ENTERPRISE FINANCIAL SERVICES CORP - Quarter Report: 2022 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, 2022.


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

For the transition period from ______ to ______

Commission file number 001-15373

ENTERPRISE FINANCIAL SERVICES CORP

Incorporated in the State of Delaware

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

Address: 150 North Meramec

Clayton, MO 63105

Telephone: (314) 725-5500

___________________

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

Title of each class

Trading Symbol(s)

Name of each exchange on which registered

Common Stock, par value $0.01 per share

EFSC

Nasdaq Global Select Market

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

EFSCP

Nasdaq Global Select Market

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

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

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

Large accelerated filer

☒

Accelerated filer

☐

Non-accelerated filer

☐

Smaller reporting company

☐

Emerging growth company

☐

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

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

Yes ☐ No ☒

As of October 25, 2022, the Registrant had 37,223,324 shares of outstanding common stock, $0.01 par value per share.

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

ENTERPRISE FINANCIAL SERVICES CORP AND SUBSIDIARIES

TABLE OF CONTENTS


						Page
PART I - FINANCIAL INFORMATION

Item 1. Financial Statements

Condensed Consolidated Balance Sheets (Unaudited)						1

Condensed Consolidated Statements of Operations (Unaudited)						2

Condensed Consolidated Statements of Comprehensive Income (Unaudited)						3

Condensed Consolidated Statements of Shareholders’ Equity (Unaudited)						4

Condensed Consolidated Statements of Cash Flows (Unaudited)						6

Notes to Condensed Consolidated Financial Statements (Unaudited)						7

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

Item 3. Quantitative and Qualitative Disclosures About Market Risk						50

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						52

Item 3. Defaults Upon Senior Securities						52

Item 4. Mine Safety Disclosures						52

Item 5. Other Information						52

Item 6. Exhibits						53

Signatures						55

Glossary of Acronyms, Abbreviations and Entities

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

ACL

Allowance for Credit Losses

FASB

Financial Accounting Standards Board

ASU

Accounting Standards Update

FCBP

First Choice Bancorp

Bank

Enterprise Bank & Trust

FHLB

Federal Home Loan Bank

C&I

Commercial and Industrial

GAAP

Generally Accepted Accounting Principles (United States)

CCB

Capital Conservation Buffer

LIBOR

London Interbank Offered Rate

CDFI

Community Development Financial Institution

NIM

Net Interest Margin

CECL

Current Expected Credit Loss

PPP

Paycheck Protection Program

Company

Enterprise Financial Services Corp

SBA

Small Business Administration

CRE

Commercial Real Estate

SBIC

Small Business Investment Company

EFSC

Enterprise Financial Services Corp

SEC

Securities and Exchange Commission

Enterprise

Enterprise Financial Services Corp

SOFR

Secured Overnight Financing Rate

PART I - 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, 2022		December 31, 2021
Assets
Cash and due from banks	$	264,078	$	209,177
Federal funds sold	1,063		1,356
Interest-earning deposits (including $0 and $14,595 pledged as collateral, respectively)	479,735		1,811,156
Total cash and cash equivalents	744,876		2,021,689
Interest-earning deposits greater than 90 days	9,027		6,996
Securities available-for-sale	1,466,912		1,366,006
Securities held-to-maturity, net	646,393		429,681
Loans held-for-sale	785		6,389
Loans	9,354,987		9,017,642
Allowance for credit losses on loans	(140,572)		(145,041)
Total loans, net	9,214,415		8,872,601


Other investments	58,637		59,896
Fixed assets, net	43,882		47,915




Goodwill	365,164		365,164
Intangible assets, net	18,217		22,286

Other assets	426,479		338,735
Total assets	$	12,994,787	$	13,537,358

Liabilities and Shareholders' Equity
Noninterest-bearing demand accounts	$	4,642,539	$	4,578,436
Interest-bearing demand accounts	2,270,898		2,465,884
Money market accounts	2,792,766		2,890,976
Savings accounts	824,483		800,210
Certificates of deposit:
Brokered	129,039		128,970
Other	397,869		479,323
Total deposits	11,057,594		11,343,799
Subordinated debentures and notes	155,298		154,899
FHLB advances	—		50,000
Other borrowings	197,422		353,863



Other liabilities	138,255		105,681
Total liabilities	$	11,548,569	$	12,008,242

Commitments and contingent liabilities (Note 5)

Shareholders' equity:
Preferred stock, $0.01 par value; 5,000,000 shares authorized; 75,000 shares issued and outstanding ($1,000 per share liquidation preference)	71,988		71,988
Common stock, $0.01 par value; 75,000,000 shares authorized; 37,222,900 shares issued and outstanding and 39,799,615 shares issued, respectively	372		398
Treasury stock, at cost; 0 and 1,980,093 shares	—		(73,528)
Additional paid in capital	979,543		1,018,799
Retained earnings	547,506		492,682
Accumulated other comprehensive (loss) income	(153,191)		18,777
Total shareholders' equity	1,446,218		1,529,116
Total liabilities and shareholders' equity	$	12,994,787	$	13,537,358

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

ENTERPRISE FINANCIAL SERVICES CORP AND SUBSIDIARIES

Condensed Consolidated Statements of Operations (Unaudited)


	Three months ended September 30,				Nine months ended September 30,
(in thousands, except per share data)	2022		2021		2022		2021
Interest income:
Loans	$	118,465	$	94,353	$	316,741	$	250,390
Debt securities:
Taxable	7,766		4,435		19,670		13,293
Nontaxable	4,976		3,585		13,444		10,058

Interest-earning deposits	4,190		480		7,502		906
Dividends on equity securities	298		375		988		942
Total interest income	135,695		103,228		358,345		275,589
Interest expense:




Deposits	8,687		2,740		15,396		7,870
Subordinated debentures and notes	2,313		2,855		6,790		8,521
FHLB advances	103		212		495		604
Other borrowings	302		148		596		460
Total interest expense	11,405		5,955		23,277		17,455
Net interest income	124,290		97,273		335,068		258,134
Provision (benefit) for credit losses	676		19,668		(2,734)		17,045
Net interest income after provision (benefit) for credit losses	123,614		77,605		337,802		241,089
Noninterest income:
Deposit service charges	4,951		4,520		13,863		11,466
Wealth management revenue	2,432		2,573		7,587		7,572
Card services revenue	2,652		3,186		9,206		8,657


Tax credit income (loss)	(3,625)		3,325		169		3,654


Other income	3,044		4,015		11,464		13,764
Total noninterest income	9,454		17,619		42,289		45,113
Noninterest expense:
Employee compensation and benefits	36,999		33,722		108,854		91,416
Occupancy	4,497		4,496		13,392		11,776
Data processing	3,543		3,328		9,914		9,068
Professional fees	1,597		901		4,316		3,189



Branch-closure expenses	—		3,441		—		3,441
Merger-related expenses	—		14,671		—		19,762
Other expense	22,207		16,326		60,591		43,573
Total noninterest expense	68,843		76,885		197,067		182,225

Income before income tax expense	64,225		18,339		183,024		103,977
Income tax expense	14,025		4,426		39,982		21,733
Net income	$	50,200	$	13,913	$	143,042	$	82,244
Dividends on preferred stock	937		—		3,104		—
Net income available to common shareholders	$	49,263	$	13,913	$	139,938	$	82,244

Earnings per common share
Basic	$	1.32	$	0.38	$	3.74	$	2.48
Diluted	1.32		0.38		3.73		2.48

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)	2022		2021		2022		2021
Net income	$	50,200	$	13,913	$	143,042	$	82,244
Other comprehensive income (loss), after-tax:
Change in unrealized loss on available-for-sale securities	(45,283)		(7,870)		(173,878)		(15,941)

Reclassification of gain on held-to-maturity securities	(647)		(805)		(2,052)		(2,791)
Change in unrealized gain on cash flow hedges	1,165		9		3,451		651
Reclassification of loss on cash flow hedges	55		296		511		863
Total other comprehensive loss, after-tax	(44,710)		(8,370)		(171,968)		(17,218)
Comprehensive income (loss)	$	5,490	$	5,543	$	(28,926)	$	65,026

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, 2022
	Preferred Stock			Common Stock
(in thousands, except per share data)	Shares	Amount		Shares	Amount		Treasury Stock		Additional Paid in Capital		Retained Earnings		Accumulated Other Comprehensive Income (Loss)		Total Shareholders’ Equity
Balance at June 30, 2022	75	$	71,988	37,206	$	372	$	—	$	976,684	$	506,849	$	(108,481)	$	1,447,412
Net income	—	—		—	—		—		—		50,200		—		50,200





Other comprehensive loss	—	—		—	—		—		—		—		(44,710)		(44,710)

Common stock dividends ($0.23 per share)	—	—		—	—		—		—		(8,562)		—		(8,562)
Preferred stock dividends ($12.50 per share)	—	—		—	—		—		—		(937)		—		(937)

Issuance under equity compensation plans, net	—	—		17	—		—		737		(44)		—		693

Share-based compensation	—	—		—	—		—		2,122		—		—		2,122





Balance at September 30, 2022	75	$	71,988	37,223	$	372	$	—	$	979,543	$	547,506	$	(153,191)	$	1,446,218

Balance at December 31, 2021	75	$	71,988	37,820	$	398	$	(73,528)	$	1,018,799	$	492,682	$	18,777	$	1,529,116
Net income	—	—		—	—		—		—		143,042		—		143,042





Other comprehensive loss	—	—		—	—		—		—		—		(171,968)		(171,968)

Common stock dividends ($0.66 per share)	—	—		—	—		—		—		(24,662)		—		(24,662)
Preferred stock dividends ($41.389 per share)	—	—		—	—		—		—		(3,104)		—		(3,104)
Repurchase of common stock	—	—		(700)	(7)		—		(18,867)		(14,049)		—		(32,923)
Issuance under equity compensation plans, net	—	—		103	1		—		1,421		(633)		—		789

Share-based compensation	—	—		—	—		—		5,928		—		—		5,928
Retirement of treasury stock (1,980 shares)	—	—		—	(20)		73,528		(27,738)		(45,770)		—		—




Balance at September 30, 2022	75	$	71,988	37,223	$	372	$	—	$	979,543	$	547,506	$	(153,191)	$	1,446,218


Three and nine months ended September 30, 2021
	Common Stock
(in thousands, except per share data)		Shares	Amount		Treasury Stock		Additional Paid in Capital		Retained Earnings		Accumulated Other Comprehensive Income (Loss)		Total Shareholders’ Equity
Balance at June 30, 2021		31,052	$	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)

Common stock dividends ($0.19 per share)		—	—		—		—		(7,305)		—		(7,305)
Repurchase of common stock		(470)	(4)		—		(3,412)		(17,820)		—		(21,236)



Issuance under equity compensation plans, net		13	—		—		1,376		(649)		—		727

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

Shares issued in connection with acquisition of First Choice Bancorp		—	78		—		342,912		(710)		—		342,280

Balance at September 30, 2021		38,372	$	404	$	(73,528)	$	1,031,146	$	461,711	$	19,902	$	1,439,635

Balance at December 31, 2020		31,210	$	332	$	(73,528)	$	697,839	$	417,212	$	37,120	$	1,078,975
Net income		—	—		—		—		82,244		—		82,244

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

Common stock dividends ($0.55 per share)		—	—		—		—		(18,566)		—		(18,566)
Repurchase of common stock		(722)	(6)		—		(15,243)		(17,820)		—		(33,069)



Issuance under equity compensation plans, net		107	—		—		1,530		(649)		—		881

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

Shares issued in connection with acquisition of First Choice Bancorp		—	78		—		342,912		(710)		—		342,280

Balance at September 30, 2021		38,372	$	404	$	(73,528)	$	1,031,146	$	461,711	$	19,902	$	1,439,635

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)	2022		2021
Cash flows from operating activities:
Net income	$	143,042	$	82,244
Adjustments to reconcile net income to net cash provided by operating activities
Depreciation	4,268		4,609
Provision (benefit) for credit losses	(2,734)		17,045
Deferred income taxes	1,796		(8,813)
Net amortization of debt securities	4,488		5,704
Net accretion on loan discount/premiums	(289)		(1,672)
Amortization of intangible assets	4,068		4,199
Amortization of servicing assets	2,195		690
Mortgage loans originated-for-sale	(57,281)		(120,700)
Proceeds from mortgage loans sold	63,266		128,687
Loss (gain) on:

Sale of other real estate	93		(931)
Sale of fixed assets	(44)		—
Sale of state tax credits	(154)		(437)
Asset impairment	—		3,441

Share-based compensation	5,928		4,108




Changes in other assets and liabilities, net	19,215		(12,544)







Net cash provided by operating activities	187,857		105,630
Cash flows from investing activities:
Proceeds from acquisition, net	—		212,642
Net (increase) decrease in loans	(337,863)		42,865


Proceeds received from:
Sale of debt securities, available-for-sale	—		27,135
Paydown or maturity of debt securities, available-for-sale	183,230		222,993
Paydown or maturity of debt securities, held-to-maturity	10,819		42,874
Redemption of other investments	8,304		16,952
Sale of state tax credits held for sale	8,406		5,534
Sale of other real estate	2,517		5,915
Sale of fixed assets	1,489		—
Settlement of bank-owned life insurance policies	534		—
Payments for the purchase of:
Available-for-sale debt securities	(635,733)		(547,526)
Held-to-maturity debt securities	(115,697)		—
Other investments	(17,963)		(7,629)

State tax credits held for sale	(18,846)		(6,688)
Fixed assets	(1,321)		(1,635)
Net cash (used in) provided by investing activities	(912,124)		13,432
Cash flows from financing activities:
Net increase in noninterest-bearing deposit accounts	64,103		666,480
Net (decrease) increase in interest-bearing deposit accounts	(350,308)		335,477
Repayments of long-term FHLB advances	(50,000)		—
Net decrease in FHLB advances	—		(160,000)


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




Net decrease in other borrowings	(152,155)		(51,597)



Repurchase of common stock	(32,923)		(33,069)
Cash dividends paid on common stock	(24,662)		(18,566)
Cash dividends paid on preferred stock	(3,104)		—
Other	789		(489)



Net cash (used in) provided by financing activities	(552,546)		732,522
Net (decrease) increase in cash and cash equivalents	(1,276,813)		851,584
Cash and cash equivalents, beginning of period	2,021,689		537,703
Cash and cash equivalents, end of period	$	744,876	$	1,389,287
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest	$	22,517	$	16,679
Income taxes	30,505		45,230
Noncash investing and financing transactions:
Transfer to other real estate owned in settlement of loans	$	—	$	3,227
Sales of other real estate financed	—		228
Right-of-use assets obtained in exchange for lease obligations	9,072		4,319
Common shares issued in connection with acquisition	—		343,650

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

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

ENTERPRISE FINANCIAL SERVICES CORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Unaudited)

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

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

Business and Consolidation

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

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

Basis of Financial Statement Presentation

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

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

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

Recent Accounting Pronouncements

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

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

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

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

Acquisitions and Divestitures

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

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

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

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

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

NOTE 2 - EARNINGS PER SHARE

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

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


	Three months ended September 30,				Nine months ended September 30,
(in thousands, except per share data)	2022		2021		2022		2021
Net income available to common shareholders	$	49,263	$	13,913	$	139,938	$	82,244








Weighted average common shares outstanding	37,241		36,898		37,422		33,158

Additional dilutive common stock equivalents	106		49		96		47
Weighted average diluted common shares outstanding	37,347		36,947		37,518		33,205

Basic earnings per common share:	$	1.32	$	0.38	$	3.74	$	2.48
Diluted earnings per common share:	1.32		0.38		$	3.73	$	2.48

For both the three and nine months ended September 30, 2022, common stock equivalents of approximately 218,000 were excluded from the earnings per share calculations because their effect would have been anti-dilutive. Comparatively, there were 151,000 and 153,000 common stock equivalents excluded in the prior year periods, respectively.

NOTE 3 - INVESTMENTS

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


	September 30, 2022
(in thousands)	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
Available-for-sale securities:
Obligations of U.S. Government-sponsored enterprises	$	263,717	$	—	$	(28,778)	$	234,939
Obligations of states and political subdivisions	509,274		27		(120,283)		389,018
Agency mortgage-backed securities	692,187		1		(70,900)		621,288
U.S. Treasury bills	213,659		—		(4,905)		208,754
Corporate debt securities	13,750		—		(837)		12,913
Total securities available for sale	$	1,692,587	$	28	$	(225,703)	$	1,466,912
Held-to-maturity securities:

Obligations of states and political subdivisions	$	463,941	$	—	$	(88,973)	$	374,968
Agency mortgage-backed securities	58,221		—		(6,277)		51,944
Corporate debt securities	124,920		149		(14,193)		110,876
Total securities held-to-maturity	$	647,082	$	149	$	(109,443)	$	537,788
Allowance for credit losses	(689)
Total securities held-to-maturity, net	$	646,393


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

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

During the nine months ended September 30, 2022, the Company transferred $116.9 million of securities from available-for-sale to held-to-maturity. The Company believes the held-to-maturity category is consistent with the Company’s intent for these securities. The transfer of securities was made at fair value at the time of transfer. The unamortized portion of the unrealized holding gain at the time of transfer is retained in accumulated other comprehensive income and in the carrying value of held-to-maturity securities. The balance of held-to-maturity securities in the “Amortized Cost” column in the table above includes a cumulative net unamortized unrealized gain of $18.5 million and $21.0 million at September 30, 2022 and December 31, 2021, respectively. Such amounts are amortized over the remaining life of the securities.

At September 30, 2022 and December 31, 2021, there were no holdings of securities of any one issuer in an amount greater than 10% of shareholders’ equity, other than U.S. Government agencies and sponsored enterprises. The agency mortgage-backed securities are all issued by U.S. Government agencies and sponsored enterprises. Securities having a fair value of $596.1 million and $752.7 million at September 30, 2022 and December 31, 2021, respectively, were pledged as collateral to secure deposits of public institutions and for other purposes as required by law or contract provisions.

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


	Available for sale				Held to maturity
(in thousands)	Amortized Cost		Estimated Fair Value		Amortized Cost		Estimated Fair Value
Due in one year or less	$	98,847	$	98,463	$	675	$	671
Due after one year through five years	331,727		304,813		24,003		22,507
Due after five years through ten years	83,490		74,785		176,436		157,691
Due after ten years	486,336		367,563		387,747		304,975
Agency mortgage-backed securities	692,187		621,288		58,221		51,944

	$	1,692,587	$	1,466,912	$	647,082	$	537,788

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


	September 30, 2022
	Less than 12 months				12 months or more				Total
(in thousands)	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
Obligations of U.S. Government-sponsored enterprises	$	138,491	$	15,104	$	96,448	$	13,674	$	234,939	$	28,778
Obligations of states and political subdivisions	261,078		75,462		126,173		44,821		387,251		120,283
Agency mortgage-backed securities	473,629		42,796		147,440		28,104		621,069		70,900
U.S. Treasury bills	208,754		4,905		—		—		208,754		4,905
Corporate debt securities	12,913		837		—		—		12,913		837
	$	1,094,865	$	139,104	$	370,061	$	86,599	$	1,464,926	$	225,703


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

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

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

Accrued interest receivable on held-to-maturity debt securities totaled $5.2 million and $3.4 million at September 30, 2022 and December 31 2021, respectively, and is excluded from the estimate of expected credit losses. The estimate of expected credit losses considers historical credit loss information adjusted for current conditions and reasonable and supportable forecasts. The ACL on held-to-maturity securities was $0.7 million at September 30, 2022 and $0.6 million at December 31, 2021.

There were no sales of available-for-sale investment securities during the three and nine months ended September 30, 2022, compared to proceeds of $27.1 million from the sale of available-for-sale investment securities during the three and nine months ended September 30, 2021.

Other Investments

At September 30, 2022 and December 31, 2021, other investments totaled $58.6 million and $59.9 million, respectively. As a member of the FHLB system administered by the Federal Housing Finance Agency, the Bank is required to maintain a minimum investment in capital stock with the FHLB consisting of membership stock and activity-based stock. The FHLB capital stock of $10.0 million and $12.1 million at September 30, 2022 and December 31, 2021, respectively, is recorded at cost, which represents redemption value, and is included in other investments in the consolidated balance sheets. The remaining amounts in other investments primarily include investments in SBICs, CDFIs, private equity investments, and the Company’s investment in unconsolidated trusts used to issue trust preferred securities to third parties.

NOTE 4 - LOANS

The following table presents a summary of loans by category:


(in thousands)	September 30, 2022		December 31, 2021
Commercial and industrial	$	3,710,012	$	3,396,590
Real estate:
Commercial - investor owned	2,286,458		2,141,143
Commercial - owner occupied	2,152,189		2,035,785
Construction and land development	583,649		734,073
Residential	397,450		454,052
Total real estate loans	5,419,746		5,365,053
Other	232,158		265,137
Loans, before unearned loan fees	9,361,916		9,026,780
Unearned loan fees, net	(6,929)		(9,138)
Loans, including unearned loan fees	$	9,354,987	$	9,017,642

PPP loans totaled $13.3 million at September 30, 2022, or $13.2 million net of deferred fees of $0.1 million. The loan balance at September 30, 2022 includes a net premium on acquired loans of $12.3 million. At September 30, 2022, loans of $2.8 billion were pledged to FHLB and the Federal Reserve Bank.

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

Accrued interest receivable totaled $33.6 million and $30.6 million at September 30, 2022 and December 31, 2021, respectively, and was reported in “Other Assets” on the consolidated balance sheets.

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


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







Balance at June 30, 2022	$	65,646	$	33,338	$	16,156	$	13,180	$	7,478	$	4,748	$	140,546
Provision (benefit) for credit losses	4,202		71		224		(3,987)		99		(105)		504
Charge-offs	(1,320)		—		(190)		—		(401)		(88)		(1,999)
Recoveries	640		225		232		10		365		49		1,521
Balance at September 30, 2022	$	69,168	$	33,634	$	16,422	$	9,203	$	7,541	$	4,604	$	140,572



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

Provision (benefit) for credit losses	7,283		(2,488)		(1,424)		(5,378)		(50)		(588)		(2,645)
Charge-offs	(3,576)		(200)		(395)		—		(1,706)		(262)		(6,139)
Recoveries	1,636		445		681		45		1,370		138		4,315
Balance at September 30, 2022	$	69,168	$	33,634	$	16,422	$	9,203	$	7,541	$	4,604	$	140,572

The ACL on sponsor finance loans, which is included in the categories above, represented $19.2 million and $18.2 million, respectively, as of September 30, 2022 and December 31, 2021.

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





*Provision includes $23.9 million on certain acquired First Choice loans



(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 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

*Provision includes $23.9 million on certain acquired First Choice loans

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 $9.5 million to the ACL over the baseline model. These forecasts incorporate an expectation that the Federal Reserve will continue to aggressively tighten monetary policy and will wind down its treasury and mortgage-backed securities portfolio and continue raising the federal funds rate, that the Russia-Ukraine military conflict will have a limited disruption on the economy, that the global pandemic will continue to recede and become less disruptive to supply chains and the risk of a period of stagflation. The Company has also recognized the risk posed by loans that have received multiple deferrals of principal and interest payments, including the hospitality sector, by allocating additional reserves to those segments. Some of the key risks to the forecasts that could result in future provision for credit losses are continued or worsening supply-chain disruptions, the risk that the Federal Reserve tightens too aggressively and pushes the economy into a recession, labor shortages and declines in job growth, oil prices increase more than anticipated or a period of persistently high inflation.

In addition to the CECL methodology, the Company incorporates qualitative adjustments into the ACL on loans to capture credit risks inherent within the loan portfolio that are not captured in the discounted cash flow (DCF) model. Included in these risks are 1) changes in lending policies and procedures, 2) actual and expected changes in business and economic conditions, 3) changes in the nature and volume of the portfolio, 4) changes in lending management, 5) changes in volume and the severity of past due loans, 6) changes in the quality of the loan review system, 7) changes in the value of underlying collateral, 8) the existence and effect of concentrations of credit and 9) other factors such as the regulatory, legal and competitive environments and events such as natural disasters and pandemics. At September 30, 2022, the ACL on loans included a qualitative adjustment of approximately $40.8 million. Of this amount, approximately $7.5 million was allocated to sponsor finance loans due to their unsecured nature.

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


	September 30, 2022
(in thousands)	Nonaccrual		Restructured, accruing		Loans over 90 days past due and still accruing interest		Total nonperforming loans		Nonaccrual loans with no allowance
Commercial and industrial	$	13,304	$	—	$	1	$	13,305	$	1,551
Real estate:
Commercial - investor owned	3,388		—		—		3,388		3,388
Commercial - owner occupied	1,150		—		—		1,150		1,150

Residential	252		74		—		326		252
Other	1		—		14		15		—
Total	$	18,095	$	74	$	15	$	18,184	$	6,341


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

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

The nonperforming loan balances at both September 30, 2022 and December 31, 2021 exclude government guaranteed balances of $6.5 million.

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

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


	September 30, 2022
	Type of Collateral
(in thousands)	Commercial Real Estate		Residential Real Estate		Blanket Lien
Commercial and industrial	$	4,271	$	—	$	4,726
Real estate:
Commercial - investor owned	2,268		1,120		—
Commercial - owner occupied	1,139		11		—

Residential	—		326		—

Total	$	7,678	$	1,457	$	4,726


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

Residential	—		2,048		—

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

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

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

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


	September 30, 2022
(in thousands)	30-89 Days Past Due		90 or More Days Past Due		Total Past Due		Current		Total
Commercial and industrial	$	4,966	$	6,869	$	11,835	$	3,698,058	$	3,709,893
Real estate:
Commercial - investor owned	2,059		—		2,059		2,284,399		2,286,458
Commercial - owner occupied	9,241		187		9,428		2,142,761		2,152,189
Construction and land development	1,192		—		1,192		582,457		583,649
Residential	192		—		192		397,258		397,450
Other	44		15		59		225,289		225,348
Total	$	17,694	$	7,071	$	24,765	$	9,330,222	$	9,354,987


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

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

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

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

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

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

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

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

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

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


	September 30, 2022
	Term Loans by Origination Year
(in thousands)	2022		2021		2020		2019		2018		Prior		Revolving Loans Converted to Term Loans		Revolving Loans		Total
Commercial and industrial
Pass (1-6)	$	1,085,307	$	717,307	$	360,383	$	208,530	$	65,014	$	89,982	$	7,860	$	936,868	$	3,471,251
Watch (7)	45,503		12,222		14,739		495		9,026		4,145		155		87,336		173,621
Classified (8-9)	16,722		7,013		1,328		3,839		172		1,024		—		14,672		44,770
Total Commercial and industrial	$	1,147,532	$	736,542	$	376,450	$	212,864	$	74,212	$	95,151	$	8,015	$	1,038,876	$	3,689,642

Commercial real estate-investor owned
Pass (1-6)	$	484,071	$	628,899	$	406,567	$	265,033	$	121,771	$	227,789	$	593	$	45,532	$	2,180,255
Watch (7)	18,638		9,041		29,920		12,168		—		13,128		—		—		82,895
Classified (8-9)	1,221		—		196		821		194		6,879		50		—		9,361
Total Commercial real estate-investor owned	$	503,930	$	637,940	$	436,683	$	278,022	$	121,965	$	247,796	$	643	$	45,532	$	2,272,511

Commercial real estate-owner occupied
Pass (1-6)	$	364,007	$	577,848	$	380,740	$	244,923	$	126,757	$	287,072	$	—	$	55,602	$	2,036,949
Watch (7)	9,052		2,282		13,694		5,125		14,284		8,303		—		800		53,540
Classified (8-9)	—		—		3,206		8,880		16,147		11,505		—		—		39,738
Total Commercial real estate-owner occupied	$	373,059	$	580,130	$	397,640	$	258,928	$	157,188	$	306,880	$	—	$	56,402	$	2,130,227

Construction real estate
Pass (1-6)	$	224,466	$	243,622	$	77,015	$	2,966	$	2,543	$	9,232	$	—	$	1,901	$	561,745
Watch (7)	17,349		—		520		—		—		—		—		—		17,869
Classified (8-9)	1,192		—		—		12		410		14		—		—		1,628
Total Construction real estate	$	243,007	$	243,622	$	77,535	$	2,978	$	2,953	$	9,246	$	—	$	1,901	$	581,242

Residential real estate
Pass (1-6)	$	47,323	$	69,924	$	57,277	$	22,535	$	11,568	$	93,339	$	513	$	90,659	$	393,138
Watch (7)	113		290		—		80		353		791		—		—		1,627
Classified (8-9)	156		82		—		55		767		1,223		—		5		2,288
Total residential real estate	$	47,592	$	70,296	$	57,277	$	22,670	$	12,688	$	95,353	$	513	$	90,664	$	397,053

Other
Pass (1-6)	$	12,963	$	92,335	$	57,732	$	11,299	$	21,135	$	20,562	$	—	$	8,399	$	224,425
Watch (7)	—		—		—		—		2		—		—		—		2
Classified (8-9)	—		—		—		5		5		13		—		1		24
Total Other	$	12,963	$	92,335	$	57,732	$	11,304	$	21,142	$	20,575	$	—	$	8,400	$	224,451

Total loans classified by risk category	$	2,328,083	$	2,360,865	$	1,403,317	$	786,766	$	390,148	$	775,001	$	9,171	$	1,241,775	$	9,295,126
Total loans classified by performing status																	59,861
Total loans																	$	9,354,987


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

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

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

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

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

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

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

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

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

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


	September 30, 2022
(in thousands)	Performing		Non Performing		Total
Commercial and industrial	$	20,250	$	1	$	20,251
Real estate:
Commercial - investor owned	13,947		—		13,947
Commercial - owner occupied	21,962		—		21,962
Construction and land development	2,407		—		2,407
Residential	397		—		397
Other	883		14		897
Total	$	59,846	$	15	$	59,861


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

NOTE 5 - COMMITMENTS AND CONTINGENCIES

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

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

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

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


(in thousands)	September 30, 2022		December 31, 2021
Commitments to extend credit	$	2,912,107	$	2,481,173
Letters of credit	68,211		77,314

Off-Balance Sheet Credit Risk

Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments usually have fixed expiration dates or other termination clauses, may have significant usage restrictions, and may require payment of a fee. Of the total commitments to extend credit at September 30, 2022 and December 31, 2021, approximately $284.7 million and $238.7 million, respectively, represent fixed rate loan commitments. Since certain of the commitments may expire without being drawn upon or may be revoked, the total commitment amounts do not necessarily represent future cash requirements. The Company evaluates each customer’s credit worthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Company upon extension of credit, is based on management’s credit evaluation of the borrower. Collateral held varies, but may include accounts receivable, inventory, premises and equipment, and real estate. Other liabilities includes $8.5 million and $7.6 million for estimated losses attributable to the unadvanced commitments at September 30, 2022 and December 31, 2021, respectively.

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

Contingencies

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

NOTE 6 - DERIVATIVE FINANCIAL INSTRUMENTS

Risk Management Objective of Using Derivatives

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

Cash Flow Hedges of Interest Rate Risk

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

Select terms of the hedges are as follows:


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

The gain or loss on derivatives designated and qualified as cash flow hedges of interest rate risk are recorded in accumulated other comprehensive income and subsequently reclassified into interest expense in the same period(s) during which the hedged transaction affects earnings. Amounts reported in accumulated other comprehensive income related to derivatives will be reclassified to interest expense as interest payments are paid on the Company’s variable-rate debt. During the next twelve months, the Company estimates an additional $1.1 million will be reclassified as a decrease to interest expense.

Non-designated Hedges

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

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


	Notional Amount				Derivative Assets				Derivative Liabilities
(in thousands)	September 30, 2022		December 31, 2021		September 30, 2022		December 31, 2021		September 30, 2022		December 31, 2021
Derivatives Designated as Hedging Instruments:
Interest rate swap	$	61,962	$	61,962	$	2,385	$	—	$	—	$	2,911


Derivatives not Designated as Hedging Instruments:
Interest rate swap	$	636,314	$	918,698	$	21,094	$	12,869	$	21,110	$	12,883



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

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


As of September 30, 2022
							Gross Amounts Not Offset in the Statement of Financial Position
(in thousands)	Gross Amounts Recognized		Gross Amounts Offset in the Statement of Financial Position		Net Amounts of Assets presented in the Statement of Financial Position		Financial Instruments		Fair Value Collateral Received/ Pledged		Net Amount
Assets:
Interest rate swap	$	23,479	$	—	$	23,479	$	—	$	22,640	$	839

Liabilities:
Interest rate swap	$	21,110	$	—	$	21,110	$	—	$	—	$	21,110
Securities sold under agreements to repurchase	206,695		—		206,695		—		206,695		—

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

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

As of September 30, 2022, the fair value of derivatives in a net liability position was $21.2 million, which includes accrued interest but excludes any adjustment for nonperformance risk. The Company has minimum collateral posting thresholds with certain of its derivative counterparties and posts collateral related to derivatives in a net liability position. Furthermore, the Company has received cash collateral from derivative counterparties on contracts that were in a net asset position as noted in the tables above.

NOTE 7 - FAIR VALUE MEASUREMENTS

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


	September 30, 2022
(in thousands)	Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Total Fair Value
Assets
Securities available for sale
Obligations of U.S. Government-sponsored enterprises	$	—	$	234,939	$	—	$	234,939
Obligations of states and political subdivisions	—		389,018		—		389,018
Agency mortgage-backed securities	—		621,288		—		621,288
U.S. Treasury bills	—		208,754		—		208,754
Corporate debt securities	—		12,913		—		12,913
Total securities available for sale	—		1,466,912		—		1,466,912

Other investments	—		2,606		—		2,606

Derivatives	—		23,479		—		23,479
Total assets	$	—	$	1,492,997	$	—	$	1,492,997

Liabilities
Derivatives	$	—	$	21,110	$	—	$	21,110
Total liabilities	$	—	$	21,110	$	—	$	21,110


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

Other investments	—		3,012		—		3,012

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

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

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




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

Other real estate	$	269	$	—	$	—	$	269
Loan servicing asset	3,248		—		3,248		—
Total	$	3,517	$	—	$	3,248	$	269


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

The following table presents the gains (losses) recorded in earnings 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, 2022		September 30, 2021		September 30, 2022		September 30, 2021
Nonaccrual loans	$	—	$	(1,126)	$	(1,781)	$	(1,126)
Other real estate	(11)		—		(172)		—
Loan servicing asset	230		—		110		—
Fixed assets	—		(2,546)		—		(2,546)
Total	$	219	$	(3,672)	$	(1,843)	$	(3,672)

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


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




Securities held-to-maturity, net	$	646,393	$	537,788	Level 2	$	429,681	$	434,672	Level 2
Other investments	56,031		56,031		Level 2	56,884		56,884		Level 2
Loans held for sale	785		785		Level 2	6,389		6,389		Level 2

Loans, net	9,214,415		9,004,778		Level 3	8,872,601		8,869,891		Level 3
State tax credits, held for sale	38,588		40,310		Level 3	27,994		30,686		Level 3

Servicing asset	4,519		5,050		Level 2	6,714		6,714		Level 2

Balance sheet liabilities
Certificates of deposit	$	526,908	$	508,571	Level 3	$	608,293	$	606,177	Level 3
Subordinated debentures and notes	155,298		151,135		Level 2	154,899		155,972		Level 2
FHLB advances	—		—		Level 2	50,000		51,527		Level 2
Other borrowings	197,422		197,422		Level 2	353,863		353,863		Level 2

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

NOTE 8 - SHAREHOLDERS’ EQUITY

Share Repurchases/Retirement

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

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

Shareholders’ Equity

Accumulated Other Comprehensive Income (Loss)

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


Three months ended
(in thousands)	Net Unrealized Gain (Loss) on Available-for-Sale Securities		Unamortized Gain (Loss) on Held-to-Maturity Securities		Net Unrealized Gain (Loss) on Cash Flow Hedges		Total
Balance, June 30, 2022	$	(123,521)	$	14,476	$	564	$	(108,481)
Net change	$	(45,283)	$	(647)	$	1,220	$	(44,710)

Balance, September 30, 2022	$	(168,804)	$	13,829	$	1,784	$	(153,191)

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

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, 2021	$	5,271	$	15,684	$	(2,178)	$	18,777
Net change	(173,878)		(2,052)		3,962		(171,968)
Transfer from available-for-sale to held-to-maturity	$	(197)	$	197	$	—	$	—
Balance, September 30, 2022	$	(168,804)	$	13,829	$	1,784	$	(153,191)

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

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


	Three months ended September 30,
	2022						2021
(in thousands)	Pre-tax		Tax effect		After-tax		Pre-tax		Tax effect		After-tax
Change in unrealized loss on available-for-sale debt securities	$	(60,539)	$	(15,256)	$	(45,283)	$	(10,479)	$	(2,609)	$	(7,870)

Reclassification of gain on held-to-maturity securities(a)	(865)		(218)		(647)		(1,072)		(267)		(805)
Change in unrealized gain on cash flow hedges arising during the period	1,557		392		1,165		12		3		9
Reclassification of loss on cash flow hedges(a)	73		18		55		395		99		296
Total other comprehensive loss	$	(59,774)	$	(15,064)	$	(44,710)	$	(11,144)	$	(2,774)	$	(8,370)

	Nine months ended September 30,
	2022						2021
(in thousands)	Pre-tax		Tax effect		After-tax		Pre-tax		Tax effect		After-tax
Change in unrealized loss on available-for-sale debt securities	$	(232,457)	$	(58,579)	$	(173,878)	$	(21,226)	$	(5,285)	$	(15,941)

Reclassification of gain on held-to-maturity securities(a)	(2,743)		(691)		(2,052)		(3,716)		(925)		(2,791)
Change in unrealized gain on cash flow hedges arising during the period	4,615		1,164		3,451		867		216		651
Reclassification of loss on cash flow hedges(a)	682		171		511		1,149		286		863
Total other comprehensive loss	$	(229,903)	$	(57,935)	$	(171,968)	$	(22,926)	$	(5,708)	$	(17,218)


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

NOTE 9 - SUPPLEMENTAL FINANCIAL INFORMATION

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


	Three months ended September 30,				Nine months ended September 30,
(in thousands)	2022		2021		2022		2021
Other income:
Bank-owned life insurance	$	769	$	739	$	2,551	$	2,191



Other income	2,275		3,276		8,913		11,573
Total other noninterest income	$	3,044	$	4,015	$	11,464	$	13,764

Other expense:
Amortization of intangibles	$	1,310	$	1,473	$	4,068	$	4,200
Banking expense	1,958		1,674		5,370		4,404
Deposit costs	7,661		3,683		17,826		9,466
FDIC and other insurance	2,022		1,690		5,500		4,021
Loan, legal expenses	1,768		1,772		6,003		5,082

Outside services	1,332		1,349		3,960		3,837
Other expense	6,156		4,685		17,864		12,563
Total other noninterest expense	$	22,207	$	16,326	$	60,591	$	43,573

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.

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

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

Introduction

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

Critical Accounting Policies and Estimates

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

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

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

Allowance for Credit Losses

Utilizing the CECL methodology, the Company maintains separate allowances for funded loans, unfunded loans, and held-to-maturity securities, collectively the ACL. The ACL is a valuation account to adjust the cost basis to the amount expected to be collected, based on management’s estimate of experience, current conditions, and reasonable and supportable forecasts. For purposes of determining the allowance for funded and unfunded loans, the portfolios are segregated into pools that share similar risk characteristics that are then further segregated by credit grades. Loans that do not share similar risk characteristics are evaluated on an individual basis and are not included in the collective evaluation. The Company estimates the amount of the allowance based on loan loss experience, adjusted for current and forecasted economic conditions, including unemployment, changes in GDP, and commercial and residential real estate prices. The Company’s forecast of economic conditions uses internal and external information and considers a weighted average of a baseline, upside, and downside scenarios. Because economic conditions can change and are difficult to predict, the anticipated amount of estimated loan defaults and losses, and therefore the adequacy of the allowance, could change significantly and have a direct impact on the Company’s credit costs. The Company’s allowance for credit losses on loans was $140.6 million at September 30, 2022 based on the weighting of the different economic scenarios. As a hypothetical example, if the Company had only used the upside scenario, the allowance would have decreased $7.7 million. Conversely, the allowance would have increased $39.0 million using only the downside scenario.

Executive Summary

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

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


(in thousands, except per share data)	Three months ended									At or for the nine months ended
	September 30, 2022			June 30, 2022			September 30, 2021			September 30, 2022			September 30, 2021
EARNINGS
Total interest income	$	135,695		$	116,069		$	103,228		$	358,345		$	275,589
Total interest expense	11,405			6,456			5,955			23,277			17,455
Net interest income	124,290			109,613			97,273			335,068			258,134
Provision (benefit) for credit losses	676			658			19,668			(2,734)			17,045
Net interest income after provision (benefit) for credit losses	123,614			108,955			77,605			337,802			241,089
Total noninterest income	9,454			14,194			17,619			42,289			45,113
Total noninterest expense	68,843			65,424			76,885			197,067			182,225
Income before income tax expense	64,225			57,725			18,339			183,024			103,977
Income tax expense	14,025			12,576			4,426			39,982			21,733
Net income	$	50,200		$	45,149		$	13,913		$	143,042		$	82,244
Preferred stock dividends	937			938			—			3,104			—
Net income available to common shareholders	$	49,263		$	44,211		$	13,913		$	139,938		$	82,244

Basic earnings per share	$	1.32		$	1.19		$	0.38		$	3.74		$	2.48
Diluted earnings per share	$	1.32		$	1.19		$	0.38		$	3.73		$	2.48

Return on average assets	1.51		%	1.34		%	0.45		%	1.42		%	1.01		%
Return on average common equity	13.74		%	12.65		%	3.96		%	13.09		%	9.14		%
Return on average tangible common equity1	18.82		%	17.44		%	5.37		%	17.92		%	12.31		%
Net interest margin (tax equivalent)	4.10		%	3.55		%	3.40		%	3.64		%	3.45		%

Efficiency ratio	51.47		%	52.84		%	66.92		%	52.22		%	60.09		%
Core efficiency ratio1	51.47		%	52.81		%	51.30		%	52.21		%	52.59		%
Book value per common share	$	36.92		$	36.97		$	37.52
Tangible book value per common share1	$	26.62		$	26.63		$	27.38

ASSET QUALITY
Net charge-offs (recoveries)	$	478		$	(175)		$	1,850		$	1,824		$	8,366
Nonperforming loans	18,184			19,560			41,554
Classified assets	98,078			96,801			104,220
Nonperforming loans to total loans	0.19		%	0.21		%	0.46		%
Nonperforming assets to total assets	0.14		%	0.16		%	0.35		%
ACL on loans to total loans	1.50		%	1.52		%	1.67		%
Net charge-offs (recoveries) to average loans (annualized)	0.02		%	(0.01)		%	0.08		%	0.03		%	0.14		%

(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:

•Details of PPP loans are noted in the following table:


	Quarter ended									At or for the nine months ended
(in thousands)	September 30, 2022			June 30, 2022			September 30, 2021			September 30, 2022			September 30, 2021
PPP loans outstanding, net of deferred fees	$	13,165		$	49,175		$	438,959		$	13,165		$	438,959


Average PPP loans outstanding, net	26,113			89,152			489,104			102,599			614,470
PPP interest and fee income recognized	471			1,557			6,048			4,886			22,463
PPP deferred fees remaining	119			524			7,428			119			7,428
PPP average yield	7.16		%	7.01		%	4.91		%	6.37		%	4.89		%

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

•Pre-provision net revenue1 (“PPNR”) of $64.9 million in the third quarter 2022 increased $6.5 million from the linked quarter PPNR of $58.4 million. PPNR of $180.3 million for the nine months ended September 30, 2022 increased $36.1 million from $144.2 million in the prior year period. The increase from the linked quarter was primarily due to an increase in operating revenue, partially offset by an increase in noninterest expense. The year-to-date increase over the prior year period was primarily due to the acquisition of FCBP in the third quarter 2021, partially offset by a decline in PPP income.

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

•Net interest income of $124.3 million for the third quarter 2022 increased $14.7 million from $109.6 million in the linked quarter. Net interest margin (“NIM”) was 4.10% for the third quarter 2022, compared to 3.55% for the linked quarter. Net interest income and NIM benefited from higher average loan and investment balances and expanding yields on earning assets, partially offset by higher deposit costs and a decline in average interest-earning cash. Net interest income of $335.1 million for the nine months ended September 30, 2022 increased $76.9 million from $258.1 million in the prior year period. The year-to-date increase over the prior year was due primarily to the acquisition of FCBP, an increase in market interest rates, and growth in the loan and investment portfolios, partially offset by a decline in PPP income.

•Noninterest income of $9.5 million for the third quarter 2022 decreased $4.7 million from $14.2 million in the linked quarter. The decline from the linked quarter was primarily due to a decrease in tax credit income and card service revenue. The increase in market interest rates in the quarter reduced tax credit income due to the impact on tax credit projects carried at fair value. Card services revenue declined due to the Durbin Amendment cap on debit card income that became effective in the current quarter. Noninterest income of $42.3 million for the nine months ended September 30, 2022 decreased $2.8 million from $45.1 million in the prior year period. The year-to-date decrease from the prior period was due primarily to the reduction in tax credit income partially offset by increased noninterest income from the FCBP acquisition.

Balance sheet highlights:

•Loans – Total loans increased $337.3 million to $9.4 billion at September 30, 2022, compared to $9.0 billion at December 31, 2021. PPP loans declined $258.8 million from December 31, 2021. Excluding PPP, loans grew $596.1 million, or 7%, on a year-to-date basis from December 31, 2021. Average loans totaled $9.1 billion for the nine months ended September 30, 2022 compared to $7.7 billion for the nine months ended September 30, 2021.

•Deposits – Total deposits decreased $286.2 million, to $11.1 billion at September 30, 2022 from $11.3 billion at December 31, 2021. The decline in deposits was primarily concentrated in interest-bearing demand and money market accounts that were not relationship-based and reflects a shift in our deposit mix aligned with our disciplined focus on relationship-based, lower-cost deposits. Average deposits totaled $11.4 billion for the nine months ended September 30, 2022, compared to $9.0 billion for the nine months ended September 30, 2021. Noninterest deposit accounts represented 42.0% of total deposits and the loan to deposit ratio was 84.6% at September 30, 2022.

•Asset quality – The allowance for credit losses on loans to total loans was 1.50% at September 30, 2022, compared to 1.61% at December 31, 2021. Nonperforming assets to total assets was 0.14% at September 30, 2022 compared to 0.23% at December 31, 2021. Due to the improvement in credit quality and a shift in the risk composition of the loan portfolio, offset by a decline in macroeconomic forecasts, a provision benefit of $2.7 million was recorded in the first nine months of 2022, compared to a provision expense of $17.0 million in the comparable prior year period. The provision for credit losses of $17.0 million included $23.9 million to establish the initial allowance for credit losses on certain First Choice acquired loans and commitments. Loan growth and the provision benefit in the first nine months of 2022 contributed to the decline in the ratio of allowance for credit losses to total loans.

•Shareholders’ equity – Total shareholders’ equity was $1.45 billion at September 30, 2022, compared to $1.53 billion at December 31, 2021, and the tangible common equity to tangible assets ratio2 was 7.86% at September 30, 2022 compared to 8.13% at December 31, 2021. The decline in the tangible common equity ratio was primarily due to a $172.0 million decrease in accumulated other comprehensive income, mainly from a decrease in the fair value of the available-for-sale investment portfolio. The Company and the Bank’s regulatory capital ratios exceeded the “well-capitalized” level at September 30, 2022. In June 2022, the Company retired 1,980,093 shares of treasury stock and returned them to authorized and unissued shares.

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

The Company’s Board of Directors approved a quarterly dividend of $0.24 per common share, payable on December 30, 2022 to shareholders of record as of December 15, 2022, an increase of $0.01, or 4.3%, compared to the third quarter 2022. The Board of Directors also declared a cash dividend of $12.50 per share of Series A Preferred Stock (or $0.3125 per depositary share) representing a 5% per annum rate for the period commencing (and including) September 15, 2022 to (but excluding) December 15, 2022. The dividend will be payable on December 15, 2022 to shareholders of record on November 30, 2022.

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

RESULTS OF OPERATIONS

Net Interest Income

Average Balance Sheet

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


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




Total loans1, 2	$	9,230,738	$	118,642	5.10	%	$	9,109,131	$	102,328	4.51	%	$	8,666,353	$	94,465	4.32	%
Taxable securities	1,294,470		8,064		2.27		1,209,498		6,894		2.29		904,338		4,810		2.11
Non-taxable securities2	907,785		6,653		2.84		858,621		6,050		2.83		690,600		4,773		2.74
Total securities	2,202,255		14,717		2.65		2,068,119		12,944		2.51		1,594,938		9,583		2.38
Interest-earning deposits	765,258		4,190		2.17		1,401,961		2,496		0.71		1,251,988		480		0.15
Total interest-earning assets	12,198,251		137,549		4.47		12,579,211		117,768		3.76		11,513,279		104,528		3.60
Noninterest-earning assets	959,870						949,263						821,279



Total assets	$	13,158,121					$	13,528,474					$	12,334,558

Liabilities and Shareholders' Equity
Interest-bearing liabilities:
Interest-bearing demand accounts	$	2,200,619	$	1,707	0.31	%	$	2,329,431	$	659	0.11	%	$	2,228,466	$	459	0.08	%
Money market accounts	2,791,822		6,067		0.86		2,767,595		2,270		0.33		2,675,405		1,294		0.19
Savings	828,747		69		0.03		854,860		70		0.03		747,927		61		0.03
Certificates of deposit	554,987		844		0.60		591,091		851		0.58		604,594		927		0.61
Total interest-bearing deposits	6,376,175		8,687		0.54		6,542,977		3,850		0.24		6,256,392		2,741		0.17
Subordinated debentures	155,225		2,313		5.91		155,092		2,257		5.84		204,011		2,855		5.55
FHLB advances	25,543		103		1.60		50,000		197		1.58		89,457		211		0.94
Securities sold under agreements to repurchase	198,027		123		0.25		202,537		41		0.08		216,403		58		0.11
Other borrowed funds	19,984		179		3.53		21,413		111		2.08		25,699		90		1.39
Total interest-bearing liabilities	6,774,954		11,405		0.67		6,972,019		6,456		0.37		6,791,962		5,955		0.35
Noninterest bearing liabilities:
Demand deposits	4,778,720						4,987,455						4,040,761
Other liabilities	109,943						94,733						107,739
Total liabilities	11,663,617						12,054,207						10,940,462
Shareholders' equity	1,494,504						1,474,267						1,394,096
Total liabilities & shareholders' equity	$	13,158,121					$	13,528,474					$	12,334,558
Net interest income			$	126,144					$	111,312					$	98,573
Net interest spread					3.80	%					3.39	%					3.25	%
Net interest margin					4.10	%					3.55	%					3.40	%

1 Average balances include nonaccrual loans. Interest income includes loan fees of $3.6 million, $4.2 million, and $6.5 million for the three months ended September 30, 2022, June 30, 2022, and September 30, 2021, respectively.

2 Non-taxable income is presented on a fully tax-equivalent basis using a 25.2% tax rate. The tax-equivalent adjustments were $1.9 million, $1.7 million, and $1.3 million for the three months ended September 30, 2022, June 30, 2022, and September 30, 2021, respectively.



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




Total loans1, 2	$	9,116,072	$	317,271	4.65	%	$	7,727,264	$	250,699	4.34	%
Taxable securities	1,219,093		20,658		2.27		870,169		14,235		2.19
Non-taxable securities2	846,707		17,973		2.84		635,423		13,392		2.82
Total securities	2,065,800		38,631		2.50		1,505,592		27,627		2.45
Interest-earning deposits	1,312,442		7,502		0.76		914,954		906		0.13
Total interest-earning assets	12,494,314		363,404		3.89		10,147,810		279,232		3.68
Noninterest-earning assets	937,549						712,946



Total assets	$	13,431,863					$	10,860,756

Liabilities and Shareholders' Equity
Interest-bearing liabilities:
Interest-bearing demand accounts	$	2,344,007	$	2,902	0.17	%	$	2,035,029	$	1,123	0.07	%
Money market accounts	2,810,278		9,797		0.47		2,458,146		3,257		0.18
Savings	833,721		205		0.03		707,269		161		0.03
Certificates of deposit	584,213		2,492		0.57		555,045		3,329		0.80
Total interest-bearing deposits	6,572,219		15,396		0.31		5,755,489		7,870		0.18
Subordinated debentures	155,093		6,790		5.85		203,853		8,521		5.59
FHLB advances	41,758		495		1.58		63,297		603		1.27
Securities sold under agreements to repurchase	220,703		224		0.14		218,942		176		0.11
Other borrowed funds	21,402		372		2.32		27,154		285		1.40
Total interest-bearing liabilities	7,011,175		23,277		0.44		6,268,735		17,455		0.37
Noninterest bearing liabilities:
Demand deposits	4,819,718						3,280,414
Other liabilities	99,458						108,001
Total liabilities	11,930,351						9,657,150
Shareholders' equity	1,501,512						1,203,606
Total liabilities & shareholders' equity	$	13,431,863					$	10,860,756
Net interest income			$	340,127					$	261,777
Net interest spread					3.45	%					3.31	%
Net interest margin					3.64	%					3.45	%

1 Average balances include nonaccrual loans. Interest income includes loan fees of $13.0 million and $22.1 million for the nine months ended September 30, 2022 and September 30, 2021, respectively.

2 Non-taxable income is presented on a fully tax-equivalent basis using a 25.2% tax rate. The tax-equivalent adjustments were $5.1 million and $3.6 million for the nine months ended September 30, 2022 and September 30, 2021, respectively.

Rate/Volume

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


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



Loans(3)	$	1,395	$	14,919	$	16,314		$	47,366	$	19,206	$	66,572
Taxable securities	552		618		1,170			5,896		527		6,423
Non-taxable securities(3)	404		199		603			4,484		97		4,581
Interest-earning deposits	(1,540)		3,234		1,694			551		6,045		6,596
Total interest-earning assets	$	811	$	18,970	$	19,781		$	58,297	$	25,875	$	84,172

Interest paid on:
Interest-bearing demand accounts	$	(37)	$	1,085	$	1,048		$	194	$	1,585	$	1,779
Money market accounts	21		3,776		3,797			528		6,012		6,540
Savings	(1)		—		(1)			30		15		45
Certificates of deposit	(42)		35		(7)			167		(1,005)		(838)
Subordinated debentures	4		52		56			(2,119)		388		(1,731)
FHLB advances	(96)		2		(94)			(234)		126		(108)
Securities sold under agreements to repurchase	(1)		83		82			1		47		48
Other borrowings	(7)		75		68			(70)		157		87
Total interest-bearing liabilities	(159)		5,108		4,949			(1,503)		7,325		5,822
Net interest income	$	970	$	13,862	$	14,832		$	59,800	$	18,550	$	78,350

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

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

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

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

Net interest income (on a tax equivalent basis) of $126.1 million for the three months ended September 30, 2022 increased $14.8 million, from $111.3 million in the linked quarter. Interest income increased during the quarter due to higher loan and investment balances combined with an increase in market interest rates. The effective federal funds rate for the third quarter 2022 was 2.20%, an increase of 144 basis points, compared to the linked quarter. Excess liquidity was redeployed into the investment portfolio which, combined with higher average loan balances, benefited the earning-asset mix. The increase in interest income was partially offset by higher interest expense on the deposit portfolio due to higher costs.

Net interest income (on a tax equivalent basis) for the nine months ended September 30, 2022 of $340.1 million increased $78.3 million, over $261.8 million in the prior year period. The year-to-date increase over the prior year was primarily due to the FCBP acquisition and an increase in market interest rates. Organic growth in the loan portfolio and the continued increase in the investment portfolio has also benefited net interest income.

The current quarter and year-to-date increases in net interest income were partially offset by a decline in PPP income. PPP income in the third quarter 2022 was $0.5 million, compared to $1.6 million in the linked quarter. PPP income was $4.9 million for the nine months ended September 30, 2022, compared to $22.5 million in the comparable prior year period.

NIM was 4.10% for the third quarter 2022, an increase of 55 basis points from 3.55% in the linked quarter. The increase in NIM from the linked quarter was primarily due to higher yields on loans, investments and interest-earning deposits due to an increase in market interest rates. The average loan yield was 5.10% in the third quarter 2022, an increase of 59 basis points from 4.51% in the linked quarter. The average loan yield increased due to the repricing of variable-rate loans and the origination of new loans at an average rate of 5.68% in the third quarter. Approximately 20% of the variable-rate loan portfolio reprices on the first day of each quarter and thus, interest income in the period did not benefit from the Federal Reserve’s increase in the target federal funds rate in the current quarter. These loans will reset early in the fourth quarter. The average investment yield was 2.65%, an increase of 14 basis points from the linked quarter. The investment yield increased due to the purchase of new investments at higher yields due to the expansion of the investment portfolio and the reinvestment of cash flows. Investments purchased in the third quarter 2022 had a tax equivalent average yield of 3.68%.

NIM was 3.64% for the nine months ended September 30, 2022, an increase of 19 basis points, from 3.45% in the prior year period. The increase in NIM over the prior year period was primarily due to the increase in interest rates that have had a greater impact on assets with variable interest rates than on deposit costs. In 2022, the target federal funds rate has increased 300 basis points to a range of 3.0 to 3.25%, the highest level since early 2008.

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, 2022		June 30, 2022		Increase (decrease)				September 30, 2022		September 30, 2021		Increase (decrease)
Deposit service charges	$	4,951	$	4,749	$	202	4	%	$	13,863	$	11,466	$	2,397	21	%
Wealth management revenue	2,432		2,533		(101)		(4)	%	7,587		7,572		15		—	%
Card services revenue	2,652		3,514		(862)		(25)	%	9,206		8,657		549		6	%
Tax credit income (loss)	(3,625)		1,186		(4,811)		(406)	%	169		3,654		(3,485)		(95)	%

Other income	3,044		2,212		832		38	%	11,464		13,764		(2,300)		(17)	%

Total noninterest income	$	9,454	$	14,194	$	(4,740)	(33)	%	$	42,289	$	45,113	$	(2,824)	(6)	%

Total noninterest income for the third quarter 2022 was $9.5 million, a decrease of $4.7 million from $14.2 million in the linked quarter. The decrease from the linked quarter was primarily due to decreases in tax credit income and card services revenue. Rising interest rates reduced tax credit income due to the impact on tax credit projects carried at fair value. The rise in interest rates in the third quarter 2022 increased the discount rate used in the fair value of these projects, resulting in a lower fair value. Future rate increases may result in additional fair value changes that will lower tax credit income. The Durbin Amendment limits the amount of interchange income the Company can earn on debit card transactions. This limitation went into effect for the Company in the third quarter 2022 and reduced card services revenue by approximately $1.0 million in the third quarter.

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

Total noninterest income for the nine months ended September 30, 2022 was $42.3 million, a decrease of $2.8 million from $45.1 million in the prior year period. The decrease was primarily due to tax credit and other income. Tax credit income was lower due to the previously discussed changes in the fair value of tax credits carried at fair value. Other income in the first nine months of 2022 decreased primarily due to lower private equity fund distributions and lower mortgage banking revenue due to a decline in activity, partially offset by higher income on community development investments. The FCBP acquisition contributed $4.9 million to noninterest income in 2022 compared to $1.5 million in the prior year period, primarily in deposit service charges.

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, 2022			June 30, 2022			Increase (decrease)					September 30, 2022			September 30, 2021			Increase (decrease)
Employee compensation and benefits	$	36,999		$	36,028		$	971		3	%	$	108,854		$	91,416		$	17,438		19	%
Occupancy	4,497			4,309			188			4	%	13,392			11,776			1,616			14	%
Data processing	3,543			3,111			432			14	%	9,914			9,068			846			9	%
Professional fees	1,597			1,542			55			4	%	4,316			3,189			1,127			35	%



Branch closure expenses	—			—			—			—	%	—			3,441			(3,441)			NM
Merger-related expenses	—			—			—			—	%	—			19,762			(19,762)			NM
Other expense	22,207			20,434			1,773			9	%	60,591			43,573			17,018			39	%
Total noninterest expense	$	68,843		$	65,424		$	3,419		5	%	$	197,067		$	182,225		$	14,842		8	%

Efficiency ratio	51.47		%	52.84		%	(1.37)		%			52.22		%	60.09		%	(7.87)		%
Core efficiency ratio1	51.47		%	52.81		%	(1.34)		%			52.21		%	52.59		%	(1.12)		%

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 $68.8 million for the third quarter 2022, an increase of $3.4 million from $65.4 million in the linked quarter. Employee compensation and benefits increased $1.0 million from the linked quarter due to an increase in full-time equivalent associates and higher performance-based incentive accruals. Other expense increased $2.3 million from the linked quarter primarily due to a $1.8 million increase in variable deposit costs in certain of the Company’s specialized deposit businesses that are impacted by higher interest rates.

Noninterest expense of $197.1 million for the nine months ended September 30, 2022, increased $14.8 million, from $182.2 million in the prior year period. The increase was primarily due to the FCBP acquisition that added $20.0 million in noninterest expense for the nine months ended September 30, 2022 compared to $7.4 million in the prior year period, an increase in employee compensation and benefits from merit increases in 2021, and higher deposit servicing costs. Certain deposit specialty accounts receive an earnings credit that pays costs used to service the customer. These costs are recorded as noninterest expense and will fluctuate with the amount of the underlying deposit balances and the related earnings credit rate. The increase was primarily due to continued success in generating new customer activity in the deposit specialties and higher earnings credit rates. Offsetting these increases was a decline of $19.8 million in merger expenses that were recognized in the prior year on the acquisitions of Seacoast Commerce Banc Holdings and FCBP and $3.4 million in branch closure expenses recognized in the prior year period.

Income Taxes

The Company’s effective tax rate was 21.8% for both the third quarter 2022 and the linked quarter. The effective tax rate was 21.9% and 20.9% for the nine months ended September 30, 2022 and 2021, respectively. The Company’s effective tax rate for the first nine months of 2022 has increased over the prior year period due to growth of pre-tax income and the further expansion and diversification of the Company’s geographic footprint which has affected tax apportionment between states with different income tax rates.

Summary Balance Sheet


(in thousands)	September 30, 2022		December 31, 2021		Increase (decrease)
Total cash and cash equivalents	$	744,876	$	2,021,689	$	(1,276,813)	(63)	%
Securities	2,113,305		1,795,687		317,618		18	%
Loans (excluding PPP)	9,341,822		8,921,989		419,833		5	%
PPP loans, net	13,165		134,084		(120,919)		(90)	%
Total assets	12,994,787		13,537,358		(542,571)		(4)	%
Deposits	11,057,594		11,343,799		(286,205)		(3)	%
Total liabilities	11,548,569		12,008,242		(459,673)		(4)	%
Total shareholders’ equity	1,446,218		1,529,116		(82,898)		(5)	%

Total assets were $13.0 billion at September 30, 2022, a decrease of $542.6 million from December 31, 2021. Cash and cash equivalents declined $1.3 billion, primarily due to organic loan growth, the deployment of excess liquidity into the investment portfolio and managed outflows in the deposit portfolio. New loan production and an increase in line utilization increased the loan portfolio, net of PPP. Total liabilities of $11.5 billion, decreased $459.7 million from December 31, 2021. A decrease in deposits was primarily driven from the Company’s focus on relationship-based, low-cost accounts that resulted in certain deposit account outflows.

Loans by Type

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

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


(in thousands)	September 30, 2022		December 31, 2021		Increase (decrease)
Commercial and industrial	$	3,709,893	$	3,392,375	$	317,518	9	%
Commercial real estate - investor owned	2,286,458		2,141,143		145,315		7	%
Commercial real estate - owner occupied	2,152,189		2,035,785		116,404		6	%
Construction and land development	583,649		734,073		(150,424)		(20)	%
Residential real estate	397,450		454,052		(56,602)		(12)	%
Other	225,348		260,214		(34,866)		(13)	%
Loans held for investment	$	9,354,987	$	9,017,642	$	337,345	4	%

The following table illustrates the change in loans:



(in thousands)	September 30, 2022		December 31, 2021		Increase (decrease)
C&I	$	1,842,510	$	1,538,155	$	304,355	20	%
CRE investor owned	2,106,458		1,955,087		151,371		8	%
CRE owner occupied	1,133,467		1,112,463		21,004		2	%
SBA Loans*	1,269,065		1,241,449		27,616		2	%
Sponsor finance*	650,102		508,469		141,633		28	%
Life insurance premium financing*	717,773		593,562		124,211		21	%
Tax credits*	507,681		486,881		20,800		4	%
SBA PPP loans	13,165		271,958		(258,793)		(95)	%
Residential real estate	381,634		430,985		(49,351)		(11)	%
Construction and land development	513,452		625,526		(112,074)		(18)	%
Other	219,680		253,107		(33,427)		(13)	%
Total loans	$	9,354,987	$	9,017,642	$	337,345	4	%


*Specialty loan category

Loans totaled $9.4 billion at September 30, 2022 compared to $9.0 billion at December 31, 2021. PPP loans declined $258.8 million to $13.2 million from continued PPP forgiveness by the SBA. All specialty loan categories increased in the first nine months of 2022 as compared to December 31, 2021, particularly sponsor finance loans and life insurance premium financing. Average line draw utilization was 42.1% for the first nine months of 2022, compared to 38.5% for the full year of 2021.

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

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

Provision and Allowance for Credit Losses

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


	Quarter ended				Nine months ended September 30,
(in thousands)	September 30, 2022		June 30, 2022		2022		2021
Provision (benefit) for credit losses on loans	$	504	$	1,159	$	(2,645)	$	(7,119)
Day 2 provision on First Choice acquired loans					—		23,904
Provision (benefit) for off-balance sheet commitments	340		(212)		853		1,309
Provision (benefit) for held-to-maturity securities	(18)		149		75		190
Recovery of accrued interest	(150)		(438)		(1,017)		(1,239)
Provision (benefit) for credit losses	$	676	$	658	$	(2,734)	$	17,045

The provision for credit losses, which includes a provision for losses on unfunded commitments, is a charge to earnings to maintain the ACL at a level consistent with management’s assessment of expected losses in the loan portfolio at the balance sheet date. The Company also records reversals of interest on nonaccrual loans and interest recoveries directly through the provision of credit losses.

A provision for credit losses of $0.7 million was recognized for both the third quarter 2022 and the linked quarter. Loan growth and a worsening economic forecast increased the allowance for credit losses during the quarter. This increase was partially offset by the improvement in credit quality and a shift in the composition of the loan portfolio to categories with lower reserves. For the nine months ended September 30, 2022 and 2021, a provision benefit was recognized of $2.7 million compared to a provision expense of $17.0 million, respectively. The provision expense in the prior year period was driven by the FCBP acquisition and the initial allowance recorded on certain acquired loans.

The following table summarizes the allocation of the ACL:


	September 30, 2022				December 31, 2021
(in thousands)	Allowance		Percent of loans in each category to total loans		Allowance		Percent of loans in each category to total loans
Commercial and industrial	$	69,168	39.7	%	$	63,825	37.6	%
Real estate:
Commercial	50,056		47.4	%	53,437		46.3	%
Construction and land development	9,203		6.2	%	14,536		8.1	%
Residential	7,541		4.3	%	7,927		5.1	%
Other	4,604		2.4	%	5,316		2.9	%
Total	$140,572		100.0	%	$145,041		100.0	%

The ACL on loans was 1.50% of loans at September 30, 2022, compared to 1.61% of loans at December 31, 2021. Loan growth, net charge-offs and the net provision benefit in 2022 drove the decrease in the ACL to total loans ratio. Excluding guaranteed loans, the ACL to total loans was 1.69% at September 30, 2022, compared to 1.84% at December 31, 2021.

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


	Quarter ended
	September 30, 2022						June 30, 2022
(in thousands)	Net Charge-offs (Recoveries)		Average Loans(1)		Net Charge-offs (Recoveries)/Average Loans		Net Charge-offs (Recoveries)		Average Loans(1)		Net Charge-offs (Recoveries)/Average Loans
Commercial and industrial	$	680	$	3,625,372	0.07	%	$	(109)	$	3,478,438	(0.01)	%
Real estate:
Commercial	(267)		4,353,044		(0.02)	%	(8)		4,239,384		—	%
Construction and land development	(10)		647,887		(0.01)	%	(14)		754,106		(0.01)	%
Residential	36		368,497		0.04	%	(62)		391,013		(0.06)	%
Other	39		234,054		0.07	%	18		244,131		0.03	%
Total	$	478	$	9,228,854	0.02	%	$	(175)	$	9,107,072	(0.01)	%

(1) Excludes loans held for sale.


	Nine months ended
	September 30, 2022						September 30, 2021
(in thousands)	Net Charge-offs (Recoveries)		Average Loans(1)		Net Charge-offs (Recoveries)/Average Loans		Net Charge-offs (Recoveries)		Average Loans(1)		Net Charge-offs (Recoveries)/Average Loans
Commercial and industrial	$	1,940	$	3,496,364	0.07	%	$	6,540	$	3,015,185	0.29	%
Real estate:
Commercial	(531)		4,279,682		(0.02)	%	1,261		3,203,527		0.05	%
Construction and land development	(45)		703,236		(0.01)	%	(435)		549,542		(0.11)	%
Residential	336		388,920		0.12	%	737		324,583		0.30	%
Other	124		245,378		0.07	%	263		627,618		0.06	%
Total	$	1,824	$	9,113,580	0.03	%	$	8,366	$	7,720,455	0.14	%

(1) Excludes loans held for sale.

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

Nonperforming assets

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


(in thousands)	September 30, 2022			December 31, 2021
Nonaccrual loans	$	18,095		$	23,449
Loans past due 90 days or more and still accruing interest	15			1,716
Troubled debt restructurings	74			2,859
Total nonperforming loans	18,184			28,024
Other real estate	269			3,493

Total nonperforming assets	$	18,453		$	31,517

Total assets	$	12,994,787		$	13,537,358
Total loans	9,354,987			9,017,642

Total allowance for credit losses	140,572			145,041

ACL to nonaccrual loans	777		%	619		%
ACL to nonperforming loans	773		%	518		%
ACL to total loans	1.50		%	1.61		%
Nonaccrual loans to total loans	0.19		%	0.26		%
Nonperforming loans to total loans	0.19		%	0.31		%

Nonperforming assets to total assets	0.14		%	0.23		%

Nonperforming loans based on loan type were as follows:



(in thousands)	September 30, 2022		December 31, 2021
Commercial and industrial	$	13,305	$	21,538
Commercial real estate	4,538		4,414

Residential real estate	326		2,048
Other	15		24
Total	$	18,184	$	28,024

The following table summarizes the changes in nonperforming loans:


	Nine months ended
(in thousands)	September 30, 2022



Nonperforming loans, beginning of period	$	28,024
Additions to nonaccrual loans	6,950


Charge-offs	(6,139)
Principal payments	(10,651)



Nonperforming loans, end of period	$	18,184

Deposits


(in thousands)	September 30, 2022			December 31, 2021			Increase (decrease)
Noninterest-bearing demand accounts	$	4,642,539		$	4,578,436		$	64,103	1	%
Interest-bearing demand accounts	2,270,898			2,465,884			(194,986)		(8)	%
Money market accounts	2,792,766			2,890,976			(98,210)		(3)	%
Savings accounts	824,483			800,210			24,273		3	%
Certificates of deposit:
Brokered	129,039			128,970			69		—	%
Other	397,869			479,323			(81,454)		(17)	%
Total deposits	$	11,057,594		$	11,343,799		$	(286,205)	(3)	%


Demand deposits / total deposits	42		%	40		%

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


	Three months ended
	September 30, 2022				June 30, 2022				September 30, 2021
(in thousands)	Average Balance		Average Rate Paid		Average Balance		Average Rate Paid		Average Balance		Average Rate Paid
Noninterest-bearing deposit accounts	$	4,778,720	—	%	$	4,987,455	—	%	$	4,040,761	—	%

Interest-bearing demand accounts	2,200,619		0.31		2,329,431		0.11		2,228,466		0.08
Money market accounts	2,791,822		0.86		2,767,595		0.33		2,675,405		0.19
Savings accounts	828,747		0.03		854,860		0.03		747,927		0.03
Certificates of deposit	554,987		0.60		591,091		0.58		604,594		0.61
Total interest-bearing deposits	$	6,376,175	0.54		$	6,542,977	0.24		$	6,256,392	0.17

Total average deposits	$	11,154,895	0.31		$	11,530,432	0.13		$	10,297,153	0.11


	Nine months ended
	September 30, 2022				September 30, 2021
(in thousands)	Average Balance		Average Rate Paid		Average Balance		Average Rate Paid
Noninterest-bearing deposit accounts	$	4,819,718	—	%	$	3,280,414	—	%

Interest-bearing demand accounts	2,344,007		0.17		2,035,029		0.07
Money market accounts	2,810,278		0.47		2,458,146		0.18
Savings accounts	833,721		0.03		707,269		0.03
Certificates of deposit	584,213		0.57		555,045		0.80
Total interest-bearing deposits	$	6,572,219	0.31		$	5,755,489	0.18

Total average deposits	$	11,391,937	0.18		$	9,035,903	0.12

Core deposits, defined as total deposits excluding certificates of deposits, were $10.5 billion at September 30, 2022, a decrease of $204.8 million from December 31, 2021. The decrease was primarily in interest-bearing demand accounts and money market accounts that declined $268.9 million primarily due to the managed run-off of certain interest-rate sensitive, large balance accounts. This reflects a shift in our deposit mix aligned with our disciplined focus on relationship-based, lower-cost deposits. Noninterest-bearing deposit accounts increased $64.1 million from December 31, 2021, principally due to growth in the specialty deposit group. The Company has a specialty deposit portfolio focusing on property management, community associations, and escrow industries, in addition to deposits related to its specialty lending products. These deposits totaled $2.4 billion at September 30, 2022 and $2.2 billion at December 31, 2021.

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

The total cost of deposits was 0.31% for the current quarter, compared to 0.13% for the linked quarter. For the year-to-date period in 2022, the total cost of deposits was 0.18%, compared to 0.12% in the prior year period.

Shareholders’ Equity

Shareholders’ equity totaled $1.4 billion at September 30, 2022, a decrease of $82.9 million from December 31, 2021. Significant activity during the first nine months of 2022 was as follows:

•increase from net income of $143.0 million,

•net decrease in fair value of securities and cash flow hedges of $172.0 million,

•decrease from stock repurchases of $32.9 million, and

•decrease from dividends paid on common and preferred stock of $27.8 million.

Liquidity and Capital Resources

Liquidity

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

Additionally, liquidity is provided from lines of credit with the FHLB, the Federal Reserve, and correspondent banks; the ability to acquire large and brokered deposits, sales of the securities portfolio, and the ability to sell loan

participations to other banks. These alternatives are an important part of our liquidity plan and provide flexibility and efficient execution of the asset-liability management strategy.

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

Liquidity from assets is available primarily from cash balances and the investment portfolio. Cash and interest-bearing deposits with other banks totaled $744.9 million at September 30, 2022 and $2.0 billion at December 31, 2021. The low interest rate environment in recent years, coupled with an uncertain outlook and government stimulus, such as the PPP, has increased liquidity within the banking industry, including the Company. However, recent increases in short term interest rates and a tightening of monetary policy by the Federal Reserve may lead to competitive pricing pressures and a reduction of deposits in the industry. The Company has redeployed part of its excess liquidity into the investment portfolio during the nine months ended September 30, 2022. Investment securities are another important tool to the Company’s liquidity objectives. Securities totaled $2.0 billion at September 30, 2022, and included $596 million pledged as collateral for deposits of public institutions, treasury, loan notes, and other requirements. The remaining $1.4 billion could be pledged or sold to enhance liquidity, if necessary.

Liability liquidity funding sources are available to increase financial flexibility. In addition to amounts borrowed, at September 30, 2022, the Company could borrow an additional $832 million from the FHLB of Des Moines under blanket loan pledges, and has an additional $1.4 billion available from the Federal Reserve Bank under a pledged loan agreement. The Company has unsecured federal funds lines with six correspondent banks totaling $90 million.

In the normal course of business, the Company enters into certain forms of off-balance sheet transactions, including unfunded loan commitments and letters of credit. These transactions are managed through the Company’s various risk management processes. Management considers both on-balance sheet and off-balance sheet transactions in its evaluation of the Company’s liquidity. The Company has $3.0 billion in unused commitments to extend credit as of September 30, 2022. While this commitment level would exhaust the majority the Company’s current liquidity resources, the nature of these commitments is such that the likelihood of funding them in the aggregate at any one time is low.

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

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

Strong capital ratios, credit quality and core earnings are essential to retaining cost-effective access to the wholesale funding markets. Deterioration in any of these factors could have a negative impact on the Company’s ability to access these funding sources and, as a result, these factors are monitored on an ongoing basis as part of the liquidity management process. The Bank is subject to regulations and, among other things, may be limited in its ability to pay

dividends or transfer funds to the parent company. Accordingly, consolidated cash flows as presented in the consolidated statements of cash flows may not represent cash immediately available for the payment of cash dividends to the Company’s shareholders or for other cash needs.

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

Capital Resources

The Company and the Bank are subject to various regulatory capital requirements administered by the Federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possible additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company and its bank affiliate must meet specific capital guidelines that involve quantitative measures of assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices. The banking affiliate’s capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings and other factors.

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

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


	September 30, 2022						December 31, 2021
(in thousands)	EFSC			Bank			EFSC			Bank			To Be Well-Capitalized		Minimum Ratio with CCB
Common Equity Tier 1 Capital to Risk Weighted Assets	11.0		%	12.2		%	11.3		%	12.5		%	6.5	%	7.0	%
Tier 1 Capital to Risk Weighted Assets	12.6		%	12.2		%	13.0		%	12.5		%	8.0	%	8.5	%
Total Capital to Risk Weighted Assets	14.2		%	13.2		%	14.7		%	13.5		%	10.0	%	10.5	%
Leverage Ratio (Tier 1 Capital to Average Assets)	10.4		%	10.1		%	9.7		%	9.3		%	5.0	%	4.0	%
Tangible common equity to tangible assets1	7.9		%				8.1		%
Common equity tier 1 capital	$	1,174,612		$	1,296,935		$	1,091,823		$	1,201,340
Tier 1 capital	1,340,252			1,296,987			1,257,462			1,201,391
Total risk-based capital	1,514,971			1,408,455			1,423,036			1,303,715

1 Not a required regulatory capital ratio.

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

Use of Non-GAAP Financial Measures:

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

The Company considers its tangible common equity, PPNR, core efficiency ratio, and the tangible common equity ratio, collectively “core performance measures,” presented in this report 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, that 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, 2022		June 30, 2022		September 30, 2021		September 30, 2022		September 30, 2021


Net interest income	124,290		109,613		97,273		335,068		258,134

Noninterest income	9,454		14,194		17,619		42,289		45,113



Less gain (loss) on sale of other real estate	(22)		(90)		335		(93)		884




Total core revenue	133,766		123,897		114,557		377,450		302,363



Noninterest expense	68,843		65,424		76,885		197,067		182,225




Less merger-related expenses	—		—		14,671		—		19,762
Less branch-closure expenses	—				3,441		—		3,441


Core noninterest expense	68,843		65,424		58,773		197,067		159,022













Core efficiency ratio	51.47	%	52.81	%	51.30	%	52.21	%	52.59	%

Tangible Common Equity Ratio


(in thousands)	September 30, 2022			December 31, 2021
Shareholders' equity	$	1,446,218		$	1,529,116
Less preferred stock	71,988			71,988
Less goodwill	365,164			365,164
Less intangible assets	18,217			22,286
Tangible common equity	$	990,849		$	1,069,678

Total assets	$	12,994,787		$	13,537,358
Less goodwill	365,164			365,164
Less intangible assets, net	18,217			22,286
Tangible assets	$	12,611,406		$	13,149,908

Tangible common equity to tangible assets	7.86		%	8.13		%

Average Shareholders’ Equity and Average Tangible Common Equity


	For the three months ended
(in thousands)	September 30, 2022		June 30, 2022		September 30, 2021
Average shareholder’s equity	$	1,494,504	$	1,474,267	$	1,394,096
Less average preferred stock	71,988		71,988		—
Less average goodwill	365,164		365,164		342,622
Less average intangible assets	18,857		20,175		23,473
Average tangible common equity	$	1,038,495	$	1,016,940	$	1,028,001

PPNR


	Quarter ended				Nine months ended
(in thousands)	Sep 30, 2022		Jun 30, 2022			Sep 30, 2021		Sep 30, 2022		Sep 30, 2021

Net interest income	$	124,290	$	109,613		$	97,273	$	335,068	$	258,134
Noninterest income	9,454		14,194			17,619		42,289		45,113
Less noninterest expense	68,843		65,424			76,885		197,067		182,225
Branch closure expenses	—		—			3,441		—		3,441
Merger-related expenses	—		—			14,671		—		19,762
PPNR	$	64,901	$	58,383		$	56,119	$	180,290	$	144,225

ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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

Interest Rate Risk

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

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

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


Rate Shock			Annual % change in net interest income
+ 300 bp			13.5%
+ 200 bp			9.0%
+ 100 bp			4.4%
- 100 bp			(5.7)%
- 200 bp			(13.9)%

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

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

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

In March 2022, the Adjustable Interest Rate (LIBOR) Act (“LIBOR Act”) was signed into law. The LIBOR Act addresses contracts that remain on LIBOR as of June 30, 2023 and that either do not have fallback provisions or that contain fallback provisions that do not identify a specific benchmark replacement. The LIBOR Act also establishes a safe harbor for lenders, shielding lenders from litigation as a result of using a fallback rate based on SOFR that will be selected by the Federal Reserve. The Federal Reserve is required to promulgate regulations carrying out the terms of the LIBOR Act not later than 180 days following its enactment.

We have exposure to LIBOR in various financial contracts. Instruments that may be impacted include loans, securities, debt instruments and derivatives, among other financial contracts indexed to LIBOR. We also have loans that are indirectly linked to LIBOR through reference to the ICE swap rate. We have an internal working group composed of members from legal, credit, finance, operations, risk and audit to monitor developments, develop policies and procedures, assess the impact to the Company, consider relevant options and to determine an appropriate replacement index for affected contracts that expire after the expected discontinuation of LIBOR on June 30, 2023. We are actively working to amend and address impacted contracts to allow for a replacement index. However, amending certain contracts indexed to LIBOR may require consent from the counterparties which could be difficult and costly to obtain in certain circumstances. As of September 30, 2022, the Company’s financial contracts indexed to LIBOR included $1.6 billion in loans (including $546 million indirectly linked to LIBOR through reference to an ICE swap rate), $118 million in borrowings, and $660.9 million (notional) in derivatives.

In addition, LIBOR may be referenced in other financial contracts not included in the discussion above.

The Company had $5.9 billion in variable rate loans at September 30, 2022. Of these loans, $3.6 billion have an interest rate floor and nearly all of those loans were at or above the floor.

The Company maintains an available-for-sale investment securities portfolio that totaled $1.5 billion at September 30, 2022. This portfolio consists primarily of fixed-rate securities that are subject to changes in market value due to changes in interest rates. At September 30, 2022, the available-for-sale investment portfolio had a net unrealized loss of $168.8 million.

ITEM 4: CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

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

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

Changes to Internal Controls

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

PART II - OTHER INFORMATION

ITEM 1: LEGAL PROCEEDINGS

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

ITEM 1A: RISK FACTORS

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

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

None.

ITEM 3: DEFAULTS UPON SENIOR SECURITIES

None.

ITEM 4: MINE SAFETY DISCLOSURES

Not applicable.

ITEM 5: OTHER INFORMATION

None.

ITEM 6: EXHIBITS

Exhibit No. Description

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

101.SCH Inline XBRL Taxonomy Extension Schema Document.

101.CAL Inline XBRL Taxonomy Extension Calculation Linkbase Document.

101.LAB Inline XBRL Taxonomy Extension Label Linkbase Document.

101.PRE Inline XBRL Taxonomy Extension Presentation Linkbase Document.

101.DEF Inline XBRL Taxonomy Extension Definitions Linkbase Document.

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

* Filed herewith

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

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Clayton, State of Missouri, on the day of October 28, 2022.


			ENTERPRISE FINANCIAL SERVICES CORP

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

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