ENTERPRISE FINANCIAL SERVICES CORP - Quarter Report: 2023 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, 2023.


☐						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, 2023, the Registrant had 37,385,651 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 Income (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						30

Item 3. Quantitative and Qualitative Disclosures About Market Risk						53

Item 4. Controls and Procedures						55

PART II - OTHER INFORMATION

Item 1. Legal Proceedings						55

Item 1A. Risk Factors						55

Item 2. Unregistered Sales of Equity Securities, Use of Proceeds, and Issuer Purchases of Equity Securities						56

Item 3. Defaults Upon Senior Securities						56

Item 4. Mine Safety Disclosures						56

Item 5. Other Information						56

Item 6. Exhibits						56

Signatures						58

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

FHLB

Federal Home Loan Bank

Bank

Enterprise Bank & Trust

GAAP

Generally Accepted Accounting Principles (United States)

C&I

Commercial and Industrial

LIBOR

London Interbank Offered Rate

CCB

Capital Conservation Buffer

NIM

Net Interest Margin

CECL

Current Expected Credit Loss

OREO

Other Real Estate Owned

Company

Enterprise Financial Services Corp

PPP

Paycheck Protection Program

CRE

Commercial Real Estate

SBA

Small Business Administration

EFSC

Enterprise Financial Services Corp

SEC

Securities and Exchange Commission

Enterprise

Enterprise Financial Services Corp

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, 2023		December 31, 2022
Assets
Cash and due from banks	$	190,806	$	229,580
Federal funds sold	1,699		1,753
Interest-earning deposits	178,193		60,026
Total cash and cash equivalents	370,698		291,359
Interest-earning deposits greater than 90 days	4,353		8,029
Securities available-for-sale	1,487,104		1,535,807
Securities held-to-maturity, net	730,655		709,915
Loans held-for-sale	212		1,228
Loans	10,616,820		9,737,138
Allowance for credit losses on loans	(142,133)		(136,932)
Total loans, net	10,474,687		9,600,206


Other investments	61,819		63,790
Fixed assets, net	41,268		42,985




Goodwill	365,164		365,164
Intangible assets, net	13,425		16,919

Other assets	475,657		418,770
Total assets	$	14,025,042	$	13,054,172

Liabilities and Shareholders' Equity
Noninterest-bearing demand accounts	$	3,852,486	$	4,642,732
Interest-bearing demand accounts	2,749,598		2,256,295
Money market accounts	3,211,302		2,655,159
Savings accounts	625,843		744,256
Certificates of deposit:
Brokered	695,551		118,968
Other	775,127		411,740
Total deposits	11,909,907		10,829,150
Subordinated debentures and notes	155,844		155,433
FHLB advances	—		100,000
Other borrowings	182,372		324,119



Other liabilities	165,039		123,207
Total liabilities	$	12,413,162	$	11,531,909

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; 37,385,177 and 37,253,292 shares issued and outstanding, respectively	374		373

Additional paid in capital	992,044		982,660
Retained earnings	715,303		597,574
Accumulated other comprehensive loss	(167,829)		(130,332)
Total shareholders' equity	1,611,880		1,522,263
Total liabilities and shareholders' equity	$	14,025,042	$	13,054,172

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

ENTERPRISE FINANCIAL SERVICES CORP AND SUBSIDIARIES

Condensed Consolidated Statements of Income (Unaudited)


	Three months ended September 30,				Nine months ended September 30,
(in thousands, except per share data)	2023		2022		2023		2022
Interest income:
Loans	$	180,241	$	118,465	$	503,006	$	316,741
Debt securities:
Taxable	10,141		7,766		29,046		19,670
Nontaxable	5,700		4,976		16,956		13,444

Interest-earning deposits	4,509		4,190		7,799		7,502
Dividends on equity securities	315		298		1,029		988
Total interest income	200,906		135,695		557,836		358,345
Interest expense:




Deposits	55,354		8,687		121,387		15,396
Subordinated debentures and notes	2,466		2,313		7,306		6,790
FHLB advances	141		103		2,752		495
Other borrowings	1,306		302		4,531		596
Total interest expense	59,267		11,405		135,976		23,277
Net interest income	141,639		124,290		421,860		335,068
Provision (benefit) for credit losses	8,030		676		18,552		(2,734)
Net interest income after provision (benefit) for credit losses	133,609		123,614		403,308		337,802
Noninterest income:
Deposit service charges	4,187		4,951		12,225		13,863
Wealth management revenue	2,614		2,432		7,602		7,587
Card services revenue	2,560		2,652		7,362		9,206


Tax credit income (loss)	(2,673)		(3,625)		(492)		169


Other income	5,397		3,044		16,576		11,464
Total noninterest income	12,085		9,454		43,273		42,289
Noninterest expense:
Employee compensation and benefits	40,771		36,999		124,915		108,854
Occupancy	4,198		4,497		12,213		13,392
Data processing	3,830		3,543		11,201		9,914
Professional fees	1,407		1,597		4,604		4,316





Other expense	38,438		22,207		102,650		60,591
Total noninterest expense	88,644		68,843		255,583		197,067

Income before income tax expense	57,050		64,225		190,998		183,024
Income tax expense	12,385		14,025		41,468		39,982
Net income	$	44,665	$	50,200	$	149,530	$	143,042
Dividends on preferred stock	938		937		2,813		3,104
Net income available to common shareholders	$	43,727	$	49,263	$	146,717	$	139,938

Earnings per common share
Basic	$	1.17	$	1.32	$	3.93	$	3.74
Diluted	1.17		1.32		3.91		3.73

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

ENTERPRISE FINANCIAL SERVICES CORP AND SUBSIDIARIES

Condensed Consolidated Statements of Comprehensive Income (Unaudited)


	Three months ended September 30,				Nine months ended September 30,
(in thousands)	2023		2022		2023		2022
Net income	$	44,665	$	50,200	$	149,530	$	143,042
Other comprehensive income (loss), after-tax:
Change in unrealized loss on available-for-sale securities	(41,257)		(45,283)		(30,956)		(173,878)
Reclassification of gain on sale of available-for-sale securities	—		—		(285)		—
Reclassification of gain on held-to-maturity securities	(647)		(647)		(1,971)		(2,052)
Change in unrealized gain (loss) on cash flow hedges	(2,684)		1,165		(4,747)		3,451
Reclassification of loss on cash flow hedges	224		55		462		511
Total other comprehensive loss, after-tax	(44,364)		(44,710)		(37,497)		(171,968)
Comprehensive income (loss)	$	301	$	5,490	$	112,033	$	(28,926)

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, 2023
	Preferred Stock			Common Stock
(in thousands, except per share data)	Shares	Amount		Shares	Amount		Additional Paid in Capital		Retained Earnings		Accumulated Other Comprehensive Loss		Total Shareholders’ Equity
Balance at June 30, 2023	75	$	71,988	37,359	$	374	$	988,355	$	680,981	$	(123,465)	$	1,618,233
Net income	—	—		—	—		—		44,665		—		44,665





Other comprehensive loss	—	—		—	—		—		—		(44,364)		(44,364)

Common stock dividends ($0.25 per share)	—	—		—	—		—		(9,346)		—		(9,346)
Preferred stock dividends ($12.50 per share)	—	—		—	—		—		(938)		—		(938)

Issuance under equity compensation plans, net	—	—		26	—		1,014		(59)		—		955

Share-based compensation	—	—		—	—		2,675		—		—		2,675





Balance at September 30, 2023	75	$	71,988	37,385	$	374	$	992,044	$	715,303	$	(167,829)	$	1,611,880

Balance December 31, 2022	75	$	71,988	37,253	$	373	$	982,660	$	597,574	$	(130,332)	$	1,522,263
Net income	—	—		—	—		—		149,530		—		149,530





Other comprehensive loss	—	—		—	—		—		—		(37,497)		(37,497)

Common stock dividends ($0.75 per share)	—	—		—	—		—		(28,014)		—		(28,014)
Preferred stock dividends ($37.50 per share)	—	—		—	—		—		(2,813)		—		(2,813)

Issuance under equity compensation plans, net	—	—		132	1		1,575		(974)		—		602

Share-based compensation	—	—		—	—		7,809		—		—		7,809





Balance at September 30, 2023	75	$	71,988	37,385	$	374	$	992,044	$	715,303	$	(167,829)	$	1,611,880


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

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)	2023		2022
Cash flows from operating activities:
Net income	$	149,530	$	143,042
Adjustments to reconcile net income to net cash provided by operating activities
Depreciation	3,818		4,268
Provision (benefit) for credit losses	18,552		(2,734)
Deferred income taxes	(103)		1,796
Net amortization of discount/premiums on debt securities	2,996		4,488
Net amortization on loan discount/premiums	3,819		(289)
Amortization of intangible assets	3,493		4,068
Amortization of servicing assets	1,307		2,195
Mortgage loans originated-for-sale	(14,560)		(57,281)
Proceeds from mortgage loans sold	15,648		63,266
Loss (gain) on:
Sale of investment securities	(381)		—
Sale of SBA loans	(2,015)		—
Sale of other real estate	(187)		93
Sale of fixed assets	10		(44)
Sale of state tax credits	(215)		(154)


Share-based compensation	7,809		5,928




Net change in other assets and liabilities	(269)		19,215







Net cash provided by operating activities	189,252		187,857
Cash flows from investing activities:

Net increase in loans	(943,905)		(337,863)


Proceeds received from:
Sale of debt securities, available-for-sale	28,741		—
Paydown or maturity of debt securities, available-for-sale	171,923		183,230
Paydown or maturity of debt securities, held-to-maturity	5,086		10,819
Redemption of other investments	88,863		8,304
Sale of SBA loans	44,975		—
Sale of state tax credits held for sale	1,225		8,406
Sale of other real estate	457		2,517
Sale of fixed assets	83		1,489
Settlement of bank-owned life insurance policies	—		534
Payments for the purchase of:
Available-for-sale debt securities	(198,962)		(635,733)
Held-to-maturity debt securities	(30,893)		(115,697)
Other investments	(84,023)		(17,963)

State tax credits held for sale	(75)		(18,846)
Fixed assets	(2,193)		(1,321)
Net cash used in investing activities	(918,698)		(912,124)
Cash flows from financing activities:
Net (decrease) increase in noninterest-bearing deposit accounts	(790,246)		64,103
Net increase (decrease) in interest-bearing deposit accounts	1,871,003		(350,308)
Repayments of long-term FHLB advances	—		(50,000)
Net decrease in FHLB advances	(100,000)		—


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




Net decrease in other borrowings	(137,461)		(152,155)



Repurchase of common stock	—		(32,923)
Cash dividends paid on common stock	(28,014)		(24,662)
Cash dividends paid on preferred stock	(2,813)		(3,104)
Other	602		789



Net cash provided by (used in) financing activities	808,785		(552,546)
Net increase (decrease) in cash and cash equivalents	79,339		(1,276,813)
Cash and cash equivalents, beginning of period	291,359		2,021,689
Cash and cash equivalents, end of period	$	370,698	$	744,876
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest	$	129,205	$	22,517
Income taxes	34,013		30,505
Noncash investing and financing transactions:
Transfer to other bank owned assets in settlement of loans	$	6,933	$	—

Right-of-use assets obtained in exchange for lease obligations	6,001		9,072


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, Florida, Kansas, Missouri, Nevada, and New Mexico through its banking subsidiary, Enterprise Bank & Trust.

Operating results for the three and nine months ended September 30, 2023 are not necessarily indicative of the results that may be expected for any other interim period or for the year ending December 31, 2023. These financial statements should be read in conjunction with the consolidated financial statements and footnotes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2022, 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 pursuant to the rules and regulations of the SEC. Certain information and note disclosures normally included in annual financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to those rules and regulations, although the Company believes that the disclosures made are adequate to make the information presented not misleading. 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, 2022.

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

On January 1, 2023, the Company adopted 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 charge-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 adoption of this update did not have a material effect on the Company’s consolidated financial statements.

FASB ASU 2021-01, Reference Rate Reform (Topic 848): Scope (ASU 2021-01). ASU 2021-01 was issued in January 2021 and provides 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, where 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. In December 2022, ASU 2022-06 Reference Rate Reform (Topic 848): Deferral of the Sunset date of Topic 848 was issued, which extends the sunset date from December 31, 2022 to December 31, 2024.

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) 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) amend a related illustrative example, and (3) 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 has evaluated the accounting and disclosure requirements of ASU 2022-03 and does not expect them to have a material effect on the consolidated financial statements.

FASB ASU 2023-02, Accounting for Investments in Tax Credit Structures Using the Proportional Amortization Method. ASU 2023-02 was issued in March 2023 to allow reporting entities to consistently account for equity investments made primarily for the purpose of receiving income tax credits and other income tax benefits. If certain conditions are met, a reporting entity may elect to account for its tax equity investments by using the proportional amortization method regardless of the program from which it receives income tax credits, instead of only low-income-housing tax credit (“LIHTC”) structures. This amendment also eliminates certain LIHTC-specific guidance aligning the accounting with other equity investments in tax credit structures. 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 2023-02 and does not expect them to have a material effect on the consolidated financial statements.

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)	2023		2022		2023		2022
Net income available to common shareholders	$	43,727	$	49,263	$	146,717	$	139,938








Weighted average common shares outstanding	37,405		37,241		37,353		37,422

Additional dilutive common stock equivalents	115		106		140		96
Weighted average diluted common shares outstanding	37,520		37,347		37,493		37,518

Basic earnings per common share:	$	1.17	$	1.32	$	3.93	$	3.74
Diluted earnings per common share:	1.17		1.32		$	3.91	$	3.73

For the three and nine months ended September 30, 2023, common stock equivalents of approximately 440,000 and 430,000, respectively, were excluded from the earnings per share calculations because their effect would have been anti-dilutive. Comparatively, there were 218,000 common stock equivalents excluded in both the three and nine months ended September 30, 2022.

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, 2023
(in thousands)	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
Available-for-sale securities:
Obligations of U.S. Government-sponsored enterprises	$	308,181	$	—	$	(28,724)	$	279,457
Obligations of states and political subdivisions	501,515		8		(114,089)		387,434
Agency mortgage-backed securities	713,896		—		(85,926)		627,970
U.S. Treasury bills	189,775		—		(4,984)		184,791
Corporate debt securities	8,750		—		(1,298)		7,452
Total securities available for sale	$	1,722,117	$	8	$	(235,021)	$	1,487,104
Held-to-maturity securities:

Obligations of states and political subdivisions	$	554,459	$	68	$	(87,975)	$	466,552
Agency mortgage-backed securities	53,259		—		(7,477)		45,782
Corporate debt securities	123,722		202		(13,598)		110,326
Total securities held-to-maturity	$	731,440	$	270	$	(109,050)	$	622,660
Allowance for credit losses	(785)
Total securities held-to-maturity, net	$	730,655


	December 31, 2022
(in thousands)	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
Available-for-sale securities:
Obligations of U.S. Government-sponsored enterprises	$	266,090	$	—	$	(28,305)	$	237,785
Obligations of states and political subdivisions	507,842		27		(90,425)		417,444
Agency mortgage-backed securities	727,931		453		(68,980)		659,404
U.S. Treasury Bills	213,441		1		(4,908)		208,534
Corporate debt securities	13,750		—		(1,110)		12,640
Total securities available for sale	$	1,729,054	$	481	$	(193,728)	$	1,535,807
Held-to-maturity securities:

Obligations of states and political subdivisions	$	529,012	$	2,321	$	(65,347)	$	465,986
Agency mortgage-backed securities	57,018		—		(6,416)		50,602
Corporate debt securities	124,620		163		(12,854)		111,929
Total securities held to maturity	$	710,650	$	2,484	$	(84,617)	$	628,517
Allowance for credit losses	(735)
Total securities held-to-maturity, net	$	709,915

The balance of held-to-maturity securities in the “Amortized Cost” column in the table above includes a cumulative net unamortized unrealized gain of $15.0 million and $17.6 million at September 30, 2023 and December 31, 2022, respectively. Such amounts are amortized over the remaining life of the securities.

At September 30, 2023 and December 31, 2022, 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 of $1.4 billion and $734.5 million at September 30, 2023 and December 31, 2022, respectively, were pledged as collateral to secure deposits of public institutions and for other purposes as required by law or contract provisions, in addition to collateral securing borrowing bases with the FHLB and the Federal Reserve.

The amortized cost and estimated fair value of debt securities at September 30, 2023, 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 five 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	$	104,552	$	103,752	$	1,220	$	1,213
Due after one year through five years	361,488		334,362		65,625		60,259
Due after five years through ten years	103,873		87,087		194,325		176,400
Due after ten years	438,308		333,933		417,011		339,006
Agency mortgage-backed securities	713,896		627,970		53,259		45,782

	$	1,722,117	$	1,487,104	$	731,440	$	622,660

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


	September 30, 2023
	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	$	43,940	$	800	$	235,517	$	27,924	$	279,457	$	28,724
Obligations of states and political subdivisions	3,687		467		383,239		113,622		386,926		114,089
Agency mortgage-backed securities	102,488		3,210		523,672		82,716		626,160		85,926
U.S. Treasury bills	76,579		173		108,212		4,811		184,791		4,984
Corporate debt securities	—		—		7,452		1,298		7,452		1,298
	$	226,694	$	4,650	$	1,258,092	$	230,371	$	1,484,786	$	235,021


	December 31, 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	$	73,738	$	6,249	$	163,047	$	22,056	$	236,785	$	28,305
Obligations of states and political subdivisions	103,179		13,501		311,634		76,924		414,813		90,425
Agency mortgage-backed securities	334,431		20,038		281,321		48,942		615,752		68,980
U.S. Treasury bills	198,688		4,908		—		—		198,688		4,908
Corporate debt securities	12,640		1,110		—		—		12,640		1,110
	$	722,676	$	45,806	$	756,002	$	147,922	$	1,478,678	$	193,728

The unrealized losses at both September 30, 2023 and December 31, 2022 were attributable primarily to changes in market interest rates after the securities were purchased. In 2023, the Company established an allowance for credit losses on available-for-sale investment securities through a provision for credit losses of $5.0 million and subsequently charged-off a $5.0 million investment. The charge-off related to the impairment of a debt security from a bank that failed in 2023. At each of September 30, 2023 and December 31, 2022, the Company had no allowance recorded on available-for-sale securities.

Accrued interest receivable on held-to-maturity debt securities totaled $6.7 million and $5.8 million at September 30, 2023 and December 31, 2022, 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 $0.8 million at September 30, 2023 and $0.7 million at December 31, 2022.

The Company sold $28.4 million of available-for-sale securities in January 2023 for a gain of $0.4 million. There were no sales of available-for-sale securities in the three months ended September 30, 2023 nor during the three and nine months ended September 30, 2022.

Other Investments

At September 30, 2023 and December 31, 2022, other investments totaled $61.8 million and $63.8 million, respectively. As a member of the FHLB system administered by the Federal Housing Finance Agency, the Bank is required to maintain a minimum investment in capital stock with the FHLB consisting of membership stock and activity-based stock. The FHLB capital stock of $10.0 million at September 30, 2023 and $14.0 million at December 31, 2022 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 Small Business Investment Companies, Community Development Financial Institutions, 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, 2023		December 31, 2022
Commercial and industrial	$	4,449,129	$	3,859,964
Real estate:
Commercial - investor owned	2,425,821		2,357,820
Commercial - owner occupied	2,361,370		2,270,551
Construction and land development	723,138		611,565
Residential	375,986		395,537
Total real estate loans	5,886,315		5,635,473
Other	286,953		248,990
Loans, before unearned loan fees	10,622,397		9,744,427
Unearned loan fees, net	(5,577)		(7,289)
Loans, including unearned loan fees	$	10,616,820	$	9,737,138

The loan balance at September 30, 2023 and December 31, 2022, includes a net premium on acquired loans of $9.1 million and $11.9 million, respectively. At September 30, 2023 and December 31, 2022, loans of $3.9 billion and $2.8 billion, respectively, were pledged to FHLB and the Federal Reserve Bank.

Accrued interest receivable totaled $64.5 million and $48.1 million at September 30, 2023 and December 31, 2022, respectively, and was reported in “Other Assets” on the consolidated balance sheets.

SBA 7(a) guaranteed loans sold during the three and nine months ended September 30, 2023 totaled $33.3 million and $42.1 million, respectively. A gain on sale of $1.5 million and $2.0 million was recognized for the three and nine months ended September 30, 2023, respectively. There were no SBA loan sales during 2022.

Consumer mortgage loans secured by residential real estate in process of foreclosure totaled $1.0 million at September 30, 2023. There were no consumer mortgage loans secured by residential real estate in process of foreclosure at December 31, 2022.

A summary of the activity in the ACL on loans by category for the three and nine months ended September 30, 2023 and 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, 2023	$	60,318	$	33,876	$	22,700	$	12,795	$	7,421	$	4,209	$	141,319

Provision (benefit) for credit losses	3,914		2,851		2,705		(1,662)		(939)		801		7,670
Charge-offs	(2,794)		(4,692)		—		—		(131)		(686)		(8,303)
Recoveries	1,038		27		28		14		271		69		1,447
Balance at September 30, 2023	$	62,476	$	32,062	$	25,433	$	11,147	$	6,622	$	4,393	$	142,133



(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, 2022	$	53,835	$	36,191	$	22,752	$	11,444	$	7,928	$	4,782	$	136,932

Provision (benefit) for credit losses	12,854		653		2,564		(342)		(1,472)		509		14,766
Charge-offs	(6,790)		(4,869)		—		(9)		(654)		(1,129)		(13,451)
Recoveries	2,577		87		117		54		820		231		3,886
Balance at September 30, 2023	$	62,476	$	32,062	$	25,433	$	11,147	$	6,622	$	4,393	$	142,133


(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 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 $21.7 million and $16.1 million, respectively, as of September 30, 2023 and December 31, 2022.

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 $12.9 million to the ACL over the baseline model at September 30, 2023. These forecasts incorporate an expectation that the Federal Reserve will continue quantitative tightening and that the federal funds rate has peaked at the range of 5.25% to 5.50% and will begin falling in the latter half of 2024. It is also assumed that the bank failures in early 2023 were not an indication of a broader problem in the industry. The Company has also recognized various risks posed by loans in certain segments, including the commercial office 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 market reactions to the Federal Reserve policy actions that could push the economy into a recession, persistently higher inflation, tightening in the credit markets, and further weakness in the financial system.

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 CECL 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, 2023, the ACL on loans included a qualitative adjustment of approximately $39.3 million. Of this amount, approximately $13.8 million was allocated to sponsor finance loans due to their mostly unsecured nature.

The current year-to-date gross charge-offs by loan class and year of origination is presented in the following table:


	September 30, 2023
	Term Loans by Origination Year
(in thousands)	2022		2021		2019		Prior		Revolving Loans Converted to Term Loans		Revolving Loans		Total
Commercial and industrial	$	4	$	105	$	—	$	—	$	4,915	$	1,494	$	6,518
Real estate:
Commercial - investor owned	—		170		4,692		7		—		—		4,869

Construction and land development	—		—		—		9		—		—		9
Residential	—		—		—		478		176		—		654
Other	—		457		—		236		12		—		705
Total current-period gross charge-offs by risk rating	$	4	$	732	$	4,692	$	730	$	5,103	$	1,494	$	12,755
Total current-period gross charge-offs by performing status													696
Total current-period gross charge-offs													$	13,451

The following tables present the recorded investment in nonperforming loans by category, excluding government guaranteed balances:


	September 30, 2023
(in thousands)	Nonaccrual		Loans over 90 days past due and still accruing interest		Total nonperforming loans		Nonaccrual loans with no allowance
Commercial and industrial	$	11,913	$	145	$	12,058	$	3,087
Real estate:
Commercial - investor owned	20,427		—		20,427		16,254
Commercial - owner occupied	14,705		—		14,705		9,186
Construction and land development	741		—		741		741
Residential	959		—		959		959
Other	1		41		42		—
Total	$	48,746	$	186	$	48,932	$	30,227


	December 31, 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	$	4,373	$	—	$	70	$	4,443	$	1,047
Real estate:
Commercial - investor owned	3,023		—		—		3,023		—
Commercial - owner occupied	1,177		—		—		1,177		—
Construction and land development	1,192		—		—		1,192		1,192
Residential	—		73		—		73		—
Other	1		—		72		73		—
Total	$	9,766	$	73	$	142	$	9,981	$	2,239

The nonperforming loan balances at September 30, 2023 and December 31, 2022 exclude government guaranteed balances of $6.0 million and $6.7 million, respectively.

No material interest income was recognized on nonaccrual loans during the three or nine months ended September 30, 2023 or 2022.

Collateral-dependent nonperforming loans by class of loan is presented as of the dates indicated:


	September 30, 2023
	Type of Collateral
(in thousands)	Commercial Real Estate		Residential Real Estate		Blanket Lien
Commercial and industrial	$	875	$	1,864	$	3,017
Real estate:
Commercial - investor owned	19,490		—		—
Commercial - owner occupied	4,815		—		5,735
Construction and land development			741
Residential	—		959		—

Total	$	25,180	$	3,564	$	8,752


	December 31, 2022
	Type of Collateral
(in thousands)	Commercial Real Estate		Residential Real Estate		Blanket Lien
Commercial and industrial	$	—	$	—	$	1,047
Real estate:
Commercial - investor owned	2,238		785		—
Commercial - owner occupied	1,177		—		—
Construction and land development	—		1,192		—
Residential	—		73		—

Total	$	3,415	$	2,050	$	1,047

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


	September 30, 2023
(in thousands)	30-89 Days Past Due		90 or More Days Past Due		Total Past Due		Current		Total
Commercial and industrial	$	15,723	$	7,929	$	23,652	$	4,425,477	$	4,449,129
Real estate:
Commercial - investor owned	16,287		937		17,224		2,408,597		2,425,821
Commercial - owner occupied	5,338		13,052		18,390		2,342,980		2,361,370
Construction and land development	1,737		—		1,737		721,401		723,138
Residential	446		959		1,405		374,581		375,986
Other	109		41		150		286,803		286,953
Loans, before unearned loan fees	$	39,640	$	22,918	$	62,558	$	10,559,839	$	10,622,397
Unearned loan fees, net									(5,577)
Total									$	10,616,820


	December 31, 2022
(in thousands)	30-89 Days Past Due		90 or More Days Past Due		Total Past Due		Current		Total
Commercial and industrial	$	555	$	2,373	$	2,928	$	3,857,036	$	3,859,964
Real estate:
Commercial - investor owned	—		1,135		1,135		2,356,685		2,357,820
Commercial - owner occupied	8,628		164		8,792		2,261,759		2,270,551
Construction and land development	9		1,192		1,201		610,364		611,565
Residential	1,227		—		1,227		394,310		395,537
Other	18		72		90		248,900		248,990
Loans, before unearned loan fees	$	10,437	$	4,936	$	15,373	$	9,729,054	$	9,744,427
Unearned loan fees, net									(7,289)
Total									$	9,737,138

The allowance for credit losses incorporates an estimate of lifetime expected credit losses and is recorded on each asset upon origination or acquisition. The starting point for the estimate of the allowance for credit losses is historical loss information, which includes losses from modifications of receivables to borrowers experiencing financial difficulty. The Company uses a probability of default/loss given default model to determine the allowance for credit losses.

An assessment of whether a borrower is experiencing financial difficulty is made on the date of a modification. The effect of most modifications made to borrowers experiencing financial difficulty is already included in the allowance for credit losses because of the measurement methodologies used to estimate the allowance.

The most common concession the Company provides to borrowers experiencing financial difficulty is a term extension. In limited circumstances, the Company may modify loans by providing principal forgiveness or an interest rate reduction. When principal forgiveness is provided, the amortized cost basis of the asset is written off against the allowance for credit losses. The amount of the principal forgiveness is deemed to be uncollectible; therefore, that portion of the loan is written off, resulting in a reduction of the amortized cost basis and a corresponding adjustment to the allowance for credit losses.

In some cases, the Company will modify a loan by providing multiple types of concessions. Typically, one type of concession, such as a term extension, is granted initially. If the borrower continues to experience financial difficulty, another concession, such as an interest rate reduction or principal forgiveness, may be granted.

The following table shows the recorded investment at the end of the reporting period for loans modified to borrowers experiencing financial difficulty, disaggregated by loan class and type of concession granted:












	Term Extension
	Three months ended				Nine months ended
(in thousands)	September 30, 2023		Percent of Total Loan Class		September 30, 2023		Percent of Total Loan Class
Commercial and industrial	$	66	—	%	$	26,033	0.59	%
Real estate:
Commercial - investor owned	1,000		0.04	%	1,000		0.04	%
Commercial - owner occupied	—		—	%	94		—	%
Construction and land development	—		—	%	1,137		0.16	%
Residential	28		0.01	%	102		0.03	%
Total	$	1,094			$	28,366

The following table summarizes the financial impacts of loan modifications made to borrowers experiencing financial difficulty and outstanding at the date indicated:


	Weighted Average Term Extension (in months)
	Three months ended	Nine months ended
	September 30, 2023	September 30, 2023
Commercial and industrial	4	9
Real estate:
Commercial - investor owned	3	3
Commercial - owner occupied	—	5
Construction and land development	—	10
Residential	60	22

The following table shows the aging of the recorded investment in modified loans by class:


	September 30, 2023
(in thousands)	Current		30-89 Days Past Due		90 or More Days Past Due		Total
Commercial and industrial	$	25,483	$	550	$	—	$	26,033
Real estate:
Commercial - investor owned	—		1,000				1,000
Commercial - owner occupied	94		—		—		94
Construction and land development	741		396		—		1,137
Residential	102		—		—		102

Total	$	26,420	$	1,946	$	—	$	28,366

As of September 30, 2023, no loans experienced a default subsequent to being granted a term extension modification in the prior twelve months. Default is defined as movement to nonperforming status, foreclosure or charge-off.

There were no loans restructured during the three or nine months ended September 30, 2022, and no troubled debt restructurings subsequently defaulted during the three or nine months ended September 30, 2022.

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, current economic factors and 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 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 – Special Mention credits are borrowers that 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 the loans by class and year of origination is presented in the following tables as of the dates indicated:


	September 30, 2023
	Term Loans by Origination Year
(in thousands)	2023		2022		2021		2020		2019		Prior		Revolving Loans Converted to Term Loans		Revolving Loans		Total
Commercial and industrial
Pass (1-6)	$	1,302,163	$	1,135,119	$	368,613	$	214,946	$	132,515	$	79,373	$	12,078	$	986,762	$	4,231,569
Special Mention (7)	15,824		1,966		15,127		11,500		781		11,356		200		29,541		86,295
Classified (8-9)	15,146		19,079		2,054		836		22		420		2,477		48,811		88,845
Total Commercial and industrial	$	1,333,133	$	1,156,164	$	385,794	$	227,282	$	133,318	$	91,149	$	14,755	$	1,065,114	$	4,406,709

Commercial real estate-investor owned
Pass (1-6)	$	370,443	$	588,862	$	555,012	$	350,266	$	175,231	$	243,016	$	3,891	$	51,604	$	2,338,325
Special Mention (7)	8,591		19,202		787		2,272		2,051		11,615		—		—		44,518
Classified (8-9)	1,000		1,034		—		15,254		2,832		4,459		48		—		24,627
Total Commercial real estate-investor owned	$	380,034	$	609,098	$	555,799	$	367,792	$	180,114	$	259,090	$	3,939	$	51,604	$	2,407,470

Commercial real estate-owner occupied
Pass (1-6)	$	358,503	$	504,665	$	504,496	$	318,273	$	194,614	$	328,339	$	3,985	$	29,511	$	2,242,386
Special Mention (7)	6,867		2,395		4,390		12,103		4,613		14,364		—		1,428		46,160
Classified (8-9)	2,924		2,381		2,284		1,891		8,844		26,067		5,057		2,199		51,647
Total Commercial real estate-owner occupied	$	368,294	$	509,441	$	511,170	$	332,267	$	208,071	$	368,770	$	9,042	$	33,138	$	2,340,193

Construction real estate
Pass (1-6)	$	249,482	$	314,888	$	116,471	$	30,626	$	2,288	$	3,541	$	—	$	2,287	$	719,583
Special Mention (7)	—		1,863		—		253		—		125		—		—		2,241
Classified (8-9)	1,138		352		—		—		13		469		—		—		1,972
Total Construction real estate	$	250,620	$	317,103	$	116,471	$	30,879	$	2,301	$	4,135	$	—	$	2,287	$	723,796

Residential real estate
Pass (1-6)	$	50,727	$	43,430	$	52,312	$	31,857	$	19,385	$	81,476	$	1,335	$	82,571	$	363,093
Special Mention (7)	173		252		—		—		75		1,448		—		—		1,948
Classified (8-9)	28		1,075		71		—		30		1,582		74		7,500		10,360
Total residential real estate	$	50,928	$	44,757	$	52,383	$	31,857	$	19,490	$	84,506	$	1,409	$	90,071	$	375,401

Other
Pass (1-6)	$	4,350	$	56,435	$	84,634	$	53,756	$	9,541	$	23,851	$	—	$	37,660	$	270,227
Special Mention (7)	—		—		—		—		—		83		—		1		84
Classified (8-9)	—		—		—		—		—		8		—		1		9
Total Other	$	4,350	$	56,435	$	84,634	$	53,756	$	9,541	$	23,942	$	—	$	37,662	$	270,320

Total loans classified by risk category	$	2,387,359	$	2,692,998	$	1,706,251	$	1,043,833	$	552,835	$	831,592	$	29,145	$	1,279,876	$	10,523,889
Total loans classified by performing status																	92,931
Total loans																	$	10,616,820


	December 31, 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)	$	1,403,381	$	635,275	$	332,740	$	172,127	$	62,729	$	66,152	$	8,388	$	964,592	$	3,645,384
Special Mention (7)	37,048		10,836		13,858		423		7,995		4,102		—		72,944		147,206
Classified (8-9)	16,176		4,457		1,627		24		166		183		—		21,349		43,982
Total Commercial and industrial	$	1,456,605	$	650,568	$	348,225	$	172,574	$	70,890	$	70,437	$	8,388	$	1,058,885	$	3,836,572

Commercial real estate-investor owned
Pass (1-6)	$	667,107	$	584,644	$	392,402	$	240,033	$	115,530	$	202,661	$	1,457	$	53,051	$	2,256,885
Special Mention (7)	18,844		5,751		23,502		11,605		—		13,063		—		—		72,765
Classified (8-9)	1,823		—		465		953		193		6,092		49		—		9,575
Total Commercial real estate-investor owned	$	687,774	$	590,395	$	416,369	$	252,591	$	115,723	$	221,816	$	1,506	$	53,051	$	2,339,225

Commercial real estate-owner occupied
Pass (1-6)	$	539,610	$	555,690	$	362,150	$	232,335	$	123,095	$	270,613	$	—	$	57,308	$	2,140,801
Special Mention (7)	11,164		3,801		16,856		4,455		13,043		9,009		—		800		59,128
Classified (8-9)	—		1,572		3,483		8,910		15,873		11,387		—		—		41,225
Total Commercial real estate-owner occupied	$	550,774	$	561,063	$	382,489	$	245,700	$	152,011	$	291,009	$	—	$	58,108	$	2,241,154

Construction real estate
Pass (1-6)	$	290,146	$	232,998	$	53,129	$	2,909	$	2,061	$	8,480	$	—	$	1,769	$	591,492
Special Mention (7)	17,331		—		681		146		111		106		—		—		18,375
Classified (8-9)	1,192		—		—		14		471		21		—		—		1,698
Total Construction real estate	$	308,669	$	232,998	$	53,810	$	3,069	$	2,643	$	8,607	$	—	$	1,769	$	611,565

Residential real estate
Pass (1-6)	$	63,317	$	60,910	$	48,796	$	20,943	$	11,259	$	88,795	$	579	$	96,304	$	390,903
Special Mention (7)	331		—		—		79		352		781		—		—		1,543
Classified (8-9)	121		73		—		53		1,102		994		—		5		2,348
Total residential real estate	$	63,769	$	60,983	$	48,796	$	21,075	$	12,713	$	90,570	$	579	$	96,309	$	394,794

Other
Pass (1-6)	$	38,753	$	88,613	$	56,252	$	10,556	$	20,508	$	10,796	$	—	$	9,536	$	235,014
Special Mention (7)	—		—		—		—		—		—		—		—		—
Classified (8-9)	—		—		—		4		3		11		3		4		25
Total Other	$	38,753	$	88,613	$	56,252	$	10,560	$	20,511	$	10,807	$	3	$	9,540	$	235,039

Total loans classified by risk category	$	3,106,344	$	2,184,620	$	1,305,941	$	705,569	$	374,491	$	693,246	$	10,476	$	1,277,662	$	9,658,349
Total loans classified by performing status																	78,789
Total loans																	$	9,737,138

In the tables above, loan originations in 2023 and 2022 with a classification of “special mention” or “classified” primarily represent renewals or modifications initially underwritten and originated in prior years.

For certain loans 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, 2023
(in thousands)	Performing		Non Performing		Total
Commercial and industrial	$	41,685	$	141	$	41,826
Real estate:
Commercial - investor owned	18,063		—		18,063
Commercial - owner occupied	28,629		—		28,629

Residential	719		—		719
Other	3,653		41		3,694
Total	$	92,749	$	182	$	92,931


	December 31, 2022
(in thousands)	Performing		Non Performing		Total
Commercial and industrial	$	23,240	$	70	$	23,310
Real estate:
Commercial - investor owned	18,595		—		18,595
Commercial - owner occupied	29,397		—		29,397

Residential	743		—		743
Other	6,672		72		6,744
Total	$	78,647	$	142	$	78,789

NOTE 5 - COMMITMENTS AND CONTINGENT LIABILITIES

The Company issues financial instruments with off balance sheet risk in the normal course of business. 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, 2023		December 31, 2022
Commitments to extend credit	$	3,134,567	$	3,113,966
Letters of credit	105,652		68,544

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, 2023 and December 31, 2022, approximately $219.7 million and $246.5 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 $9.8 million and $12.1 million for estimated losses attributable to the unadvanced commitments at September 30, 2023 and December 31, 2022, 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, 2023, the approximate remaining terms of standby letters of credit range from 1 month to 10 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 income and 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.

For hedges of variable-rate loans, interest rate swaps designated as cash flow hedges involve the receipt of fixed amounts and the Company making variable rate payments. In the fourth quarter 2022, the Company executed a cash flow hedge to reduce a portion of variability in cash flows on the Company’s prime based loan portfolio. The interest rate swap has a notional value of $100.0 million, that effectively fixes the interest rate at 6.63% for the notional amount and has a maturity date of January 1, 2028. In January 2023, the Company entered into another

hedge on the prime based loan portfolio with a notional value of $50.0 million, that effectively fixes the interest rate at 6.56% for the notional amount and has a maturity date of February 1, 2027.

In addition, the Company executed a prime based interest rate collar in the fourth quarter 2022 with a notional amount of $100.0 million. The collar includes a cap of 8.14% and a floor of 5.25%. This transaction, commonly referred to as a zero cost collar, involves the Company selling an interest rate cap where payments will be made when the index exceeds the cap rate, and the purchase of a floor where payments will be received if the index falls below the floor. The collar matures on October 1, 2029.

For hedges of the variable-rate liabilities, 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. The Company has executed a series of cash flow hedges to fix the effective interest rate for payments due on $62.0 million of 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 income or 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 income or expense as interest payments are paid on the Company’s variable-rate loans and debt. During the next twelve months, the Company estimates an additional $1.4 million will be reclassified as a decrease to interest expense and $2.9 million will be reclassified as a decrease to interest income.

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, 2023		December 31, 2022		September 30, 2023		December 31, 2022		September 30, 2023		December 31, 2022
Derivatives Designated as Hedging Instruments:
Interest rate swap	$	211,962	$	161,962	$	2,181	$	2,348	$	4,971	$	921
Interest rate collar	100,000		100,000		—		—		1,559		48
Total					$	2,181	$	2,348	$	6,530	$	969

Derivatives not Designated as Hedging Instruments:
Interest rate swap	$	772,498	$	687,902	$	23,763	$	20,610	$	23,764	$	20,612

The table below presents a gross presentation, the effects of offsetting, and a net presentation of the Company’s financial instruments 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 financial assets and liabilities are presented on the Balance Sheet.


As of September 30, 2023
							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	$	25,944	$	—	$	25,944	$	6,538	$	19,406	$	—
Interest rate collar	—		—		—		—		—		—

Liabilities:
Interest rate swap	$	28,735	$	—	$	28,735	$	6,538	$	—	$	22,197
Interest rate collar	1,559		—		1,559		—		—		1,559
Securities sold under agreements to repurchase	133,312		—		133,312		—		133,312		—

As of December 31, 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	$	22,958	$	—	$	22,958	$	—	$	9,010	$	13,948

Liabilities:
Interest rate swap	$	21,533	$	—	$	21,533	$	—	$	—	$	21,533
Interest rate collar	48		—		48		—		—		48
Securities sold under agreements to repurchase	270,773		—		270,773		—		270,773		—

As of September 30, 2023, the fair value of derivatives in a net liability position was $24.5 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 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, 2023
(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	$	—	$	279,457	$	—	$	279,457
Obligations of states and political subdivisions	—		387,434		—		387,434
Agency mortgage-backed securities	—		627,970		—		627,970
U.S. Treasury bills	—		184,791		—		184,791
Corporate debt securities	—		7,452		—		7,452
Total securities available for sale	—		1,487,104		—		1,487,104

Other investments	—		2,696		—		2,696

Derivatives	—		25,944		—		25,944
Total assets	$	—	$	1,515,744	$	—	$	1,515,744

Liabilities
Derivatives	$	—	$	30,294	$	—	$	30,294
Total liabilities	$	—	$	30,294	$	—	$	30,294


	December 31, 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	$	—	$	237,785	$	—	$	237,785
Obligations of states and political subdivisions	—		417,444		—		417,444
Residential mortgage-backed securities	—		659,404		—		659,404
U.S. Treasury bills	—		208,534		—		208,534
Corporate debt securities	—		12,640		—		12,640
Total securities available-for-sale	—		1,535,807		—		1,535,807

Other investments	—		2,667		—		2,667

Derivative financial instruments	—		22,958		—		22,958
Total assets	$	—	$	1,561,432	$	—	$	1,561,432

Liabilities
Derivatives	$	—	$	21,581	$	—	$	21,581
Total liabilities	$	—	$	21,581	$	—	$	21,581

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, 2023
(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)
Individually-evaluated loans	$	2,243	$	—	$	—	$	2,243
Other real estate	$	5,736	$	—	$	—	$	5,736

Total	$	7,979	$	—	$	—	$	7,979


	December 31, 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	1,027				1,027		—
Total	$	1,296	$	—	$	1,027	$	269

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


	September 30, 2023					December 31, 2022
(in thousands)	Carrying Amount		Estimated fair value		Level	Carrying Amount		Estimated fair value		Level
Balance sheet assets




Securities held-to-maturity, net	$	730,655	$	622,660	Level 2	$	709,915	$	628,517	Level 2
Other investments	59,123		59,123		Level 2	61,123		61,123		Level 2
Loans held for sale	212		212		Level 2	1,228		1,228		Level 2

Loans, net	10,474,687		$	10,244,122	Level 3	9,600,206		9,328,844		Level 3
State tax credits, held for sale	26,765		27,529		Level 3	27,700		28,880		Level 3

Servicing asset	3,202		4,058		Level 2	3,648		3,905		Level 2

Balance sheet liabilities
Certificates of deposit	$	1,470,678	$	1,456,118	Level 3	$	530,708	$	512,229	Level 3
Subordinated debentures and notes	155,844		153,975		Level 2	155,433		152,679		Level 2
FHLB advances	—		—		Level 2	100,000		100,004		Level 2
Other borrowings	182,372		157,173		Level 2	324,119		324,119		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, 2022, as filed with the SEC.

NOTE 8 - SHAREHOLDERS’ EQUITY

Shareholders’ Equity

Accumulated Other Comprehensive Income (Loss)

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


Three months ended
(in thousands)	Net Unrealized 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, 2023	$	(134,533)	$	11,861	$	(793)	$	(123,465)
Net change	(41,257)		(647)		(2,460)		(44,364)

Balance, September 30, 2023	$	(175,790)	$	11,214	$	(3,253)	$	(167,829)

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)

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, 2022	$	(144,549)	$	13,185	$	1,032	$	(130,332)
Net change	(31,241)		(1,971)		(4,285)		(37,497)

Balance, September 30, 2023	$	(175,790)	$	11,214	$	(3,253)	$	(167,829)

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)

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


	Three months ended September 30,
	2023						2022
(in thousands)	Pre-tax		Tax effect		After-tax		Pre-tax		Tax effect		After-tax
Change in unrealized loss on available-for-sale securities	$	(55,156)	$	(13,899)	$	(41,257)	$	(60,539)	$	(15,256)	$	(45,283)

Reclassification of gain on held-to-maturity securities(a)	(865)		(218)		(647)		(865)		(218)		(647)
Change in unrealized gain (loss) on cash flow hedges	(3,588)		(904)		(2,684)		1,557		392		1,165
Reclassification of loss on cash flow hedges(b)	299		75		224		73		18		55
Total other comprehensive loss	$	(59,310)	$	(14,946)	$	(44,364)	$	(59,774)	$	(15,064)	$	(44,710)

	Nine months ended September 30,
	2023						2022
(in thousands)	Pre-tax		Tax effect		After-tax		Pre-tax		Tax effect		After-tax
Change in unrealized loss on available-for-sale securities	$	(41,385)	$	(10,429)	$	(30,956)	$	(232,457)	$	(58,579)	$	(173,878)
Reclassification of gain on sale of available-for-sale securities(a)	(381)		(96)		(285)		—		—		—
Reclassification of gain on held-to-maturity securities(a)	(2,635)		(664)		(1,971)		(2,743)		(691)		(2,052)
Change in unrealized gain (loss) on cash flow hedges	(6,346)		(1,599)		(4,747)		4,615		1,164		3,451
Reclassification of loss on cash flow hedges(b)	616		154		462		682		171		511
Total other comprehensive loss	$	(50,131)	$	(12,634)	$	(37,497)	$	(229,903)	$	(57,935)	$	(171,968)

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

NOTE 9 - SUPPLEMENTAL FINANCIAL INFORMATION

The following table presents miscellaneous income and other expense components that primarily 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)	2023		2022		2023		2022
Other income:
Bank-owned life insurance	$	822	$	769	$	2,410	$	2,551

Community development fees	338		170		3,010		2,529
Gain on sale of SBA loans	1,514		—		2,015		—
Other income	2,723		2,105		9,141		6,384
Total other noninterest income	$	5,397	$	3,044	$	16,576	$	11,464

Other expense:
Amortization of intangibles	$	1,119	$	1,310	$	3,493	$	4,068
Banking expense	1,863		1,958		6,003		5,370
Deposit costs	20,987		7,661		50,687		17,826
FDIC and other insurance	2,868		2,022		8,060		5,500
Loan, legal expenses	2,132		1,768		5,922		6,003

Outside services	1,704		1,332		4,861		3,960
Other expense	7,765		6,156		23,624		17,864
Total other noninterest expense	$	38,438	$	22,207	$	102,650	$	60,591

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 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 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 Israel and potential for a broader regional conflict and the war in Ukraine and the imposition of additional sanctions and export controls in connection therewith), or pandemics, or other health emergencies, and their effects on economic and business environments in which we operate, including the related disruption to the financial market and other economic activity; and other risks discussed under the caption “Risk Factors” under Part I, Item 1A of our 2022 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 2023 compared to the financial condition as of December 31, 2022. In addition, this discussion summarizes the significant factors affecting the results of operations of the Company for the three months ended September 30, 2023, compared to the linked second quarter of 2023 (“linked quarter”) and the results of operations, liquidity and cash flows for the nine months ended September 30, 2023 compared to the same period in 2022 (“prior year quarter”). 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 2022. 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, 2022.

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, 2022.

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 and 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 $142.1 million at September 30, 2023 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 $27.4 million. Conversely, the allowance would have increased $44.5 million using only the downside scenario.

Executive Summary

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


(in thousands, except per share data)	Three months ended									Nine months ended
	September 30, 2023			June 30, 2023			September 30, 2022			September 30, 2023			September 30, 2022
EARNINGS
Total interest income	$	200,906		$	187,897		$	135,695		$	557,836		$	358,345
Total interest expense	59,267			47,205			11,405			135,976			23,277
Net interest income	141,639			140,692			124,290			421,860			335,068
Provision (benefit) for credit losses	8,030			6,339			676			18,552			(2,734)
Net interest income after provision (benefit) for credit losses	133,609			134,353			123,614			403,308			337,802
Total noninterest income	12,085			14,290			9,454			43,273			42,289
Total noninterest expense	88,644			85,956			68,843			255,583			197,067
Income before income tax expense	57,050			62,687			64,225			190,998			183,024
Income tax expense	12,385			13,560			14,025			41,468			39,982
Net income	$	44,665		$	49,127		$	50,200		$	149,530		$	143,042
Preferred stock dividends	938			937			937			2,813			3,104
Net income available to common shareholders	$	43,727		$	48,190		$	49,263		$	146,717		$	139,938

Basic earnings per share	$	1.17		$	1.29		$	1.32		$	3.93		$	3.74
Diluted earnings per share	$	1.17		$	1.29		$	1.32		$	3.91		$	3.73

Return on average assets	1.26		%	1.44		%	1.51		%	1.47		%	1.42		%
Return on average common equity	11.00		%	12.48		%	13.74		%	12.73		%	13.09		%
Return on average tangible common equity1	14.49		%	16.53		%	18.82		%	16.90		%	17.92		%
Net interest margin (tax equivalent)	4.33		%	4.49		%	4.10		%	4.50		%	3.64		%

Efficiency ratio	57.66		%	55.46		%	51.47		%	54.95		%	52.22		%
Core efficiency ratio1	56.18		%	54.04		%	49.80		%	53.55		%	50.46		%
Book value per common share	$	41.19		$	41.39		$	36.92
Tangible book value per common share1	$	31.06		$	31.23		$	26.62

ASSET QUALITY
Net charge-offs	$	6,856		$	2,973		$	478		$	9,565		$	1,824
Nonperforming loans	48,932			16,112			18,184
Classified assets	184,393			108,065			98,078
Nonperforming loans to total loans	0.46		%	0.15		%	0.19		%
Nonperforming assets to total assets	0.40		%	0.12		%	0.14		%
ACL on loans to total loans	1.34		%	1.34		%	1.50		%
Net charge-offs to average loans (annualized)	0.26		%	0.12		%	0.02		%	0.13		%	0.03		%

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:

•PPNR1 of $65.1 million for the third quarter 2023 and $209.0 million for the nine months ended September 30, 2023, decreased $3.8 million and increased $28.6 million, from the linked quarter and prior year-to-date period, respectively. The decrease from the linked quarter was primarily due to a decrease in noninterest income and an increase in noninterest expense. The increase from the prior year-to-date period was primarily due to an increase in net interest income, partially offset by an increase in noninterest expense.

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

•Net interest income of $141.6 million for the third quarter 2023 and $421.9 million for the nine months ended September 30, 2023, increased $0.9 million and $86.8 million from the linked and prior year-to-date period, respectively. The NIM was 4.33% for the third quarter 2023 and 4.50% for the nine months ended September 30, 2023, compared to 4.49% and 3.64% for the linked and prior year-to-date period, respectively. Net interest income benefited from higher average loan and investment balances and expanding yields on earning assets, partially offset by higher deposit interest expense. NIM decreased 16 basis points from the linked quarter, primarily due to an increase in deposit interest expense. NIM increased 86 basis points from the prior year-to-date period, primarily due to an increase in market interest rates and organic growth in earning assets.

•Noninterest income of $12.1 million for the third quarter 2023 and $43.3 million for the nine months ended September 30, 2023, decreased $2.2 million from the linked quarter and increased $1.0 million from the prior year-to-date period. The decline from the linked quarter was primarily due to a decrease in tax credit and community development income, partially offset by a gain on the sale of SBA loans. The increase from the prior year-to-date period was primarily due to an increase in the sale of assets (SBA loans, securities, and OREO) and other miscellaneous income, partially offset by a decline in deposit service charges and card services revenue. The Durbin Amendment cap on debit card income has decreased card services revenue since July 1, 2022.

•Noninterest expense of $88.6 million for the third quarter 2023 and $255.6 million for the nine months ended September 30, 2023, increased $2.7 million and $58.5 million from the linked quarter and prior year-to-date period, respectively. The increase from the linked quarter was primarily due to an increase in variable deposit costs. The increase from the prior year-to-date period was due to deposit costs, employee compensation and benefits due to merit increases and headcount, and other expense primarily due to FDIC assessments and operational losses.

Balance sheet highlights:

•Loans – Total loans increased $879.7 million, or 9.0%, to $10.6 billion at September 30, 2023, compared to $9.7 billion at December 31, 2022. Average loans totaled $10.2 billion for the nine months ended September 30, 2023 compared to $9.1 billion for the nine months ended September 30, 2022.

•Deposits – Total deposits increased $1.1 billion, to $11.9 billion at September 30, 2023 from $10.8 billion at December 31, 2022. Total estimated insured deposits, which includes collateralized deposits, reciprocal deposits and accounts that qualify for pass through insurance, totaled $8.5 billion at September 30, 2023, compared to $4.9 billion at December 31, 2022. Average deposits totaled $11.4 billion for both the nine months ended September 30, 2023 and 2022. Noninterest deposit accounts represented 32.3% of total deposits and the loan to deposit ratio was 89.1% at September 30, 2023, compared to 42.0% and 84.6%, respectively, for the comparable prior year period.

•Asset quality – The allowance for credit losses on loans to total loans was 1.34% at September 30, 2023, compared to 1.41% at December 31, 2022. Nonperforming assets to total assets was 0.40% at September 30, 2023 compared to 0.08% at December 31, 2022. A provision for credit losses of $8.0 million and $18.6 million was recorded in the third quarter of 2023 and the nine months ended September 30, 2023,

respectively. This compares to $6.3 million in the linked quarter and a benefit of $2.7 million in the comparable prior year period.

•Shareholders’ equity – Total shareholders’ equity was $1.61 billion at September 30, 2023, compared to $1.52 billion at December 31, 2022, and the tangible common equity to tangible assets ratio2 was 8.51% at September 30, 2023 compared to 8.43% at December 31, 2022. The Company and the Bank’s regulatory capital ratios exceeded the “well-capitalized” level at September 30, 2023.

The Company’s Board of Directors approved a quarterly dividend of $0.25 per common share, payable on December 29, 2023 to shareholders of record as of December 15, 2023. 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, 2023 to (but excluding) December 15, 2023. The dividend will be payable on December 15, 2023 to shareholders of record on November 30, 2023.

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 and Net Interest Margin

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,
	2023						2023						2022
(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	$	10,521,966	$	180,382	6.80	%	$	10,284,873	$	170,314	6.64	%	$	9,230,738	$	118,642	5.10	%
Taxable securities	1,330,828		10,456		3.12		1,328,891		9,984		3.01		1,294,470		8,064		2.27
Non-taxable securities2	972,022		7,620		3.11		969,104		7,566		3.13		907,785		6,653		2.84
Total securities	2,302,850		18,076		3.11		2,297,995		17,550		3.06		2,202,255		14,717		2.65
Interest-earning deposits	335,771		4,509		5.33		173,785		2,095		4.84		765,258		4,190		2.17
Total interest-earning assets	13,160,587		202,967		6.12		12,756,653		189,959		5.97		12,198,251		137,549		4.47
Noninterest-earning assets	908,273						915,332						959,870



Total assets	$	14,068,860					$	13,671,985					$	13,158,121

Liabilities and Shareholders' Equity
Interest-bearing liabilities:
Interest-bearing demand accounts	$	2,672,084	$	13,701	2.03	%	$	2,509,805	$	10,120	1.62	%	$	2,200,619	$	1,707	0.31	%
Money market accounts	3,079,221		26,427		3.40		2,920,079		20,499		2.82		2,791,822		6,067		0.86
Savings accounts	646,187		250		0.15		686,973		227		0.13		828,747		69		0.03
Certificates of deposit	1,519,119		14,976		3.91		1,219,500		10,526		3.46		554,987		844		0.60
Total interest-bearing deposits	7,916,611		55,354		2.77		7,336,357		41,372		2.26		6,376,175		8,687		0.54
Subordinated debentures and notes	155,769		2,466		6.28		155,632		2,431		6.27		155,225		2,313		5.91
FHLB advances	10,326		141		5.42		98,912		1,279		5.19		25,543		103		1.60
Securities sold under agreements to repurchase	146,893		969		2.61		162,606		704		1.74		198,027		123		0.25
Other borrowings	50,571		337		2.66		133,770		1,419		4.25		19,984		179		3.53
Total interest-bearing liabilities	8,280,170		59,267		2.84		7,887,277		47,205		2.40		6,774,954		11,405		0.67
Noninterest bearing liabilities:
Demand deposits	4,005,923						4,051,456						4,778,720
Other liabilities	134,162						111,915						109,943
Total liabilities	12,420,255						12,050,648						11,663,617
Shareholders' equity	1,648,605						1,621,337						1,494,504
Total liabilities & shareholders' equity	$	14,068,860					$	13,671,985					$	13,158,121
Net interest income			$	143,700					$	142,754					$	126,144
Net interest spread					3.28	%					3.57	%					3.80	%
Net interest margin					4.33	%					4.49	%					4.10	%


1 Average balances include nonaccrual loans. Interest income includes loan fees of $3.3 million, $3.7 million, and $3.6 million for the three months ended September 30, 2023, June 30, 2023, and September 30, 2022, respectively.
2 Non-taxable income is presented on a fully tax-equivalent basis using a 25.2% tax rate. The tax-equivalent adjustments were $2.1 million, $2.1 million, and $1.9 million for the three months ended September 30, 2023, June 30, 2023, and September 30, 2022, respectively.



	Nine months ended September 30,
	2023						2022
(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	$	10,203,291	$	503,458	6.60	%	$	9,116,072	$	317,271	4.65	%
Taxable securities	1,327,595		30,075		3.03		1,219,093		20,658		2.27
Non-taxable securities2	968,890		22,668		3.13		846,707		17,973		2.84
Total securities	2,296,485		52,743		3.07		2,065,800		38,631		2.50
Interest-earning deposits	206,110		7,799		5.06		1,312,442		7,502		0.76
Total interest-earning assets	12,705,886		564,000		5.93		12,494,314		363,404		3.89
Noninterest-earning assets	921,562						937,549



Total assets	$	13,627,448					$	13,431,863

Liabilities and Shareholders' Equity
Interest-bearing liabilities:
Interest-bearing demand accounts	$	2,462,988	$	29,728	1.61	%	$	2,344,007	$	2,902	0.17	%
Money market accounts	2,942,970		62,397		2.83		2,810,278		9,797		0.47
Savings accounts	688,157		707		0.14		833,721		205		0.03
Certificates of deposit	1,139,489		28,555		3.35		584,213		2,492		0.57
Total interest-bearing deposits	7,233,604		121,387		2.24		6,572,219		15,396		0.31
Subordinated debentures and notes	155,633		7,306		6.28		155,093		6,790		5.85
FHLB advances	73,020		2,752		5.04		41,758		495		1.58
Securities sold under agreements to repurchase	174,783		2,422		1.85		220,703		224		0.14
Other borrowings	79,396		2,109		3.55		21,402		372		2.32
Total interest-bearing liabilities	7,716,436		135,976		2.36		7,011,175		23,277		0.44
Noninterest bearing liabilities:
Demand deposits	4,178,038						4,819,718
Other liabilities	119,883						99,458
Total liabilities	12,014,357						11,930,351
Shareholders' equity	1,613,091						1,501,512
Total liabilities & shareholders' equity	$	13,627,448					$	13,431,863
Net interest income			$	428,024					$	340,127
Net interest spread					3.57	%					3.45	%
Net interest margin					4.50	%					3.64	%


1 Average balances include nonaccrual loans. Interest income includes loan fees of $10.7 million and $13.0 million for the nine months ended September 30, 2023 and 2022, respectively.
2 Non-taxable income is presented on a fully tax-equivalent basis using a 25.2% tax rate. The tax-equivalent adjustments were $6.2 million and $5.1 million for the nine months ended September 30, 2023 and 2022, 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, 2023						Nine months ended September 30, 2023
	compared to						compared to
	Three months ended June 30, 2023						Nine months ended September 30, 2022
	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)	$	4,815	$	5,253	$	10,068	41,448		144,739		186,187
Taxable securities	18		454		472		1,968		7,449		9,417
Non-taxable securities(3)	49		5		54		2,749		1,946		4,695
Interest-earning deposits	2,177		237		2,414		(10,960)		11,257		297
Total interest-earning assets	$	7,059	$	5,949	$	13,008	$	35,205	$	165,391	$	200,596

Interest paid on:
Interest-bearing demand accounts	$	729	$	2,852	$	3,581	$	154	$	26,672	$	26,826
Money market accounts	1,242		4,686		5,928		485		52,115		52,600
Savings accounts	(13)		36		23		(42)		544		502
Certificates of deposit	2,910		1,540		4,450		4,253		21,810		26,063
Subordinated debentures and notes	12		23		35		24		492		516
FHLB advances	(1,193)		55		(1,138)		577		1,680		2,257
Securities sold under agreements to repurchase	(73)		338		265		(57)		2,255		2,198
Other borrowings	(672)		(410)		(1,082)		1,453		284		1,737
Total interest-bearing liabilities	2,942		9,120		12,062		6,847		105,852		112,699
Net interest income	$	4,117	$	(3,171)	$	946	$	28,358	$	59,539	$	87,897

(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 for the third quarter 2023 and the nine months ended September 30, 2023 was $141.6 million and $421.9 million, respectively, an increase of $0.9 million and $86.8 million compared to the linked quarter and prior year period, respectively. Net interest income on a tax equivalent basis of $143.7 million for the quarter ended September 30, 2023 and $428.0 million for the nine months ended September 30, 2023, increased $0.9 million and $87.9 million, from the linked quarter and prior year-to-date period respectively. The increase from the linked quarter and the prior year-to-date period reflects the benefit of higher market interest rates on the Company’s asset sensitive balance sheet combined with organic growth. The effective federal funds rate for the third quarter 2023 was 5.26%, an increase of 27 basis points, compared to the linked quarter. The effective federal funds rate for the first nine months of 2023 was 4.93%, an increase of 389 basis points, compared to first nine months of 2022.

Interest income increased $13.0 million during the third quarter 2023 primarily due to an increase of $10.1 million in loan interest income and a $2.4 million increase in interest on cash accounts. Loan interest income has increased from continued loan growth and higher loan yields. Interest on loans benefited from a 16 basis point increase in yield and a $237.1 million increase in average loans, compared to the linked quarter. The average interest rate of new loan originations in the third quarter 2023 was 7.89%. Interest on cash accounts increased due to a 49 basis point increase in yield and a $162.0 million increase in average balances.

Year-to-date, interest income increased $199.5 million over the prior year period due to a $186.3 million increase in loan interest and a $13.2 million increase in interest on securities and interest earning cash. Loan yields in the first

nine months of 2023 increased 195 basis points to 6.60%, compared to 4.65% in the prior year period. Average loans increased $1.1 billion, or 12% over the prior year period. Average securities increased $230.7 million, or 11% over the prior year period. Average interest-earning deposits declined $1.1 billion in the first nine months of 2023 compared to the prior year period. However, a 430 basis point increase in yield to 5.06% in 2023 more than offset the interest income impact of the decreased balance.

Interest expense increased $12.1 million in the third quarter 2023 primarily due to a $14.0 million increase in deposit interest expense. This increase was partially offset by a $1.1 million decrease in interest expense on other borrowings. The increase in deposit interest expense reflects a shift in the deposit mix from demand deposits to interest-bearing deposits, particularly money market accounts and certificates of deposit, as well as higher rates paid on deposits. The average cost of interest-bearing deposits was 2.77%, an increase of 51 basis points over the linked quarter. The increase in rate was primarily due to higher rates paid on commercial money market accounts, certificates of deposit and interest-bearing demand accounts, which increased 58 basis points, 45 basis points, and 41 basis points, respectively. The total cost of deposits, including noninterest-bearing demand accounts, was 1.84% during the third quarter 2023, compared to 1.46% in the linked quarter. The decrease in interest expense on other borrowings was primarily due to a decline in average borrowings, which were reduced due to the increase in liquidity from the growth in core deposits.

Year-to-date, interest expense increased $112.7 million over the prior year period, primarily due to a $106.0 million increase in deposit interest expense and a $6.7 million increase on borrowed funds. The cost of interest bearing deposits increased 193 basis points year-over-year, while the cost of total interest bearing liabilities increased 192 basis points during the same period. The total cost of deposits, including noninterest-bearing demand accounts, was 1.42% in the first nine months of 2023, compared to 0.18% in the prior year-to-date period.

NIM, on a tax equivalent basis, was 4.33% in the third quarter 2023 and 4.50% for the first nine months of 2023, a decrease of 16 basis points and an increase of 86 basis points from the linked quarter and the prior year-to-date period, respectively.

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, 2023		June 30, 2023		Increase (decrease)				September 30, 2023		September 30, 2022		Increase (decrease)
Deposit service charges	$	4,187	$	3,910	$	277	7	%	$	12,225	$	13,863	$	(1,638)	(12)	%
Wealth management revenue	2,614		2,472		142		6	%	7,602		7,587		15		—	%
Card services revenue	2,560		2,464		96		4	%	7,362		9,206		(1,844)		(20)	%
Tax credit income (loss)	(2,673)		368		(3,041)		(826)	%	(492)		169		(661)		(391)	%

Other income	5,397		5,076		321		6	%	16,576		11,464		5,112		45	%

Total noninterest income	$	12,085	$	14,290	$	(2,205)	(15)	%	$	43,273	$	42,289	$	984	2	%

Total noninterest income for the third quarter 2023 was $12.1 million, a $2.2 million decrease from the linked quarter, primarily due to a decrease in tax credit income. Tax credit income is typically highest in the fourth quarter of each year and will vary in other periods based on transaction volumes and fair value changes on credits carried at fair value. The increase in other income of $0.3 million was primarily due to a $1.5 million gain on the sale of SBA loans, partially offset by a decline in income from community development investments.

Total noninterest income for the nine months ended September 30, 2023 was $43.3 million, an increase from the prior year period of $1.0 million which was primarily due to a $5.1 million increase in other income, partially offset

by a decline in deposit service charges and card services revenue. The Durbin Amendment cap on debit card income has limited card services revenue since July 1, 2022. The increase in other income was primarily due to the sale of assets (SBA loans, securities, and OREO), income from private equity investments and loan and swap fees.

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, 2023			June 30, 2023			Increase (decrease)					September 30, 2023			September 30, 2022			Increase (decrease)
Employee compensation and benefits	$	40,771		$	41,641		$	(870)		(2)	%	$	124,915		$	108,854		$	16,061		15	%
Occupancy	4,198			3,954			244			6	%	12,213			13,392			(1,179)			(9)	%
Data processing	3,830			3,661			169			5	%	11,201			9,914			1,287			13	%
Professional fees	1,407			1,566			(159)			(10)	%	4,604			4,316			288			7	%
Deposit costs	20,987			16,980			4,007			24	%	50,688			7,661			43,027			562	%




Other expense	17,451			18,154			(703)			(4)	%	51,962			52,930			(968)			(2)	%
Total noninterest expense	$	88,644		$	85,956		$	2,688		3	%	$	255,583		$	197,067		$	58,516		30	%

Efficiency ratio	57.66		%	55.46		%	2.20		%			54.95		%	52.22		%	2.73		%
Core efficiency ratio1	56.18		%	54.04		%	2.14		%			53.55		%	50.46		%	3.09		%

1 Core efficiency ratio is a non-GAAP measure. Refer to discussion and reconciliation of this measure in the accompanying financial tables.

Noninterest expense was $88.6 million for the third quarter 2023, an increase of $2.7 million from $86.0 million in the linked quarter. Employee compensation and benefits decreased $0.9 million from the linked quarter primarily due to lower claims on self-insured medical policies. Deposit costs relate to certain specialized deposit businesses that are impacted by higher interest rates as well as increasing average balances. Deposit costs increased $4.0 million from the linked quarter primarily due to higher average balances and an increase in expenses related to the earnings credit earned on these accounts. Other expense decreased $0.7 million from the linked quarter, primarily due to a $0.9 million decrease in operational losses.

Total noninterest expense of $255.6 million for the first nine months of 2023 increased $58.5 million from the prior year period, primarily related to a $43.0 million increase in variable deposit costs, and a $16.1 million increase in compensation and benefits.

In May 2023, the FDIC issued a Notice of Proposed Rulemaking which would implement a special assessment to recover the cost associated with protecting uninsured depositors following the closure of FDIC insured banks earlier in 2023. The FDIC is proposing to collect a special assessment at an annual rate of approximately 12.5 basis points over eight quarterly assessment periods. As proposed, the estimated impact of the special assessment is approximately $2.2 million and will be recognized when the rule is finalized.

Income Taxes

The Company’s effective tax rate was 21.7% for both the third quarter 2023 and the nine months ended September 30, 2023. This compares to an effective tax rate of 21.6% and 21.9% for the linked quarter and prior year-to-date period, respectively.

Summary Balance Sheet


(in thousands)	September 30, 2023		December 31, 2022		Increase (decrease)
Total cash and cash equivalents	$	370,698	$	291,359	$	79,339	27	%
Securities, net	2,217,759		2,245,722		(27,963)		(1)	%
Total loans	10,616,820		9,737,138		879,682		9	%
Total assets	14,025,042		13,054,172		970,870		7	%
Deposits	11,909,907		10,829,150		1,080,757		10	%
Total liabilities	12,413,162		11,531,909		881,253		8	%
Total shareholders’ equity	1,611,880		1,522,263		89,617		6	%

Total assets were $14.0 billion at September 30, 2023, an increase of $970.9 million from December 31, 2022. Cash and cash equivalents increased due to deposit growth exceeding loan growth, while loan production increased the loan portfolio. Securities decreased primarily due to an decrease in the fair value of available for sale investments, partially offset by an increase in securities primarily due to the reinvestment of cash flows. Total liabilities of $12.4 billion, increased $881.3 million from December 31, 2022. A $1.1 billion increase in deposits, partially offset by a $241.7 million net decrease in FHLB advances and other borrowings, was the primary driver of the increase in total liabilities.

Investments

At September 30, 2023, investment securities were $2.2 billion, or 16%, of total assets, which is comparable to the Company’s historical percentage dating back to 2019. At December 31, 2022, investment securities were $2.2 billion, or 17%, of total assets.

The table below sets forth the carrying value of investment securities, excluding the allowance for credit losses:


	September 30, 2023				December 31, 2022
($ in thousands)	Amount		%		Amount		%
Obligations of U.S. Government sponsored enterprises	$	279,457	12.6	%	$	237,785	10.6	%
Obligations of states and political subdivisions	941,893		42.5	%	946,456		42.1	%
Agency mortgage-backed securities	681,229		30.7	%	716,422		31.9	%
U.S. Treasury Bills	184,791		8.3	%	208,534		9.3	%
Corporate debt securities	131,174		5.9	%	137,260		6.1	%


Total	$	2,218,544	100.0	%	$	2,246,457	100.0	%


Net Unrealized Losses
($ in thousands)	September 30, 2023		December 31, 2022
Available-for-sale securities	$	(235,013)	$	(193,247)
Held-to-maturity securities	(108,780)		(82,133)
Total	$	(343,793)	$	(275,380)

Investment securities decreased $27.9 million from the prior year end, primarily due to a decrease in the fair value of the available-for-sale securities, partially offset by an increase from the reinvestment of portfolio cash flows. Investment purchases in 2023 had a weighted average, tax equivalent yield of 5.0%. In January 2023, $28.4 million of available-for-sale investment securities with a tax equivalent yield of 4.0% were sold at a net gain of $0.4 million and were reinvested in securities with a 4.5% yield.

The average duration of the investment portfolio was 5.6 years at September 30, 2023. The Company leverages the investment portfolio to lengthen the overall duration of the balance sheet, primarily using high-quality municipal securities. The expected cash flow from pay downs, maturities and interest over the next 12 months is approximately $270 million.

Loans by Type

The Company has a diversified loan portfolio, with no particular 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 sets forth the composition of the loan portfolio by type of loans


(in thousands)	September 30, 2023		December 31, 2022		Increase (decrease)
Commercial and industrial	$	4,448,535	$	3,859,882	$	588,653	15	%
Commercial real estate - investor owned	2,425,533		2,357,820		67,713		3	%
Commercial real estate - owner occupied	2,368,822		2,270,551		98,271		4	%
Construction and land development	723,796		611,565		112,231		18	%
Residential real estate	376,120		395,537		(19,417)		(5)	%
Other	274,014		241,783		32,231		13	%
Total Loans	$	10,616,820	$	9,737,138	$	879,682	9	%

The following table provides additional information on select specialty lending detail:



(in thousands)	September 30, 2023		December 31, 2022		Increase (decrease)
C&I	$	2,020,303	$	1,904,654	$	115,649	6	%
CRE investor owned	2,260,220		2,176,424		83,796		4	%
CRE owner occupied	1,255,885		1,174,094		81,791		7	%
SBA Loans*	1,309,497		1,312,378		(2,881)		—	%
Sponsor finance*	888,000		635,061		252,939		40	%
Life insurance premium financing*	928,486		817,115		111,371		14	%
Tax credits*	683,580		559,605		123,975		22	%
SBA PPP loans	4,940		7,272		(2,332)		(32)	%
Residential real estate	364,618		379,924		(15,306)		(4)	%
Construction and land development	639,555		534,753		104,802		20	%
Other	261,736		235,858		25,878		11	%
Total loans	$	10,616,820	$	9,737,138	$	879,682	9	%


*Specialty loan category

Loans totaled $10.6 billion at September 30, 2023 compared to $9.7 billion at December 31, 2022. The increase was driven primarily by C&I, CRE investor owned, construction and specialty loans. The increase in specialty loans was primarily in the sponsor finance and life insurance areas. Average line draw utilization was 42.7% for the first nine months of 2023, compared to 41.8% for the full year of 2022.

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. The Company may sell the guaranteed portion of the loan and retain servicing rights, and in the first nine months of 2023, SBA loans totaling $42.1 million were sold.

Provision and Allowance for Credit Losses

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


	Quarter ended				Nine months ended
(in thousands)	September 30, 2023		June 30, 2023			September 30, 2023		September 30, 2022
Provision (benefit) for credit losses on loans	$	7,670	$	5,997		$	14,766	$	(2,645)

Provision for available-for-sale securities	—		250			5,076		—
Provision (benefit) for off-balance sheet commitments	(447)		75			(2,286)		853
Provision (benefit) for held-to-maturity securities	(73)		(14)			50		75
Charge-offs (recoveries) of accrued interest	880		31			946		(1,017)
Provision (benefit) for credit losses	$	8,030	$	6,339		$	18,552	$	(2,734)

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. A provision for credit losses on both available-for-sale and held-to-maturity investment securities is recognized in certain circumstances. 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 $8.0 million for the third quarter 2023 and $18.6 million for the nine months ended September 30, 2023, increased $1.7 million and $21.3 million from the linked quarter and prior year-to-date period, respectively. The provision in the third quarter 2023 was primarily related net charge-offs, an increase in nonperforming loans and loan growth, partially offset by an improvement in forecasted economic factors. The provision in the linked quarter was primarily related to loan growth, and to a lesser extent, net charge-offs. The provision for credit losses in the first nine months of 2023 was primarily due to loan growth, net charge-offs and the increase in nonperforming loans. The provision for credit losses in 2023 also included the impact of the impairment of an available-for-sale investment security. The available-for-sale investment impairment was related to a subordinated debt security in a publicly-traded bank that failed in the first quarter of 2023. The provision benefit in the prior year-to-date period, was primarily due to an improvement in economic factors and the recovery of accrued interest on nonperforming loans.

The following table summarizes the allocation of the ACL on loans:


	September 30, 2023				December 31, 2022
(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	$	62,476	41.9	%	$	53,835	39.6	%
Real estate:
Commercial	57,495		45.2	%	58,943		47.5	%
Construction and land development	11,147		6.8	%	11,444		6.3	%
Residential	6,622		3.5	%	7,928		4.1	%
Other	4,393		2.6	%	4,782		2.5	%
Total	$142,133		100.0	%	$136,932		100.0	%

The ACL on loans was 1.34% of loans at September 30, 2023, compared to 1.41% of loans at December 31, 2022. The decrease in the ACL on loans is due to improvement in the economic forecast and the charge-off of impaired loans, partially offset by the increase in nonperforming loans. Excluding guaranteed loans, the ACL to total loans was 1.47% at September 30, 2023, compared to 1.56% at December 31, 2022.

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


	Quarter ended
	September 30, 2023						June 30, 2023
(in thousands)	Net Charge-offs (Recoveries)		Average Loans(1)		Net Charge-offs (Recoveries)/Average Loans(2)		Net Charge-offs (Recoveries)		Average Loans(1)		Net Charge-offs (Recoveries)/Average Loans(2)
Commercial and industrial	$	1,756	$	4,357,144	0.16	%	$	2,688	$	4,222,236	0.26	%
Real estate:
Commercial	4,637		4,752,047		0.39	%	(103)		4,727,171		(0.01)	%
Construction and land development	(14)		723,653		(0.01)	%	(8)		693,251		—	%
Residential	(140)		369,648		(0.15)	%	194		358,917		0.22	%
Other	617		318,790		0.77	%	202		282,750		0.29	%
Total	$	6,856	$	10,521,282	0.26	%	$	2,973	$	10,284,325	0.12	%

(1) Excludes loans held for sale.

(2)Annualized.



	Nine months ended
	September 30, 2023						September 30, 2022
(in thousands)	Net Charge-offs (Recoveries)		Average Loans(1)		Net Charge-offs (Recoveries)/Average Loans(2)		Net Charge-offs (Recoveries)		Average Loans(1)		Net Charge-offs (Recoveries)/Average Loans(2)
Commercial and industrial	$	4,213	$	4,153,634	0.14	%	$	1,940	$	3,496,364	0.07	%
Real estate:
Commercial	4,665		4,697,142		0.13	%	(531)		4,279,682		(0.02)	%
Construction and land development	(45)		706,615		(0.01)	%	(45)		703,236		(0.01)	%
Residential	(166)		358,391		(0.06)	%	336		388,920		0.12	%
Other	898		286,957		0.42	%	124		245,378		0.07	%
Total	$	9,565	$	10,202,739	0.13	%	$	1,824	$	9,113,580	0.03	%
(1) Excludes loans held for sale.
(2)Annualized.

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 and charge-offs increase, the Company could recognize elevated levels of provision for credit losses. The provision is also reflective of charge-offs (recoveries) 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, 2023			December 31, 2022
Nonaccrual loans	$	48,746		$	9,766
Loans past due 90 days or more and still accruing interest	186			142
Troubled debt restructurings	—			73
Total nonperforming loans	48,932			9,981
Other	6,933			269

Total nonperforming assets	$	55,865		$	10,250

Total assets	$	14,025,042		$	13,054,172
Total loans	10,616,820			9,737,138

Total allowance for credit losses	142,133			136,932

ACL to nonaccrual loans	292		%	1,402		%
ACL to nonperforming loans	290		%	1,372		%
ACL to total loans	1.34		%	1.41		%
Nonaccrual loans to total loans	0.46		%	0.10		%
Nonperforming loans to total loans	0.46		%	0.10		%

Nonperforming assets to total assets	0.40		%	0.08		%

Nonperforming loans based on loan type were as follows:



(in thousands)	September 30, 2023		December 31, 2022
Commercial and industrial	$	12,058	$	4,443
Commercial real estate	35,132		4,200
Construction and land development	741		1,192
Residential real estate	959		73
Other	42		73
Total	$	48,932	$	9,981

The following table summarizes the changes in nonperforming loans:


	Nine months ended
(in thousands)	September 30, 2023



Nonperforming loans, beginning of period	$	9,981
Additions	74,568


Charge-offs	(13,451)
Principal payments	(16,430)
Moved to other real estate	(5,736)


Nonperforming loans, end of period	$	48,932

Deposits


(in thousands)	September 30, 2023			December 31, 2022			Increase (decrease)
Noninterest-bearing demand accounts	$	3,852,486		$	4,642,732		$	(790,246)	(17)	%
Interest-bearing demand accounts	2,749,598			2,256,295			493,303		22	%
Money market accounts	3,211,302			2,655,159			556,143		21	%
Savings accounts	625,843			744,256			(118,413)		(16)	%
Certificates of deposit:
Brokered	695,551			118,968			576,583		485	%
Other	775,127			411,740			363,387		88	%
Total deposits	$	11,909,907		$	10,829,150		$	1,080,757	10	%



Demand deposits / total deposits	32		%	43		%

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


	Quarter ended
	September 30, 2023				June 30, 2023				September 30, 2022
(in thousands)	Average Balance		Average Rate Paid		Average Balance		Average Rate Paid		Average Balance		Average Rate Paid
Noninterest-bearing deposit accounts	$	4,005,923	—	%	$	4,051,456	—	%	$	4,778,720	—	%

Interest-bearing demand accounts	2,672,084		2.03		2,509,805		1.62		2,200,619		0.31
Money market accounts	3,079,221		3.40		2,920,079		2.82		2,791,822		0.86
Savings accounts	646,187		0.15		686,973		0.13		828,747		0.03
Certificates of deposit	1,519,119		3.91		1,219,500		3.46		554,987		0.60
Total interest-bearing deposits	$	7,916,611	2.77		$	7,336,357	2.26		$	6,376,175	0.54

Total average deposits	$	11,922,534	1.84		$	11,387,813	1.46		$	11,154,895	0.31



	Nine months ended
	September 30, 2023				September 30, 2022
(in thousands)	Average Balance		Average Rate Paid		Average Balance		Average Rate Paid
Noninterest-bearing deposit accounts	$	4,178,038	—	%	$	4,819,718	—	%

Interest-bearing demand accounts	2,462,988		1.61		2,344,007		0.17
Money market accounts	2,942,970		2.83		2,810,278		0.47
Savings accounts	688,157		0.14		833,721		0.03
Certificates of deposit	1,139,489		3.35		584,213		0.57
Total interest-bearing deposits	$	7,233,604	2.24		$	6,572,219	0.31

Total average deposits	$	11,411,642	1.42		$	11,391,937	0.18

Total deposits excluding brokered certificates of deposits, were $11.2 billion at September 30, 2023, an increase of $504.2 million from December 31, 2022. The mix of the deposit portfolio shifted from noninterest-bearing demand deposits to higher yielding categories in the current year due to the competitive rate environment. Brokered certificates of deposit increased $576.6 million, to $695.6 million at September 30, 2023. Brokered certificates of deposit were used as a stable funding source to support loan growth in the first half of 2023. This strategy helped preserve wholesale borrowing capacity and liquidity measures. As customer deposits increased in the third quarter 2023, brokered certificates of deposit declined $198.3 million in the current quarter. 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 $3.2 billion at September 30, 2023 and $2.5 billion at December 31, 2022.

To provide customers a deposit product with enhanced FDIC insurance, the Company participates in several programs through third parties that provide full FDIC insurance on deposit amounts by exchanging or reciprocating larger depository relationships with other member banks. Total reciprocal deposits were $1.1 billion at September 30, 2023, compared to $205.8 million at December 31, 2022. The Company considers reciprocal accounts as customer-related deposits due to the customer relationship that generated the transaction.

At September 30, 2023, estimated uninsured/uncollateralized deposits totaled $3.4 billion, or 29% of total deposits, compared to $5.9 billion, or 55% of total deposits, at December 31, 2022. The decrease in estimated uninsured deposits was the result of an increase in reciprocal deposits and accounts that qualify for pass-through insurance.

As rates increase, deposit balances may decline or the composition of the deposit portfolio may continue to shift to higher-yielding deposit products, such as money market accounts or certificates of deposit. The total cost of deposits was 1.84% for the current quarter, compared to 1.46% for the linked quarter. For the year-to-date period in 2023, the total cost of deposits was 1.42%, compared to 0.18% in the prior year period.

Shareholders’ Equity

Shareholders’ equity totaled $1.6 billion at September 30, 2023, an increase of $89.6 million from December 31, 2022. Significant activity during the first nine months of 2023 was as follows:

•increase from net income of $149.5 million,

•net decrease in fair value of securities and cash flow hedges of $37.5 million, and

•decrease from dividends paid on common and preferred stock of $30.8 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 loans or 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. To the extent that other banks tighten their lending capacity, this may impact our ability to sell loan participations.

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 $370.7 million at September 30, 2023 and $291.4 million at December 31, 2022. Recent increases in short term interest rates, a tightening of monetary policy by the Federal Reserve and bank failures in early 2023 have led to competitive pricing pressures and a reduction of deposits in the industry. To enhance liquidity, the Company reduced reinvestment of investment portfolio cash flows for a short period during the nine months ended September 30, 2023. However, investment securities are an important tool to the Company’s liquidity objectives and reinvestment of cash flows resumed as the market stabilized.

Available on- and off-balance sheet liquidity sources include the following items:


(in thousands)	September 30, 2023
Federal Reserve Bank borrowing capacity	$	2,491,087
FHLB borrowing capacity	945,086
Unpledged securities	790,887
Federal funds lines (6 correspondent banks)	120,000
Cash and interest-bearing deposits	370,698
Holding Company line of credit	25,000
Total	$	4,742,758

The Company also has a portfolio of SBA guaranteed loans, a portion of which could be sold in the secondary market to generate earnings and liquidity. SBA loans totaling $42.1 million were sold during 2023.

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 $3.2 billion in unused commitments to extend credit as of September 30, 2023. However, 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, 2023. The line of credit has a one-year term and was renewed in February 2023 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 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 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%). In addition, the Company must maintain an additional CCB above the regulatory minimum ratio requirements. The CCB is designed to insulate banks from periods of stress and impose constraints on dividends, share repurchases and discretionary bonus payments when capital levels fall below prescribed levels. As of September 30, 2023, and December 31, 2022, 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, 2023				December 31, 2022
(in thousands)	EFSC		Bank		EFSC		Bank		To Be Well-Capitalized		Minimum Ratio with CCB
Common Equity Tier 1 Capital to Risk Weighted Assets	11.2	%	12.1	%	11.1	%	12.1	%	6.5	%	7.0	%
Tier 1 Capital to Risk Weighted Assets	12.6	%	12.1	%	12.6	%	12.1	%	8.0	%	8.5	%
Total Capital to Risk Weighted Assets	14.1	%	13.1	%	14.2	%	13.1	%	10.0	%	10.5	%
Leverage Ratio (Tier 1 Capital to Average Assets)	10.9	%	10.5	%	10.9	%	10.5	%	5.0	%	N/A
Tangible common equity to tangible assets1	8.51	%			8.43	%




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 Efficiency Ratio


	Quarter ended									Nine months ended
(in thousands)	September 30, 2023			June 30, 2023			September 30, 2022			September 30, 2023			September 30, 2022
Net interest income (GAAP)	$	141,639		$	140,692		$	124,290		$	421,860		$	335,068
Tax-equivalent adjustment	2,061			2,062			1,854			6,164			5,059
Net interest income - FTE (non-GAAP)	$	143,700		$	142,754		$	126,144		$	428,024		$	340,127
Noninterest income (GAAP)	12,085			14,290			9,454			43,273			42,289
Less gain on sale of investment securities	—			—			—			381			—
Less gain (loss) on sale of other real estate owned	—			97			(22)			187			(93)
Core revenue (non-GAAP)	$	155,785		$	156,947		$	135,620		$	470,729		$	382,509

Noninterest expense (GAAP)	$	88,644		$	85,956		$	68,843		$	255,583		$	197,067
Less amortization on intangibles	1,118			1,136			1,310			3,493			4,068


Core noninterest expense (non-GAAP)	$	87,526		$	84,820		$	67,533		$	252,090		$	192,999

Core efficiency ratio (non-GAAP)	56.18		%	54.04		%	49.80		%	53.55		%	50.46		%

Tangible Common Equity, Tangible Book Value per Share, and Tangible Common Equity Ratio


(in thousands)	September 30, 2023			December 31, 2022
Shareholders' equity (GAAP)	$	1,611,880		$	1,522,263
Less preferred stock	71,988			71,988
Less goodwill	365,164			365,164
Less intangible assets	13,425			16,919
Tangible common equity (non-GAAP)	$	1,161,303		$	1,068,192

Common shares outstanding	37,385			37,253
Tangible book value per share (non-GAAP)	$	31.06		$	28.67

Total assets (GAAP)	$	14,025,042		$	13,054,172
Less goodwill	365,164			365,164
Less intangible assets, net	13,425			16,919
Tangible assets (non-GAAP)	$	13,646,453		$	12,672,089

Tangible common equity to tangible assets (non-GAAP)	8.51		%	8.43		%

Return on Average Tangible Common Equity (ROATCE)


	Quarter ended									Nine months ended
(in thousands)	September 30, 2023			June 30, 2023			September 30, 2022			September 30, 2023			September 30, 2022
Average shareholder’s equity (GAAP)	$	1,648,605		$	1,621,337		$	1,494,504		$	1,613,091		$	1,501,512
Less average preferred stock	71,988			71,988			71,988			71,988			71,988
Less average goodwill	365,164			365,164			365,164			365,164			365,164
Less average intangible assets	13,967			15,094			18,857			15,094			20,181
Average tangible common equity (non-GAAP)	$	1,197,486		$	1,169,091		$	1,038,495		$	1,160,845		$	1,044,179

Net income available to common shareholders (GAAP)	$	43,727		$	48,190		$	49,263		$	146,717		$	139,938
Return on average tangible common equity	14.49		%	16.53		%	18.82		%	16.90		%	17.92		%

Pre-Provision Net Revenue (PPNR)


	Quarter ended				Nine months ended
(in thousands)	September 30, 2023		June 30, 2023			September 30, 2022		September 30, 2023		September 30, 2022
Net interest income	$	141,639	$	140,692		$	124,290	$	421,860	$	335,068
Noninterest income	12,085		14,290			9,454		43,273		42,289
Less gain on sale of investment securities	—		—			—		381		—
Less gain (loss) on sale of other real estate owned	—		97			(22)		187		(93)
Less noninterest expense	88,644		85,956			68,843		255,583		197,067


PPNR (non-GAAP)	$	65,080	$	68,929		$	64,923	$	208,982	$	180,383

Calculation of Estimated Insured Deposits


	Quarter ended
(in thousands)	September 30, 2023
Estimated uninsured deposits per Call Report	$	3,886,299
Collateralized/affiliate deposits	(455,553)
Accrued interest on deposits	(6,231)
Adjusted uninsured/uncollateralized deposits	3,424,515
Estimated insured/collateralized deposits	8,485,392
Total deposits	$	11,909,907

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 a simulation model to measure the sensitivity to changing rates on earnings.

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 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 baseline amounts calculated using flat rates. The difference represents the Company’s 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, 2023:


Rate Shock			Annual % change in net interest income
+ 300 bp			9.1%
+ 200 bp			6.1%
+ 100 bp			3.0%
- 100 bp			(3.2)%
- 200 bp			(6.6)%
- 300 bp			(10.0)%

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, 2023, the Company had derivative contracts to manage interest rate risk, including $250.0 million in notional value on derivatives to hedge the cash flows on floating rate loans and $62.0 million in notional value on derivative on floating rate debt. Derivative financial instruments are also discussed in “Item 1. Note 6 – Derivative Financial Instruments.”

The Financial Conduct Authority has announced that the most common USD LIBOR settings (overnight, 1-month. 3-month, 6-month and 12-month) will cease publication after September 30, 2024. However, LIBOR rates published after June 30, 2023 will be based on a “synthetic” methodology. LIBOR is commonly referenced in financial instruments. With the cessation of LIBOR, the Company has selected term SOFR as the replacement index for the majority of its variable rate loans and began providing customer notifications in early 2023. The Company ceased using LIBOR and International Exchange, Inc. swap rates in new contracts and began issuing SOFR based loans in December 2021.

The Company had $6.5 billion in variable rate loans at September 30, 2023. Of these loans, $4.1 billion have an interest rate floor and nearly all of those loans were at or above the floor. Variable rate loans include $2.8 billion indexed to the prime rate, $2.6 billion indexed to SOFR, $277.5 million indexed to LIBOR, and $797.0 million indexed to other rates.

At September 30, 2023, the Company’s available-for-sale and held-to-maturity investment securities totaled $1.5 billion and $730.7 million, respectively. These portfolios consist primarily of fixed-rate securities that are subject to changes in market value due to changes in interest rates. At September 30, 2023, net unrealized losses were $235.0 million and $108.8 million on the available-for-sale and held-to-maturity investment portfolios, respectively.

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 (the “CEO”) and the Chief Financial Officer (the “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, 2023. 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, 2023 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, Part I, Item 1A of our Report on Form 10-K for the fiscal year ended December 31, 2022, and supplemented by the additional risk factor set forth below.

Adverse developments affecting the banking industry, and resulting media coverage, have eroded customer confidence in the banking system and could have a material effect on the Company’s operations and/or stock price.

The recent high-profile bank failures involving Silicon Valley Bank and Signature Bank have generated significant market volatility among publicly traded bank holding companies and, in particular, regional banks. These market developments have negatively impacted customer confidence in the safety and soundness of regional banks. As a result, customers may choose to maintain deposits with larger financial institutions or invest in higher yielding short-term fixed income securities, all of which could materially adversely impact our liquidity, cost of funding, loan funding capacity, net interest margin, capital and results of operations. In connection with high-profile bank failures, uncertainty and concern has been, and may be in the future, compounded by advances in technology that increase the speed at which deposits can be moved, as well as the speed and reach of media attention, including social media, and its ability to disseminate concerns or rumors, in each case potentially exacerbating liquidity concerns. While the Department of the Treasury, the Federal Reserve, and the FDIC have made statements ensuring

that depositors of recently failed banks would have access to their deposits, including uninsured deposit accounts, there is no guarantee that such actions will be successful in restoring customer confidence in regional banks and the banking system more broadly. In addition, the banking operating environment and public trading prices of banking institutions can be highly correlated, in particular during times of stress, which could adversely impact the trading prices of our common stock and potentially our results of operations. For more information on the Company's liquidity position, please see the “Deposits” and “Liquidity and Capital Resources” sections of Item 2: Management's Discussion and Analysis of Financial Condition and Results of Operations.

ITEM 2: UNREGISTERED SALES OF EQUITY SECURITIES, USE OF PROCEEDS, AND ISSUER PURCHASES OF EQUITY SECURITIES

None.

ITEM 3: DEFAULTS UPON SENIOR SECURITIES

None.

ITEM 4: MINE SAFETY DISCLOSURES

Not applicable.

ITEM 5: OTHER INFORMATION

During the quarter ended September 30, 2023, no officer or director of the company adopted or terminated any contract, instruction, or written plan for the purchase or sale of securities of the company’s common stock that is intended to satisfy the affirmative defense conditions of Securities Exchange Act Rule 10b5-1(c) or any non-Rule 10b5-1 trading arrangement as defined in 17 CFR § 229.408(c).

ITEM 6: EXHIBITS

Exhibit No. Description

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, 2023, 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 27, 2023.


			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