2020, 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. During the three months ended September 30, 2021, the Company recorded a provision for credit losses on held-to-maturity securities of $0.2 million. At September 30, 2021, the ACL on held-to-maturity securities was $0.6 million compared to $0.4 million at December 31, 2020.

During the three and nine months ended September 30, 2021, the Company received proceeds of $27.1 million from the sale of available-for-sale investment securities. Proceeds from sales of available-for-sale investment securities during the three and nine months ended September 30, 2020 totaled $20.0 million and $20.2 million, respectively.

Other Investments

At September 30, 2021 and December 31, 2020, other investments totaled $59.2 million and $48.8 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 $12.1 million and $10.8 million at September 30, 2021 and December 31, 2020, 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 preferred securities to third parties.

NOTE 5 - LOANS

The following table presents a summary of loans by category:


(in thousands)	September 30, 2021		December 31, 2020
Commercial and industrial	$	3,386,599	$	3,100,299
Real estate:
Commercial - investor owned	2,121,251		1,589,419
Commercial - owner occupied	2,058,460		1,498,408
Construction and land development	747,759		546,686
Residential	542,690		319,179
Total real estate loans	5,470,160		3,953,692
Other	270,037		187,083
Loans, before unearned loan fees	9,126,796		7,241,074
Unearned loan fees, net	(10,213)		(16,139)
Loans, including unearned loan fees	$	9,116,583	$	7,224,935

PPP loans totaled $446.4 million at September 30, 2021, or $439.0 million net of deferred fees of $7.4 million. The loan balance at September 30, 2021 includes a net premium on acquired loans of $4.1 million. At September 30, 2021 loans of $2.7 billion were pledged to FHLB and the Federal Reserve Bank.

PPP loans totaled $709.9 million at December 31, 2020, or $698.6 million net of unearned fees of $11.3 million. The loan balance includes a net premium on acquired loans of $16.1 million at December 31, 2020. At December 31, 2020 loans of $2.5 billion were pledged to FHLB and the Federal Reserve Bank.

The Company has elected to present the accrued interest receivable balance separate from amortized cost basis, to exclude accrued interest receivable balances from the tabular disclosures, and not to estimate an ACL on accrued interest receivable as these amounts are timely written off as a credit loss expense.

Accrued interest receivable totaled $31.6 million and $31.1 million at September 30, 2021 and December 31, 2020, 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 nine months ended September 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 June 30, 2021	$	53,351	$	36,003	$	15,564	$	11,632	$	4,677	$	6,958	$	128,185
Initial allowance on acquired PCD loans	1,077		3,651		1,504		37		—		737		7,006
Provision for credit losses	9,836		1,475		1,909		2,215		5,271		(1,951)		18,755
Charge-offs	(2,829)		(117)		(259)		(3)		(840)		(203)		(4,251)
Recoveries	452		1,623		15		171		115		25		2,401
Balance at September 30, 2021	$	61,887	$	42,635	$	18,733	$	14,052	$	9,223	$	5,566	$	152,096


(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
Initial allowance on acquired PCD loans	1,077		3,651		1,504		37		—		737		7,006
Provision (benefit) for credit losses	8,538		7,715		686		(7,833)		5,374		2,305		16,785
Charge-offs	(8,019)		(2,489)		(503)		(3)		(1,155)		(389)		(12,558)
Recoveries	1,479		1,696		34		438		419		126		4,192
Balance at September 30, 2021	$	61,887	$	42,635	$	18,733	$	14,052	$	9,223	$	5,566	$	152,096

The ACL on sponsor finance loans, which is included in the categories above, represented $17.2 million and $19.0 million, respectively, as of September 30, 2021 and December 30, 2020.

A summary of the activity in the ACL on loans by category for the three and nine months ended September 30, 2020 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 June 30, 2020	$	50,139	$	25,019	$	11,088	$	15,962	$	6,333	$	1,729	$	110,270
Provision for credit losses	8,929		4,869		(1,854)		2,873		(1,132)		342		14,027
Charge-offs	(2,006)		(272)		(30)		—		(173)		(103)		(2,584)
Recoveries	808		55		268		83		303		40		1,557
Balance at September 30, 2020	$	57,870	$	29,671	$	9,472	$	18,918	$	5,331	$	2,008	$	123,270


(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, 2019	$	27,455	$	5,935	$	4,873	$	2,611	$	1,280	$	1,134	$	43,288
CECL adoption	6,494		10,726		2,598		5,183		3,470		(84)		28,387
PCD loans immediately charged off	—		(5)		(57)		(217)		(1,401)		—		(1,680)
Balance at January 1, 2020	$	33,949	$	16,656	$	7,414	$	7,577	$	3,349	$	1,050	$	69,995
Provision for credit losses	27,688		10,692		1,740		11,220		1,623		1,150		54,113
Charge-offs	(5,372)		(498)		(30)		(31)		(327)		(294)		(6,552)
Recoveries	1,605		2,821		348		152		686		102		5,714
Balance at September 30, 2020	$	57,870	$	29,671	$	9,472	$	18,918	$	5,331	$	2,008	$	123,270

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 $18.3 million to the ACL over the baseline model. These forecasts incorporate an accommodative monetary policy and the current and anticipated impact of government stimulus. The Company has also recognized the risk posed by loans that have received multiple deferrals of principal and interest payments, loans in the hospitality sector, and loans with other specific identified risks 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 if another significant wave of COVID hits, the vaccination process stalls, supply chain issues persist, small-business bankruptcies occur at higher levels, or unemployment increases.

Loans acquired during the period are initially recorded at fair value at the date of acquisition, which includes a credit related discount. In addition, a provision for credit losses is recorded in the period of acquisition for estimated lifetime credit losses on non-PCD acquired loans.

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


	September 30, 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	$	27,655	$	2,870	$	5	$	30,530	$	12,137
Real estate:
Commercial - investor owned	1,846		—		—		1,846		425
Commercial - owner occupied	6,892		—		—		6,892		2,800

Residential	2,185		77		—		2,262		1,562
Other	13		—		11		24		12
Total	$	38,591	$	2,947	$	16	$	41,554	$	16,936


	December 31, 2020
(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	$	18,158	$	3,482	$	130	$	21,770	$	8,316
Real estate:
Commercial - investor owned	9,579		—		—		9,579		716
Commercial - owner occupied	2,940		—		—		2,940		6,024

Residential	4,112		77		—		4,189		—
Other	29		—		—		29		3,190
Total	$	34,818	$	3,559	$	130	$	38,507	$	18,246

The total nonperforming loan balances at September 30, 2021 and December 31, 2020 exclude government guaranteed balances of $5.1 million and $5.4 million, respectively.

No interest income was recognized on nonaccrual loans during the three and nine months ended September 30, 2021 or 2020.

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


	September 30, 2021
	Type of Collateral
(in thousands)	Commercial Real Estate		Residential Real Estate		Blanket Lien		Other
Commercial and industrial	$	10,804	$	300	$	11,761	$	—
Real estate:
Commercial - investor owned	426		1,209		—		—
Commercial - owner occupied	6,689		88		—		—

Residential	—		2,262		—		—
Other	—		—		—		12
Total	$	17,919	$	3,859	$	11,761	$	12


	December 31, 2020
	Type of Collateral
(in thousands)	Commercial Real Estate		Residential Real Estate		Blanket Lien		Other
Commercial and industrial	$	8,316	$	—	$	394	$	—
Real estate:
Commercial - investor owned	9,579		—		—		—
Commercial - owner occupied	2,940		—		—		—

Residential	—		4,135		—		—
Other	—		—		—		17
Total	$	20,835	$	4,135	$	394	$	17

During the three and nine months ended September 30, 2021, one residential real estate loan totaling $0.2 million was modified as a troubled debt restructuring. The recorded investment by category for troubled debt restructurings that occurred during the three months ended September 30, 2020 are as follows:


	September 30, 2020
(in thousands, except for number of loans)		Number of loans	Pre-Modification Outstanding Recorded Balance		Post-Modification Outstanding Recorded Balance
Commercial and industrial		2	$	3,716	$	3,716
Real estate:



Residential		1	217		217

Total		3	$	3,933	$	3,933

The recorded investment by category for troubled debt restructurings that occurred during the nine months ended September 30, 2020 are as follows:



	September 30, 2020
(in thousands, except for number of loans)		Number of loans	Pre-Modification Outstanding Recorded Balance		Post-Modification Outstanding Recorded Balance
Commercial and industrial		3	$	7,447	$	7,447
Real estate:



Residential		3	372		372

Total		6	$	7,819	$	7,819

No troubled debt restructurings subsequently defaulted during the three and nine months ended September 30, 2021 or 2020.

In response to the COVID-19 pandemic, the Company has implemented short-term deferral programs allowing customers to primarily defer payments for up to 90 days. Deferrals under the CARES Act or interagency guidance are not included above as troubled debt restructurings. As of September 30, 2021, nearly all of these loans have returned to a paying status.

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


	September 30, 2021
(in thousands)	30-89 Days Past Due		90 or More Days Past Due		Total Past Due		Current		Total
Commercial and industrial	$	17,470	$	11,752	$	29,222	$	3,349,949	$	3,379,171
Real estate:
Commercial - investor owned	298		—		298		2,120,953		2,121,251
Commercial - owner occupied	9,900		4,560		14,460		2,044,000		2,058,460
Construction and land development	169		—		169		747,590		747,759
Residential	138		1,309		1,447		541,243		542,690
Other	274		11		285		266,967		267,252
Total	$	28,249	$	17,632	$	45,881	$	9,070,702	$	9,116,583


	December 31, 2020
(in thousands)	30-89 Days Past Due		90 or More Days Past Due		Total Past Due		Current		Total
Commercial and industrial	$	8,652	$	12,928	$	21,580	$	3,067,415	$	3,088,995
Real estate:
Commercial - investor owned	734		9,301		10,035		1,579,384		1,589,419
Commercial - owner occupied	328		4,647		4,975		1,493,433		1,498,408
Construction and land development	13		—		13		546,673		546,686
Residential	2,071		2,118		4,189		314,990		319,179
Other	1,731		50		1,781		180,467		182,248
Total	$	13,529	$	29,044	$	42,573	$	7,182,362	$	7,224,935

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:


	September 30, 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)	$	1,025,274	$	600,089	$	359,330	$	156,889	$	127,622	$	95,642	$	15,631	$	773,641	$	3,154,118
Watch (7)	37,465		27,305		10,397		9,662		3,520		14,758		6,128		62,883		172,118
Classified (8-9)	19,268		2,554		5,443		2,426		271		911		1,944		13,718		46,535
Total Commercial and industrial	$	1,082,007	$	629,948	$	375,170	$	168,977	$	131,413	$	111,311	$	23,703	$	850,242	$	3,372,771

Commercial real estate-investor owned
Pass (1-6)	$	497,726	$	499,617	$	367,055	$	153,179	$	133,202	$	235,601	$	3,668	$	62,184	$	1,952,232
Watch (7)	9,701		44,311		33,781		8,944		2,365		47,826		—		3,231		150,159
Classified (8-9)	1,396		8,744		264		341		1,167		4,364		—		—		16,276
Total Commercial real estate-investor owned	$	508,823	$	552,672	$	401,100	$	162,464	$	136,734	$	287,791	$	3,668	$	65,415	$	2,118,667

Commercial real estate-owner occupied
Pass (1-6)	$	495,546	$	462,729	$	285,680	$	182,073	$	155,216	$	255,326	$	—	$	47,128	$	1,883,698
Watch (7)	16,007		13,284		25,665		33,631		10,725		17,548		—		352		117,212
Classified (8-9)	1,868		653		12,257		4,750		6,581		6,651		—		63		32,823
Total Commercial real estate-owner occupied	$	513,421	$	476,666	$	323,602	$	220,454	$	172,522	$	279,525	$	—	$	47,543	$	2,033,733

Construction real estate
Pass (1-6)	$	298,041	$	232,249	$	79,465	$	36,419	$	15,157	$	9,394	$	388	$	3,487	$	674,600
Watch (7)	38,496		16,080		60		1,208		11,143		2,377		—		—		69,364
Classified (8-9)	53		—		379		423		—		24		96		—		975
Total Construction real estate	$	336,590	$	248,329	$	79,904	$	38,050	$	26,300	$	11,795	$	484	$	3,487	$	744,939

Residential real estate
Pass (1-6)	$	136,636	$	78,641	$	41,755	$	15,737	$	26,345	$	114,292	$	283	$	101,199	$	514,888
Watch (7)	1,277		16,881		2,450		1,284		261		1,286		—		87		23,526
Classified (8-9)	879		222		563		76		12		2,245		—		75		4,072
Total residential real estate	$	138,792	$	95,744	$	44,768	$	17,097	$	26,618	$	117,823	$	283	$	101,361	$	542,486

Other
Pass (1-6)	$	110,977	$	70,441	$	20,206	$	24,006	$	7,781	$	20,193	$	—	$	10,683	$	264,287
Watch (7)	—		—		—		4		—		2,490		—		1		2,495
Classified (8-9)	—		—		13		14		—		18		—		1		46
Total Other	$	110,977	$	70,441	$	20,219	$	24,024	$	7,781	$	22,701	$	—	$	10,685	$	266,828


	December 31, 2020
	Term Loans by Origination Year
(in thousands)	2020		2019		2018		2017		2016		Prior		Revolving Loans Converted to Term Loans		Revolving Loans		Total
Commercial and industrial
Pass (1-6)	$	1,402,276	$	454,729	$	262,258	$	132,832	$	25,057	$	58,315	$	14,118	$	527,170	$	2,876,755
Watch (7)	44,922		15,369		9,585		7,509		19,613		110		—		60,448		157,556
Classified (8-9)	6,602		9,219		3,115		3,964		4,490		1,080		1,281		22,432		52,183
Total Commercial and industrial	$	1,453,800	$	479,317	$	274,958	$	144,305	$	49,160	$	59,505	$	15,399	$	610,050	$	3,086,494

Commercial real estate-investor owned
Pass (1-6)	$	481,867	$	338,843	$	189,305	$	131,718	$	138,288	$	161,439	$	6,509	$	32,058	$	1,480,027
Watch (7)	32,308		19,722		6,656		—		9,647		17,370		—		—		85,703
Classified (8-9)	—		5,278		8,716		5,830		1,245		2,620		—		—		23,689
Total Commercial real estate-investor owned	$	514,175	$	363,843	$	204,677	$	137,548	$	149,180	$	181,429	$	6,509	$	32,058	$	1,589,419

Commercial real estate-owner occupied
Pass (1-6)	$	419,142	$	287,001	$	215,181	$	179,382	$	104,470	$	167,456	$	2,672	$	45,323	$	1,420,627
Watch (7)	13,657		5,257		3,113		6,198		4,338		8,460		1,776		941		43,740
Classified (8-9)	2,420		7,427		5,822		6,140		1,309		10,860		—		63		34,041
Total Commercial real estate-owner occupied	$	435,219	$	299,685	$	224,116	$	191,720	$	110,117	$	186,776	$	4,448	$	46,327	$	1,498,408

Construction real estate
Pass (1-6)	$	223,069	$	156,360	$	45,460	$	18,579	$	11,539	$	9,144	$	—	$	28,880	$	493,031
Watch (7)	2,544		86		34,179		11,632		—		2,499		—		—		50,940
Classified (8-9)	56		2,124		503		1		—		31		—		—		2,715
Total Construction real estate	$	225,669	$	158,570	$	80,142	$	30,212	$	11,539	$	11,674	$	—	$	28,880	$	546,686

Residential real estate
Pass (1-6)	$	57,059	$	27,907	$	17,718	$	17,138	$	27,443	$	92,657	$	1,172	$	66,902	$	307,996
Watch (7)	210		840		526		—		514		1,603		287		511		4,491
Classified (8-9)	571		733		121		14		898		3,181		—		253		5,771
Total residential real estate	$	57,840	$	29,480	$	18,365	$	17,152	$	28,855	$	97,441	$	1,459	$	67,666	$	318,258

Other
Pass (1-6)	$	43,526	$	28,195	$	30,074	$	9,646	$	5,641	$	17,027	$	—	$	40,779	$	174,888
Watch (7)	—		1		8		—		—		2,637		—		1		2,647
Classified (8-9)	—		18		19		13		—		17		8		4		79
Total Other	$	43,526	$	28,214	$	30,101	$	9,659	$	5,641	$	19,681	$	8	$	40,784	$	177,614

In the tables above, loan originations in 2021 and 2020 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 presents the recorded investment on loans based on payment activity as of the periods indicated:


	September 30, 2021
(in thousands)	Performing		Non Performing		Total
Commercial and industrial	$	6,395	$	5	$	6,400
Real estate:
Commercial - investor owned	2,584		—		2,584
Commercial - owner occupied	24,727		—		24,727
Construction and land development	2,820		—		2,820
Residential	204		—		204
Other	413		11		424
Total	$	37,143	$	16	$	37,159


	December 31, 2020
(in thousands)	Performing		Non Performing		Total
Commercial and industrial	$	2,502	$	—	$	2,502
Real estate:



Residential	921		—		921
Other	4,612		21		4,633
Total	$	8,035	$	21	$	8,056

The Company has purchased loans through the FCBP acquisition, for which there was, at acquisition, evidence of more than insignificant deterioration of credit quality since origination. The carrying amount of those loans is as follows:


($ in thousands)	At July 21, 2021
Par value of acquired loans	$	180,440
Allowance for credit losses	(7,006)
Non-credit discount	(6,428)
Purchase price of acquired loans	$	167,006

NOTE 6 - BRANCH CLOSURE

During the quarter ended September 30, 2021, the Company commenced the process to close three branch locations in California related to the First Choice acquisition. A lease and fixed asset impairment charge of $0.4 million was recognized and reported in merger-related expenses. Additionally, the Company has also commenced the process to close two branches in St. Louis and consolidate the operations and customers of these branches with other nearby locations. An impairment charge of $3.4 million on these branches was recognized in the third quarter 2021 for buildings, leases and fixed assets.

NOTE 7 - 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)	September 30, 2021		December 31, 2020
Commitments to extend credit	$	2,422,097	$	1,946,068
Letters of credit	67,071		50,971

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 September 30, 2021, and December 31, 2020, approximately $269.7 million and $160.6 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 $7.0 million and $5.7 million for estimated losses attributable to the unadvanced commitments at September 30, 2021, and December 31, 2020, 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 September 30, 2021, the approximate remaining terms of standby letters of credit range from 1 month to 5 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 8 - DERIVATIVE FINANCIAL INSTRUMENTS

Risk Management Objective of Using Derivatives

The Company is exposed to certain risk 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

For derivatives designated and that qualify as cash flow hedges of interest rate risk, the gain or loss on the derivative is 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 that an additional $1.5 million will be reclassified as an increase 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)	September 30, 2021		December 31, 2020		September 30, 2021		December 31, 2020		September 30, 2021		December 31, 2020
Derivatives Designated as Hedging Instruments:
Interest rate swap	$	61,962	$	61,962	$	—	$	—	$	3,971	$	5,987


Derivatives not Designated as Hedging Instruments:
Interest rate swap	$	932,666	$	1,026,016	$	17,442	$	28,703	$	17,457	$	28,980



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 September 30, 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 Posted		Net Amount
Assets:
Interest rate swap	$	17,442	$	—	$	17,442	$	633	$	—	$	16,809

Liabilities:
Interest rate swap	$	21,428	$	—	$	21,428	$	633	$	20,519	$	276
Securities sold under agreements to repurchase	219,484		—		219,484		—		219,484		—

As of December 31, 2020
							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 Posted		Net Amount
Assets:
Interest rate swap	$	28,703	$	—	$	28,703	$	2	$	—	$	28,701

Liabilities:
Interest rate swap	$	34,967	$	—	$	34,967	$	2	$	34,903	$	62
Securities sold under agreements to repurchase	271,081		—		271,081		—		271,081		—

As of September 30, 2021, the fair value of derivatives in a net liability position, which includes accrued interest but excludes any adjustment for nonperformance risk, related to these agreements was $22.2 million. Further, the Company has minimum collateral posting thresholds with certain of its derivative counterparties and has posted collateral of $20.5 million.

NOTE 9 - 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:


	September 30, 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	$	—	$	114,937	$	—	$	114,937
Obligations of states and political subdivisions	—		515,416		—		515,416
Agency mortgage-backed securities	—		505,766		—		505,766
U.S. Treasury bills	—		71,292		—		71,292
Corporate debt securities	—		12,403		—		12,403
Total securities available for sale	—		1,219,814		—		1,219,814

Other investments	217		2,782		—		2,999

Derivatives	—		17,442		—		17,442
Total assets	$	217	$	1,240,038	$	—	$	1,240,255

Liabilities
Derivatives	$	—	$	21,428	$	—	$	21,428
Total liabilities	$	—	$	21,428	$	—	$	21,428


	December 31, 2020
(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	$	—	$	15,161	$	—	$	15,161
Obligations of states and political subdivisions	—		344,232		—		344,232
Residential mortgage-backed securities	—		526,572		—		526,572
Corporate debt securities	—		14,998		—		14,998
U.S. Treasury bills	—		11,466		—		11,466
Total securities available-for-sale	—		912,429		—		912,429



Derivative financial instruments	—		28,703		—		28,703
Total assets	$	—	$	941,132	$	—	$	941,132

Liabilities
Derivatives	$	—	$	34,967	$	—	$	34,967
Total liabilities	$	—	$	34,967	$	—	$	34,967

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.




	September 30, 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 (1)	$	1,373	$	—	$	—	$	1,373

Fixed assets	940		—		—		940
Total	$	2,313	$	—	$	—	$	2,313

(1) The amount represents only balances measured at fair value during the period and still held as of the reporting date.

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




	Three months ended				Nine months ended
(in thousands)	September 30, 2021		June 30, 2021		September 30, 2021		September 30, 2020
Nonaccrual loans	$	1,126	$	—	$	1,126	$	4,756
Other real estate	—		—		—		1,000
Fixed assets	2,546		—		2,546		—
Total	$	3,672	$	—	$	3,672	$	5,756

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


	September 30, 2021					December 31, 2020
(in thousands)	Carrying Amount		Estimated fair value		Level	Carrying Amount		Estimated fair value		Level
Balance sheet assets




Securities held-to-maturity, net	$	438,472	$	444,625	Level 2	$	487,610	$	501,523	Level 2
Other investments	59,156		59,156		Level 2	48,764		48,764		Level 2
Loans held for sale	5,068		5,068		Level 2	13,564		13,564		Level 2

Loans, net	8,964,487		8,954,895		Level 3	7,088,264		7,067,562		Level 3
State tax credits, held for sale	37,184		41,306		Level 3	36,853		39,925		Level 3

Servicing asset	7,965		7,965		Level 2	5,721		5,721		Level 2

Balance sheet liabilities
Certificates of deposit	$	627,171	$	628,425	Level 3	$	550,095	$	553,946	Level 3
Subordinated debentures and notes	204,103		193,752		Level 2	203,637		192,889		Level 2
FHLB advances	50,000		51,527		Level 2	50,000		51,871		Level 2
Other borrowings and notes payable	243,770		243,770		Level 2	301,081		301,081		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, 2020, as filed with the SEC.

NOTE 10 - GOODWILL AND INTANGIBLE ASSETS

Goodwill increased $104.8 million to $365.4 million at September 30, 2021 from $260.6 million at December 31, 2020 due to the acquisition of FCBP.

The table below presents a summary of intangible assets:


	Nine months ended
(in thousands)	September 30, 2021
Core deposit intangible, net, beginning of period	$	23,084
Established through acquisition	4,892
Amortization	(4,199)
Core deposit intangible, net, end of period	23,777

Amortization expense on the core deposit intangibles was $1.5 million and $1.4 million for the three months ended September 30, 2021 and 2020, respectively, and $4.2 million and $4.3 million for the nine months ended September 30, 2021 and 2020, respectively. The core deposit intangibles are being amortized over a 10-year period.

The following table reflects the amortization schedule for the core deposit intangible at September 30, 2021:


Year	Core Deposit Intangible (in thousands)
2021	$	1,491
2022	5,367
2023	4,601
2024	3,834
2025	3,068
After 2025	5,416
	$	23,777

NOTE 11 - SHAREHOLDERS’ EQUITY AND COMPENSATION PLANS

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 on Available-for-Sale Debt Securities		Unamortized Gain (Loss) on Held-to-Maturity Securities		Net Unrealized Gain (Loss) on Cash Flow Hedges		Total
Balance, June 30, 2021	$	14,250	$	17,322	$	(3,300)	$	28,272
Net change	$	(7,870)	$	(805)	$	305	$	(8,370)

Balance, September 30, 2021	$	6,380	$	16,517	$	(2,995)	$	19,902

Balance, June 30, 2020	$	27,872	$	13,099	$	(8,162)	$	32,809
Net change	$	(220)	$	(705)	$	624	$	(301)

Balance, September 30, 2020	$	27,652	$	12,394	$	(7,538)	$	32,508

Nine 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, 2020	$	22,320	$	19,308	$	(4,508)	$	37,120
Net change	$	(15,940)	$	(2,791)	$	1,513	$	(17,218)
Balance, September 30, 2021	$	6,380	$	16,517	$	(2,995)	$	19,902

Balance, December 31, 2019	$	14,977	$	4,934	$	(2,162)	$	17,749
Net change	$	21,325	$	(1,190)	$	(5,376)	$	14,759
Transfer from available-for-sale to held-to-maturity	$	(8,650)	$	8,650	$	—	$	—
Balance, September 30, 2020	$	27,652	$	12,394	$	(7,538)	$	32,508

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


	Three months ended September 30,
	2021						2020
(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	$	(10,479)	$	(2,609)	$	(7,870)	$	125	$	31	$	94
Reclassification adjustment for realized gain on sale of available-for-sale debt securities(a)	—		—		—		(417)		(103)		(314)
Reclassification of gain on held-to-maturity securities(b)	(1,072)		(267)		(805)		(936)		(231)		(705)
Change in unrealized gain on cash flow hedges arising during the period	12		3		9		146		36		110
Reclassification of loss on cash flow hedges(b)	395		99		296		683		169		514
Total other comprehensive income	$	(11,144)	$	(2,774)	$	(8,370)	$	(399)	$	(98)	$	(301)

	Nine months ended September 30,
	2021						2020
(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	$	(21,226)	$	(5,285)	$	(15,941)	$	28,741	$	7,099	$	21,642
Reclassification adjustment for realized gain on sale of available-for-sale debt securities(a)	—		—		—		(421)		(104)		(317)
Reclassification of gain on held-to-maturity securities(b)	(3,716)		(925)		(2,791)		(1,580)		(390)		(1,190)
Change in unrealized gain (loss) on cash flow hedges arising during the period	867		216		651		(8,296)		(2,049)		(6,247)
Reclassification of loss on cash flow hedges(b)	1,149		286		863		1,157		286		871
Total other comprehensive income	$	(22,926)	$	(5,708)	$	(17,218)	$	19,601	$	4,842	$	14,759

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

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

Compensation Plans

Employee Stock Options

During the nine months ended September 30, 2021, employee stock options were granted under the Amended and Restated 2018 Stock Incentive Plan.

Various information related to the stock options is shown below.


	Employee Stock Options	Weighted Average Life	Weighted Average Exercise Price
Options Outstanding, December 31, 2020	—
Options granted	118,604		$	43.80
Options forfeited	(4,597)
Options Outstanding, September 30, 2021	114,007	9.5

At September 30, 2021, none of the outstanding stock options were exercisable.

NOTE 12 - SUBSEQUENT EVENT

The Company redeemed its $50.0 million fixed-to-floating subordinated debentures on the first call date of November 1, 2021.

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 further increases in unemployment rates, 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. In addition, 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. Other factors that could cause or contribute to such differences include, but are not limited to: our ability to efficiently consummate and 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 conditions; 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; our ability to attract and retain relationship officers and other key personnel; burdens imposed by federal and state regulation; changes in regulatory requirements; changes in accounting policies and practices or accounting standards, including ASU 2016-13 (Topic 326), “Measurement of Credit Losses on Financial Instruments,” commonly referenced as CECL model, which has changed how we estimate credit losses; uncertainty regarding the future of LIBOR; natural disasters, war or terrorist activities, or pandemics, or the outbreak of COVID-19 or similar outbreaks, and their effects on economic and business environments in which we operate; increased unemployment rates and defaults as a result of the economic disruptions caused by COVID-19; the impact of governmental orders issued in response to COVID-19; and other risks discussed under the caption “Risk Factors” under Part 1, Item 1A of our 2020 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.

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 nine months of 2021 compared to the financial condition as of December 31, 2020. In addition, this discussion summarizes the significant factors affecting the results of operations of the Company for the three months ended September 30, 2021, compared to the linked second quarter (“linked quarter”) in 2021 and the results of operations, liquidity and cash flows for the nine months ended September 30, 2021 compared to the same period in 2020. 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 2020. 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, 2020.

Critical Accounting Policies

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, 2020.

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. The three months ended September 30, 2021 continued to be characterized by heightened uncertainty due to the COVID-19 pandemic which could impact estimates and assumptions made by management. 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 $152.1 million at September 30, 2021 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 $22.3 million. Conversely, the allowance would have increased $45.2 million using only the downside scenario.

Executive Summary

The Company closed its acquisition of FCBP and it’s wholly owned subsidiary, FCB, on July 21, 2021. FCBP operated eight full service branches in Southern California. The Company closed its acquisition of Seacoast on November 12, 2020. The results of operations of FCBP and Seacoast are included in our results from the acquisition dates forward, which may affect certain comparisons to the linked quarter and the nine months ended September 30, 2020.

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


(in thousands, except per share data)	At or for the three months ended									At or for the nine months ended
	September 30, 2021			June 30, 2021			September 30, 2020			September 30, 2021			September 30, 2020
EARNINGS
Total interest income	$	103,228		$	87,401		$	70,787		$	275,589		$	220,666
Total interest expense	5,955			5,663			7,433			17,455			28,111
Net interest income	97,273			81,738			63,354			258,134			192,555
Provision (benefit) for credit losses	19,668			(2,669)			14,080			17,045			55,935
Net interest income after provision for credit losses	77,605			84,407			49,274			241,089			136,620
Total noninterest income	17,619			16,204			12,629			45,113			35,997
Total noninterest expense	76,885			52,456			39,524			182,225			116,109
Income before income tax expense	18,339			48,155			22,379			103,977			56,508
Income tax expense	4,426			9,750			4,428			21,733			11,055
Net income	$	13,913		$	38,405		$	17,951		$	82,244		$	45,453

Basic earnings per share	$	0.38		$	1.23		$	0.68		$	2.48		$	1.73
Diluted earnings per share	$	0.38		$	1.23		$	0.68		$	2.48		$	1.73

Return on average assets	0.45		%	1.50		%	0.86		%	1.01		%	0.76		%
Return on average common equity	3.96		%	13.79		%	8.06		%	9.14		%	6.96		%
Return on average tangible common equity1	5.37		%	18.44		%	10.94		%	12.31		%	9.51		%
Net interest margin (tax equivalent)	3.40		%	3.46		%	3.29		%	3.45		%	3.52		%

Efficiency ratio	66.92		%	53.56		%	52.02		%	60.09		%	50.80		%
Core efficiency ratio1	51.30		%	51.86		%	51.04		%	52.59		%	50.97		%
Book value per common share	$	37.52		$	35.86		$	33.66
Tangible book value per common share1	$	27.38		$	26.85		$	24.80

ASSET QUALITY
Net charge-offs	$	1,850		$	869		$	1,027		$	8,366		$	2,518
Nonperforming loans	41,554			42,252			39,623
Classified assets	104,220			100,063			84,710
Nonperforming loans to total loans	0.46		%	0.58		%	0.65		%
Nonperforming assets to total assets	0.35		%	0.44		%	0.53		%
ACL on loans to total loans	1.67		%	1.77		%	2.01		%
Net charge-offs to average loans (annualized)	0.08		%	0.05		%	0.07		%	0.14		%	0.06		%

(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 the PPP loans are noted in the following table:


	At or for the three months ended						At or for the nine months ended
(in thousands)	September 30, 2021			June 30, 2021			September 30, 2021			September 30, 2020
PPP loans outstanding, net of deferred fees	$	438,959		$	396,660		$	438,959		$	396,660


Average PPP loans outstanding, net	489,104			664,375			614,470			483,832
PPP average loan size	210			171			200			147
PPP interest and fee income	6,048			7,940			22,463			9,309
PPP deferred fees	7,428			12,243			7,428			12,243
PPP average yield	4.91		%	4.79		%	4.89		%	2.57		%

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 the PPP loan balances.

•Pre-provision net revenue1 (“PPNR”) of $56.1 million in the third quarter 2021 increased $8.7 million from the linked quarter PPNR of $47.4 million. PPNR for the nine months ended September 30, 2021 of $144.2 million increased $30.2 million from $114.0 million in the prior year period. The increase from the linked quarter was primarily due to the FCBP acquisition that added $11.2 million of PPNR. The increase for the nine months ended September 30, 2021 compared to the prior year period was primarily from the Seacoast and FCBP acquisitions and income from PPP that started in the second quarter 2020.

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

•Net interest income of $97.3 million for the third quarter 2021 increased $15.5 million, or 19.0%, from the linked quarter, primarily due to the FCBP acquisition, partially offset by a decline in PPP income. Net interest margin (“NIM”) was 3.40% for the third quarter 2021, compared to 3.46% for the linked quarter. Net interest income was $258.1 million for the nine months ended September 30, 2021, compared to $192.6 million in the prior year period. NIM was 3.45% for the nine months ended September 30, 2021, compared to 3.52% for the prior year period. Net interest income in 2021 increased over the prior year primarily due to the Seacoast and FCBP acquisitions and PPP loan fees and interest. NIM for the nine months ended September 30, 2021, declined from the prior year period primarily due to a lower rate environment and an increase in cash on the balance sheet.

•Noninterest income of $17.6 million for the third quarter 2021 increased $1.4 million from the linked quarter, primarily due to higher tax credit activity and the FCBP acquisition, offset by a decline in Other income from a private equity distribution received in the linked quarter. For the nine months ended September 30, 2021, noninterest income was $45.1 million, compared to $36.0 million in the prior year period. The increase was primarily due to the Seacoast acquisition, tax credit income and income on private equity investments.

•Branch Consolidation - As part of the integration of FCBP, the Company commenced the process to close three branch locations in California. A lease and fixed asset impairment charge of $0.4 million was recognized and reported in merger expenses. The Company expects to realize annual cost savings of approximately $0.8 million from these locations. Additionally, the Company has also commenced the process to close two branches in St. Louis and consolidate the operations and customers of these branches

with other nearby locations. An impairment charge of $3.4 million on these branches was recognized in the third quarter 2021 for buildings, leases and fixed assets. The Company expects to realize annual cost savings of approximately $1.5 million on these two branches. These branch closures are reflective of current trends in the industry and traffic as a result of technology adoption and other business climate trends.

Balance sheet highlights:

•Loans – Total loans increased $1.9 billion to $9.1 billion at September 30, 2021, compared to $7.2 billion at December 31, 2020. The FCB acquisition added $1.9 billion of loans, while organic growth added an additional $413.9 million. These increases were offset by a decline in PPP loans of $466.0 million during the first nine months of 2021 due to higher loan forgiveness and the end of the statutory deadline for new PPP originations.

•Deposits – Total deposits increased $2.8 billion, to $10.8 billion at September 30, 2021 from $8.0 billion at December 31, 2020. The FCBP acquisition added $1.9 billion and deposits from PPP loans and the low-rate environment has contributed to the increase during the first nine months of 2021. Specialty deposits increased $316.4 million in 2021 primarily due to community associations and sponsor finance. Noninterest deposit accounts represented 40.4% of total deposits and the loan to deposit ratio was 84.2% at September 30, 2021.

•Asset quality – The allowance for credit losses on loans to total loans was 1.67% at September 30, 2021, compared to 1.89% at December 31, 2020. Nonperforming assets to total assets was 0.35% at September 30, 2021 compared to 0.45% at December 31, 2020. In the third quarter 2021, an ACL on the acquired FCBP loan portfolio of $30.5 million was recorded, representing 1.57% of the acquired loans. Approximately $7.0 million of this ACL was allocated to the PCD portfolio. The decline in the allowance to total loans ratio in the first nine months of 2021 was primarily due to the comparatively lower ACL on the FCBP loan portfolio, net loan charge-offs of $8.4 million, improved credit metrics, and continued improvement in economic forecasts. Loans acquired during the period are initially recorded at fair value at the date of acquisition, which includes a credit related discount. In addition, a provision for credit losses is recorded in the period of acquisition for estimated lifetime credit losses on non-PCD acquired loans. This additional provision for credit losses on the FCBP acquisition increased the provision for credit losses for the three and nine months ended September 30, 2021.

•Shareholders’ equity – Total shareholders’ equity was $1.4 billion at September 30, 2021, compared to $1.1 billion at December 31, 2020, and the tangible common equity to tangible assets ratio2 was 8.40% at both September 30, 2021 and December 31, 2020. The Company and the Bank’s regulatory capital ratios exceeded the “well-capitalized” level at September 30, 2021.

The Company issued 7,808,459 shares totaling $343.7 million in the third quarter 2021 as merger consideration in connection with the FCBP acquisition.

The Company has 1,277,951 shares available for repurchase under its common stock repurchase authorization. The Company repurchased 722,049 shares totaling $33.1 million in the first nine months of 2021.

The Company’s Board of Directors approved a quarterly dividend of $0.20 per common share, payable on December 31, 2021 to shareholders of record as of December 15, 2021, an increase of $0.01 from the third quarter dividend.

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 September 30,						Three months ended June 30,
	2021						2021
(in thousands)	Average Balance		Interest Income/Expense		Average Yield/ Rate		Average Balance		Interest Income/Expense		Average Yield/ Rate
Assets
Interest-earning assets:
Taxable loans (1)	$	8,626,780	$	94,016	4.32	%	$	7,272,209	$	78,769	4.34	%
Tax-exempt loans (2)	39,573		449		4.50		34,262		393		4.60


Total loans	8,666,353		94,465		4.32		7,306,471		79,162		4.35
Taxable debt and equity investments	904,338		4,810		2.11		856,439		4,706		2.20
Non-taxable debt and equity investments (2)	690,600		4,773		2.74		646,143		4,520		2.81
Short-term investments	1,251,988		480		0.15		806,928		237		0.12
Total securities and short-term investments	2,846,926		10,063		1.40		2,309,510		9,463		1.64
Total interest-earning assets	11,513,279		104,528		3.60		9,615,981		88,625		3.70
Noninterest-earning assets	821,279						665,363



Total assets	$	12,334,558					$	10,281,344

Liabilities and Shareholders' Equity
Interest-bearing liabilities:
Interest-bearing transaction accounts	$	2,228,466	$	459	0.08	%	$	1,985,811	$	336	0.07	%
Money market accounts	2,675,405		1,294		0.19		2,344,871		988		0.17
Savings	747,927		61		0.03		718,193		52		0.03
Certificates of deposit	604,594		927		0.61		522,633		1,091		0.84
Total interest-bearing deposits	6,256,392		2,741		0.17		5,571,508		2,467		0.18
Subordinated debentures	204,011		2,855		5.55		203,849		2,847		5.60
FHLB advances	89,457		211		0.94		50,000		197		1.58
Securities sold under agreements to repurchase	216,403		58		0.11		209,062		58		0.11
Other borrowed funds	25,699		90		1.39		27,147		94		1.39
Total interest-bearing liabilities	6,791,962		5,955		0.35		6,061,566		5,663		0.37
Noninterest bearing liabilities:
Demand deposits	4,040,761						3,008,703
Other liabilities	107,739						94,106
Total liabilities	10,940,462						9,164,375
Shareholders' equity	1,394,096						1,116,969
Total liabilities & shareholders' equity	$	12,334,558					$	10,281,344
Net interest income			$	98,573					$	82,962
Net interest spread					3.25	%					3.33	%
Net interest margin					3.40	%					3.46	%

(1)Average balances include nonaccrual loans. Interest income includes loan fees of $6.5 million, and $7.6 million for the three months ended September 30, 2021 and June 30, 2021, respectively.

(2)Interest income and yields have been adjusted to reflect a tax-equivalent basis.


	Nine months ended September 30,
	2021						2020
(in thousands)	Average Balance		Interest Income/Expense		Average Yield/ Rate		Average Balance		Interest Income/Expense		Average Yield/ Rate
Assets
Interest-earning assets:
Taxable loans (1)	$	7,691,030	$	249,458	4.34	%	$	5,796,713	$	193,277	4.45	%
Tax-exempt loans (2)	36,234		1,241		4.58		36,655		1,353		4.93


Total loans	7,727,264		250,699		4.34		5,833,368		194,630		4.46
Taxable debt and equity investments	870,169		14,235		2.19		1,059,957		20,329		2.56
Non-taxable debt and equity investments (2)	635,423		13,392		2.82		296,839		7,359		3.31
Short-term investments	914,954		906		0.13		188,849		500		0.35
Total securities and short-term investments	2,420,546		28,533		1.58		1,545,645		28,188		2.44
Total interest-earning assets	10,147,810		279,232		3.68		7,379,013		222,818		4.03
Noninterest-earning assets	712,946						576,993



Total assets	$	10,860,756					$	7,956,006

Liabilities and Shareholders' Equity
Interest-bearing liabilities:
Interest-bearing transaction accounts	$	2,035,029	$	1,123	0.07	%	$	1,464,144	$	1,836	0.17	%
Money market accounts	2,458,146		3,257		0.18		1,911,584		6,738		0.47
Savings	707,269		161		0.03		579,619		233		0.05
Certificates of deposit	555,045		3,329		0.80		713,633		9,176		1.72
Total interest-bearing deposits	5,755,489		7,870		0.18		4,668,980		17,983		0.51
Subordinated debentures	203,853		8,521		5.59		171,465		7,061		5.50
FHLB advances	63,297		603		1.27		240,596		2,070		1.15
Securities sold under agreements to repurchase	218,942		176		0.11		197,776		479		0.32
Other borrowed funds	27,154		285		1.40		32,836		518		2.11
Total interest-bearing liabilities	6,268,735		17,455		0.37		5,311,653		28,111		0.71
Noninterest bearing liabilities:
Demand deposits	3,280,414						1,684,107
Other liabilities	108,001						87,302
Total liabilities	9,657,150						7,083,062
Shareholders' equity	1,203,606						872,944
Total liabilities & shareholders' equity	$	10,860,756					$	7,956,006
Net interest income			$	261,777					$	194,707
Net interest spread					3.31	%					3.32	%
Net interest margin					3.45	%					3.52	%

(1)Average balances include nonaccrual loans. Interest income includes loan fees of $22.1 million, and $8.9 million for the nine months ended September 30, 2021 and 2020, respectively.

(2)Interest income and yields have been adjusted to reflect a tax-equivalent basis.

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 September 30, 2021						Nine months ended September 30, 2021
	compared to						compared to
	Three months ended June 30, 2021						Nine months ended September 30, 2020
	Increase (decrease) due to						Increase (decrease) due to
(in thousands)	Volume(1)		Rate(2)		Net			Volume(1)		Rate(2)		Net
Interest earned on:
Taxable loans	$	15,595	$	(348)	$	15,247		$	61,401	$	(5,220)	$	56,181
Tax-exempt loans (3)	65		(9)		56			(16)		(95)		(111)

Taxable debt and equity investments	285		(181)		104			(3,354)		(2,741)		(6,095)
Non-taxable debt and equity investments (3)	353		(100)		253			7,274		(1,241)		6,033
Short-term investments	167		76		243			887		(481)		406
Total interest-earning assets	$	16,465	$	(562)	$	15,903		$	66,192	$	(9,778)	$	56,414

Interest paid on:
Interest-bearing transaction accounts	$	57	$	66	$	123		$	550	$	(1,263)	$	(713)
Money market accounts	167		139		306			1,546		(5,027)		(3,481)
Savings	9		—		9			44		(116)		(72)
Certificates of deposit	161		(325)		(164)			(1,720)		(4,127)		(5,847)
Subordinated debentures	4		4		8			1,346		114		1,460
FHLB advances	116		(102)		14			(1,670)		203		(1,467)
Securities sold under agreements to repurchase	—		—		—			46		(349)		(303)
Other borrowings	(4)		—		(4)			(80)		(153)		(233)
Total interest-bearing liabilities	510		(218)		292			62		(10,718)		(10,656)
Net interest income	$	15,955	$	(344)	$	15,611		$	66,130	$	940	$	67,070

(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) for the three months ended September 30, 2021 increased $15.6 million, over the linked quarter prior primarily due to the addition of $1.7 billion of earning-assets from the FCBP acquisition. PPP loans (excluding FCBP) decreased $164.0 in the current quarter, compared to a decline of $341.0 million in the linked quarter. Forgiveness of these loans by the SBA accelerates deferred loan fees into income that benefits net interest income. Total PPP income in the current quarter was $6.0 million, compared to $7.9 million in the linked quarter.

During the nine months ended September 30, 2021, tax equivalent net interest income increased $67.1 million from the nine months ended September 30, 2020, primarily due to the FCBP and Seacoast acquisitions and income from PPP loans that began originating in the second quarter 2020. These increases were partially offset by a decline in the yield on earning assets from 4.03% in the first nine months of 2020 to 3.68% in the same period of 2021. The decline in yield was primarily due to the Federal Open Markets Committee reduction of the target federal funds rate by 150 basis points in the first quarter of 2020.

NIM was 3.40% for the third quarter 2021, compared to 3.46% in the linked quarter. NIM decreased six basis points from the linked quarter primarily due to a ten basis point decrease in earning asset yields. The decrease in the

earning asset yield was primarily due to higher levels of cash related to payoffs of PPP loans and deposit growth, and lower yields on investment securities and loans. Average interest-bearing cash accounts totaled $1.3 billion in the third quarter 2021, compared to $806.9 million in the linked quarter. The cost of interest-bearing liabilities declined two basis points from the linked quarter, primarily due to lower rates on time deposits. While NIM declined due to the aforementioned factors, the FCBP acquisition benefited NIM for the quarter and partially offset the increase in low-yielding cash balances.

NIM was 3.45% for the nine months ended September 30, 2021, a 7 basis point decrease compared to 3.52% in the prior year period. NIM was impacted by the decline in short-term rates as approximately 63% of the loan portfolio has variable rates, with most indexed to one-month LIBOR and Prime. LIBOR and Prime have declined significantly over the past year in conjunction with the decrease in the target federal funds rate discussed above. Higher levels of low-yielding, short-term investments also contributed to the decline in NIM, as the average balance increased $726.1 million.

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								Nine months ended
(in thousands)	September 30, 2021		June 30, 2021		Increase (decrease)				September 30, 2021		September 30, 2020		Increase (decrease)
Deposit service charges	$	4,520	$	3,862	$	658	17	%	$	11,466	$	8,557	$	2,909	34	%
Wealth management revenue	2,573		2,516		57		2	%	7,572		7,283		289		4	%
Card services revenue	3,186		2,975		211		7	%	8,657		6,970		1,687		24	%
Tax credit income	3,325		1,370		1,955		143	%	3,654		2,563		1,091		43	%

Miscellaneous income	4,015		5,481		(1,466)		(27)	%	13,764		10,624		3,140		30	%

Total noninterest income	$	17,619	$	16,204	$	1,415	9	%	$	45,113	$	35,997	$	9,116	25	%

Total noninterest income for the third quarter 2021 was $17.6 million, an increase of $1.4 million from the linked quarter. The increase was primarily due to the acquisition of FCBP that added $1.4 million of noninterest income, primarily in deposit service charges and servicing income. Tax credit income increased $2.0 million in the quarter, partially offset by a $1.9 million decline in miscellaneous income from lower gains on the sale of real estate and private equity fund distributions in the linked quarter.

Noninterest income for the nine months ended September 30, 2021, increased $9.1 million compared to the prior year period due to the FCBP and Seacoast acquisitions ($2.2 million), private equity income ($2.9 million), card services and tax credit income ($2.7 million) and gains on the sale of mortgages and other real estate owned ($1.7 million). The increase in card services, tax credit income and mortgage sales were due to higher volumes and business activity in 2021. Private equity distributions and gains on the sale of other real estate owned are not consistent sources of revenue. As the Company has exceeded $10 billion in assets during 2021, the Durbin Amendment to the Dodd-Frank Act will begin limiting the amount of interchange fees that the Company receives as part of card services revenue in July 2022.

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											Nine months ended
(in thousands)	September 30, 2021			June 30, 2021			Increase (decrease)					September 30, 2021			September 30, 2020			Increase (decrease)
Employee compensation and benefits	$	33,722		$	28,132		$	5,590		20	%	$	91,416		$	66,114		$	25,302		38	%
Occupancy	4,496			3,529			967			27	%	11,776			9,940			1,836			18	%
Data processing	3,328			2,850			478			17	%	9,068			6,393			2,675			42	%
Professional fees	901			1,300			(399)			(31)	%	3,189			2,904			285			10	%


Branch closure expenses	3,441			—			3,441			NM		3,441			—			3,441			NM
Merger-related expenses	14,671			1,949			12,722			653	%	19,762			1,563			18,199			1,164	%
Other	16,326			14,696			1,630			11	%	43,573			29,195			14,378			49	%
Total noninterest expense	$	76,885		$	52,456		$	24,429		47	%	$	182,225		$	116,109		$	66,116		57	%

Efficiency ratio	66.92		%	53.56		%	13.36		%			60.09		%	50.80		%	9.29		%
Core efficiency ratio1	51.30		%	51.86		%	(0.56)		%			52.59		%	50.97		%	0.33		%

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 $76.9 million for the third quarter 2021, compared to $52.5 million for the linked quarter. The increase from the linked quarter was primarily due to merger-related expenses of $14.7 million (an increase of $12.7 million from the linked quarter), FCBP noninterest expense of $7.0 million, and branch closure expenses of $3.4 million.

Noninterest expense was $182.2 million for the nine months ended September 30, 2021, compared to $116.1 million for the prior year period. The increase from the prior year was primarily due to the FCBP and Seacoast acquisitions ($38.5 million), merger-related expenses ($18.2 million), and branch closure expenses ($3.4 million).

Income Taxes

The Company’s effective tax rate was 24.1% for the third quarter 2021, compared to 20.2% in the linked quarter. The increase reflects the impact of non-deductible merger expenses and an increase in state taxes. For the nine months ended September 30, 2021 and 2020, the effective tax rate was 20.9% and 19.6%, respectively. The increase in the effective tax rate in 2021 over 2020 was partially due to higher state tax expense from the Company’s expanded geographic footprint.

Summary Balance Sheet


(in thousands)	September 30, 2021		December 31, 2020		Increase (decrease)
Total cash and cash equivalents	$	1,389,287	$	537,703	$	851,584	158	%
Securities	1,658,286		1,400,039		258,247		18	%
Loans (excluding PPP)	8,677,624		6,829,606		1,848,018		27	%
PPP loans, net	438,959		698,645		(259,686)		(37)	%
Total assets	12,888,016		9,751,571		3,136,445		32	%
Deposits	10,827,775		7,985,389		2,842,386		36	%
Total liabilities	11,448,381		8,672,596		2,775,785		32	%
Total shareholders’ equity	1,439,635		1,078,975		360,660		33	%

Assets

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)	September 30, 2021		December 31, 2020		Increase (decrease)
Commercial and industrial	$	3,379,171	$	3,088,995	$	290,176	9	%
Commercial real estate - investor owned	2,121,252		1,589,419		531,833		33	%
Commercial real estate - owner occupied	2,058,460		1,498,408		560,052		37	%
Construction and land development	747,758		546,686		201,072		37	%
Residential real estate	542,690		319,179		223,511		70	%
Other	267,252		182,248		85,004		47	%
Loans held for investment	$	9,116,583	$	7,224,935	$	1,891,648	26	%

The following table illustrates the change in loans:



(in thousands)	September 30, 2021		December 31, 2020		Increase (decrease)
C&I	$	1,458,078	$	1,103,060	$	355,018	32	%
CRE investor owned	1,935,284		1,420,905		514,379		36	%
CRE owner occupied	1,163,236		825,846		337,390		41	%
SBA Loans*	1,199,758		895,930		303,828		34	%
Sponsor finance*	454,431		396,487		57,944		15	%
Life insurance premium financing*	572,492		534,092		38,400		7	%
Tax credits*	462,168		382,602		79,566		21	%
SBA PPP loans	438,959		698,645		(259,686)		(37)	%
Residential real estate	519,859		318,091		201,768		63	%
Construction and land development	652,227		474,399		177,828		37	%
Other	260,091		174,878		85,213		49	%
Total loans	$	9,116,583	$	7,224,935	$	1,891,648	26	%


*Specialty loan category

Loans totaled $9.1 billion at September 30, 2021 compared to $7.2 billion at December 31, 2020. The acquisition of FCBP added $1.9 billion in 2021. PPP loans declined $260 million ($466.0 million excluding FCBP) in 2021 as PPP forgiveness by the SBA accelerated and the deadline for new originations passed in the second quarter 2021. All specialty loan categories have increased in 2021, led by SBA 7(a) loans. At September 30, 2021, line draw utilization was 38.2% compared to 38.1% at December 31, 2020.

Specialty lending products, especially 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 typically 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. At September 30, 2021, the unsold guaranteed portion of SBA loans totaled $808.2 million at September 30, 2021.

In response to the COVID-19 pandemic, the Company provided short-term payment deferrals to certain customers in 2020, primarily for 90 days or less. As of September 30, 2021, nearly all of these loans have returned to a paying status.

Provision and Allowance for Credit Losses

The adoption of CECL on January 1, 2020 increased the ACL on loans by $28.4 million, or 65%, and the allowance for unfunded commitments by $2.4 million. These increases were primarily offset in retained earnings and did not impact the consolidated statement of operations. The following table summarizes changes in the ACL on loans arising from CECL adoption; loan charge-offs and recoveries by loan category, and additions to the allowance charged to expense.


	Three months ended				Nine months ended September 30,
(in thousands)	September 30, 2021		June 30, 2021			2021		2020
Allowance, at beginning of period	$	128,185	$	131,527		$	136,671	$	43,288

CECL adoption	—		—			—		28,387
PCD loans immediately charged-off	—		—			—		(1,680)
Allowance at beginning of period, adjusted for adoption of CECL	128,185		131,527			136,671		69,995
Initial allowance on acquired PCD loans	7,006		—			7,006		—
Provision (benefit) for credit losses on loans	18,755		(2,473)			16,785		54,113
Charge-offs:
Commercial and industrial	(2,829)		(1,451)			(8,019)		(5,372)
Real estate:
Commercial	(376)		(216)			(2,992)		(528)
Construction and land development	(3)		—			(3)		(31)
Residential	(840)		(44)			(1,155)		(327)
Other	(203)		(121)			(389)		(294)
Total charge-offs	(4,251)		(1,832)			(12,558)		(6,552)
Recoveries:
Commercial and industrial	452		700			1,479		1,605
Real estate:
Commercial	1,638		49			1,730		3,169
Construction and land development	171		32			438		152
Residential	115		161			419		686
Other	25		21			126		102
Total recoveries	2,401		963			4,192		5,714
Net charge-offs	(1,850)		(869)			(8,366)		(838)

Allowance, at end of period	$	152,096	$	128,185		$	152,096	$	123,270

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


	Quarter ended				Nine months ended September 30,
(in thousands)	September 30, 2021		June 30, 2021		2021		2020
Provision (benefit) for credit losses on loans	$	(5,149)	$	(2,473)	$	(7,119)	$	54,113
Day 2 provision on First Choice acquired loans	23,904		—		23,904		—
Provision for off-balance sheet commitments	1,641		38		1,309		2,350
Provision for held-to-maturity securities	190		—		190		342
Accrued interest	(918)		(234)		(1,239)		(870)
Provision (benefit) for credit losses	$	19,668	$	(2,669)	$	17,045	$	55,935

The following table summarizes the allocation of the ACL:


	September 30, 2021				December 31, 2020
(in thousands)	Allowance		Percent		Allowance		Percent
Commercial and industrial	$	61,887	40.7	%	$	58,812	43.0	%
Real estate:
Commercial	61,368		40.3	%	49,074		35.9	%
Construction and land development	14,052		9.2	%	21,413		15.7	%
Residential	9,223		6.1	%	4,585		3.4	%
Other	5,566		3.7	%	2,787		2.0	%
Total	$152,096		100.0	%	$136,671		100.0	%

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.

The provision for credit losses was $19.7 million for the third quarter 2021 and $17.0 million for the first nine months of 2021, compared to a benefit of $2.7 million for the linked quarter and an expense of $55.9 million in the same period of 2020. The provision for credit losses for the three and nine months ended September 30, 2021 was due to the establishment of the $23.9 million ACL on acquired FCBP non-PCD loans and a $1.6 million provision on unfunded commitments that was primarily related to FCBP loan commitments. The provision for credit losses on FCBP loans was offset by a provision benefit on the pre-existing loan portfolio. The Company’s strong asset quality metrics and strengthening customer credit risk profiles, along with an improvement in the economic forecast, particularly GDP and unemployment, led to the provision benefit in 2021. Conversely, the Company was in the middle of the pandemic at September 30, 2020 when economic forecasts were severely constrained, which led to the provision expense of $41.9 million in the prior year period.

Gross charge-offs of $4.3 million in the quarter primarily consisted of one commercial loan that had previously defaulted and was fully reserved for in 2020. During the first nine months of 2021, gross charge-offs totaled $12.6 million, compared to $6.6 million in the prior year period.

To the extent the Company does not recognize charge-offs and economic forecasts improve in future periods, the Company could recognize further 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.

The ACL on loans was 1.67% of loans at September 30, 2021, compared to 1.77% at June 30, 2021 and 1.89% at December 31, 2020. The ACL coverage ratio of 1.57% on the FCBP acquired loans contributed to the decline in the combined coverage ratio at September 30, 2021.

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)	September 30, 2021			December 31, 2020
Nonaccrual loans	$	38,591		$	34,818
Loans past due 90 days or more and still accruing interest	16			130
Troubled debt restructurings	2,947			3,559
Total nonperforming loans	41,554			38,507
Other real estate	3,493			5,330

Total nonperforming assets	$	45,047		$	43,837

Total assets	$	12,888,016		$	9,751,571
Total loans	9,116,583			7,224,935

Nonperforming loans to total loans	0.46		%	0.53		%

Nonperforming assets to total assets	0.35		%	0.45		%

ACL on loans to nonperforming loans	366		%	355		%

Nonperforming loans increased $3.0 million to $41.6 million at September 30, 2021 from $38.5 million at December 31, 2020. Other real estate decreased during 2021 and the Company has recognized gains on sale of $0.9 million from the disposition of these properties.

Nonperforming loans

Nonperforming loans based on loan type were as follows:



(in thousands)	September 30, 2021		December 31, 2020
Commercial and industrial	$	30,530	$	21,770
Commercial real estate	8,738		12,519

Residential real estate	2,262		4,189
Other	24		29
Total	$	41,554	$	38,507

The following table summarizes the changes in nonperforming loans:


	Nine months ended
(in thousands)	September 30, 2021



Nonperforming loans, beginning of period	$	38,507
Additions to nonaccrual loans	35,361


Charge-offs	(12,558)
Other principal reductions	(16,235)
Moved to other real estate	(1,937)
Moved to performing	(1,582)
Change in loans past due 90 days or more and still accruing interest	(2)
Nonperforming loans, end of period	$	41,554

Deposits


(in thousands)	September 30, 2021			December 31, 2020			Increase (decrease)
Noninterest-bearing deposit accounts	$	4,375,713		$	2,711,828		$	1,663,885	61	%
Interest-bearing transaction accounts	2,253,639			1,768,497			485,142		27	%
Money market accounts	2,822,259			2,327,066			495,193		21	%
Savings accounts	748,993			627,903			121,090		19	%
Certificates of deposit:
Brokered	128,923			50,209			78,714		157	%
Other	498,248			499,886			(1,638)		—	%
Total deposits	$	10,827,775		$	7,985,389		$	2,842,386	36	%

Core deposits / total deposits	94		%	93		%
Demand deposits / total deposits	40		%	34		%

Core deposits, defined as total deposits excluding certificates of deposits, were $10.2 billion at September 30, 2021, an increase of $2.8 billion from December 31, 2020. The increase was primarily from the FCBP acquisition that added $1.7 billion in core deposits. Noninterest-bearing and interest-bearing deposits have also increased due to elevated deposits from customers who received PPP loans and customers who have retained excess liquidity due to the low yield of alternative short-term investments. Noninterest-bearing deposits were $4.4 billion at September 30, 2021, or 40.4% of total deposits. 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 $1.9 billion at September 30, 2021 and $1.1 billion at December 31, 2020.

The total cost of deposits was 0.11% for the current quarter compared to 0.12% for the linked quarter.

Shareholders’ Equity

Shareholders’ equity totaled $1.4 billion at September 30, 2021, an increase of $360.7 million from December 31, 2020. Significant activity during the first nine months of 2021 was as follows:

•increase from net income of $82.2 million,

•increase from the issuance of 7.8 million shares in the acquisition of FCBP totaling $343.7 million ($342.3 million net of shares withheld for taxes on employee share based equity awards)

•net decrease in fair value of securities and cash flow hedges of $17.2 million,

•decrease from shares repurchased of $33.1 million, and

•decrease from dividends paid on common shares of $18.6 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 loans and securities 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 also has a high-quality investment portfolio that has been structured to provide a continuous flow of cash payments.

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 asset categories is provided through cash and interest-bearing deposits with other banks, which totaled $1.4 billion at September 30, 2021, compared to $545.3 million at December 31, 2020. The low interest rate environment, coupled with an uncertain outlook and government stimulus, such as the PPP, have increased liquidity for the banking industry, including the Company. Investment securities are another important tool to the Company’s liquidity objectives. Securities totaled $1.7 billion at September 30, 2021, and included $582 million pledged as collateral for deposits of public institutions, treasury, loan notes, and other requirements. The remaining $1.1 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 currently borrowed, at September 30, 2021, the Bank could borrow an additional $704 million from the FHLB of Des Moines under blanket loan pledges, and has an additional $1.1 billion available from the Federal Reserve Bank under a pledged loan agreement. The Bank 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 $2.5 billion in commitments to extend credit as of September 30, 2021. 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 September 30, 2021. The line of credit has a one-year term and matures in February 2022. 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.

Capital Resources

EFSC 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 EFSC 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 September 30, 2021, and December 31, 2020, EFSC 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 EFSC’s capital ratios at the dates indicated:


(in thousands)	September 30, 2021			December 31, 2020			Minimum Capital Requirement to be considered “Well Capitalized”, including Capital Conservation Buffer
Total capital to risk-weighted assets	14.5		%	14.9		%	10.5	%
Tier 1 capital to risk-weighted assets	12.2		%	12.1		%	8.5	%
Common equity tier 1 capital to risk-weighted assets	11.2		%	10.9		%	7.0	%
Leverage ratio (Tier 1 capital to average assets)	9.7		%	10.0		%	4.0	%
Tangible common equity to tangible assets1	8.4		%	8.4		%
Total risk-based capital	$	1,385,389		$	1,094,601
Tier 1 capital	1,166,529			889,527
Common equity tier 1 capital	1,072,876			795,873

1 Not a required regulatory capital ratio

The following table summarizes the Bank’s various capital ratios at the dates indicated:


(in thousands)	September 30, 2021			December 31, 2020			Well Capitalized Minimum %		Minimum Capital Requirement to be considered “Well Capitalized” Including Capital Conservation Buffer
Total capital to risk-weighted assets	13.4		%	13.7		%	10.0	%	10.5	%
Tier 1 capital to risk-weighted assets	12.3		%	12.5		%	8.0	%	8.5	%
Common equity tier 1 capital to risk-weighted assets	12.3		%	12.5		%	6.5	%	7.0	%
Leverage ratio (Tier 1 capital to average assets)	9.8		%	10.3		%	5.0	%	4.0	%
Total risk-based capital	$	1,278,031		$	1,004,839
Tier 1 capital	1,172,421			913,169
Common equity tier 1 capital	1,172,368			913,116

In March 2020, the U.S. banking agencies issued an interim final rule that provides banking organizations that implement CECL before the end of 2020 the option to delay for two years an estimate of CECL’s effect on regulatory capital followed by a three-year transition period. The Company adopted CECL on January 1, 2020. For additional information regarding the adoption of CECL, see “Item 1. Note 1 – Summary of Significant Accounting Policies.” The Company has elected the transition provisions provided by the U.S. banking agencies’ rule. Accordingly, the regulatory capital effects resulting from adoption of the CECL methodology will not be fully reflected in the Company’s regulatory capital until January 1, 2025. Based on the Company’s regulatory capital position as of September 30, 2021, the estimated impact of adopting CECL would reduce the Common Equity Tier 1 Capital ratio by approximately 40 basis points. The actual impact of adopting CECL on the regulatory capital ratios may change as the final impact is not determined until the end of the second year of the transition period.

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, PPNR ROAA, financial metrics adjusted for PPP impact, 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, PPNR ROAA, financial metrics adjusted for PPP impact, 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						Nine months ended
(in thousands)	September 30, 2021			June 30, 2021			September 30, 2020			September 30, 2021			September 30, 2020
Net interest income	$	97,273		$	81,738		$	63,354		$	258,134		$	192,555
Less: Incremental accretion income	—			—			1,235			—			3,227
Core net interest income	97,273			81,738			62,119			258,134			189,328

Total noninterest income	17,619			16,204			12,629			45,113			35,997


Less: Gain on sale of investment securities	—			—			417			—			421
Less: Gain on sale of other real estate	335			549			—			884			—

Less: Other non-core income	—						—			—			265
Core noninterest income	17,284			15,655			12,212			44,229			35,311

Total core revenue	114,557			97,393			74,331			302,363			224,639



Total noninterest expense	76,885			52,456			39,524			182,225			116,109

Less: Other expenses related to non-core acquired loans	—			—			25			—			49


Less: Merger-related expenses	14,671			1,949			1,563			19,762			1,563
Less: Branch-closure expenses	3,441						—			3,441			—


Core noninterest expense	58,773			50,507			37,936			159,022			114,497













Core efficiency ratio	51.30		%	51.86		%	51.04		%	52.59		%	50.97		%

Tangible Common Equity Ratio


(in thousands)	September 30, 2021			December 31, 2020
Total shareholders' equity	$	1,439,635		$	1,078,975
Less: Goodwill	365,415			260,567
Less: Intangible assets	23,777			23,084
Tangible common equity	$	1,050,443		$	795,324

Total assets	$	12,888,016		$	9,751,571
Less: Goodwill	365,415			260,567
Less: Intangible assets, net	23,777			23,084
Tangible assets	$	12,498,824		$	9,467,920

Tangible common equity to tangible assets	8.40		%	8.40		%

Average Shareholders’ Equity and Average Tangible Common Equity


	For the three months ended
(in thousands)	September 30, 2021		June 30, 2021		September 30, 2020
Average shareholder’s equity	$	1,394,096	$	1,116,969	$	885,496
Less: Average goodwill	342,622		260,567		210,344
Less: Average intangible assets, net	23,473		20,997		22,489
Average tangible common equity	$	1,028,001	$	835,405	$	652,663

Critical Accounting Policies

The impact and any associated risks related to the Company’s critical accounting policies on business operations are described 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 description 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, 2020.

ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The disclosures set forth in this item are qualified by the section captioned “Safe Harbor Statement Under the Private Securities Litigation Reform Act of 1995” included in Item 2 – Management’s Discussion and Analysis of Financial Condition and Results of Operations of this report 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 minimize or eliminate any impact from market interest rate changes. In order to measure earnings sensitivity to changing rates, the Company uses an earnings simulation model.

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 Company uses an earning sensitivity model to track earnings 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:


Rate Shock1			Annual % change in net interest income
+ 300 bp			22.5%
+ 200 bp			13.8%
+ 100 bp			5.5%



1 Due to the current levels of interest rates, the downward shock scenarios are not shown.

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 financial 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 September 30, 2021, 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.”

At September 30, 2021, the Company had $5.7 billion in variable rate loans including $3.2 billion based on LIBOR and $2.2 billion based on Prime. Approximately 76% of the LIBOR based loans are indexed to one-month LIBOR. Of the total variable rate loans, $3.0 billion had a rate floor of which approximately $2.8 billion, or 94%, were currently priced at the floor.

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 September 30, 2021. 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 September 30, 2021 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 Report on Form 10-Q, and Part I, Item 1A of our Report on Form 10-K for the fiscal year ended December 31, 2020. There have been no material changes to the risk factors described in such Annual Report on Form 10-K.

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
July 1, 2021 through July 31, 2021	145,926	45.79		145,926	1,602,437
August 1, 2021 through August 31, 2021	205,137	45.69		205,137	1,397,300
September 1, 2021 through September 30, 2021	119,349	43.43		119,349	1,277,951
Total	470,412	$	45.15	470,412	1,277,951

(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. 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 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)).

3.7 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)).

3.8 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)).

3.9 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)).

3.10 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 September 30, 2021, 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 November 4, 2021.


			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