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, ~~2019~~.

2020.



☐						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,, MO63105

Telephone: (~~314~~) (314) 725-5500

___________________

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

Title of each class

Trading Symbol(s)

Name of each exchange on which registered

Common Stock, par value $0.01 per share

EFSC

Nasdaq Global Select Market

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

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

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



~~Title of each class~~	~~Trading Symbol(s)~~	~~Name of each exchange on which registered~~
~~Common Stock, par value $0.01 per share~~	~~EFSC~~	~~Nasdaq Global Select Market~~

Indicate by check mark whether the registrant 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. (Check one):

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 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 ~~23, 2019,~~21, 2020, the Registrant had ~~26,518,924~~26,209,739 shares of outstanding common stock, $0.01 par value per share.

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

ENTERPRISE FINANCIAL SERVICES CORP AND SUBSIDIARIES

TABLE OF CONTENTS


			Page
PART I - FINANCIAL INFORMATION

Item 1. Financial Statements

Condensed Consolidated Balance Sheets (Unaudited)					1

Condensed Consolidated Statements of Operations (Unaudited)					2

				~~Page~~
~~PART I - FINANCIAL INFORMATION~~

~~Item 1. Financial Statements~~

~~Condensed Consolidated Balance Sheets (Unaudited)~~	1

~~Condensed Consolidated Statements of Operations (Unaudited)~~	2

Condensed Consolidated Statements of Comprehensive Income (Unaudited)		3

Condensed Consolidated Statements of Shareholders’ Equity (Unaudited)					4

Condensed Consolidated Statements of Cash Flows (Unaudited)					5

Notes to Condensed Consolidated Financial Statements (Unaudited)					6

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations					3228

Item 3. Quantitative and Qualitative Disclosures About Market Risk					5352

Item 4. Controls and Procedures					5453

PART II - OTHER INFORMATION

Item 1. Legal Proceedings					5453

Item 1A. Risk Factors					5554

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

Item 3. Defaults Upon Senior Securities					56

Item 4. Mine Safety Disclosures					56

Item 5. Other Information					56

Item 6. Exhibits					5857

Signatures					6059

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

FHLB

Federal Home Loan Bank

ACLL

Allowance for Credit Losses on Loans (excludes allowance for securities and allowance for unfunded commitments)

GAAP

Generally Accepted Accounting Principles (United States)

ASC

Accounting Standards Codification

LIBOR

London Interbank Offered Rate

ASU

Accounting Standards Update

MD&A

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

Bank

Enterprise Bank & Trust

PCD

Purchased Credit Deteriorated

C&I

Commercial and Industrial

PCI

Purchased Credit Impaired

CECL

Current Expected Credit Loss

PPP

Paycheck Protection Program

Company

Enterprise Financial Services Corp and Subsidiaries

SBA

Small Business Administration

CRE

Commercial Real Estate

SCBH

Seacoast Commerce Banc Holdings

DCF

Discounted Cash Flow

Seacoast

Seacoast Commerce Bank

EFSC

Enterprise Financial Services Corp

SEC

Securities and Exchange Commission

Enterprise

Enterprise Financial Services Corp and Subsidiaries

SOFR

Secured Overnight Financing Rate

FASB

Financial Accounting Standards Board

Trinity

Trinity Capital Corporation

FDIC

Federal Deposit Insurance Corporation

PART 1 - ITEM 1 - FINANCIAL STATEMENTS

ENTERPRISE FINANCIAL SERVICES CORP AND SUBSIDIARIES

Condensed Consolidated Balance Sheets (Unaudited)


(in thousands, except share and per share data)	September 30, 2019			December 31, 2018			(in thousands, except share and per share data)	September 30, 2020		December 31, 2019
Assets							Assets
Cash and due from banks	$	153,730		$	91,511		Cash and due from banks	$	98,816	$	74,769
Federal funds sold	2,829			1,714			Federal funds sold	1,204		3,060
Interest-earning deposits (including $17,785 and $1,305 pledged as collateral, respectively)	99,943			103,327
Interest-earning deposits (including $45,525 and $15,285 pledged as collateral, respectively)							Interest-earning deposits (including $45,525 and $15,285 pledged as collateral, respectively)	292,195		89,427
Total cash and cash equivalents	256,502			196,552			Total cash and cash equivalents	392,215		167,256
Interest-earning deposits greater than 90 days	3,975			3,185			Interest-earning deposits greater than 90 days	8,374		3,730
Securities available for sale	1,247,333			721,369
Securities held to maturity, at cost	60,786			65,679
Loans held for sale	6,281			392
Securities available-for-sale							Securities available-for-sale	1,005,426		1,135,317
Securities held-to-maturity, net							Securities held-to-maturity, net	327,049		181,166
Loans held-for-sale							Loans held-for-sale	14,032		5,570
Loans	5,228,014			4,350,001			Loans	6,126,307		5,314,337
Less: Allowance for loan losses	44,555			43,476
Loans, net	5,183,459			4,306,525
Other investments, at cost	46,867			26,654
Less: Allowance for credit losses on loans							Less: Allowance for credit losses on loans	123,270		43,288
Total loans, net							Total loans, net	6,003,037		5,271,049

Other investments							Other investments	43,456		38,044
Fixed assets, net	59,216			32,109			Fixed assets, net	56,807		60,013

Goodwill	211,251			117,345			Goodwill	210,344		210,344
Intangible assets, net	27,626			8,553			Intangible assets, net	21,820		26,076

Other assets	243,495			167,299			Other assets	285,416		235,226
Total assets	$	7,346,791		$	5,645,662		Total assets	$	8,367,976	$	7,333,791

Liabilities and Shareholders' Equity							Liabilities and Shareholders' Equity
Demand deposits	$	1,295,450		$	1,100,718
Noninterest-bearing deposit accounts							Noninterest-bearing deposit accounts	$	1,929,540	$	1,327,348
Interest-bearing transaction accounts	1,307,855			1,037,684			Interest-bearing transaction accounts	1,499,756		1,367,444
Money market accounts	1,652,394			1,565,729			Money market accounts	2,019,222		1,713,615
Savings	548,658			199,425
Savings accounts							Savings accounts	615,663		536,169
Certificates of deposit:							Certificates of deposit:
Brokered	209,754			198,981			Brokered	65,209		215,758
Other	610,269			485,448			Other	546,836		610,689
Total deposits	5,624,380			4,587,985			Total deposits	6,676,226		5,771,023
Subordinated debentures and notes (net of debt issuance cost of $907 and $1,005, respectively)	141,179			118,156
Federal Home Loan Bank advances	461,426			70,000
Subordinated debentures and notes							Subordinated debentures and notes	203,510		141,258
FHLB advances							FHLB advances	250,000		222,406
Other borrowings	162,920			221,450			Other borrowings	209,038		230,886
Notes payable	36,714			2,000			Notes payable	30,000		34,286

Other liabilities	74,077			42,267			Other liabilities	116,935		66,747
Total liabilities	$	6,500,696		$	5,041,858		Total liabilities	$	7,485,709	$	6,466,606

Commitments and contingent liabilities (Note 7)
Commitments and contingent liabilities (Note 6)							Commitments and contingent liabilities (Note 6)

Shareholders' equity:							Shareholders' equity:
Preferred stock, $0.01 par value; 5,000,000 shares authorized; 0 shares issued and outstanding	—			—			Preferred stock, $0.01 par value; 5,000,000 shares authorized; 0 shares issued and outstanding	0		0
Common stock, $0.01 par value; 45,000,000 shares authorized; 28,042,628 and 23,938,994 shares issued, respectively	280			239
Treasury stock, at cost; 1,429,861 and 1,127,105 shares, respectively	(54,472		)	(42,655		)
Common stock, $0.01 par value; 45,000,000 shares authorized; 28,189,670 and 28,067,087 shares issued, respectively							Common stock, $0.01 par value; 45,000,000 shares authorized; 28,189,670 and 28,067,087 shares issued, respectively	282		281
Treasury stock, at cost; 1,980,093 and 1,523,842 shares, respectively							Treasury stock, at cost; 1,980,093 and 1,523,842 shares, respectively	(73,528)		(58,181)
Additional paid in capital	524,916			350,936			Additional paid in capital	529,105		526,599
Retained earnings	356,160			304,566			Retained earnings	393,900		380,737
Accumulated other comprehensive income (loss)	19,211			(9,282		)
Accumulated other comprehensive income							Accumulated other comprehensive income	32,508		17,749
Total shareholders' equity	846,095			603,804			Total shareholders' equity	882,267		867,185
Total liabilities and shareholders' equity	$	7,346,791		$	5,645,662		Total liabilities and shareholders' equity	$	8,367,976	$	7,333,791

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

ENTERPRISE FINANCIAL SERVICES CORP AND SUBSIDIARIES

Condensed Consolidated Statements of Operations (Unaudited)


	Three months ended September 30,				Nine months ended September 30,					Three months ended September 30,						Nine months ended September 30,
(in thousands, except per share data)	2019		2018		2019		2018		(in thousands, except per share data)	2020		2019		2020		2019
Interest income:									Interest income:
Interest and fees on loans	$	71,214	$	55,383	$	201,867	$	158,781	Interest and fees on loans	$	62,648	$	71,214	$	194,295	$	201,867
Interest on debt securities:									Interest on debt securities:
Taxable	8,004		4,482		21,236		12,697		Taxable	5,554		8,004		19,698		21,236
Nontaxable	969		263		2,277		816		Nontaxable	2,241		969		5,542		2,277
Interest on interest-bearing deposits	572		306		1,722		777

Interest on interest-earning deposits									Interest on interest-earning deposits	113		572		500		1,722
Dividends on equity securities	319		323		794		729		Dividends on equity securities	231		319		631		794
Total interest income	81,078		60,757		227,896		173,800		Total interest income	70,787		81,078		220,666		227,896
Interest expense:									Interest expense:
Interest-bearing transaction accounts	2,048		799		5,972		2,422
Money market accounts	6,959		5,423		20,470		13,221
Savings accounts	232		157		646		429
Certificates of deposit	3,970		2,878		11,060		7,115

Deposits									Deposits	3,712		13,209		17,983		38,148
Subordinated debentures and notes	1,956		1,483		5,562		4,305		Subordinated debentures and notes	2,826		1,956		7,061		5,562
Federal Home Loan Bank advances	2,203		1,729		5,297		4,435
FHLB advances									FHLB advances	720		2,203		2,070		5,297
Notes payable and other borrowings	664		195		1,785		561		Notes payable and other borrowings	175		664		997		1,785
Total interest expense	18,032		12,664		50,792		32,488		Total interest expense	7,433		18,032		28,111		50,792
Net interest income	63,046		48,093		177,104		141,312		Net interest income	63,354		63,046		192,555		177,104
Provision for loan losses	1,833		2,263		5,031		4,524
Net interest income after provision for loan losses	61,213		45,830		172,073		136,788
Provision for credit losses									Provision for credit losses	14,080		1,833		55,935		5,031
Net interest income after provision for credit losses									Net interest income after provision for credit losses	49,274		61,213		136,620		172,073
Noninterest income:									Noninterest income:
Service charges on deposit accounts	3,246		2,997		9,547		8,855		Service charges on deposit accounts	2,798		3,246		8,557		9,547
Wealth management revenue	2,661		2,012		7,314		6,267		Wealth management revenue	2,456		2,661		7,283		7,314
Card services revenue	2,494		1,760		6,745		4,926		Card services revenue	2,498		2,494		6,970		6,745

Tax credit income	1,238		192		1,968		508		Tax credit income	748		1,238		2,563		1,968
Gain on sale of investment securities	337		—		337		9

Miscellaneous income	3,588		1,449		8,847		7,080		Miscellaneous income	4,129		3,925		10,624		9,184
Total noninterest income	13,564		8,410		34,758		27,645		Total noninterest income	12,629		13,564		35,997		34,758
Noninterest expense:									Noninterest expense:
Employee compensation and benefits	20,845		16,297		60,884		49,370		Employee compensation and benefits	22,040		20,845		66,114		60,884
Occupancy	3,179		2,394		9,004		7,142		Occupancy	3,408		3,179		9,940		9,004
Data processing	2,051		1,634		6,415		4,634		Data processing	2,167		2,051		6,393		6,415
Professional fees	1,064		1,023		2,847		2,619		Professional fees	755		1,064		2,904		2,847
Merger related expenses	393		—		17,969		—

Merger-related expenses									Merger-related expenses	1,563		393		1,563		17,969
Other	10,707		8,574		30,012		24,519		Other	9,591		10,707		29,195		30,012
Total noninterest expense	38,239		29,922		127,131		88,284		Total noninterest expense	39,524		38,239		116,109		127,131

Income before income tax expense	36,538		24,318		79,700		76,149		Income before income tax expense	22,379		36,538		56,508		79,700
Income tax expense	7,469		1,802		16,051		10,461		Income tax expense	4,428		7,469		11,055		16,051
Net income	$	29,069	$	22,516	$	63,649	$	65,688	Net income	$	17,951	$	29,069	$	45,453	$	63,649

Earnings per common share									Earnings per common share
Basic	$	1.09	$	0.97	$	2.46	$	2.84	Basic	$	0.68	$	1.09	$	1.73	$	2.46
Diluted	1.08		0.97		2.45		2.81		Diluted	0.68		1.08		1.73		2.45

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)	2020		2019		2020		2019
Net income	$	17,951	$	29,069	$	45,453	$	63,649
Other comprehensive income (loss), after-tax:
Change in unrealized gain on available-for-sale debt securities	94		7,018		21,642		31,362
Reclassification adjustment for realized gain on sale of available-for-sale debt securities	(314)		(254)		(317)		(34)
Reclassification of (gain) loss on held-to-maturity securities	(705)		10		(1,190)		15
Change in unrealized gain (loss) on cash flow hedges arising during the period	110		(669)		(6,247)		(2,886)
Reclassification of loss on cash flow hedges	514		32		871		36
Total other comprehensive income (loss), after-tax	(301)		6,137		14,759		28,493
Comprehensive income	$	17,650	$	35,206	$	60,212	$	92,142

Three months ended September 30, Nine months ended September 30,
(in thousands) 2019 2018 2019 2018
Net income $ 29,069
$ 22,516
$ 63,649
$ 65,688
Other comprehensive income (loss), net of tax:
Unrealized gains (losses) on investment securities arising during the period, net of income tax expense (benefit) for three months of $2,306 and $(1,328), and for nine months of $10,293 and $(3,926), respectively 7,028
(4,047 ) 31,377
(11,968 )
Reclassification adjustment for realized gains on sale of securities available for sale included in net income, net of income tax expense for three months of $83 and $0, and for nine months of $11 and $2, respectively (254 ) —
(34 ) (7 )
Unrealized loss on cash flow hedges arising during the 2019 periods, net of income tax benefit for three months of $219 and for nine months of $947 (669 ) —
(2,886 ) —
Reclassification of loss on cash flow hedge arising during the 2019 periods, net of income tax benefit for three months of $10 and for nine months of $12 32
—
36
—
Total other comprehensive income (loss) 6,137
(4,047 ) 28,493
(11,975 )
Total comprehensive income $ 35,206
$ 18,469
$ 92,142
$ 53,713

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, 2020																		Three and nine months ended September 30, 2020
(in thousands, except per share data)																		(in thousands, except per share data)	Common Stock		Treasury Stock		Additional paid in capital		Retained earnings		Accumulated other comprehensive income (loss)		Total shareholders’ equity
Balance at June 30, 2020																		Balance at June 30, 2020	$	281	$	(73,528)	$	527,734	$	380,667	$	32,809	$	867,963
Net income																		Net income	0		0		0		17,951		0		17,951

Other comprehensive income																		Other comprehensive income	0		0		0		0		(301)		(301)
Comprehensive income																		Comprehensive income	0		0		0		17,951		(301)		17,650
Cash dividends paid on common shares, $0.18 per share																		Cash dividends paid on common shares, $0.18 per share	0		0		0		(4,718)		0		(4,718)

Issuance under equity compensation plans, 13,583 shares, net																		Issuance under equity compensation plans, 13,583 shares, net	1		0		331		0		0		332

Share-based compensation																		Share-based compensation	0		0		1,040		0		0		1,040

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

Balance at December 31, 2019																		Balance at December 31, 2019	$	281	$	(58,181)	$	526,599	$	380,737	$	17,749	$	867,185
Net income																		Net income	0		0		0		45,453		0		45,453

Other comprehensive income																		Other comprehensive income	0		0		0		0		14,759		14,759
Total comprehensive income																		Total comprehensive income	0		0		0		45,453		14,759		60,212
Cash dividends paid on common shares, $0.54 per share																		Cash dividends paid on common shares, $0.54 per share	0		0		0		(14,176)		0		(14,176)
Repurchase of common shares																		Repurchase of common shares	0		(15,347)		0		0		0		(15,347)
Issuance under equity compensation plans, 122,583 shares, net																		Issuance under equity compensation plans, 122,583 shares, net	1		0		(563)		0		0		(562)

Share-based compensation																		Share-based compensation	0		0		3,069		0		0		3,069

Reclassification for the adoption of ASU 2016-13 (CECL)																		Reclassification for the adoption of ASU 2016-13 (CECL)	0		0		0		(18,114)		0		(18,114)
Balance at September 30, 2020																		Balance at September 30, 2020	$	282	$	(73,528)	$	529,105	$	393,900	$	32,508	$	882,267

Three and nine months ended September 30, 2019																		Three and nine months ended September 30, 2019
(in thousands, except per share data)	Common Stock		Treasury Stock			Additional paid in capital			Retained earnings			Accumulated other comprehensive income (loss)			Total shareholders’ equity			(in thousands, except per share data)	Common Stock		Treasury Stock		Additional paid in capital		Retained earnings		Accumulated other comprehensive income (loss)		Total shareholders’ equity
Balance at June 30, 2019	$	280	$	(42,655	)	$	523,454		$	331,348		$	13,074		$	825,501		Balance at June 30, 2019	$	280	$	(42,655)	$	523,454	$	331,348	$	13,074	$	825,501
Net income	—		—			—			29,069			—			29,069			Net income	0		0		0		29,069		0		29,069

Other comprehensive income	—		—			—			—			6,137			6,137			Other comprehensive income	0		0		0		0		6,137		6,137
Total comprehensive income	—		—			—			29,069			6,137			35,206
Comprehensive income																		Comprehensive income	0		0		0		29,069		6,137		35,206
Cash dividends paid on common shares, $0.16 per share	—		—			—			(4,257		)	—			(4,257		)	Cash dividends paid on common shares, $0.16 per share	0		0		0		(4,257)		0		(4,257)
Repurchase of common shares	—		(11,817		)	—			—			—			(11,817		)	Repurchase of common shares	0		(11,817)		0		0		0		(11,817)

Issuance under equity compensation plans, 9,382 shares, net	—		—			353			—			—			353			Issuance under equity compensation plans, 9,382 shares, net	0		0		353		0		0		353

Share-based compensation	—		—			1,109			—			—			1,109			Share-based compensation	0		0		1,109		0		0		1,109

Balance at September 30, 2019	$	280	$	(54,472	)	$	524,916		$	356,160		$	19,211		$	846,095		Balance at September 30, 2019	$	280	$	(54,472)	$	524,916	$	356,160	$	19,211	$	846,095

Balance at December 31, 2018	$	239	$	(42,655	)	$	350,936		$	304,566		$	(9,282	)	$	603,804		Balance at December 31, 2018	$	239	$	(42,655)	$	350,936	$	304,566	$	(9,282)	$	603,804
Net income	—		—			—			63,649			—			63,649			Net income	0		0		0		63,649		0		63,649

Other comprehensive income	—		—			—			—			28,493			28,493			Other comprehensive income	0		0		0		0		28,493		28,493
Total comprehensive income	—		—			—			63,649			28,493			92,142			Total comprehensive income	0		0		0		63,649		28,493		92,142
Cash dividends paid on common shares, $0.45 per share	—		—			—			(12,055		)	—			(12,055		)	Cash dividends paid on common shares, $0.45 per share	0		0		0		(12,055)		0		(12,055)
Repurchase of common shares	—		(11,817		)	—			—			—			(11,817		)	Repurchase of common shares	0		(11,817)		0		0		0		(11,817)

Issuance under equity compensation plans, 112,812 shares, net	1		—			(881		)	—			—			(880		)	Issuance under equity compensation plans, 112,812 shares, net	1		0		(881)		0		0		(880)

Share-based compensation	—		—			3,016			—			—			3,016			Share-based compensation	0		0		3,016		0		0		3,016

Shares issued in connection with acquisition of Trinity Capital Corporation, 3,990,822 shares	40		—			171,845			—			—			171,885			Shares issued in connection with acquisition of Trinity Capital Corporation, 3,990,822 shares	40		0		171,845		0		0		171,885

Balance at September 30, 2019	$	280	$	(54,472	)	$	524,916		$	356,160		$	19,211		$	846,095		Balance at September 30, 2019	$	280	$	(54,472)	$	524,916	$	356,160	$	19,211	$	846,095

(in thousands, except per share data)	Common Stock		Treasury Stock			Additional paid in capital			Retained earnings			Accumulated other comprehensive income (loss)			Total shareholders’ equity
Balance at June 30, 2018	$	239	$	(26,326	)	$	348,471		$	264,280		$	(12,580	)	$	574,084
Net income	—		—			—			22,516			—			22,516
Other comprehensive loss	—		—			—			—			(4,047		)	(4,047		)
Total comprehensive income (loss)	—		—			—			22,516			(4,047		)	18,469
Cash dividends paid on common shares, $0.12 per share	—		—			—			(2,780		)	—			(2,780		)
Repurchase of common shares	—		(3,782		)	—			—			—			(3,782		)
Issuance under equity compensation plans, 18,592 shares, net	—		—			(77		)	—			—			(77		)
Share-based compensation	—		—			923			—			—			923
Reclassification adjustment for change in accounting policies	—		—			—			834			(834		)	—
Balance at September 30, 2018	$	239	$	(30,108	)	$	349,317		$	284,016		$	(16,627	)	$	586,837

Balance at December 31, 2017	$	238	$	(23,268	)	$	350,061		$	225,360		$	(3,818	)	$	548,573
Net income	—		—			—			65,688			—			65,688
Other comprehensive loss	—		—			—			—			(11,975		)	(11,975		)
Total comprehensive income (loss)	—		—			—			65,688			(11,975		)	53,713
Cash dividends paid on common shares, $0.34 per share	—		—			—			(7,866		)	—			(7,866		)
Repurchase of common shares	—		(6,840		)	—			—			—			(6,840		)
Issuance under equity compensation plans, 138,149 shares, net	1		—			(3,298		)	—			—			(3,297		)
Share-based compensation	—		—			2,554			—			—			2,554
Reclassification adjustment for change in accounting policies	—		—			—			834			(834		)	—
Balance at September 30, 2018	$	239	$	(30,108	)	$	349,317		$	284,016		$	(16,627	)	$	586,837

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

ENTERPRISE FINANCIAL SERVICES CORP AND SUBSIDIARIES

Condensed Consolidated Statements of Cash Flows (Unaudited)


	Nine months ended September 30,
(in thousands, except share data)	2020		2019
Cash flows from operating activities:
Net income	$	45,453	$	63,649
Adjustments to reconcile net income to net cash provided by operating activities
Depreciation	4,573		4,187
Provision for credit losses	55,935		5,031
Deferred income taxes	(9,609)		4,777
Net amortization of debt securities	4,775		2,009
Amortization of intangible assets	4,256		3,993

Mortgage loans originated-for-sale	(164,151)		(39,260)
Proceeds from mortgage loans sold	157,377		33,503
Loss (gain) on:
Sale of investment securities	(421)		(45)
Sale of other real estate	13		(59)

Sale of state tax credits	(290)		(469)

Share-based compensation	3,069		3,016

Net accretion of loan discount	(5,976)		(8,101)


Changes in other assets and liabilities, net	5,243		(5,661)







Net cash provided by operating activities	100,247		66,570
Cash flows from investing activities:
Acquisition cash purchase price, net of cash and cash equivalents acquired	0		(23,377)
Net increase in loans	(800,812)		(197,514)


Proceeds received from:
Sale of debt securities, available-for-sale	20,221		314,189
Paydown or maturity of debt securities, available-for-sale	234,267		95,386
Paydown or maturity of debt securities, held-to-maturity	25,833		4,760
Redemption of other investments	26,350		43,034
Sale of state tax credits held for sale	5,621		3,978
Sale of other real estate	652		4,380
Settlement of bank-owned life insurance policies	1,993		0
Payments for the purchase of:
Available-for-sale debt securities	(274,677)		(467,695)
Other investments	(40,714)		(61,226)

State tax credits held for sale	(11,026)		(9,666)
Fixed assets, net	(1,633)		(4,008)
Net cash used in investing activities	(813,925)		(297,759)
Cash flows from financing activities:
Net increase in noninterest-bearing deposit accounts	602,192		25,653
Net increase (decrease) in interest-bearing deposit accounts	303,011		(70,446)

Proceeds from FHLB advances, net	27,700		384,500

Proceeds from notes payable	0		41,000
Repayments of notes payable	(4,286)		(6,286)



Proceeds from issuance of subordinated debentures, net	61,953		0
Net decrease in other borrowings	(21,848)		(58,530)
Cash dividends paid on common stock	(14,176)		(12,055)



Payments for the repurchase of common stock	(15,347)		(11,817)


Payments for the issuance of equity instruments, net	(562)		(880)


Net cash provided by financing activities	938,637		291,139
Net increase in cash and cash equivalents	224,959		59,950
Cash and cash equivalents, beginning of period	167,256		196,552
Cash and cash equivalents, end of period	$	392,215	$	256,502
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest	$	26,858	$	49,862
Income taxes	7,514		12,955
Noncash transactions:
Transfer to other real estate owned in settlement of loans	$	261	$	7,964
Sales of other real estate financed	48		0
Right-of-use assets obtained in exchange for lease obligations	200		0
Common shares issued in connection with acquisition	0		171,885

Transfer of securities from available for sale to held to maturity	163,592		0

Nine months ended September 30,
(in thousands, except share data) 2019 2018
Cash flows from operating activities:
Net income $ 63,649
$ 65,688
Adjustments to reconcile net income to net cash provided by operating activities
Depreciation 4,187
2,622
Provision for loan losses 5,031
4,524
Deferred income taxes 4,777
2,822
Net amortization of debt securities 2,009
1,338
Amortization of intangible assets 3,993
1,908
Gain on sale of investment securities (45 ) (9 )
Mortgage loans originated for sale (39,260 ) (30,136 )
Proceeds from mortgage loans sold 33,503
32,839
Gain on sale of other real estate (59 ) (13 )
Gain on state tax credits, net (469 ) (508 )
Share-based compensation 3,016
2,554
Accretion of loan discount (8,101 ) (1,253 )
Changes in:
Accrued interest receivable (1,031 ) (5,811 )
Accrued interest payable 560
703
Other assets 1,270
(16,309 )
Other liabilities (6,460 ) (1,093 )
Net cash provided by operating activities 66,570
59,866
Cash flows from investing activities:
Acquisition cash purchase price, net of cash and cash equivalents acquired (23,377 ) —
Increase in loans (197,514 ) (172,449 )
Proceeds received from:
Sale of debt securities, available for sale 314,189
1,451
Paydown or maturity of debt securities, available for sale 95,386
61,881
Paydown or maturity of debt securities, held to maturity 4,760
4,988
Redemption of other investments 43,034
30,593
Sale of state tax credits held for sale 3,978
3,056
Sale of other real estate 4,380
467
Payments for the purchase of:
Available for sale debt securities (467,695 ) (108,121 )
Other investments (61,226 ) (44,597 )
State tax credits held for sale (9,666 ) (4,704 )
Fixed assets, net (4,008 ) (2,369 )
Net cash used in investing activities (297,759 ) (229,804 )
Cash flows from financing activities:
Net increase (decrease) in noninterest-bearing deposit accounts 25,653
(61,781 )
Net increase (decrease) in interest-bearing deposit accounts (70,446 ) 115,843
Proceeds from Federal Home Loan Bank advances 1,352,000
1,142,500
Repayments of Federal Home Loan Bank advances (967,500 ) (914,000 )
Proceeds from notes payable 41,000
—
Repayments of notes payable (6,286 ) —
Net decrease in other borrowings (58,530 ) (91,879 )
Cash dividends paid on common stock (12,055 ) (7,866 )
Payments for the repurchase of common stock (11,817 ) (6,840 )
Payments for the issuance of equity instruments, net (880 ) (3,297 )
Net cash provided by financing activities 291,139
172,680
Net increase in cash and cash equivalents 59,950
2,742
Cash and cash equivalents, beginning of period 196,552
153,323
Cash and cash equivalents, end of period $ 256,502
$ 156,065
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $ 49,862
$ 31,785
Income taxes 12,955
8,492
Noncash transactions:
Transfer to other real estate owned in settlement of loans $ 7,964
$ —
Common shares issued in connection with acquisition 171,885
—

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

ENTERPRISE FINANCIAL SERVICES CORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Unaudited)

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

The significant accounting policies used by Enterprise Financial Services Corp (the “Company,” “EFSC,” or “Enterprise”) in the preparation of the condensed consolidated financial statements are summarized below:

Business and Consolidation

Enterprise is a financial holding company that provides a full range of banking and wealth management services to individuals and corporate customers located in the Arizona, Kansas, Missouri, and New Mexico markets through its banking subsidiary, Enterprise Bank & ~~Trust (the “Bank”).~~Trust.

Operating results for the three and nine months ended September 30, ~~2019~~2020 are not necessarily indicative of the results that may be expected for any other interim period or for the year ending December 31, ~~2019.~~2020. For further information, refer to the consolidated financial statements and footnotes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, ~~2018,~~2019, as filed with the ~~Securities and Exchange Commission.~~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 ~~the accounting principles generally accepted in the United States of America (“U.S. GAAP”)~~GAAP for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Except as disclosed herein, there has been no material change in the information disclosed in the Notes to Consolidated Financial Statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019.

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.

Recently Adopted Accounting Pronouncements

~~During the first quarter of 2019,~~On January 1, 2020, the Company adopted ~~Accounting Standards Update (“ASU”) 2017-08,~~ASU 2016-13 “Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments,” which replaces the incurred loss methodology with an expected loss methodology commonly referred to as the CECL methodology. The measurement of expected credit losses under the CECL methodology is applicable to financial assets measured at amortized cost, including loan receivables and held-to-maturity debt securities. It also applies to off-balance sheet credit exposures such as loan commitments, standby letters of credit, financial guarantees, and other similar instruments. In addition, this standard made changes to the accounting for available-for-sale debt securities, including the requirement for credit losses to be presented as an allowance rather than as a write-down on available-for-sale debt securities.

The Company adopted this standard using the modified retrospective method for all financial assets measured at amortized cost, and off-balance-sheet credit exposures. Results for reporting periods beginning after January 1, 2020 are presented under the new standard while prior period amounts continue to be reported in accordance with previously applicable GAAP. The Company recorded an after-tax decrease to retained earnings of $18.1 million as of January 1, 2020 for the cumulative effect of adopting this standard.

The Company adopted this standard using the prospective transition approach for PCD assets that were previously classified as PCI assets. Management did not reassess whether PCI assets met the criteria of PCD assets as of the date of the adoption.

The Company elected not to maintain PCI pools for certain loans which are now accounted for individually. Thus they are now included in nonperforming and classified loans. Management did not reassess whether modifications to individual acquired financial assets accounted for in pools were troubled debt restructurings as of the date of adoption.

The following table illustrates the impact of adoption:



($ in thousands)	December 31, 2019		Impact of Adoption		January 1, 2020
Assets:
Loans	$	5,314,337	$	7,091	$	5,321,428
Allowance for credit losses on loans	43,288		28,387		71,675
Allowance for credit losses on held-to-maturity debt securities	0		303		303
Deferred tax asset	14,851		5,898		20,749

Liabilities:
Reserve for unfunded commitments	430		2,413		2,843

Shareholders’ Equity
Retained Earnings	380,737		(18,114)		362,623

The Company also adopted ASU 2018-13, “~~Receivables - Nonrefundable Fees and Other Costs (Subtopic 310-20), Premium Amortization on Purchased Callable Debt Securities.”~~ ~~ASU 2017-08 shortens the amortization period of certain callable debt securities held at a premium~~Fair Value Measurement (Topic 820): Disclosure Framework—Changes to the ~~earliest call~~Disclosure Requirements for Fair Value Measurement” on January 1, 2020. The Company previously selected the option to adopt the removal or modification of disclosures during the second quarter of 2019. The amendments on changes in unrealized gains and losses, the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements, and the narrative description of measurement uncertainty are applied prospectively for only the most recent interim or annual period presented. All other amendments are applied retrospectively to all periods presented upon their effective date. The adoption of this update did not have a material effect on the Company's consolidated financial statements.

Accounting Standards Issued but not yet Adopted

FASB ASU 2020-04, “Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting.” In March 2020, the FASB issued “Reference Rate Reform (Topic 848)” whichprovides optional expedients and exceptions for contracts, hedging relationships, and other transactions that reference LIBOR or another reference rate expected to be discontinued because of reference rate reform. The guidance is effective for contract modifications as of March 12, 2020 through December 31, 2022. The Company ~~adopted ASU 2016-02~~ is currently evaluating the optional expedients and exceptions and has not yet determined the impact this standard may have on its consolidated financial statements.

~~“Leases (Topic 842)”~~

Loans

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

Accrued interest receivable totaled $24.6 million at September 30, 2020 and was reported in Other Assets on the consolidated balance sheets.

PCD Loans

The Company has purchased loans, some of which have experienced more than insignificant credit deterioration since origination. PCD loans are recorded at the amount paid. An ACL is determined using the ~~optional transition method effective~~same methodology as other loans held for investment. The initial ACL determined on ~~January 1, 2019. ASU 2016-02 requires organizations~~a collective basis is allocated to individual loans. The sum of the loan’s purchase price and ACL becomes its initial amortized cost basis. The difference between the initial amortized cost basis and the par value of the loan is a noncredit discount or premium, which is amortized into interest income over the life of the loan. Subsequent changes to the ACL are recorded through provision expense.

Allowance for Credit Losses on Loans

The ACLL is a valuation account that ~~lease assets~~is deducted from the amortized cost basis to ~~recognize~~present the net amount expected to be collected. Loans are charged-off against the allowance when management believes the uncollectibility of a loan balance is confirmed.

Management estimates the allowance using relevant available information, from internal and external sources, relating to past events, current conditions, and reasonable and supportable forecasts. Credit loss experience provides the basis for the estimation of expected credit losses. Adjustments to historical loss information are made for differences in current loan-specific risk characteristics such as differences in underwriting standards, portfolio mix, delinquency level, or term as well as for changes in environmental conditions, such as changes in unemployment rates, property values, or other relevant factors.

The ACLL is measured on a collective basis when similar risk characteristics exist. The Company has identified the following portfolio segments:

C&I – C&I loans consist of loans to small and medium-sized businesses in a wide variety of industries. These loans are generally collateralized by inventory, accounts receivable, equipment, real estate and other commercial assets, and ~~liabilities~~may be supported by other credit enhancements such as personal guarantees. Risk arises primarily due to a difference between expected and actual cash flows of the borrower. However, the recoverability of these loans is also dependent on other factors primarily dictated by the type of collateral securing these loans. The fair value of the collateral securing these loans may fluctuate as market conditions change. Included within C&I are revolving loans supported by borrowing bases that fluctuate depending on the amount of underlying collateral. A portion of C&I loans consists of enterprise value lending, which are loans with senior debt exposure to private equity backed companies.

CRE – CRE loans include various types of loans for which the ~~rights~~Company holds real property as collateral. Commercial real estate lending activity is typically restricted to owner-occupied properties or to investor properties that are owned by customers with a current banking relationship. The primary risks of CRE loans include the borrower’s inability to pay, material decreases in the value of the real estate being held as collateral and ~~obligations created~~significant increases in interest rates, which may make the real estate mortgage loan unprofitable. Real estate loans may be more adversely affected by ~~leases.~~conditions in the real estate markets or in the general economy.

Construction and Land Development – The Company ~~recorded $15.5 million for right-to-use assets~~originates loans to finance construction projects including one- to four-family residences, multifamily residences, commercial office, and ~~$16.2 million for lease liabilities related to operating leases.~~ ~~The Company elected~~industrial projects. Construction loans are generally collateralized by first liens on the practical expedients package which eliminates (1) the need to reassess whether any expired or existing contracts are or contain a lease, (2) the need to reassess the lease classification, and (3) the need to reassess initial direct costs for any existing leases. The ~~Company also elected an accounting policy to not recognize assets and liabilities on leases 12 months or less, and an accounting policy for equipment and~~ real estate ~~leases~~and have floating interest rates. Construction loans are considered to ~~not separate nonlease components because~~have higher risks due to construction completion and timing risk, and the ultimate repayment being sensitive to interest rate changes, governmental regulation of real property and the availability of long-term financing. Additionally, economic conditions may impact ~~was immaterial.~~

~~Acquisitions~~

~~Acquisitions~~the Company’s ability to recover its investment in construction loans. Adverse economic conditions may negatively impact the real estate market which could affect the borrowers’ ability to complete and ~~business combinations are accounted for using~~sell the acquisition method of accounting. The assets and liabilities of the acquired entities have been recorded at their estimated fair values at the date of acquisition. Goodwill represents the excess of the purchase price overproject. Additionally, the fair value of ~~net assets acquired,~~the underlying collateral may fluctuate as market conditions change.

Residential Real Estate – The Company originates loans to finance one- to four-family residences, secured by both first and second liens. Repayment of these loans is dependent on the borrowers’ ability to pay and the fair value of the underlying collateral. Residential loans with a second lien are inherently riskier due to the junior lien position.

Agricultural – Agricultural loans are generally secured with equipment, cattle, crops or other non-real property and at times the underlying real property. Agricultural loans are primarily included as a component of CRE and C&I loans.

Consumer – The Company provides a broad range of consumer loans to customers, including personal lines of credit, credit cards and automobile loans. Repayment of these loans is dependent on the ~~amount assigned~~borrowers’ ability to ~~identifiable intangible assets.~~ pay and the fair value of the underlying collateral. Consumer loans are included as a component of Other loans.

The ~~purchase price allocation process requires an estimation~~Company utilizes a DCF method to measure the ACL on loans collectively evaluated that are sub-segmented by credit risk levels. The DCF method incorporates assumptions for probability of default, loss given default, prepayments and curtailments over the contractual term of the ~~fair values~~loans. In determining the probability of default, the Company utilized a regression analysis to determine certain economic factors that are relevant loss drivers in the portfolio segments based on historical or peer evaluations. National unemployment is a loss driver used in nearly all portfolios, except Consumer. The annual percentage change in gross domestic product is also used in C&I, Construction, Agricultural and Consumer portfolios. The annual percentage change in a commercial real estate index, national house price index and the consumer price index are used in the CRE, Residential Real Estate and Consumer portfolios, respectively. The contractual term excludes expected extensions, renewals, and modifications unless either of the ~~assets acquired and~~following applies: management has a reasonable expectation at the ~~liabilities assumed. When~~reporting date that a ~~business combination agreement provides for~~troubled debt restructuring will be executed with an ~~adjustment to~~individual borrower or the cost of the combination contingent on future events, the Company includes an estimate of the acquisition-date fair value as part of the cost of the combination. To determine the fair values, the Company utilizes third party valuations, such as appraisals,extension or ~~internal valuations based on discounted cash flow analyses or other valuation techniques. The results of operations of the acquired business~~renewal options are included in the ~~Company’s consolidated financial statements from~~original or modified contract at the reporting date ~~of acquisition. Merger-related costs~~and are ~~costs~~not unconditionally cancellable by the Company.

The Company uses a one-year reasonable and supportable forecast that considers baseline, upside and downside economic scenarios. For periods beyond the forecast period, the Company ~~incurs~~reverts to effect a business combination. The Company presents merger-related expenses as a separate component of noninterest expenses on the Condensed Consolidated Statements of Operations. Merger-related expenses include costs directly related to merger or acquisition activity and include legal and professional fees, system consolidation and conversion costs, gain orhistorical loss on sale of investment securities incurred through repositioning the acquired investment portfolio, and compensation costs such as severance and retention incentives for employees impacted by acquisition activity. The Company accounts for merger-related costs as expenses in the periods in which the costs are incurred and the services are received.

~~Revenue~~

The Company’s revenues are primarily composed of interest income on financial instruments, including investment securities. Other noninterest income is primarily comprised of service charges on deposit accounts, wealth management revenue, card services revenue and gains on sale of other real estate. Descriptions of our revenue-generating activities, which are presented in our income statement as components of noninterest income, are as follows:

Service charges on deposit accounts - represents fees generated from a variety of deposit products and services provided to customers under a day-to-day contract. These fees are recognized on a daily or monthly basis.

~~Wealth management revenue - represents monthly fees earned from directing, holding, and managing customers’ assets. Revenue is recognized over regular intervals, either monthly or quarterly.~~

~~Card services revenue - represents revenue earned from merchant, debit and credit cards as incurred and includes a contra revenue account for rebates.~~

~~Gain on sale of other real estate - represents income recognized at delivery of control of a property at the time of a real estate closing.~~

~~Leases~~

We determine if an arrangement is a lease at inception. Operating leases are included in operating lease right-of-use (“ROU”) assets on our consolidated balance sheet. ROU assets represent our right to use an underlying asset for the lease term and lease liabilities represent our obligation to make lease payments arising from the lease. Operating lease ROU assets and liabilities are recognized at commencement date based on the present value of lease payments over the lease term. We use our incremental borrowing rate based on the information available at commencement date in determining the present value of lease payments. The operating lease ROU asset also includes any lease payments made prior to commencement and excludes lease incentives. Our lease terms may include options to extend or terminate the lease when it is reasonably certain that we will exercise that option. Lease expense for lease payments is recognizedrates on a straight-line basis over a one-year period.

Loans that do not share risk characteristics are evaluated on an individual basis. Loans evaluated individually are not also included in the ~~lease term. We account for the lease and non-lease components as a single lease component.~~

~~Assumptions and judgments~~collective evaluation. When management determines that foreclosure is probable, expected credit losses are used in applying ASC 842 and may include (1) the decision framework for identifying a lease, (2) the accounting policy election for equipment and real estate leases to not separate nonlease components, and (3) the discount rate for determining the initial present value of the lease payments which is based on information available at the commencement date for determining the lease term and assessing if optional periods are reasonably likely to be exercised. For the calculation at January 1, 2019, the discount rate was based on the remaining lease terms.

~~Derivative Instruments and Hedging Activities~~

~~FASB ASC 815,~~ ~~Derivatives and Hedging~~ ~~(“ASC 815”), provides the disclosure requirements for derivatives and hedging activities with the intent to provide users of financial statements with an enhanced understanding of: (a) how~~

and why an entity uses derivative instruments, (b) how the entity accounts for derivative instruments and related hedged items, and (c) how derivative instruments and related hedged items affect an entity’s financial position, financial performance, and cash flows. Further, qualitative disclosures are required that explain the Company’s objectives and strategies for using derivatives, as well as quantitative disclosures about the fair value of and gains and losses on derivative instruments, and disclosures about credit-risk-related contingent features in derivative instruments.

The Company records all derivatives on the balance sheet at fair value. The accounting for changes in the fair value of derivatives depends on the intended use of the derivative, whether the Company has elected to designate a derivative in a hedging relationship and apply hedge accounting and whether the hedging relationship has satisfied the criteria necessary to apply hedge accounting. Derivatives designated and qualifying as a hedge of the exposure to changes in the fair value of an asset, liability, or firm commitment attributable to a particular risk, such as interest rate risk, are considered fair value hedges. Derivatives designated and qualifying as a hedge of the exposure to variability in expected future cash flows, or other types of forecasted transactions, are considered cash flow hedges. Hedge accounting generally provides for the matching of the timing of gain or loss recognition on the hedging instrument with the recognition of the changes in the fair value of the ~~hedged asset or liability that are attributable to~~collateral at the hedged risk in a fair value hedge or the earnings effect of the hedged forecasted transactions in a cash flow hedge. The Company may enter into derivative contracts that are intended to economically hedge certain of its risk, even though hedge accounting does not apply, or the Company elects not to apply hedge accounting.reporting date, adjusted for selling costs as appropriate.

The Company does not offset derivative asset and liability positions. However, the Company's exposure to the credit risk of its derivative financial instruments is generally mitigated by master netting agreements with its counterparties.

The Alternative Reference Rates Committee (“ARRC”) has proposed that the Secured Overnight Funding Rate (“SOFR”) replace LIBOR. ARRC has proposed the transition to SOFR from LIBOR until the end of 2021. The Company has material contracts indexed to LIBOR. Industry organizations are currently working on the transition plan. The Company is monitoring this activity and evaluating the risks involved.

NOTE 2 - ~~ACQUISITION~~ACQUISITIONS

Acquisition of ~~Trinity Capital Corporation.~~Seacoast Commerce Banc Holdings.

On ~~March 8, 2019,~~August 20, 2020, the Company ~~closed its acquisition of 100% of Trinity Capital Corporation~~and the Bank entered into a definitive agreement with Seacoast Commerce Banc Holdings (“~~Trinity”~~SCBH”) and its wholly-owned bank subsidiary, ~~Los Alamos National~~Seacoast Commerce Bank (“~~LANB”~~Seacoast”)~~. Trinity operated 6 full-service retail~~, pursuant to which the Company will acquire SCBH and ~~commercial banking offices in Los Alamos, Santa Fe, and Albuquerque, New Mexico.~~

~~Trinity shareholders received cash consideration~~Seacoast. Based on the number of ~~$1.84 per share~~shares of ~~Trinity~~Seacoast common stock and ~~0.1972 shares of EFSC common~~restricted stock per share of Trinity common stock with cash in lieu of fractional shares. Aggregate consideration at closing was 4.0 million shares of EFSC common stock and $37.3 million cash paid to Trinity shareholders. Based on EFSC’s closing stock price of $43.07 on March 7, 2019, the overall transaction had a value of $209.2 million. The Company recognized $18.0 million and $1.3 million of merger-related costs recorded in noninterest expense in the statement of operations for the nine months ended September 30, 2019, and the year ended December 31, 2018, respectively.

The acquisition of Trinity has been accounted for as a business combination using the acquisition method of accounting which requires assets acquired and liabilities assumed to be recognized at fair valueawards outstanding as of the ~~acquisition date. Goodwill~~record date of ~~$93.9 million arising from~~September 24, 2020 and the ~~acquisition consists largely~~closing price of Enterprise's common stock on Nasdaq of $27.27 on September 30, 2020, the implied value of the ~~synergies and economies~~aggregate stock consideration would be approximately $135.3 million.

Pursuant to the terms of ~~scale expected from combining~~ the ~~operations~~definitive agreement, upon consummation of ~~Trinity into Enterprise. The goodwill is assigned as part~~the proposed transaction, SCBH shareholders will receive 0.5061 shares of the Company’s ~~Banking reporting unit. None~~common stock for each share of SCBH common stock they hold. Headquartered in San Diego, California, Seacoast has five full-service banking branches in California and Nevada, and loan and deposit production offices throughout Arizona, California, Colorado, Illinois, Indiana, Massachusetts, Michigan, Nevada, Ohio, Oregon, Texas, Utah and Washington. The proposed transaction has been approved by the FDIC and the Federal Reserve Bank of St. Louis. The closing of the ~~goodwill recognized~~proposed transaction, which is ~~expected~~anticipated to ~~be deductible for income tax purposes.~~

~~The following table presents the assets acquired and liabilities assumed of Trinity as of March 8, 2019. Additional adjustments may be recorded~~occur during the ~~allocation period specified by ASC 805 as additional information becomes known.~~

(in thousands) As Recorded by Trinity Adjustments As Recorded by EFSC
Assets acquired:
Cash and cash equivalents $ 13,899
$ —
$ 13,899
Interest-earning deposits greater than 90 days 100
—
100
Securities 428,715
(619 ) (a) 428,096
Loans 705,057
(20,743 ) (b) 684,314
Other real estate 5,284
(772 ) (c) 4,512
Other investments 6,673
—
6,673
Fixed assets 27,586
(300 ) (d) 27,286
Accrued interest receivable 3,997
—
3,997
Intangible assets —
23,066
(e) 23,066
Deferred tax assets 10,708
(1,057 ) (f) 9,651
Other assets 35,045
(5,008 ) (g) 30,037
Total assets acquired $ 1,237,064
$ (5,433 ) $ 1,231,631

Liabilities assumed:
Deposits $ 1,081,151
$ 36
(h) $ 1,081,187
Subordinated debentures 26,806
(3,972 ) (i) 22,834
Federal Home Loan Bank advances 6,800
171
(j) 6,971
Accrued interest payable 370
—
370
Other liabilities 5,842
(827 ) (k) 5,015
Total liabilities assumed $ 1,120,969
$ (4,592 ) $ 1,116,377

Net assets acquired $ 116,095
$ (841 ) $ 115,254

Consideration paid:
Cash $ 37,275
Common stock 171,885
Total consideration paid $ 209,160

Goodwill $ 93,906

~~(a)Fair value adjustments~~fourth quarter of ~~the securities portfolio as of the acquisition date.~~


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


~~(c)~~	~~Fair value adjustment based on the Company’s evaluation of the acquired OREO portfolio.~~


~~(d)~~	~~Fair value adjustments based on the Company’s evaluation of the acquired premises and equipment.~~


~~(e)~~	~~Record the core deposit intangible asset on the acquired core deposit accounts. Amount to be amortized using a sum of years digits method over a useful life of 10 years.~~


~~(f)~~	~~Adjustment for deferred taxes at the acquisition date.~~


~~(g)~~	~~Fair value adjustment of other assets at the acquisition date.~~


~~(h)~~	~~Fair value adjustment to time deposits.~~


~~(i)~~	~~Fair value adjustment to the trust preferred securities at the acquisition date.~~


~~(j)~~	~~Fair value adjustment to the Federal Home Loan Bank borrowings.~~


~~(k)~~	~~Fair value adjustment of other liabilities recorded during the second quarter of 2019 upon continued refinement of the fair values.~~

The following table provides the unaudited pro forma information for the results of operations for the nine months ended September 30, 2019 and 2018, as if the acquisition had occurred on January 1, 2018. The pro forma results combine the historical results of Trinity with the Company’s Consolidated Statements of Income, adjusted for the

impact of the application of the acquisition method of accounting including loan discount accretion, intangible assets amortization, and deposit and trust preferred securities premium accretion, net of taxes. The pro forma results have been prepared for comparative purposes only and are not necessarily indicative of the results that would have been obtained had the acquisition actually occurred on January 1, 2018. No assumptions have been applied2020, remains subject to the ~~pro forma results~~approval of ~~operations regarding possible revenue enhancements, expense efficiencies~~Seacoast’s shareholders and the Missouri Division of Finance, as well as the satisfaction or ~~asset dispositions. Only the acquisition-related expenses that have been incurred~~waiver, as applicable, of ~~September 30, 2019 are included in net income in the table below.~~ all closing conditions.

Pro Forma
Nine months ended September 30,
(in thousands, except per share data) 2019 2018
Total revenues (net interest income plus noninterest income) $ 221,055
$ 211,004
Net income 78,055
59,473
Diluted earnings per common share 3.00
2.18

NOTE 3 - EARNINGS PER SHARE

Basic earnings per common share data is calculated by dividing net income by the weighted average number of common shares outstanding during the period. Common shares outstanding include common stock and restricted stock awards where recipients have satisfied the vesting terms. 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) 2019 2018 2019 2018
Net income as reported $ 29,069
$ 22,516
$ 63,649
$ 65,688

Weighted average common shares outstanding 26,778
23,148
25,878
23,129
Additional dilutive common stock equivalents 90
181
98
211
Weighted average diluted common shares outstanding 26,868
23,329
25,976
23,340

Basic earnings per common share: $ 1.09
$ 0.97
$ 2.46
$ 2.84
Diluted earnings per common share: 1.08
0.97
$ 2.45
$ 2.81


	Three months ended September 30,						Nine months ended September 30,
(in thousands, except per share data)	2020		2019		2020		2019
Net income as reported	$	17,951	$	29,069	$	45,453	$	63,649








Weighted average common shares outstanding	26,217		26,778		26,290		25,878

Additional dilutive common stock equivalents	11		90		21		98
Weighted average diluted common shares outstanding	26,228		26,868		26,311		25,976

Basic earnings per common share:	$	0.68	$	1.09	$	1.73	$	2.46
Diluted earnings per common share:	0.68		1.08		$	1.73	$	2.45

For the three and nine months ended September 30, ~~2019~~2020 common stock equivalents of approximately ~~21,000~~132,000 and ~~26,000,~~139,000, respectively, were excluded from the earnings per share calculations because their effect would have been anti-dilutive. ~~For~~Comparatively, there were 21,000 and 26,000 common stock equivalents excluded in the ~~comparable~~prior year periods, ~~in 2018, the amounts were immaterial.~~respectively.

NOTE 4 - INVESTMENTS

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


	September 30, 2020
(in thousands)	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Allowance for Credit Losses		Fair Value
Available-for-sale securities:
Obligations of U.S. Government-sponsored enterprises	$	9,972	$	228	$	0	$	0	$	10,200
Obligations of states and political subdivisions	355,036		11,625		(539)		0		366,122
Agency mortgage-backed securities	581,111		24,884		(46)		0		605,949
U.S. Treasury bills	10,977		544		0		0		11,521
Corporate debt securities	11,502		134		(2)		0		11,634
Total securities available for sale	$	968,598	$	37,415	$	(587)	$	0	$	1,005,426
Held-to-maturity securities:

Obligations of states and political subdivisions	$	95,497	$	1,038	$	0	$	(16)	$	96,519
Agency mortgage-backed securities	109,954		2,468		(148)		0		112,274
Corporate debt securities	122,243		8,367		0		(629)		129,981
Total securities held-to-maturity	$	327,694	$	11,873	$	(148)	$	(645)	$	338,774
Less: Allowance for credit losses	645
Total securities held-to-maturity, net	$	327,049


	September 30, 2019										December 31, 2019
(in thousands)	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value		(in thousands)	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
Available for sale securities:
Available-for-sale securities:										Available-for-sale securities:
Obligations of U.S. Government-sponsored enterprises	$	9,949	$	84	$	—		$	10,033	Obligations of U.S. Government-sponsored enterprises	$	9,954	$	92	$	0	$	10,046
Obligations of states and political subdivisions	164,263		6,298		(248		)	170,313		Obligations of states and political subdivisions	207,269		6,118		(363)		213,024
Agency mortgage-backed securities	917,102		18,021		(1,012		)	934,111		Agency mortgage-backed securities	888,129		15,083		(1,191)		902,021
U.S. Treasury bills	9,969		278		—			10,247
Corporate debt securities	116,355		6,274		—			122,629
U.S. Treasury Bills										U.S. Treasury Bills	9,971		255		0		10,226
Total securities available for sale	$	1,217,638	$	30,955	$	(1,260	)	$	1,247,333	Total securities available for sale	$	1,115,323	$	21,548	$	(1,554)	$	1,135,317
Held to maturity securities:
Held-to-maturity securities:										Held-to-maturity securities:

Obligations of states and political subdivisions	$	12,468	$	167	$	—		$	12,635	Obligations of states and political subdivisions	$	11,704	$	170	$	0	$	11,874
Agency mortgage-backed securities	48,318		670		—			48,988		Agency mortgage-backed securities	46,346		675		0		47,021
Corporate debt securities										Corporate debt securities	123,116		128		(200)		123,044
Total securities held to maturity	$	60,786	$	837	$	—		$	61,623	Total securities held to maturity	$	181,166	$	973	$	(200)	$	181,939

During the second quarter of 2020, the Company transferred municipal securities and agency mortgage-backed securities with an aggregate book value of $163.6 million and an aggregate fair value of $175.1 million from available-for-sale to held-to-maturity. The Company believes the held- to-maturity category is more consistent with the Company’s intent for these securities. The transfer of securities was made at fair value at the time of transfer. The unamortized portion of the $11.5 million unrealized holding gain at the time of transfer is retained in accumulated other comprehensive income and in the carrying value of held-to-maturity securities. Such amounts are amortized over the remaining life of the securities.

December 31, 2018
(in thousands) Amortized Cost Gross
Unrealized Gains Gross
Unrealized Losses Fair Value
Available for sale securities:
    Obligations of U.S. Government-sponsored enterprises $ 99,926
$ —
$ (1,428 ) $ 98,498
    Obligations of states and political subdivisions 26,566
327
(83 ) 26,810
    Agency mortgage-backed securities 596,825
1,160
(11,849 ) 586,136
U.S. Treasury Bills $ 9,962
$ —
$ (37 ) $ 9,925
          Total securities available for sale $ 733,279
$ 1,487
$ (13,397 ) $ 721,369
Held to maturity securities:
   Obligations of states and political subdivisions $ 12,506
$ 16
$ (114 ) $ 12,408
   Agency mortgage-backed securities 53,173
—
(1,647 ) 51,526
          Total securities held to maturity $ 65,679
$ 16
$ (1,761 ) $ 63,934

During the third quarter of 2020, the Company sold seven agency mortgage-backed securities with an aggregate book value of $19.6 million for an aggregate gain of $0.4 million.

At September 30, ~~2019~~2020 and December 31, ~~2018,~~2019, there were no holdings of securities of any one issuer in an amount greater than 10% of shareholders’ equity, other than U.S. Government agencies and sponsored enterprises. The agency mortgage-backed securities are all issued by U.S. Government agencies and sponsored enterprises. Securities having a fair value of ~~$416.0~~$449.5 million and ~~$433.7~~$484.8 million at September 30, ~~2019~~2020 and December 31, ~~2018,~~2019, respectively, were pledged as collateral to secure deposits of public institutions and for other purposes as required by law or contract provisions.

The amortized cost and estimated fair value of debt securities at September 30, ~~2019,~~2020, 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 43 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	$	3,139	$	3,161	$	0	$	0
Due after one year through five years	32,281		33,232		10,187		10,587
Due after five years through ten years	16,828		17,443		125,476		133,063
Due after ten years	335,239		345,641		82,077		82,850
Agency mortgage-backed securities	581,111		605,949		109,954		112,274

	$	968,598	$	1,005,426	$	327,694	$	338,774

Available for sale Held to maturity
(in thousands) Amortized Cost Estimated Fair Value Amortized Cost Estimated Fair Value
Due in one year or less $ 1,079
$ 1,086
$ —
$ —
Due after one year through five years 27,564
28,081
3,879
3,929
Due after five years through ten years 127,062
133,705
8,589
8,706
Due after ten years 144,831
150,350
—
—
Agency mortgage-backed securities 917,102
934,111
48,318
48,988
$ 1,217,638
$ 1,247,333

$ 60,786

$ 61,623

The following table ~~represents~~presents a summary of available-for-sale investment securities ~~that had~~in an unrealized ~~loss:~~loss position:


	September 30, 2020
			Less than 12 months							12 months or more					Total
(in thousands)	Fair Value			Unrealized Losses		Fair Value		Unrealized Losses			Fair Value		Unrealized Losses

Obligations of states and political subdivisions	$	57,934		$	539	$	0	$	0		$	57,934	$	539
Agency mortgage-backed securities	21,211			46		0		0			21,211		46

Corporate debt securities	3,000			2		0		0			3,000		2
	$	82,145		$	587	$	0	$	0		$	82,145	$	587


The following table presents a summary of available-for-sale and held-to-maturity investment securities in an unrealized loss position:

	December 31, 2019
			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 states and political subdivisions	$	56,327		$	363	$	0	$	0		$	56,327	$	363
Agency mortgage-backed securities	131,693			756		41,491		435			173,184		1,191

Corporate debt securities	67,964			200		0		0			67,964		200
	$	255,984		$	1,319	$	41,491	$	435		$	297,475	$	1,754

September 30, 2019
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 states and political subdivisions $ 36,066
$ 248
$ —
$ —
$ 36,066
$ 248
Agency mortgage-backed securities 124,823
352
55,333
660
180,156
1,012
$ 160,889
$ 600

$ 55,333

$ 660

$ 216,222

$ 1,260

December 31, 2018
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 $ 19,622
$ 322
$ 78,876
$ 1,106
$ 98,498
$ 1,428
Obligations of states and political subdivisions 3,102
15
14,156
182
17,258
197
Agency mortgage-backed securities 87,357
2,211
389,770
11,285
477,127
13,496
U.S. Treasury bills —
—
9,925
37
9,925
37
$ 110,081
$ 2,548

$ 492,727

$ 12,610

$ 602,808

$ 15,158

The unrealized losses at both September 30, ~~2019,~~2020 and December 31, ~~2018,~~2019 were primarily attributable to changes in market interest rates ~~since~~after the securities were purchased. Management systematically evaluates investment securities for other-than-temporary declines in fair value on a quarterly basis. This analysis requires management to consider various factors, which include among other considerations (1) the present value of the cash flows expected to be collected compared to the amortized cost of the security, (2) duration and magnitude of the decline in value, (3) the financial condition of the issuer or issuers, (4) structure of the security, and (5) the intent to sell the security or whether it is more likely than not the Company would be required to sell the security before its anticipated recovery in market value. At September 30, ~~2019,~~2020, management performed its quarterly analysis of all securities with an unrealized loss and concluded no individual securities were other-than-temporarily impaired. Accrued interest receivable on available-for-sale debt securities totaled $4.0 million at September 30, 2020 and is excluded from the estimate of credit losses.

Accrued interest receivable on held-to-maturity debt securities totaled $2.4 million at September 30, 2020 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. At September 30, 2020, the ACL on held-to-maturity securities was $0.6 million.

NOTE 5 - LOANS

The loan portfolio is comprised of loans originated by the Company and loans acquired in connection with the Company’s acquisitions. These loans are accounted for using the guidance in the Accounting Standards Codification (ASC) sections 310-30 and 310-20. Loans accounted for using ASC 310-30 are sometimes referred to as purchased credit impaired (“PCI”) loans.

~~The~~following table ~~below shows the loan portfolio composition including carrying value categorized by loans accounted for at amortized cost, which includes our originated loans, and by loans accounted for as PCI.~~

(in thousands)

September 30, 2019 December 31, 2018
Loans accounted for at amortized cost $ 5,132,391
$ 4,303,600
Loans accounted for as PCI 95,623
46,401
Total loans $ 5,228,014
$ 4,350,001

At September 30, 2019, loans acquired in the Trinity acquisition included $562.4 million accounted for at amortized cost and $62.2 million accounted for as PCI. These loans were recorded at fair value with no allowance for loan losses.

~~The table below shows the composition of the allowance for loan losses:~~

(in thousands)

September 30, 2019 December 31, 2018
Allowance for loans accounted for at amortized cost $ 43,698
$ 42,295
Allowance for loans accounted for as PCI 857
1,181
Total allowance for loan losses $ 44,555
$ 43,476

~~Below is~~presents a summary of loans by ~~category~~category:


(in thousands)	September 30, 2020		December 31, 2019
Commercial and industrial	$	3,171,916	$	2,361,157
Real estate:
Commercial - investor owned	1,292,182		1,299,884
Commercial - owner occupied	735,704		697,437
Construction and land development	474,727		457,273
Residential	321,792		366,261
Total real estate loans	2,824,405		2,820,855
Other	151,230		134,941
Loans, before unearned loan fees	6,147,551		5,316,953
Unearned loan fees, net	(21,244)		(2,616)
Loans, including unearned loan fees	$	6,126,307	$	5,314,337

PPP loans totaled $838.6 million at September 30, ~~2019~~2020, or $819.1 million net of unearned fees of $19.5 million. The loan balance at September 30, 2020 also includes a discount on acquired loans of $19.8 million. At September 30, 2020 loans of $2.4 billion were pledged to FHLB and ~~December 31, 2018:~~the Federal Reserve Bank.

(in thousands) September 30, 2019 December 31, 2018
Commercial and industrial $ 2,287,722
$ 2,121,008
Real estate:
Commercial - investor owned 1,247,691
843,728
Commercial - owner occupied 660,433
604,498
Construction and land development 425,639
330,097
Residential 374,162
298,944
Total real estate loans 2,707,925
2,077,267
Consumer and other 139,090
107,351
Loans, before unearned loan fees 5,134,737
4,305,626
Unearned loan fees, net (2,346 ) (2,026 )
Loans, including unearned loan fees $ 5,132,391
$ 4,303,600

A summary of the activity in the ~~allowance~~ACLL by category for the three and nine months ended September 30, 2020 is as follows:


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











Balance at June 30, 2020	$	50,139	$	25,019	$	11,088	$	15,962	$	6,333	$	1,729	$	110,270
Provision for credit losses	8,929		4,869		(1,854)		2,873		(1,132)		342		14,027
Charge-offs	(2,006)		(272)		(30)		0		(173)		(103)		(2,584)
Recoveries	808		55		268		83		303		40		1,557
Balance at September 30, 2020	$	57,870	$	29,671	$	9,472	$	18,918	$	5,331	$	2,008	$	123,270


(in thousands)	Commercial and industrial		CRE - investor owned		CRE - owner occupied		Construction and land development		Residential real estate		Other		Total
Allowance for credit losses on loans:
Balance at December 31, 2019	$	27,455	$	5,935	$	4,873	$	2,611	$	1,280	$	1,134	$	43,288
CECL adoption	6,494		10,726		2,598		5,183		3,470		(84)		28,387
PCD loans immediately charged off	0		(5)		(57)		(217)		(1,401)		0		(1,680)
Balance at January 1, 2020	$	33,949	$	16,656	$	7,414	$	7,577	$	3,349	$	1,050	$	69,995




Provision for credit losses	27,688		10,692		1,740		11,220		1,623		1,150		54,113
Charge-offs	(5,372)		(498)		(30)		(31)		(327)		(294)		(6,552)
Recoveries	1,605		2,821		348		152		686		102		5,714
Balance at September 30, 2020	$	57,870	$	29,671	$	9,472	$	18,918	$	5,331	$	2,008	$	123,270

Reserves on enterprise value lending and agricultural lending, which are included in the categories above, represented $20.1 million and $1.8 million, respectively, as of September 30, 2020.

On January 1, 2020, the Company adopted the CECL methodology which added $28.4 million to the ACLL. Upon adoption, $1.7 million of nonaccrual PCD loans with individual outstanding balances of less than $100,000 were immediately charged-off. Under the CECL method, the Company recorded $14.0 million and $54.1 million in provision for credit losses on loans in the three and nine months ended September 30, 2020, respectively, compared to $1.8 million and $5.0 million in provision for loan losses ~~and~~in the ~~recorded investment~~prior year periods, respectively, under the incurred loss method. The increase in ~~loans by class and category based on impairment methodology through September 30,~~the provision for credit losses in 2020 was primarily due to a change in economic forecasts from the end of 2019 ~~and at December 31, 2018, is as follows:~~due to the COVID-19 pandemic. The deterioration in the forecast was most significant in the second quarter of 2020. The economic forecast improved in the third quarter of 2020 compared to the second quarter of 2020.

(in thousands) Commercial and industrial CRE - investor owned
CRE -
owner occupied
Construction and land development Residential real estate Consumer and other Total
Allowance for loan losses:
Balance at December 31, 2018 $ 29,039
$ 4,683
$ 4,239
$ 1,987
$ 1,616
$ 731
$ 42,295
Provision (provision reversal) for loan losses 1,445
769
(431 ) (252 ) (288 ) 233
1,476
Losses charged off (1,853 ) (120 ) (36 ) (45 ) (67 ) (129 ) (2,250 )
Recoveries 29
7
2
9
364
13
424
Balance at March 31, 2019 $ 28,660
$ 5,339

$ 3,774

$ 1,699

$ 1,625

$ 848

$ 41,945
Provision (provision reversal) for loan losses 1,781
364
591
(216 ) (345 ) (215 ) 1,960
Losses charged off (1,380 ) (431 ) —
—
(26 ) (53 ) (1,890 )
Recoveries 32
52
6
489
124
217
920
Balance at June 30, 2019 $ 29,093
$ 5,324

$ 4,371

$ 1,972

$ 1,378

$ 797

$ 42,935
Provision (provision reversal) for loan losses 867
333
419
(88 ) 193
109
1,833
Losses charged off (1,295 ) —
(22 ) —
(255 ) (86 ) (1,658 )
Recoveries 209
11
3
260
65
40
588
Balance at September 30, 2019 $ 28,874
$ 5,668

$ 4,771

$ 2,144

$ 1,381

$ 860

$ 43,698

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 80%, 10%, and 10%, respectively, which added approximately $1.2 million to the ACL over the baseline model. These forecasts incorporate an accommodative monetary policy and the current and anticipated impact of government stimulus. The Company has also recognized the risk posed by loans that have received multiple deferrals of principal and interest payments, including the hospitality sector, by allocating additional reserves to those segments. Some of the key risks to the forecasts that could result in future provision for credit losses are additional shutdowns and self-quarantines if another significant wave of COVID hits, small-business bankruptcies occur at higher levels, unemployment increases, or the next round of fiscal stimulus is delayed or does not occur.

(in thousands) Commercial and industrial CRE - investor owned
CRE -
owner occupied
Construction and land development Residential real estate Consumer and other Total
Balance September 30, 2019
Allowance for loan losses - Ending balance:
Individually evaluated for impairment $ 2,023
$ 258
$ —
$ —
$ 116
$ 11
$ 2,408
Collectively evaluated for impairment 26,851
5,410
4,771
2,144
1,265
849
41,290
Total $ 28,874
$ 5,668

$ 4,771

$ 2,144

$ 1,381

$ 860

$ 43,698
Loans - Ending balance:

Individually evaluated for impairment $ 11,433
$ 2,637
$ 1,423
$ —
$ 1,267
$ 11
$ 16,771
Collectively evaluated for impairment 2,276,289
1,245,054
659,010
425,639
372,895
136,733
5,115,620
Total $ 2,287,722
$ 1,247,691

$ 660,433

$ 425,639

$ 374,162

$ 136,744

$ 5,132,391

Balance December 31, 2018
Allowance for loan losses - Ending balance:
Individually evaluated for impairment $ 4,266
$ —
$ 109
$ —
$ 52
$ 26
$ 4,453
Collectively evaluated for impairment 24,773
4,683
4,130
1,987
1,564
705
37,842
Total $ 29,039
$ 4,683

$ 4,239

$ 1,987

$ 1,616

$ 731

$ 42,295
Loans - Ending balance:
Individually evaluated for impairment $ 12,950
$ 398
$ 2,135
$ —
$ 2,277
$ 311
$ 18,071
Collectively evaluated for impairment 2,108,058
843,330
602,363
330,097
296,667
105,014
4,285,529
Total $ 2,121,008
$ 843,728

$ 604,498

$ 330,097

$ 298,944

$ 105,325

$ 4,303,600

~~A summary of nonperforming loans individually evaluated for impairment by category at September 30, 2019 and December 31, 2018, and~~The following tables present the ~~income recognized on impaired loans is as follows:~~

September 30, 2019
(in thousands) Unpaid
Contractual
Principal Balance Recorded
Investment
With No Allowance
Recorded
Investment
With
Allowance
Total
Recorded Investment Related Allowance Average
Recorded Investment
Commercial and industrial $ 24,233
$ 1,096
$ 10,337
$ 11,433
$ 2,023
$ 12,429
Real estate:
    Commercial - investor owned 3,312
1,135
1,502
2,637
258
2,525
    Commercial - owner occupied 245
221
—
221
—
27
    Construction and land development —
—
—
—
—
—
    Residential 1,388
1,021
246
1,267
116
1,782
Consumer and other 1
—
11
11
11
11
Total $ 29,179
$ 3,473

$ 12,096

$ 15,569

$ 2,408

$ 16,774

December 31, 2018
(in thousands) Unpaid
Contractual
Principal Balance Recorded
Investment
With No Allowance
Recorded
Investment
With
Allowance
Total
Recorded Investment Related Allowance Average
Recorded Investment
Commercial and industrial $ 21,893
$ 3,294
$ 9,656
$ 12,950
$ 4,266
$ 13,827
Real estate:
    Commercial - investor owned 553
398
—
398
—
277
    Commercial - owner occupied 847
472
336
808
109
691
    Construction and land development —
—
—
—
—
—
    Residential 2,425
1,659
618
2,277
52
778
Consumer and other 329
—
312
312
26
—
Total $ 26,047
$ 5,823

$ 10,922

$ 16,745

$ 4,453

$ 15,573

Three months ended September 30, Nine months ended September 30,
(in thousands) 2019 2018 2019 2018
Total interest income that would have been recognized under original terms $ 247
$ 614
$ 893
$ 1,615
Total cash received and recognized as interest income on non-accrual loans 77
68
262
157
Total interest income recognized on accruing impaired loans 3
110
115
133

~~The~~ recorded investment in nonperforming loans by ~~category~~category:


	September 30, 2020
(in thousands)	Nonaccrual		Restructured, accruing		Loans over 90 days past due and still accruing interest		Total nonperforming loans		Nonaccrual loans with no allowance
Commercial and industrial	$	19,141	$	3,557	$	888	$	23,586	$	10,208
Real estate:
Commercial - investor owned	9,850		0		0		9,850		1,440
Commercial - owner occupied	1,511		0		0		1,511		1,511
Construction and land development	200		0		0		200		200
Residential	4,316		78		0		4,394		3,246
Other	19		0		63		82		0
Total	$	35,037	$	3,635	$	951	$	39,623	$	16,605

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


	December 31, 2019
(in thousands)	Nonaccrual		Restructured, accruing		Loans over 90 days past due and still accruing interest		Total nonperforming loans
Commercial and industrial	$	22,328	$	0	$	250	$	22,578
Real estate:
Commercial - investor owned	2,303		0		0		2,303
Commercial - owner occupied	213		0		0		213

Residential	1,251		79		0		1,330
Other	1		0		0		1
Total	$	26,096	$	79	$	250	$	26,425

The following table presents the amortized cost basis of collateral-dependent nonperforming loans by class of loan at September 30, ~~2019 and December 31, 2018, is as follows:~~ 2020:


	Type of Collateral
(in thousands)	Commercial Real Estate		Residential Real Estate		Blanket Lien		Other
Commercial and industrial	$	11,056	$	0	$	405	$	0
Real estate:
Commercial - investor owned	9,850		0		0		0
Commercial - owner occupied	1,511		0		0		0
Construction and land development	0		200		0		0
Residential	0		4,208		0		0
Other	0		0		0		18
Total	$	22,417	$	4,408	$	405	$	18

September 30, 2019
(in thousands) Non-accrual Restructured, accruing Loans over 90 days past due and still accruing interest Total
Commercial and industrial $ 11,409
$ —
$ 24
$ 11,433
Real estate:
    Commercial - investor owned 2,637
—
—
2,637
    Commercial - owner occupied 221
—
—
221
    Construction and land development —
—
—
—
    Residential 1,162
79
26
1,267
Consumer and other 1
—
10
11
       Total $ 15,430
$ 79

$ 60

$ 15,569

December 31, 2018
(in thousands) Non-accrual Restructured, accruing Total
Commercial and industrial $ 12,805
$ 145
$ 12,950
Real estate:
    Commercial - investor owned 398
—
398
    Commercial - owner occupied 808
—
808
    Construction and land development —
—
—
    Residential 2,197
80
2,277
Consumer and other 312
—
312
       Total $ 16,520
$ 225
$ 16,745

~~There were no loans over 90 days past due and still accruing at December 31, 2018.~~

~~There were no loans restructured~~The recorded investment by category for troubled debt restructurings that occurred during the three months ended September 30, ~~2019. The recorded investment by category for the portfolio loans restructured~~2020 are as follows:


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



Residential	1	217		217

Total	3	$	3,933	$	3,933

No troubled debt restructurings occurred during the three months ended September 30, ~~2018, is as follows:~~2019.

September 30, 2018
(in thousands, except for number of loans) Number of loans Pre-Modification Outstanding Recorded Balance Post-Modification Outstanding Recorded Balance
Commercial and industrial 1
$ 187
$ 187
Total 1
$ 187
$ 187

The recorded investment by category for ~~the portfolio loans restructured~~troubled debt restructurings that occurred during the nine months ended September 30, 2020 and 2019 ~~and 2018, is~~are as follows:



	September 30, 2020								September 30, 2019
(in thousands, except for number of loans)	Number of loans	Pre-Modification Outstanding Recorded Balance		Post-Modification Outstanding Recorded Balance		Number of loans	Pre-Modification Outstanding Recorded Balance		Post-Modification Outstanding Recorded Balance
Commercial and industrial	3	$	7,447	$	7,447	0	$	0	$	0
Real estate:

Commercial - owner occupied	0	0		0		1	188		188

Residential	3	372		372		2	332		332

Total	6	$	7,819	$	7,819	3	$	520	$	520

September 30, 2019 September 30, 2018
(in thousands, except for number of loans) Number of loans Pre-Modification Outstanding Recorded Balance Post-Modification Outstanding Recorded Balance Number of loans Pre-Modification Outstanding Recorded Balance Post-Modification Outstanding Recorded Balance
Commercial and industrial —
$ —
$ —
1
$ 187
$ 187
Real estate:
Commercial - owner occupied 1
188
188
—
—
—
Residential 2
332
332
—
—
—
Total 3
$ 520
$ 520
1
$ 187
$ 187

~~As of~~No troubled debt restructurings subsequently defaulted during the three or nine months ended September 30, ~~2019, the Company had $0.6 million in specific reserves allocated to restructured loans totaling $3.3 million.~~

2020. Restructured loans that subsequently defaulted during the three months ended September 30, 2019 included 1one commercial and industrial loan with a recorded balance of $0.1 million. Restructured loans that subsequently defaulted for the nine months ended September 30, 2019 included 2two commercial and industrial loans with an aggregate recorded balance of $0.4 ~~million. There were no~~million

In response to the COVID-19 pandemic, the Company has implemented short-term deferral programs allowing customers to primarily defer payments for up to 90 days. Deferrals under the CARES Act or interagency guidance are not included above as troubled debt ~~restructured loans that subsequently defaulted during the three and nine months ended~~restructurings. As of September 30, ~~2018.~~

2020, $690.8 million in loans have participated in the programs, including $355.8 million in loans deferring full principal and interest payments and $335.0 million in loans deferring principal only. As of September 30, 2020, $139.4 million loans remain in a deferral status. Interest of $4.5 million has been deferred and will be collected upon final maturity.

The aging of the recorded investment in past due loans by ~~portfolio~~ class ~~and category~~ at September 30, ~~2019 and December 31, 2018,~~2020 is shown below.


	September 30, 2020
(in thousands)	30-89 Days Past Due		90 or More Days Past Due		Total Past Due		Current		Total
Commercial and industrial	$	1,558	$	16,313	$	17,871	$	3,134,523	$	3,152,394
Real estate:
Commercial - investor owned	164		9,516		9,680		1,282,502		1,292,182
Commercial - owner occupied	1,166		1,190		2,356		733,348		735,704
Construction and land development	898		0		898		473,829		474,727
Residential	840		2,154		2,994		318,798		321,792
Other	46		82		128		149,380		149,508
Total	$	4,672	$	29,255	$	33,927	$	6,092,380	$	6,126,307

September 30, 2019
(in thousands)
30-89 Days
Past Due

90 or More
Days
Past Due

Total
Past Due
Current Total
Commercial and industrial $ 6,913
$ 7,314
$ 14,227
$ 2,273,495
$ 2,287,722
Real estate:
Commercial - investor owned 2,408
2,000
4,408
1,243,283
1,247,691
Commercial - owner occupied 1,166
—
1,166
659,267
660,433
Construction and land development 62
—
62
425,577
425,639
Residential 2,098
1,183
3,281
370,881
374,162
Consumer and other 107
—
107
136,637
136,744
Total $ 12,754
$ 10,497

$ 23,251

$ 5,109,140

$ 5,132,391

December 31, 2018
(in thousands)
30-89 Days
Past Due

90 or More
Days
Past Due

Total
Past Due
Current Total
Commercial and industrial $ 66
$ 10,257
$ 10,323
$ 2,110,685
$ 2,121,008
Real estate:
Commercial - investor owned 529
127
656
843,072
843,728
Commercial - owner occupied 292
565
857
603,641
604,498
Construction and land development 6
—
6
330,091
330,097
Residential 709
897
1,606
297,338
298,944
Consumer and other —
312
312
105,013
105,325
Total $ 1,602
$ 12,158

$ 13,760

$ 4,289,840

$ 4,303,600

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


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


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


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


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


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

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

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

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

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

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

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


•	~~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 non-accrual.

The recorded investment by risk category of the loans by ~~portfolio~~ class ~~and category~~ at September 30, ~~2019,~~2020, which is based upon the most recent analysis performed ~~and December 31, 2018,~~ is as follows:


	Term Loans by Origination Year
(in thousands)	2020		2019		2018		2017		2016		Prior		Revolving Loans Converted to Term Loans		Revolving Loans		Total
Commercial and industrial
Pass (1-6)	$	1,378,251	$	499,865	$	289,283	$	155,369	$	30,317	$	41,477	$	14,000	$	524,025	$	2,932,587
Watch (7)	41,834		11,685		3,421		11,619		22,835		105		0		63,198		154,697
Classified (8-9)	4,685		11,235		3,253		3,861		4,783		2,367		578		21,859		52,621
Total Commercial and industrial	$	1,424,770	$	522,785	$	295,957	$	170,849	$	57,935	$	43,949	$	14,578	$	609,082	$	3,139,905

Commercial real estate-investor owned
Pass (1-6)	$	338,563	$	277,705	$	180,534	$	119,492	$	138,823	$	158,678	$	4,969	$	33,539	$	1,252,303
Watch (7)	6,634		5,115		1,245		0		12,584		3,609		0		0		29,187
Classified (8-9)	64		498		8,362		455		248		1,065		0		0		10,692
Total Commercial real estate-investor owned	$	345,261	$	283,318	$	190,141	$	119,947	$	151,655	$	163,352	$	4,969	$	33,539	$	1,292,182

Commercial real estate-owner occupied
Pass (1-6)	$	192,320	$	184,427	$	80,269	$	72,465	$	43,855	$	68,277	$	2,715	$	43,882	$	688,210
Watch (7)	10,628		5,213		259		4,851		8,367		4,946		0		2,823		37,087
Classified (8-9)	400		508		4,538		812		0		4,149		0		0		10,407
Total Commercial real estate-owner occupied	$	203,348	$	190,148	$	85,066	$	78,128	$	52,222	$	77,372	$	2,715	$	46,705	$	735,704

Construction real estate
Pass (1-6)	$	147,206	$	152,879	$	77,811	$	18,076	$	11,676	$	11,899	$	0	$	25,516	$	445,063
Watch (7)	3,064		0		14,540		11,456		0		348		0		0		29,408
Classified (8-9)	222		0		0		0		0		34		0		0		256
Total Construction real estate	$	150,492	$	152,879	$	92,351	$	29,532	$	11,676	$	12,281	$	0	$	25,516	$	474,727

Residential real estate
Pass (1-6)	$	38,603	$	30,290	$	20,571	$	17,630	$	32,011	$	105,538	$	644	$	64,662	$	309,949
Watch (7)	212		852		828		0		0		2,122		277		801		5,092
Classified (8-9)	534		882		328		13		906		3,111		0		50		5,824
Total residential real estate	$	39,349	$	32,024	$	21,727	$	17,643	$	32,917	$	110,771	$	921	$	65,513	$	320,865

Other
Pass (1-6)	$	23,762	$	13,492	$	20,109	$	551	$	3,567	$	28,539	$	0	$	52,276	$	142,296
Watch (7)	0		1		5		0		0		2,685		0		1		2,692
Classified (8-9)	0		19		21		3		0		18		9		6		76
Total Other	$	23,762	$	13,512	$	20,135	$	554	$	3,567	$	31,242	$	9	$	52,283	$	145,064

September 30, 2019
(in thousands) Pass (1-6) Watch (7) Classified (8 & 9) Total
Commercial and industrial $ 2,091,433
$ 120,930
$ 75,359
$ 2,287,722
Real estate:
Commercial - investor owned 1,226,499
17,552
3,640
1,247,691
Commercial - owner occupied 625,365
28,763
6,305
660,433
Construction and land development 418,357
7,179
103
425,639
Residential 368,241
3,333
2,588
374,162
Consumer and other 136,738
—
6
136,744
Total $ 4,866,633
$ 177,757
$ 88,001
$ 5,132,391

In the table above, loan originations in 2020 and 2019 with a classification of watch or classified primarily represent renewals or modifications initially underwritten and originated in prior years.

December 31, 2018
(in thousands) Pass (1-6) Watch (7) Classified (8 & 9) Total
Commercial and industrial $ 1,927,782
$ 146,033
$ 47,193
$ 2,121,008
Real estate:
Commercial - investor owned 823,128
15,083
5,517
843,728
Commercial - owner occupied 563,003
31,834
9,661
604,498
Construction and land development 318,451
11,580
66
330,097
Residential 287,802
4,232
6,910
298,944
Consumer and other 105,007
6
312
105,325
Total $ 4,025,173
$ 208,768

$ 69,659
$ 4,303,600

~~Below is a summary of PCI~~For certain loans, ~~by category at September 30, 2019 and December 31, 2018:~~

September 30, 2019 December 31, 2018
(in thousands)
Weighted-
Average
Risk Rating¹
Recorded
Investment
PCI Loans

Weighted-
Average
Risk Rating¹
Recorded
Investment
PCI Loans
Commercial and industrial 5.77 $ 15,773
6.09 $ 2,159
Real estate:
Commercial - investor owned 7.04 39,329
7.19 23,939
Commercial - owner occupied 6.58 20,435
7.39 9,669
Construction and land development 5.75 7,847
6.03 4,548
Residential 6.31 12,011
6.40 6,082
Total real estate loans 79,622
44,238
Consumer and other 5.54 228
2.18 4
Total $ 95,623
$ 46,401
¹Risk ratings are based on the borrower’s contractual obligation, which is not reflective of the purchase discount.

~~The~~primarily credit cards, the Company evaluates credit quality based on the aging ~~of the recorded investment in past due PCI loans by portfolio class and category at September 30, 2019 and December 31, 2018, is shown below:~~

September 30, 2019
(in thousands)
30-89 Days
Past Due

90 or More
Days
Past Due

Total
Past Due
Current Total
Commercial and industrial $ 922
$ 532
$ 1,454
$ 14,319
$ 15,773
Real estate:
Commercial - investor owned —
2,115
2,115
37,214
39,329
Commercial - owner occupied —
1,023
1,023
19,412
20,435
Construction and land development 14
217
231
7,616
7,847
Residential 703
833
1,536
10,475
12,011
Consumer and other —
35
35
193
228
Total $ 1,639
$ 4,755

$ 6,394

$ 89,229

$ 95,623

December 31, 2018
(in thousands)
30-89 Days
Past Due

90 or More
Days
Past Due

Total
Past Due
Current Total
Commercial and industrial $ —
$ —
$ —
$ 2,159
$ 2,159
Real estate:
Commercial - investor owned 416
88
504
23,435
23,939
Commercial - owner occupied 591
6,279
6,870
2,799
9,669
Construction and land development —
—
—
4,548
4,548
Residential 146
37
183
5,899
6,082
Consumer and other —
—
—
4
4
Total $ 1,153
$ 6,404

$ 7,557

$ 38,844

$ 46,401

status.

The following table ~~is a roll forward of PCI~~presents the recorded investment on loans ~~net of the allowance for loan losses, for the nine months ended September 30, 2019 and 2018.~~based on payment activity:

(in thousands) Contractual Cashflows Non-accretable Difference Accretable Yield Carrying Amount
Balance December 31, 2018 $ 73,157
$ 15,299
$ 12,638
$ 45,220
Acquisitions 111,963
13,542
30,238
68,183
Principal reductions and interest payments (33,548 ) —
—
(33,548 )
Accretion of loan discount —
—
(8,014 ) 8,014
Changes in contractual and expected cash flows due to remeasurement 10,490
(2,057 ) (86 ) 12,633
Reductions due to disposals (9,121 ) (3,345 ) (40 ) (5,736 )
Balance September 30, 2019 $ 152,941
$ 23,439

$ 34,736

$ 94,766

Balance December 31, 2017 $ 112,710
$ 29,005
$ 13,964
$ 69,741
Principal reductions and interest payments (38,165 ) —
—
(38,165 )
Accretion of loan discount —
—
(5,118 ) 5,118
Changes in contractual and expected cash flows due to remeasurement 4,341
(8,939 ) 3,179
10,101
Balance September 30, 2018 $ 78,886
$ 20,066

$ 12,025

$ 46,795


	September 30, 2020
(in thousands)	Performing		Non Performing		Total
Commercial and industrial	$	12,425	$	64	$	12,489
Real estate:



Residential	927		0		927
Other	4,381		63		4,444
Total	$	17,733	$	127	$	17,860

The accretable yield is recognized in interest income over the estimated life of the acquired loans using the effective yield method. Outstanding customer balances on PCI loans were $121.5 million and $64.7 million as of September 30, 2019, and December 31, 2018, respectively.

~~NOTE 6 - LEASES~~

The Company has banking and limited-service facilities, datacenters, and certain equipment leased under agreements. Most of the leases expire between 2019 and 2024 and include one or more renewal options of up to five years. One lease expires in 2030. All leases are classified as operating leases.

For the three months ended For the nine months ended
(in thousands) September 30, 2019 September 30, 2019
Operating lease cost $ 821
$ 2,434
Short-term lease cost 81
215
Total lease cost $ 902
$ 2,649

~~Payments on operating leases included in the measurement~~The recorded investment by risk category of ~~lease liabilities during the nine months ended September 30,~~loans by class at December 31, 2019, ~~totaled $2.4 million. Right-of-use assets obtained in exchange for lease obligations totaled $0.4 million during the nine months ended September 30, 2019.~~

~~Supplemental balance sheet information related to leases~~ was as follows:


	December 31, 2019
(in thousands)	Pass (1-6)		Watch (7)		Classified (8 & 9)		Total*
Commercial and industrial	$	2,151,084	$	124,718	$	70,021	$	2,345,823
Real estate:
Commercial - investor owned	1,242,569		17,572		2,840		1,262,981
Commercial - owner occupied	643,276		28,773		6,473		678,522
Construction and land development	437,134		12,140		106		449,380
Residential	348,246		4,450		2,496		355,192
Other	132,096		3		51		132,150
Total	$	4,954,405	$	187,656	$	81,987	$	5,224,048

As of
(in thousands) September 30, 2019
Operating lease right-of-use assets, included in other assets $ 13,849
Operating lease liabilities, included in other liabilities 14,440

Operating leases
Weighted average remaining lease term 5 years
Weighted average discount rate 3.0 %
*Excludes $90.3 million of loans accounted for as PCI

~~Maturities of operating lease liabilities were as follows:~~

(in thousands)
Year Amount
2019 $ 818
2020 3,329
2021 3,355
2022 2,795
2023 2,191
Thereafter 3,143
Total operating lease liabilities, payments 15,631
Less: present value adjustment 1,191
Operating lease liabilities $ 14,440

As of September 30, 2019, the Company has an operating lease amendment for the expansion of an existing facility that has not yet commenced. This amendment is expected to commence in 2019 with a lease term of 8 years.

Lessor income was immaterial during the three and nine months ended September 30, 2019. During the second quarter of 2019, the Company executed an agreement, as landlord, to lease a portion of an owned building. The agreement commenced in the third quarter of 2019 with current payments prorated for partial occupancy. The initial term is for 7 years, with an annual rental income of $1.3 million.

NOTE 76 - COMMITMENTS AND CONTINGENCIES

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

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

The Company uses the same credit policies in making commitments and conditional obligations as it does for financial instruments included on its consolidated balance sheets. ~~At September 30, 2019, the amount of unadvanced commitments on impaired loans was insignificant.~~

The contractual amounts of off-balance-sheet financial instruments ~~as of September 30, 2019, and December 31, 2018,~~ are as follows:


(in thousands)	September 30, 2020		December 31, 2019
Commitments to extend credit	$	1,733,591	$	1,469,413
Letters of credit	47,206		47,969

(in thousands) September 30, 2019 December 31, 2018
Commitments to extend credit $ 1,426,131
$ 1,344,687
Letters of credit 51,375
44,665

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, ~~2019,~~2020, and December 31, ~~2018,~~2019, approximately ~~$128.4~~$170.0 million and ~~$68.5~~$144.8 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 $5.2 million and $0.4 million for estimated losses attributable to the unadvanced commitments at September 30, ~~2019,~~2020, and December 31, ~~2018.~~

2019, 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, ~~2019,~~2020, the approximate remaining terms of standby letters of credit range from 1 month to 3 years, 5 ~~years~~.months.

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 87 - DERIVATIVE FINANCIAL INSTRUMENTS

Risk Management Objective of Using Derivatives

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

Cash Flow Hedges of Interest Rate Risk

The Company’s objectives in using interest rate derivatives are to add stability to interest expense and to manage its exposure to interest rate movements. To accomplish this objective, the Company primarily uses interest rate swaps as part of its interest rate risk management strategy. Interest rate swaps designated as cash flow hedges involve the receipt of variable amounts from a counterparty in exchange for the Company making fixed-rate payments over the life of the agreements without exchange of the underlying notional amount. ~~During 2019, such~~These derivatives were used to hedge the variable cash flows associated with existing variable-rate debt. These cash flow hedges include: (1) swaps of variable three-month LIBOR on $62.0 million of junior subordinated debentures to a weighted-average-fixed rate of 2.62% over approximately six years, (2) a swap ~~variable 90 day LIBOR~~of the federal funds effective rate on $100.0 million of rolling

FHLB overnight advances to a fixed rate of ~~2.62%~~1.12% for three years, and (3) a swap of three-month LIBOR on ~~average~~$100.0 million of rolling three-month FHLB advances for ~~an average term of six~~five years.

For derivatives designated and that qualify as cash flow hedges of interest rate risk, the gain or loss on the derivative is recorded in accumulated other comprehensive income and subsequently reclassified into interest expense in the same period(s) during which the hedged transaction affects earnings. Amounts reported in accumulated other comprehensive income related to derivatives will be reclassified to interest expense as interest payments are paid on the Company’s variable-rate debt. During the next twelve months, the Company estimates that an additional ~~$0.5~~$2.9 million will be reclassified as an increase to interest expense.

Non-designated Hedges

Derivatives not designated as hedges are not considered speculative and result from a service the Company provides to certain customers. The Company executes interest rate swaps with commercial banking customers to facilitate their respective risk management strategies. Those interest rate swaps are simultaneously hedged by offsetting derivatives ~~that~~ 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 as well as their classification on the Balance Sheet as of September 30, 2019 and December 31, 2018.~~instruments:


	Notional Amount						Derivative Assets						Derivative Liabilities
(in thousands)	September 30, 2020		December 31, 2019		September 30, 2020		December 31, 2019		September 30, 2020		December 31, 2019
Derivatives Designated as Hedging Instruments:
Interest rate swap	$	261,962	$	61,962	$	0	$	0	$	10,011	$	2,872


Derivatives not Designated as Hedging Instruments:
Interest rate swap	$	1,044,139	$	749,819	$	33,999	$	11,055	$	34,229	$	11,875



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

Derivative Assets Derivative Liabilities
September 30, 2019 December 31, 2018 September 30, 2019 December 31, 2018
(in thousands) Notional Amount Balance Sheet Location Fair Value Notional Amount Balance Sheet Location Fair Value Balance Sheet Location Fair Value Balance Sheet Location Fair Value
Derivatives Designated as Hedging Instruments
Interest rate swap $ 185,886
Other Assets $ —
$ —
Other Assets $ —
Other Liabilities $ 3,785
Other Liabilities $ —
Total $ —
$ —
$ 3,785
$ —

Derivatives not Designated as Hedging Instruments
Interest rate swap $ 628,864
Other Assets $ 13,561
$ 494,567
Other Assets $ 2,217
Other Liabilities $ 14,666
Other Liabilities $ 2,217
Foreign exchange forward contracts —
Other Assets —
806
Other Assets 806
Other Liabilities —
Other Liabilities 806
Total $ 13,561
$ 3,023
$ 14,666
$ 3,023

The tables below present the effect of cash flow hedge accounting on Accumulated Other Comprehensive Income for the three and nine months ended September 30, 2019. The Company did not have cash flow hedging instruments in 2018. The loss reclassified from accumulated OCI is recorded as an adjustment to interest expense.

Amount of Loss Recognized in OCI Amount of Loss Reclassified from Accumulated OCI into Income
(in thousands) Three months ended September 30, 2019 Nine months ended September 30, 2019 Three months ended September 30, 2019 Nine months ended September 30, 2019
Derivatives in Cash Flow Hedging Relationships
Interest rate swap $ (846 ) $ (3,785 ) $ (42 ) $ (48 )
Total $ (846 ) $ (3,785 ) $ (42 ) $ (48 )

The table below presents a gross presentation, the effects of offsetting, and a net presentation of the Company’s financial instruments that are subject to ~~offsetting as of September 30, 2019 and December 31, 2018.~~offsetting. The gross amounts of assets or liabilities can be reconciled to the tabular disclosure of fair value. The ~~tabular disclosure of~~ fair value table above provides the location that financial assets and liabilities are presented on the Balance Sheet.


As of September 30, 2019
As of September 30, 2020													As of September 30, 2020
							Gross Amounts Not Offset in the Statement of Financial Position																	Gross Amounts Not Offset in the Statement of Financial Position
(in thousands)	Gross Amounts Recognized		Gross Amounts Offset in the Statement of Financial Position		Net Amounts of Assets presented in the Statement of Financial Position		Financial Instruments		Fair Value Collateral Posted		Net Amount		(in thousands)	Gross Amounts Recognized		Gross Amounts Offset in the Statement of Financial Position		Net Amounts of Assets presented in the Statement of Financial Position		Financial Instruments		Fair Value Collateral Posted		Net Amount
Assets:													Assets:
Interest rate swap	$	13,561	$	—	$	13,561	$	22	$	—	$	13,539	Interest rate swap	$	33,999	$	0	$	33,999	$	2	$	0	$	33,997

Liabilities:													Liabilities:
Interest rate swap	$	18,451	$	—	$	18,451	$	22	$	17,785	$	644	Interest rate swap	$	44,240	$	0	$	44,240	$	2	$	44,063	$	175
Securities sold under agreements to repurchase	162,920		—		162,920		—		162,920		—		Securities sold under agreements to repurchase	209,038		0		209,038		0		209,038		0

As of December 31, 2018
As of December 31, 2019													As of December 31, 2019
							Gross Amounts Not Offset in the Statement of Financial Position																	Gross Amounts Not Offset in the Statement of Financial Position
(in thousands)	Gross Amounts Recognized		Gross Amounts Offset in the Statement of Financial Position		Net Amounts of Assets presented in the Statement of Financial Position		Financial Instruments		Fair Value Collateral Posted		Net Amount		(in thousands)	Gross Amounts Recognized		Gross Amounts Offset in the Statement of Financial Position		Net Amounts of Assets presented in the Statement of Financial Position		Financial Instruments		Fair Value Collateral Posted		Net Amount
Assets:													Assets:
Interest rate swap	$	2,217	$	—	$	2,217	$	—	$	—	$	2,217	Interest rate swap	$	11,055	$	0	$	11,055	$	56	$	0	$	10,999

Liabilities:													Liabilities:
Interest rate swap	$	2,217	$	—	$	2,217	$	—	$	—	$	2,217	Interest rate swap	$	14,747	$	0	$	14,747	$	56	$	14,573	$	118
Securities sold under agreements to repurchase	221,450		—		221,450		—		221,450		—		Securities sold under agreements to repurchase	230,886		0		230,886		0		230,886		0

As of September 30, ~~2019,~~2020, the fair value of derivatives in a net liability position, which includes accrued interest but excludes any adjustment for nonperformance risk, related to these agreements was ~~$18.5~~$45.2 million. Further, the Company has minimum collateral posting thresholds with certain of its derivative counterparties and has posted collateral of ~~$17.8 million.~~$45.5 million.

NOTE 98 - FAIR VALUE MEASUREMENTS

The following table summarizes financial instruments measured at fair value on a recurring basis ~~as of September 30, 2019 and December 31, 2018,~~ segregated by the level of the valuation inputs within the fair value hierarchy utilized to measure fair value:


	September 30, 2020
(in thousands)	Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Total Fair Value
Assets
Securities available for sale
Obligations of U.S. Government-sponsored enterprises	$	0	$	10,200	$	0	$	10,200
Obligations of states and political subdivisions	0		366,122		0		366,122
Agency mortgage-backed securities	0		605,949		0		605,949
U.S. Treasury bills	0		11,521		0		11,521
Corporate debt securities	0		11,634		0		11,634
Total securities available for sale	0		1,005,426		0		1,005,426



Derivatives	0		33,999		0		33,999
Total assets	$	0	$	1,039,425	$	0	$	1,039,425

Liabilities
Derivatives	$	0	$	44,240	$	0	$	44,240
Total liabilities	$	0	$	44,240	$	0	$	44,240

September 30, 2019
(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 $ —
$ 10,033
$ —
$ 10,033
Obligations of states and political subdivisions —
170,313
—
170,313
Agency mortgage-backed securities —
934,111
—
934,111
U.S. Treasury bills —
10,247
—
10,247
Corporate debt securities —
122,629
122,629
Total securities available for sale —
1,247,333

—

1,247,333
Other investments 164
—
—
164
Derivatives —
13,561
—
13,561
Total assets $ 164
$ 1,260,894

$ —

$ 1,261,058

Liabilities

Derivatives $ —
$ 18,451
$ —
$ 18,451
Total liabilities $ —
$ 18,451

$ —

$ 18,451


	December 31, 2019
(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	$	0	$	10,046	$	0	$	10,046
Obligations of states and political subdivisions	0		213,024		0		213,024
Residential mortgage-backed securities	0		902,021		0		902,021
U.S. Treasury bills	0		10,226		0		10,226
Total securities available-for-sale	0		1,135,317		0		1,135,317



Derivative financial instruments	0		11,055		0		11,055
Total assets	$	0	$	1,146,372	$	0	$	1,146,372

Liabilities
Derivatives	$	0	$	14,747	$	0	$	14,747
Total liabilities	$	0	$	14,747	$	0	$	14,747

December 31, 2018
(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 $ —
$ 98,498
$ —
$ 98,498
Obligations of states and political subdivisions —
26,810
—
26,810
Agency mortgage-backed securities —
586,136
—
586,136
U.S. Treasury bills —
9,925
—
9,925
Total securities available for sale —
721,369

—

721,369
Other investments 121
—
—
121
Derivatives —
3,023
—
3,023
Total assets $ 121
$ 724,392

$ —

$ 724,513

Liabilities

Derivatives $ —
$ 3,023
$ —
$ 3,023
Total liabilities $ —
$ 3,023

$ —

$ 3,023

~~Level 3 financial instruments~~

~~The following table presents the changes in Level 3 financial instruments measured at fair value on a recurring basis as of September 30, 2019 and 2018.~~

State tax credits held for sale
Three months ended September 30, Nine months ended September 30,
(in thousands) 2019 2018 2019 2018
Beginning balance $ —
$ 299
$ —
$ 400
Total gains:
Included in earnings —
7
—
13
Purchases, sales, issuances and settlements:
Sales —
(135 ) —
(242 )
Ending balance $ —
$ 171
$ —
$ 171

Change in unrealized losses relating to assets still held at the reporting date $ —
$ (34 ) $ —
$ (60 )

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.



	(1)		(1)		(1)		(1)
(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)		Total losses for the three months ended September 30, 2020		Total losses for the nine months ended September 30, 2020
Impaired loans	$	1,639	$	0	$	0	$	1,639	$	1,788	$	4,756
Other real estate	3,600		0		0		3,600		248		1,000
Total	$	5,239	$	0	$	0	$	5,239	$	2,036	$	5,756

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

(1) (1) (1) (1)
(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)
Total losses for the three
months ended September 30, 2019 Total losses for the nine
months ended September 30, 2019
Impaired loans $ 1,589
$ —
$ —
$ 1,589
$ 118
$ 1,532
Total $ 1,589
$ —

$ —

$ 1,589

$ 118
$ 1,532

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

Following is a summary of the carrying amounts and fair values of ~~the Company’s~~certain financial ~~instruments on the consolidated balance sheets at September 30, 2019 and December 31, 2018.~~instruments:


	September 30, 2020									December 31, 2019
(in thousands)	Carrying Amount		Estimated fair value		Level	Carrying Amount		Estimated fair value		Level
Balance sheet assets




Securities held-to-maturity, net	$	327,049	$	338,774	Level 2	$	181,166	$	181,939	Level 2
Other investments	43,456		43,456		Level 2	38,044		38,044		Level 2
Loans held for sale	14,032		14,032		Level 2	5,570		5,570		Level 2

Loans, net	6,003,037		5,961,862		Level 3	5,271,049		5,205,651		Level 3
State tax credits, held for sale	42,497		48,327		Level 3	36,802		39,046		Level 3


Balance sheet liabilities
Certificates of deposit	$	612,045	$	617,277	Level 3	$	826,447	$	825,203	Level 3
Subordinated debentures and notes	203,510		193,059		Level 2	141,258		130,985		Level 2
FHLB advances	250,000		251,942		Level 2	222,406		221,402		Level 2
Other borrowings and notes payable	239,038		239,038		Level 2	265,172		265,172		Level 2

September 30, 2019 December 31, 2018
(in thousands) Carrying Amount Estimated fair value Carrying Amount Estimated fair value
Balance sheet assets
Cash and due from banks $ 153,730
$ 153,730
$ 91,511
$ 91,511
Federal funds sold 2,829
2,829
1,714
1,714
Interest-bearing deposits 103,918
103,918
106,512
106,512
Securities available for sale 1,247,333
1,247,333
721,369
721,369
Securities held to maturity 60,786
61,623
65,679
63,934
Other investments, at cost 46,867
46,867
26,654
26,654
Loans held for sale 6,281
6,281
392
392
Derivative financial instruments 13,561
13,561
3,023
3,023
Portfolio loans, net 5,183,459
5,123,351
4,306,525
4,253,239
State tax credits, held for sale 43,808
46,981
37,587
39,169
Accrued interest receivable 21,097
21,097
16,069
16,069

Balance sheet liabilities
Deposits 5,624,380
5,604,045
4,587,985
4,583,047
Subordinated debentures and notes 141,179
131,603
118,156
106,316
Federal Home Loan Bank advances 461,426
464,033
70,000
70,000
Other borrowings and notes payable 199,634
199,539
223,450
223,260
Derivative financial instruments 18,451
18,451
3,023
3,023
Accrued interest payable 2,907
2,907
1,977
1,977

For information regarding the methods and assumptions used to estimate the fair value of each class of financial instruments refer to Note 1819 – Fair Value Measurements in the Company’s Annual Report on Form 10-K for the year ended December 31, ~~2018,~~2019, as filed with the ~~Securities and Exchange Commission.~~SEC.

NOTE 9 - SUBORDINATED DEBENTURES AND NOTES

The following table presents the level in the fair value hierarchy for the estimated fair values of only the Company’s financial instruments that are not already presented on the condensed consolidated balance sheets at fair value at September 30, 2019, and December 31, 2018.

Estimated Fair Value Measurement at Reporting Date Using Balance at September 30, 2019
(in thousands) Level 1 Level 2 Level 3
Financial Assets:
Securities held to maturity $ —
$ 61,623
$ —
$ 61,623
Portfolio loans, net —
—
5,123,351
5,123,351
State tax credits, held for sale —
—
46,981
46,981
Financial Liabilities:
Deposits 4,804,357
—
799,688
5,604,045
Subordinated debentures and notes —
131,603
—
131,603
Federal Home Loan Bank advances —
464,033
—
464,033
Other borrowings and notes payable —
199,539
—
199,539

Estimated Fair Value Measurement at Reporting Date Using Balance at December 31, 2018
(in thousands) Level 1 Level 2 Level 3
Financial Assets:
Securities held to maturity $ —
$ 63,934
$ —
$ 63,934
Portfolio loans, net —
—
4,253,239
4,253,239
State tax credits, held for sale —
—
39,169
39,169
Financial Liabilities:
Deposits 3,903,556
—
679,491
4,583,047
Subordinated debentures and notes —
106,316
—
106,316
Federal Home Loan Bank advances —
70,000
—
70,000
Other borrowings and notes payable —
223,260
—
223,260

~~NOTE 10 - GOODWILL AND INTANGIBLE ASSETS~~

~~Goodwill increased $93.9 million to $211.3 million at September 30, 2019 from $117.3 million at December 31, 2018 due to the acquisition of Trinity.~~

~~The table below presents a summary of intangible assets:~~

Nine months ended
(in thousands) September 30, 2019
Gross core deposit intangible, beginning of period $ 20,574
Additions from acquisition 23,066
Gross core deposit intangible, end of period 43,640
Accumulated amortization (16,014 )
Core deposit intangible, net, end of period $ 27,626

Amortization expense on the core deposit intangible was $1.6 million and $0.6 million for the quarters ended September 30, 2019 and 2018, and $4.0 million and $1.9 million for the nine months ended September 30, 2019 and 2018, respectively. The core deposit intangibles are being amortized over a 10~~year period.~~

~~The following table reflects the expected amortization schedule for the core deposit intangible at September 30, 2019.~~

Year
Core Deposit Intangible
(in thousands)
2019 $ 1,550
2020 5,608
2021 4,814
2022 4,085
2023 3,456
After 2023 8,113
$ 27,626

~~NOTE 11 - SUBORDINATED DEBENTURES~~

~~The~~ amounts and terms of each issuance of ~~the Company’s~~EFSC’s subordinated debentures ~~at September 30, 2019~~ and ~~December 31, 2018 were as follows:~~notes:

Amount

Maturity Date

Initial Call Date⁽¹⁾

Interest Rate

(in thousands)

September 30, 2020

December 31, 2019

EFSC Clayco Statutory Trust I

3,196

December 17, 2033

December 17, 2008

Floats @ 3MO LIBOR + 2.85%

EFSC Capital Trust II

5,155

June 17, 2034

June 17, 2009

Floats @ 3MO LIBOR + 2.65%

EFSC Statutory Trust III

11,341

December 15, 2034

December 15, 2009

Floats @ 3MO LIBOR + 1.97%

EFSC Clayco Statutory Trust II

4,124

September 15, 2035

September 15, 2010

Floats @ 3MO LIBOR + 1.83%

EFSC Statutory Trust IV

10,310

December 15, 2035

December 15, 2010

Floats @ 3MO LIBOR + 1.44%

EFSC Statutory Trust V

4,124

September 15, 2036

September 15, 2011

Floats @ 3MO LIBOR + 1.60%

EFSC Capital Trust VI

14,433

March 30, 2037

March 30, 2012

Floats @ 3MO LIBOR + 1.60%

EFSC Capital Trust VII

4,124

December 15, 2037

December 15, 2012

Floats @ 3MO LIBOR + 2.25%

JEFFCO Stat Trust I⁽²⁾

7,786

7,886

February 22, 2031

February 22, 2011

Fixed @ 10.20%

JEFFCO Stat Trust II⁽²⁾

4,429

4,388

March 17, 2034

March 17, 2009

Floats @ 3MO LIBOR + 2.75%

Trinity Capital Trust III⁽²⁾

5,256

5,206

September 8, 2034

September 8, 2009

Floats @ 3MO LIBOR + 2.70%

Trinity Capital Trust IV⁽²⁾

10,310

10,302

November 23, 2035

August 23, 2010

Fixed @ 6.88%

Trinity Capital Trust V⁽²⁾

7,665

7,543

December 15, 2036

September 15, 2011

Floats @ 3MO LIBOR + 1.65%

Total junior subordinated debentures

92,253

92,132

5.75% Fixed-to-floating rate subordinated notes

63,250

June 1, 2030

June 1, 2025

Fixed @ 5.75% until
June 1, 2025, then floats @ Benchmark rate (3 month term SOFR) + 5.66%

4.75% Fixed-to-floating rate subordinated notes

50,000

November 1, 2026

November 1, 2021

Fixed @ 4.75% until
November 1, 2021, then floats @ 3MO LIBOR + 3.387%

Debt issuance costs

(1,993)

(874)

Total fixed-to-floating rate subordinated notes

111,257

49,126

Total subordinated debentures and notes

203,510

141,258

⁽¹⁾Callable each quarter after initial call date.

⁽²⁾ Purchase accounting adjustments are reflected in the balance that also impact the effective interest rate.

Amount Maturity Date Call Date Interest Rate
(in thousands) September 30, 2019 December 31, 2018
EFSC Clayco Statutory Trust I $ 3,196
$ 3,196

December 17, 2033

December 17, 2008
Floats @ 3MO LIBOR + 2.85%
EFSC Capital Trust II 5,155
5,155

June 17, 2034

June 17, 2009
Floats @ 3MO LIBOR + 2.65%
EFSC Statutory Trust III 11,341
11,341

December 15, 2034

December 15, 2009
Floats @ 3MO LIBOR + 1.97%
EFSC Clayco Statutory Trust II 4,124
4,124

September 15, 2035

September 15, 2010
Floats @ 3MO LIBOR + 1.83%
EFSC Statutory Trust IV 10,310
10,310

December 15, 2035

December 15, 2010
Floats @ 3MO LIBOR + 1.44%
EFSC Statutory Trust V 4,124
4,124

September 15, 2036

September 15, 2011
Floats @ 3MO LIBOR + 1.60%
EFSC Capital Trust VI 14,433
14,433

March 30, 2037

March 30, 2012
Floats @ 3MO LIBOR + 1.60%
EFSC Capital Trust VII 4,124
4,124

December 15, 2037

December 15, 2012
Floats @ 3MO LIBOR + 2.25%
JEFFCO Stat Trust I (1) 7,920
8,019

February 22, 2031

February 22, 2011
Fixed @ 10.20%
JEFFCO Stat Trust II (1) 4,375
4,335

March 17, 2034

March 17, 2009
Floats @ 3MO LIBOR + 2.75%
Trinity Capital Trust III (1) 5,189
—

September 8, 2034

September 8, 2009
Floats @ 3MO LIBOR + 2.70%
Trinity Capital Trust IV (1) 10,293
—

November 23, 2035

August 23, 2010
Fixed @ 6.88%
Trinity Capital Trust V (1) 7,502
—

December 15, 2036

September 15, 2011
Floats @ 3MO LIBOR + 1.65%
Total junior subordinated debentures 92,086
69,161

Fixed-to-floating rate subordinated notes 50,000
50,000

November 1, 2026

November 1, 2021
Fixed @ 4.75% until
November 1, 2021, then floats @ 3MO LIBOR + 3.387%
Debt issuance costs (907 ) (1,005 )
Total fixed-to-floating rate subordinated notes 49,093
48,995

Total subordinated debentures and notes $ 141,179
$ 118,156

(1) Purchase accounting adjustments are reflected in the balance and also impact the effective interest rate.

~~As part~~On May 21, 2020, EFSC issued $63.3 million of ~~the acquisition of Trinity, the Company acquired additional junior~~5.75% fixed-to-floating rate subordinated ~~debentures issued by unconsolidated statutory trusts with a par value of $26.8 million. The Company has assigned a fair value of $22.8 million to these junior subordinated debentures.~~

~~NOTE 12 - NEW AUTHORITATIVE ACCOUNTING GUIDANCE~~

~~FASB ASU 2018-13 “Fair Value Measurement (Topic 820): Disclosure Framework—Changes to the Disclosure Requirements for Fair Value Measurement”~~ ~~In August 2018, the FASB issued ASU 2018-13, which changes the fair value measurement disclosure requirements of ASC 820. The amendments~~notes due in this ASU are the result of a broader disclosure project called FASB Concepts Statement, Conceptual Framework for Financial Reporting — Chapter 8: Notes to Financial Statements, which the Board finalized on August 28, 2018. The Board used the guidance in the Concepts Statement, including consideration of costs and benefits, to improve the effectiveness of ASC 820’s disclosure requirements. The amendments in this update are effective for all entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. The amendments on changes in unrealized gains and losses, the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements, and the narrative description of measurement uncertainty should be applied prospectively for only the most recent interim or annual period presented in the initial fiscal year of adoption. All other amendments should be applied retrospectively to all periods presented upon their effective date. Early adoption is permitted upon issuance of this update. An entity is permitted to early adopt any removed or modified disclosures upon issuance of this update and delay adoption of the additional disclosures until their effective date. The Company has selected the option to adopt the removal or modification of disclosures during the second quarter of 2019. The Company is currently evaluating the additional disclosures and has not yet determined the impact this standard may have on its consolidated financial statements.

~~FASB ASU 2016-13 “Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments”~~ In June 2016, the FASB issued ASU 2016-13, “Financial Instruments (Topic 326)” which changes the methodology for evaluating impairment of most financial instruments. The ASU replaces the currently used incurred loss model with a forward-looking expected loss model, which will generally result2030 in a ~~more timely recognition of losses. Existing PCI assets will be grandfathered~~public offering (the “2030 Notes”). From and ~~classified as purchased credit deteriorated (PCD) assets at~~including the date of ~~adoption. The PCD assets~~issuance to, but excluding, June 1, 2025, the 2030 Notes will ~~be grossed up for~~bear interest at a rate equal to 5.75% per annum, payable semiannually in arrears on each June 1 and December 1. From and including June 1, 2025 to, but excluding, the ~~allowance for expected credit losses at~~maturity date or the date of ~~adoption and~~earlier redemption, the ~~noncredit discount~~2030 Notes will ~~continue~~bear interest at a floating rate per annum equal to a benchmark rate (which is expected to be ~~recognized~~three-month term SOFR (as defined in the Indenture, dated May 21, 2020, between EFSC and U.S. Bank National Association, as trustee, and subsequent First Supplemental Indenture)), plus 566.0 basis points, payable quarterly in arrears on March 1, June 1, September 1 and December 1 of each year, commencing on September 1, 2025. Notwithstanding the foregoing, in the event that the benchmark rate is less than zero, then the benchmark rate shall be deemed to be zero.

NOTE 10 - ACCUMULATED OTHER COMPREHENSIVE INCOME

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


Three and nine months ended September 30, 2020
(in thousands)	Net Unrealized Gain (Loss) on Available-for-Sale Debt Securities		Unamortized Gain (Loss) on Held-to-Maturity Securities		Net Unrealized Loss on Cash Flow Hedges		Total
Balance, June 30, 2020	$	27,872	$	13,099	$	(8,162)	$	32,809
Net change	$	(220)	$	(705)	$	624	$	(301)

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

Balance, December 31, 2019	$	14,977	$	4,934	$	(2,162)	$	17,749
Net change	$	21,325	$	(1,190)	$	(5,376)	$	14,759
Transfer from available-for-sale to held-to-maturity	(8,650)		8,650		0		0
Balance, September 30, 2020	$	27,652	$	12,394	$	(7,538)	$	32,508

Three and nine months ended September 30, 2019
(in thousands)	Net Unrealized Gain (Loss) on Available-for-Sale Debt Securities		Unamortized Gain (Loss) on Held-to-Maturity Securities		Net Unrealized Loss on Cash Flow Hedges		Total
Balance, June 30, 2019	$	15,517	$	(230)	$	(2,213)	$	13,074
Net change	$	6,764	$	10	$	(637)	$	6,137
Balance, September 30, 2019	$	22,281	$	(220)	$	(2,850)	$	19,211

Balance, December 31, 2018	$	(9,047)	$	(235)	$	0	$	(9,282)
Net change	$	31,328	$	15	$	(2,850)	$	28,493
Balance, September 30, 2019	$	22,281	$	(220)	$	(2,850)	$	19,211

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


	Three months ended September 30,
(in thousands)	2020										2019
	Pre-tax		Tax effect		After-tax		Pre-tax		Tax effect		After-tax
Change in unrealized gain on available-for-sale debt securities	$	125	$	31	$	94	$	9,320	$	2,302	$	7,018
Reclassification adjustment for realized gain on sale of available-for-sale debt securities^(a)	(417)		(103)		(314)		(337)		(83)		(254)
Reclassification of (gain) loss on held-to-maturity securities^(b)	(936)		(231)		(705)		13		3		10
Change in unrealized gain (loss) on cash flow hedges arising during the period	146		36		110		(888)		(219)		(669)
Reclassification of loss on cash flow hedges^(b)	683		169		514		42		10		32
Total other comprehensive income	$	(399)	$	(98)	$	(301)	$	8,150	$	2,013	$	6,137

	Nine months ended September 30,
	2020										2019
	Pre-tax		Tax effect		After-tax		Pre-tax		Tax effect		After-tax
Change in unrealized gain on available-for-sale debt securities	$	28,741	$	7,099	$	21,642	$	41,649	$	10,287	$	31,362
Reclassification adjustment for realized gain on sale of available-for-sale debt securities^(a)	(421)		(104)		(317)		(45)		(11)		(34)
Reclassification of (gain) loss on held-to-maturity securities^(b)	(1,580)		(390)		(1,190)		20		5		15
Change in unrealized loss on cash flow hedges arising during the period	(8,296)		(2,049)		(6,247)		(3,833)		(947)		(2,886)
Reclassification of loss on cash flow hedges^(b)	1,157		286		871		47		11		36
Total other comprehensive income	$	19,601	$	4,842	$	14,759	$	37,838	$	9,345	$	28,493

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

^(b)The pre-tax amount is reported in interest ~~income based on~~income/expense in the ~~yield~~Consolidated Statements of such assets as of the adoption date. Subsequent changes in expected credit losses on PCD assets will be recorded through the allowance. The guidance becomes effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. Early adoption is permitted for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. The Company has formed an implementation team that includes members of accounting, credit, and loan operations to review the requirements of ASU 2016-13, and has contracted with a software provider to aid in implementation. The Company has assessed its data and system needs, implemented a model validation process, selected portfolio segmentations and loss methodologies, and is continuing to refine forecast inputs and documentation of the end-to-end process. While the impact of adopting this standard has not been fully determined, the Company will recognize a cumulative effect adjustment to the allowance and retained earnings upon adoption. The Company expects to finalize quantifying the anticipated impact of the adoption of this standard on the Company’s financial statements during the fourth quarter of 2019.Operations

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

RESULTS OF OPERATIONS

Forward Looking Statements

~~Some of the information in this~~

This Quarterly Report on Form 10-Q contains information and statements that are considered “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Such forward-looking statements are based on management’s current expectations and beliefs concerning future developments and their potential effects on the Company, and include, without limitation, statements about the Company’s plans, strategies, goals, objectives, expectations, or consequences of statements about the future performance, operations, products and services of the Company and its subsidiaries, as well as statements about the Company’s expectations regarding revenue and asset growth, financial performance and profitability, loan and deposit growth, yields and returns, loan diversification and credit management, products and services, shareholder value creation and the impact of the SCBH acquisition and other acquisitions.Forward-looking statements are typically ~~are~~ identified with the use of terms such as “may,” “might,” “will,” “would,” “should,” “expect,” “plan,” “anticipate,” “believe,” “estimate,” “predict,” “potential,” “could,” ~~“continue”~~“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 ~~also include, but~~ are ~~not limited~~inherently subject to ~~statements regarding plans, objectives, expectations or consequences of statements about the future performance, operations products~~risks and ~~services of the Company~~uncertainties and ~~its subsidiaries. Our~~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 due~~statements.

The COVID-19 pandemic is adversely affecting us, our customers, counterparties, employees, and third-party service providers, and the ultimate extent of the impacts on our business, financial position, results of operations, liquidity, and prospects is uncertain. Continued deterioration in general business and economic conditions, including further increases in unemployment rates, or turbulence in domestic or global financial markets could adversely affect our revenues and the values of our assets and liabilities, reduce the availability of funding, lead to a ~~number~~tightening of credit, and further increase stock price volatility. In addition, changes to statutes, regulations, or regulatory policies or practices as a result of, or in response to COVID-19, could affect us in substantial and unpredictable ways. Other factors ~~including,~~that could cause or contribute to such differences include, but are not limited to: our ability to efficiently integrate acquisitions, including the SCBH acquisition, into our operations, retain the customers of these businesses and grow the acquired operations; credit risk; changes in the appraised valuation of real estate securing impaired loans; our ability to recover our investment in loans; fluctuations in the fair value of collateral underlying loans; outcomes of litigation and other contingencies; exposure to general and local economic conditions; risks associated with rapid increases or decreases in prevailing interest rates; changes in business prospects that could impact goodwill estimates and assumptions; consolidation within the banking industry; competition from banks and other financial institutions; our ability to attract and retain relationship officers and other key personnel; burdens imposed by federal and state regulation; changes in regulatory requirements; changes in accounting policies and practices or accounting standards, including ASU 2016-13 (Topic 326), “Measurement of Credit Losses on Financial Instruments,” commonly referenced as ~~the Current Expected Credit Loss (“CECL”)~~CECL model, which ~~will change~~has changed how we estimate credit ~~losses and may increase the required level of our allowance for credit losses after adoption on January 1, 2020;~~losses; uncertainty regarding the future of LIBOR; natural disasters, war or terrorist activities, or pandemics, or the outbreak of COVID-19 or similar outbreaks, and their effects on economic and business environments in which we operate; increased unemployment rates and defaults as a result of the economic disruptions caused by COVID-19; the impact of governmental orders issued in response to COVID-19; and other risks discussed under the caption “Risk Factors” under Part 1, Item 1A of our ~~2018~~2019 Annual Report on Form 10-K and Item 1A of Part II of our Quarterly Report on Form 10-Q for the quarters ended March 31, 2020 and June 30, 2020, and other reports filed with the ~~Securities and Exchange Commission,~~SEC, all of which could cause the Company’s actual results to differ from those set forth in the forward-looking statements.

Readers are cautioned not to place undue reliance on our forward-looking statements, which reflect management’s analysis and expectations only as of the date of such statements. Forward-looking statements speak only as of the date they are made, and the Company does not intend, and undertakes no obligation, to publicly revise or update forward-looking statements after the date of this report, whether as a result of new information, future events or otherwise, except as required by federal securities law. You should understand that it is not possible to predict or

identify all risk factors. Readers should carefully review all disclosures we file from time to time with the ~~Securities and Exchange Commission~~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 ~~2019~~2020 compared to the financial condition as of December 31, ~~2018.~~2019. In addition, this discussion summarizes the significant factors affecting the results of operations, liquidity and cash flows of the Company for the three and nine months ended September 30, ~~2019,~~2020, compared to the same periods in ~~2018.~~2019. 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, ~~2018. Certain financial condition comparisons~~2019.

COVID-19 Pandemic

On January 31, 2020, the Secretary of Health and Human Services declared a public health emergency due to the ~~prior year~~global outbreak of a new strain of coronavirus (COVID-19). On March 13, 2020, the President of the United States proclaimed the COVID-19 as a national emergency, following the World Health Organization’s categorization of the outbreak as a pandemic. COVID-19 continues to aggressively spread globally, including throughout the United States. The pandemic and resulting travel bans, closure of non-essential businesses, social distancing measures and government responses across the country have had a profound impact on the global economy, financial markets and how business has been conducted across all industries and have affected many of the Company’s customers and clients. To the extent the economic impacts of the pandemic continue for a prolonged period and conditions stagnate or worsen, our provision for credit losses, noninterest income, and profitability may be adversely affected.

The Company has taken proactive and disciplined steps to promote the safety and overall wellbeing of its associates, customers and stakeholders, as well as to manage its financial performance. Steps taken include activation of the Company’s business continuity plan, formation of a communication and action task force, cost containment measures, restrictions on business travel, conversion of in-person meetings to virtual or with restrictions in certain markets, a work-from-home mandate, branch lobby access restrictions, and multiple safety and social distancing protocols. The Company has also worked with its customers to implement appropriate loan deferral strategies in certain circumstances.

On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security (“CARES”) Act was signed into law. The CARES Act contains provisions to assist individuals and businesses, including the SBA’s Paycheck Protection Program (“PPP”). The PPP provided $349 billion in guaranteed loans that are forgivable if certain requirements are met. On April 24, 2020, an additional $310 billion was added to the PPP program. The CARES Act included a provision that allowed depository institutions the option to defer adoption of the CECL standard to the earlier of (1) the end of the COVID-19 national emergency or (2) December 31, 2020. The Company did not elect the deferral option.

On April 7, 2020, the U.S. banking agencies issued an Interagency Statement on Loan Modifications and Reporting for Financial Institutions Working with Customers Affected by the Coronavirus (Revised). The statement describes accounting for COVID-19-related loan modifications, including clarifying the interaction between current accounting rules and the temporary relief provided by the CARES Act. The statement also encourages institutions to work constructively with borrowers affected by COVID-19 and states the agencies will not criticize supervised institutions for prudent loan modifications. Both the CARES Act and the interagency statement provide relief from the accounting and reporting implications of troubled debt restructurings. The Company has implemented short-term deferral programs allowing customers to primarily defer payments for up to 90 days. As of September 30, 2020, loans of $139.4 million were in a deferral status of which $86.1 million represent second round deferrals. The deferral period expires in the fourth quarter 2020 for approximately 99% of loans in a deferral status.

Critical Accounting Policies

The following accounting policies are considered most critical to the understanding of the Company’s financial condition and results of operations. These critical 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 ~~comparisons~~could reasonably be expected. The impact and any associated risks related to our critical accounting 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 ~~linked~~year ended December 31, 2019.

The Company has prepared the consolidated financial information in this report in accordance with GAAP. The Company makes estimates and assumptions that affect the reported amount of assets and liabilities, disclosure of contingent assets and liabilities at the date of the consolidated financial statements, and the reported amounts of revenue and expenses during the reporting period. Such estimates include the valuation of loans, goodwill, intangible assets, and other long-lived assets, along with assumptions used in the calculation of income taxes, among others. These estimates and assumptions are based on management’s best estimates and judgment. Management evaluates its estimates and assumptions on an ongoing basis using loss experience and other factors, including the current economic environment, which management believes to be reasonable under the circumstances. We adjust such estimates and assumptions when facts and circumstances dictate. The three and nine months ended September 30, 2020 were characterized by heightened uncertainty due to the COVID-19 pandemic which could impact estimates and assumptions made by management. As future events and their effects cannot be determined with precision, actual results could differ significantly from these estimates. Changes in estimates resulting from continuing changes in the economic environment will be reflected in the financial statement in future periods. There can be no assurances that actual results will not differ from those estimates.

Allowance for Credit Losses

On January 1, 2020, the Company adopted Accounting Standard Update 2016-13 “Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments.” This standard, referred to as CECL, requires an estimate of lifetime expected credit losses on certain financial assets measured at amortized cost.

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

Goodwill and Other Intangible Assets

The Company completes a goodwill impairment test in the fourth quarter each year or whenever events or changes in circumstances indicate the Company may not be able to recover the goodwill, or intangible assets, respective carrying amount. The impairment test involves the use of various estimates and assumptions. Management believes the estimates and assumptions utilized are ~~included for additional trend analysis.~~

reasonable.

Goodwill is evaluated for impairment at the reporting unit level. Reporting units are defined as the same level as, or one level below, an operating segment. An operating segment is a component of a business for which separate financial information is available that management regularly evaluates in deciding how to allocate resources and assess performance. The Company has one reporting unit and one operating segment.

Potential impairments to goodwill must first be identified by performing a qualitative assessment that evaluates relevant events or circumstances to determine whether it is more likely than not the fair value of a reporting unit is less than its carrying amount. If this test indicates it is more likely than not that goodwill has been impaired, then a quantitative impairment test is completed. The quantitative impairment test calculates the fair value of the reporting unit and compares it with its carrying amount, including goodwill. If the carrying amount of goodwill exceeds its implied fair market value, an impairment loss is recognized. That loss is equal to the carrying amount of goodwill that is in excess of its implied fair market value.

Intangible assets other than goodwill, such as core deposit intangibles, determined to have finite lives are amortized over their estimated remaining useful lives. These assets are reviewed for impairment whenever events or changes in circumstances indicate the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to estimated undiscounted future cash flows expected to be generated by the asset. If the carrying amount of an asset exceeds its estimated future cash flows, an impairment charge is recognized by the amount by which the carrying amount of the asset exceeds the fair value of the asset.

As of September 30, 2020, while the Company has not recognized an impairment, there can be no assurance that prolonged market volatility resulting from the COVID-19 pandemic will not result in impairments to goodwill or other intangibles in future periods.

Executive Summary

The Company closed its acquisition of Trinity ~~Capital Corporation (“Trinity”)~~ on March 8, 2019. The results of operations of Trinity are included in our ~~consolidated~~ results from this date forward, ~~and are excluded from preceding periods. See “Item 1, Note 2 – Acquisitions” for more information.~~which may affect certain comparisons to the nine months ended September 30, 2019.

~~The following table presents the fair values of assets acquired and liabilities assumed of Trinity as of March 8, 2019:~~

(in thousands)
Assets acquired:
Cash and cash equivalents $ 13,899
Interest-earning deposits greater than 90 days 100
Securities 428,096
Loans 684,314
Other real estate 4,512
Other investments 6,673
Fixed assets 27,286
Accrued interest receivable 3,997
Intangible assets 23,066
Deferred tax assets 9,651
Other assets 30,037
Total assets acquired $ 1,231,631

Liabilities assumed:
Deposits $ 1,081,187
Subordinated debentures 22,834
FHLB advances 6,971
Accrued interest payable 370
Other liabilities 5,015
Total liabilities assumed $ 1,116,377

Net assets acquired $ 115,254

Consideration paid:
Cash $ 37,275
Common stock 171,885
Total consideration paid $ 209,160

Goodwill $ 93,906

Below are highlights of our financial performance for the three and nine months ended September 30, ~~2019~~2020 and ~~2018.~~2019.


(in thousands, except per share data)	At or for the three months ended												At or for the nine months ended
				September 30, 2020				September 30, 2019				September 30, 2020				September 30, 2019
EARNINGS
Total interest income	$	70,787			$	81,078			$	220,666			$	227,896
Total interest expense	7,433				18,032				28,111				50,792
Net interest income	63,354				63,046				192,555				177,104
Provision for credit losses	14,080				1,833				55,935				5,031
Net interest income after provision for credit losses	49,274				61,213				136,620				172,073
Total noninterest income	12,629				13,564				35,997				34,758
Total noninterest expense	39,524				38,239				116,109				127,131
Income before income tax expense	22,379				36,538				56,508				79,700
Income tax expense	4,428				7,469				11,055				16,051
Net income	$	17,951			$	29,069			$	45,453			$	63,649

Basic earnings per share	$	0.68			$	1.09			$	1.73			$	2.46
Diluted earnings per share	$	0.68			$	1.08			$	1.73			$	2.45

Return on average assets	0.86		%		1.60		%		0.76		%		1.26		%
Return on average common equity	8.06		%		13.66		%		6.96		%		11.00		%
Return on average tangible common equity¹	10.94		%		19.08		%		9.51		%		15.16		%
Net interest margin (tax equivalent)	3.29		%		3.81		%		3.52		%		3.85		%
Core net interest margin¹	3.22		%		3.69		%		3.47		%		3.76		%
Efficiency ratio	52.02		%		49.91		%		50.80		%		60.01		%
Core efficiency ratio¹	51.04		%		51.73		%		50.97		%		52.96		%
Book value per common share	$	33.66			$	31.79
Tangible book value per common share¹	$	24.80			$	22.82

ASSET QUALITY
Net charge-offs	$	1,027			$	1,070			$	2,518			$	3,866
Nonperforming loans	39,623				15,569
Classified assets	84,710				93,984
Nonperforming loans to total loans	0.65		%		0.30		%
Nonperforming assets to total assets	0.53		%		0.33		%
ACLL to total loans	2.01		%		0.85		%
Net charge-offs to average loans (annualized)	0.07		%		0.08		%		0.06		%		0.11		%

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

(in thousands, except per share data) At or for the three months ended For the nine months ended
September 30,
2019 September 30,
2018 September 30,
2019 September 30,
2018
EARNINGS
Total interest income $ 81,078
$ 60,757
$ 227,896
$ 173,800
Total interest expense 18,032
12,664
50,792
32,488
Net interest income 63,046
48,093
177,104
141,312
Provision for portfolio loans 1,833
2,263
5,031
4,524
Net interest income after provision for loan losses 61,213
45,830
172,073
136,788
Total noninterest income 13,564
8,410
34,758
27,645
Total noninterest expense 38,239
29,922
127,131
88,284
Income before income tax expense 36,538
24,318
79,700
76,149
Income tax expense 7,469
1,802
16,051
10,461
Net income $ 29,069
$ 22,516
$ 63,649
$ 65,688

Basic earnings per share $ 1.09
$ 0.97
$ 2.46
$ 2.84
Diluted earnings per share 1.08
0.97
2.45
2.81

Return on average assets 1.60 % 1.63 % 1.26 % 1.62 %
Return on average common equity 13.66
15.22
11.00
15.41
Return on average tangible common equity¹
19.08
19.42
15.16
19.85
Net interest margin (tax equivalent) 3.81
3.78
3.85
3.78
Core net interest margin¹
3.69
3.74
3.76
3.74
Efficiency ratio 49.91
52.96
60.01
52.25
Core efficiency ratio¹
51.73
52.23
52.96
52.86
Book value per common share $ 31.79
$ 25.41

Tangible book value per common share¹
22.82
19.94

ASSET QUALITY
Net charge-offs $ 1,070
$ 2,447
$ 3,866
$ 2,862
Nonperforming loans 15,569
17,044

Classified assets 93,984
73,704

Nonperforming loans to total loans 0.30 % 0.40 %
Nonperforming assets to total assets 0.33
0.32

Allowance for loan losses to total loans 0.85
1.04

Net charge-offs to average loans (annualized) 0.08
0.23
0.11 % 0.09 %

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

For the three and nine months ended September 30, ~~2019~~2020 compared to ~~the three and nine months ended September 30, 2018, the Company notes the following trends:~~

~~For~~ the three and nine months ended September 30, 2019, the Company notes the following trends:

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


	Quarter ended
(in thousands)	September 30, 2020
PPP loans outstanding, net of unearned fees	$	819,100
Average PPP loans outstanding, net	813,244
PPP average loan size	216
PPP interest and fee income	5,226
PPP unearned fees	19,522
PPP average yield	2.56		%

Participation in the PPP has impacted the Company’s financial metrics in the three and nine months ended September 30, 2020. Loan and deposit growth, earnings per share, and return on assets all increased due to the PPP. Conversely, net interest margin, the allowance coverage ratio, the leverage ratio and the ratio of tangible common equity to tangible assets all decreased. Since the PPP loans are guaranteed by the SBA, CET1, Tier 1 and total risk-based capital are not impacted by the PPP loan balances.

•For the three and nine months ended September 30, 2020, the Company had net income of $18.0 million and $45.5 million, respectively, compared to $29.1 million and $63.6 million, respectively, ~~compared to $22.5 million and $65.7 million in~~for the prior year periods. Earnings per diluted share for the three and nine months ended September 30, ~~2019, were~~2020 was $0.68 and $1.73, respectively, and $1.08 and $2.45, ~~per diluted share, respectively, and $0.97 and $2.81 per diluted share,~~ for the same respective periods in ~~2018.~~2019. Net income and

earnings per share for the ~~first~~three and nine months ended September 30, 2020 were impacted from $14.1 million and $55.9 million, respectively, on a pretax basis ($10.6 million and $42.1 million, respectively, after tax), of provision for credit losses. The increase in the provision for credit losses for the three months ending September 30, 2020 was primarily due to an increase in individual reserves and qualitative reserves established for certain higher risk areas, including hospitality and loans that have received principal and interest deferrals partially offset by improvements in economic forecasts. Deterioration in the economic forecasts during the first two quarters of 2020 primarily contributed to the increase for the nine months ended September 30, 2020. Net income and earnings per share for the three months ended September 30, 2020 and 2019 were impacted ~~from $18.0~~by $1.6 million and $0.4 million, respectively, on a pretax basis ($~~14.0~~1.2 million and $0.3 million, respectively, after tax), of merger-related ~~expenses compared to~~expenses. For the ~~prior year period.~~nine months ended September 30, 2020 and 2019 net income and earnings per share were impacted by $1.6 million and $18.0 million, respectively, on a pretax basis ($1.2 million and $14.0 million, respectively, after tax), of merger-related expenses.


•	~~Excluding the impact of merger-related expenses, the adjusted return on average assets~~¹~~, adjusted return on average common equity~~¹~~, and adjusted return on average tangible common equity~~¹ ~~were 1.54%, 13.42%, and 18.50%, respectively, for the nine months ended September 30, 2019.~~

Net interest income for the three and nine months ended September 30, ~~2019~~2020 increased ~~$15.0~~$0.3 million and ~~$35.8~~$15.5 million, respectively, over the prior year ~~periods.~~ periods primarily from reductions in rates on interest-bearing liabilities. Higher loan volumes, due to PPP loans in the three and nine month comparisons, and due to the Trinity acquisition in the nine month comparison, were offset by reductions in loan yields of 139 basis points and 102 basis points for the three and nine month comparisons, respectively.

The ~~acquisition of Trinity along with organic loan growth and an expanded investment portfolio supported the increase in~~tax-equivalent net interest ~~income over~~margin was 3.29% and 3.52% for the three and nine months ended September 30, 2020, respectively, compared to 3.81% and 3.85% in the prior year ~~periods.~~periods, respectively. The net interest margin was impacted by the decline in short-term rates as approximately 60% of the Company’s loan portfolio (excluding PPP) has variable rates, with most indexed to one-month LIBOR that has declined significantly over the past year. Average one-month LIBOR was 0.16% and 0.64% in the three and nine months ended September 30, 2020, respectively, compared to 2.18% and 2.37% in the comparable prior year periods, respectively.

•

The net interest margin for both the three and nine months ended September 30, 2019 expanded over the prior year periods, primarily due to the impact of interest rate increases on portfolio loans out-pacing the increase in deposit and borrowing costs and the addition of Trinity’s lower-cost deposit portfolio. Core net interest margin,¹ which excludes incremental accretion on non-core acquired loans, increased two basis points to 3.76% for the first nine months of 2019 from the prior year period, and decreased five basis points to 3.69% for the three months ended September 30, 2019 from the prior year period. The decline in core net interest margin during the third quarter of 2019 over the prior year period was primarily caused by the reduction in short-term rates during the three months ended September 30, 2019. Additionally, the overall mix of interest-earning assets negatively impacted net interest margin due to a larger investment portfolio.

Noninterest income for the three and nine months ended September 30, ~~2019 increased $5.2~~2020 decreased $0.9 million and $7.1 million, respectively, compared to the prior year periods due to contributions from Trinity of approximately $2.4 million and $5.3 million, respectively, primarily related to wealth management and card services revenue. Tax credit income also contributed to the increase in both periods.

~~Noninterest expense for the three and nine months ended September 30, 2019~~ increased ~~$8.3 million and $38.8~~$1.2 million, respectively, compared to the prior year periods. For the third quarter 2020, the increase in deposit balances provided more earnings credits to business customers on analysis, resulting in lower service charge income compared to the prior year periods. The increase in noninterest income for the ~~three~~nine months ended September 30, ~~2019 reflects~~2020 compared to the ~~ongoing operating expenses from~~prior year period was primarily due to the acquisition of Trinity ~~acquisition, including planned cost savings from~~in March 2019.

•Noninterest expense increased $1.3 million, or 3%, for the ~~transaction.~~third quarter 2020, compared to the same period in 2019. The increase ~~in the first nine months of 2019~~ was primarily due to merger-related ~~expenses of $18.0 million and increased operating expenses following~~expenses. For the ~~closing of the Trinity acquisition, most notably in employee compensation and benefits.~~

~~Balance sheet highlights:~~

•

~~Loans~~ – Total loans increased to $5.2 billion at September 30, 2019, increasing $878.0 million when compared to December 31, 2018. The increase is primarily attributable to the acquisition of Trinity along with growth in the commercial and industrial (“C&I”), commercial real estate (“CRE”), and life insurance premium finance categories, partially offset by paydowns outpacing growth in the other categories.

•

~~Deposits~~ – Total deposits at September 30, 2019 were $5.6 billion, an increase of $1.0 billion, from December 31, 2018. The increase is primarily attributable to the acquisition of Trinity. Core deposits, defined as total deposits excluding time deposits, were $4.8 billion at September 30, 2019, an increase of $900.8 million, or 23% when compared to December 31, 2018. The ratio of noninterest-bearing deposits to total deposits was relatively stable at 23% at September 30, 2019, compared to 24% at December 31, 2018.


•	~~Asset quality~~ – Nonperforming loans were $15.6 million at September 30, 2019, compared to $16.7 million at December 31, 2018. Nonperforming loans represented 0.30% and 0.38% of total loans at September 30, 2019 and December 31, 2018, respectively.

~~The provision for loan losses was $1.8 million and $5.0 million for the three and~~ nine months ended September 30, ~~2019, respectively, compared to $2.3~~2020, noninterest expense decreased $11.0 million, ~~and $4.5 million for~~or 9%, from the prior year ~~periods, respectively. See “Item~~period primarily due to higher merger-related expenses in the prior year period, partially offset by an increase in employee compensation from merit increases and the acquisition of Trinity.

Balance sheet highlights:

•Loans – Total loans grew $812.0 million from December 31, 2019, or 15.3%, to $6.1 billion as of September 30, 2020. Growth in the loan portfolio was primarily driven by PPP loans.

•Deposits – Total deposits grew $905.2 million, or 15.7%, to $6.7 billion as of September 30, 2020 primarily due to PPP related deposits, government stimulus checks and organic growth. Noninterest deposit accounts represented 28.9% of total deposits at September 30, 2020, and the loan to deposit ratio was 91.8%.

•Asset quality – The allowance for credit losses on loans to total loans increased to 2.01% at September 30, 2020 from 0.81% at December 31, 2019. Nonperforming assets to total assets was 0.53% at September 30, 2020 compared to 0.45% at December 31, 2019.

•Subordinated notes - In the second quarter 2020, EFSC issued $63.3 million of 5.75% fixed-to-floating rate subordinated notes due in 2030. The notes are callable beginning in 2025 and are included in tier 2 capital.

•Shareholders’ equity – Total shareholders’ equity was $882.3 million and the tangible common equity to tangible assets ratio¹ was 7.99% at September 30, 2020 compared to 8.89% at December 31, 2019. Balance sheet growth from the PPP was the primary cause of the decline in the tangible common equity to tangible assets ratio. Bank regulatory capital ratios remain “well-capitalized,” with a common equity tier 1 ~~Note 5 – Portfolio Loans,~~ratio of 12.0% and ~~Provision and Allowance for Loan Losses”~~a total risk-based capital ratio of ~~this Quarterly Report on Form 10-Q for more information.~~13.3%.


•	~~Shareholders’ equity~~ ~~– The Company repurchased 302,756 shares at an average price of $39.03 per share in the third quarter of 2019.~~

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

RESULTS OF OPERATIONS

Net Interest Income

Average Balance Sheet

The following tables present, for the periods indicated, certain information related to our average interest-earning assets and interest-bearing liabilities, as well as the corresponding interest rates earned and paid, all on a tax equivalent basis. Non-core acquired loans noted in the table below were acquired from the FDIC and were previously covered by shared-loss agreements.


	Three months ended September 30,
	2020										2019
(in thousands)	Average Balance		Interest Income/Expense		Average Yield/ Rate		Average Balance		Interest Income/Expense		Average Yield/ Rate
Assets
Interest-earning assets:
Taxable loans (1)	$	6,066,992	$	60,951	4.00	%	$	5,140,946	$	68,309	5.27	%
Tax-exempt loans (2)	35,934		415		4.59		26,364		482		7.25
Non-core acquired loans - contractual	9,789		150		6.10		10,699		402		14.91
Non-core acquired loans - incremental accretion			1,235		50.19				2,140		79.36
Total loans	6,112,715		62,751		4.08		5,178,009		71,333		5.47
Taxable debt and equity investments	987,263		5,785		2.33		1,169,753		8,323		2.82
Non-taxable debt and equity investments (2)	374,252		2,976		3.16		143,107		1,287		3.57
Short-term investments	295,854		113		0.15		113,214		572		2.00
Total securities and short-term investments	1,657,369		8,874		2.13		1,426,074		10,182		2.83
Total interest-earning assets	7,770,084		71,625		3.67		6,604,083		81,515		4.90
Noninterest-earning assets	571,884						618,274



Total assets	$	8,341,968					$	7,222,357

Liabilities and Shareholders' Equity
Interest-bearing liabilities:
Interest-bearing transaction accounts	$	1,529,097	$	255	0.07	%	$	1,356,328	$	2,048	0.60	%
Money market accounts	1,981,026		1,003		0.20		1,639,603		6,959		1.68
Savings	605,475		45		0.03		548,109		232		0.17
Certificates of deposit	630,076		2,409		1.52		820,943		3,970		1.92
Total interest-bearing deposits	4,745,674		3,712		0.31		4,364,983		13,209		1.20
Subordinated debentures	203,438		2,826		5.53		141,136		1,956		5.50
FHLB advances	250,000		720		1.15		378,207		2,203		2.31
Securities sold under agreements to repurchase	199,308		59		0.12		155,238		327		0.84
Other borrowed funds	31,413		116		1.48		37,817		337		3.54
Total interest-bearing liabilities	5,429,833		7,433		0.54		5,077,381		18,032		1.41
Noninterest bearing liabilities:
Demand deposits	1,920,694						1,232,360
Other liabilities	105,945						68,642
Total liabilities	7,456,472						6,378,383
Shareholders' equity	885,496						843,974
Total liabilities & shareholders' equity	$	8,341,968					$	7,222,357
Net interest income			$	64,192					$	63,483
Net interest spread					3.13	%					3.49	%
Net interest margin					3.29	%					3.81	%
Core net interest margin (3)					3.22	%					3.69	%

(1)Average balances include nonaccrual loans. Interest income includes loan fees of $4.1 million and $1.3 million for the three months ended September 30, 2020 and 2019 respectively.

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

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

Three months ended September 30,
2019 2018
(in thousands) Average Balance Interest
Income/Expense
Average
Yield/
Rate
Average Balance Interest
Income/Expense
Average
Yield/
Rate
Assets
Interest-earning assets:
Taxable portfolio loans (1) $ 5,140,946
$ 68,309
5.27 % $ 4,196,242
$ 54,086
5.11 %
Tax-exempt portfolio loans (2) 26,364
482
7.25
34,392
483
5.57
Non-core acquired loans - contractual 10,699
402
14.91
21,891
399
7.23
Non-core acquired loans - incremental accretion 2,140
79.36
535
9.70
Total loans 5,178,009
71,333
5.47
4,252,525

55,503
5.18
Taxable debt and equity investments 1,169,753
8,323
2.82
715,846
4,805
2.66
Non-taxable debt and equity investments (2) 143,107
1,287
3.57
39,283
349
3.52
Short-term investments 113,214
572
2.00
64,919
306
1.87
Total securities and short-term investments 1,426,074
10,182
2.83
820,048

5,460
2.64
Total interest-earning assets 6,604,083
81,515
4.90
5,072,573
60,963
4.77
Noninterest-earning assets 618,274
398,931

Total assets $ 7,222,357
$ 5,471,504

Liabilities and Shareholders' Equity
Interest-bearing liabilities:
Interest-bearing transaction accounts $ 1,356,328
$ 2,048
0.60 % $ 758,621
$ 799
0.42 %
Money market accounts 1,639,603
6,959
1.68
1,523,822
5,423
1.41
Savings 548,109
232
0.17
208,057
157
0.30
Certificates of deposit 820,943
3,970
1.92
678,214
2,878
1.68
Total interest-bearing deposits 4,364,983
13,209
1.20
3,168,714

9,257
1.16
Subordinated debentures 141,136
1,956
5.50
118,134
1,483
4.98
FHLB advances 378,207
2,203
2.31
311,522
1,729
2.20
Other borrowed funds 193,055
664
1.36
160,151
195
0.48
Total interest-bearing liabilities 5,077,381
18,032
1.41
3,758,521

12,664
1.34
Noninterest bearing liabilities:
Demand deposits 1,232,360
1,086,809

Other liabilities 68,642
39,409

Total liabilities 6,378,383
4,884,739

Shareholders' equity 843,974
586,765

Total liabilities & shareholders' equity $ 7,222,357
$ 5,471,504

Net interest income $ 63,483
$ 48,299

Net interest spread 3.49 % 3.43 %
Net interest margin 3.81 % 3.78 %
Core net interest margin (3) 3.69 % 3.74 %


~~(1)~~	Average balances include non-accrual loans. The income on such loans is included in interest but is recognized only upon receipt. Loan fees, net of amortization of deferred loan origination fees and costs, included in interest income are approximately $1.3 million and $1.0 million for the three months ended September 30, 2019 and 2018 respectively.


~~(2)~~	~~Non-taxable income is presented on a tax-equivalent basis using a 24.7% tax rate in 2019 and 2018. The tax-equivalent adjustments were $0.4 million and $0.2 million for the~~ ~~three~~ ~~months ended September 30, 2019 and 2018, respectively.~~


~~(3)~~	~~A non-GAAP measure. A reconciliation has been included in this section under the caption “Use of Non-GAAP Financial measures.”~~


	Nine months ended September 30,
	2020										2019
(in thousands)	Average Balance		Interest Income/Expense		Average Yield/ Rate		Average Balance		Interest Income/Expense		Average Yield/ Rate
Assets
Interest-earning assets:
Taxable loans (1)	$	5,784,018	$	189,521	4.38	%	$	4,890,974	$	195,628	5.35	%
Tax-exempt loans (2)	36,655		1,353		4.93		27,063		1,359		6.71
Non-core acquired loans - contractual	12,695		529		5.57		12,598		1,009		10.71
Non-core acquired loans - incremental accretion			3,227		33.96				4,207		44.66
Total loans	5,833,368		194,630		4.46		4,930,635		202,203		5.48
Taxable debt and equity investments	1,059,957		20,329		2.56		1,041,874		22,030		2.83
Non-taxable debt and equity investments (2)	296,839		7,359		3.31		111,758		3,025		3.62
Short-term investments	188,849		500		0.35		108,930		1,722		2.11
Total securities and short-term investments	1,545,645		28,188		2.44		1,262,562		26,777		2.84
Total interest-earning assets	7,379,013		222,818		4.03		6,193,197		228,980		4.94
Noninterest-earning assets	576,993						556,791



Total assets	$	7,956,006					$	6,749,988

Liabilities and Shareholders' Equity
Interest-bearing liabilities:
Interest-bearing transaction accounts	$	1,464,144	$	1,836	0.17	%	$	1,273,591	$	5,972	0.63	%
Money market accounts	1,911,584		6,738		0.47		1,579,702		20,470		1.73
Savings	579,619		233		0.05		471,024		646		0.18
Certificates of deposit	713,633		9,176		1.72		783,182		11,060		1.89
Total interest-bearing deposits	4,668,980		17,983		0.51		4,107,499		38,148		1.24
Subordinated debentures	171,465		7,061		5.50		135,512		5,562		5.49
FHLB advances	240,596		2,070		1.15		286,267		5,297		2.47
Securities sold under agreements to repurchase	197,776		479		0.32		168,740		939		0.74
Other borrowed funds	32,836		518		2.11		31,102		846		3.64
Total interest-bearing liabilities	5,311,653		28,111		0.71		4,729,120		50,792		1.44
Noninterest bearing liabilities:
Demand deposits	1,684,107						1,188,758
Other liabilities	87,302						58,267
Total liabilities	7,083,062						5,976,145
Shareholders' equity	872,944						773,843
Total liabilities & shareholders' equity	$	7,956,006					$	6,749,988
Net interest income			$	194,707					$	178,188
Net interest spread					3.32	%					3.50	%
Net interest margin					3.52	%					3.85	%
Core net interest margin (3)					3.47	%					3.76	%

(1)Average balances include non-accrual loans. Interest income includes loan fees of $8.9 million and $3.4 million for the nine months ended September 30, 2020 and 2019 respectively.

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

(3)A non-GAAP measure. A reconciliation has been included in this MD&A section under the caption "Use of Non-GAAP Financial measures."

Nine months ended September 30, 2019
2019 2018
(in thousands) Average Balance Interest
Income/Expense
Average
Yield/
Rate
Average Balance Interest
Income/Expense
Average
Yield/
Rate
Assets
Interest-earning assets:
Taxable portfolio loans (1) $ 4,890,974
$ 195,628
5.35 % $ 4,144,319
$ 154,760
4.99 %
Tax-exempt portfolio loans (2) 27,063
1,359
6.71
35,561
1,446
5.44
Non-core acquired loans - contractual 12,598
1,009
10.71
25,705
1,342
6.98
Non-core acquired loans - incremental accretion 4,207
44.66
1,592
8.28
Total loans 4,930,635
202,203
5.48
4,205,585
159,140
5.06
Taxable debt and equity investments 1,041,874
22,030
2.83
705,894
13,426
2.54
Non-taxable debt and equity investments (2) 111,758
3,025
3.62
40,576
1,084
3.57
Short-term investments 108,930
1,722
2.11
63,416
777
1.64
Total securities and short-term investments 1,262,562
26,777
2.84
809,886
15,287
2.52
Total interest-earning assets 6,193,197
228,980
4.94
5,015,471
174,427
4.65
Noninterest-earning assets 556,791
393,933

Total assets $ 6,749,988
$ 5,409,404

Liabilities and Shareholders' Equity
Interest-bearing liabilities:
Interest-bearing transaction accounts $ 1,273,591
$ 5,972
0.63 % $ 814,679
$ 2,422
0.40 %
Money market accounts 1,579,702
20,470
1.73
1,470,177
13,221
1.20
Savings 471,024
646
0.18
206,213
429
0.28
Certificates of deposit 783,182
11,060
1.89
638,889
7,115
1.49
Total interest-bearing deposits 4,107,499
38,148
1.24
3,129,958
23,187
0.99
Subordinated debentures 135,512
5,562
5.49
118,123
4,305
4.87
FHLB advances 286,267
5,297
2.47
302,937
4,435
1.96
Other borrowed funds 199,842
1,785
1.19
178,245
561
0.42
Total interest-bearing liabilities 4,729,120
50,792
1.44
3,729,263
32,488
1.16
Noninterest bearing liabilities:
Demand deposits 1,188,758
1,073,903

Other liabilities 58,267
36,323

Total liabilities 5,976,145
4,839,489

Shareholders' equity 773,843
569,915

Total liabilities & shareholders' equity $ 6,749,988
$ 5,409,404

Net interest income $ 178,188
$ 141,939

Net interest spread 3.50 % 3.49 %
Net interest margin 3.85 % 3.78 %
Core net interest margin (3) 3.76 % 3.74 %


~~(1)~~	Average balances include non-accrual loans. The income on such loans is included in interest but is recognized only upon receipt. Loan fees, net of amortization of deferred loan origination fees and costs, included in interest income are approximately $3.4 million and $2.9 million for the nine months ended September 30, 2019 and 2018 respectively.


~~(2)~~	Non-taxable income is presented on a fully tax-equivalent basis using a 24.7% tax rate in 2019 and 2018. The tax-equivalent adjustments were $1.1 million and $0.6 million for the nine months ended September 30, 2019 and 2018, respectively.


~~(3)~~	~~A non-GAAP measure. A reconciliation has been included in this section under the caption "Use of Non-GAAP Financial measures."~~

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.


	2019 compared to 2018																			2020 compared to 2019
	Three months ended September 30,									Nine months ended September 30,										Three months ended September 30,										Nine months ended September 30,
	Increase (decrease) due to									Increase (decrease) due to										Increase (decrease) due to										Increase (decrease) due to
(in thousands)	Volume(1)			Rate(2)			Net			Volume(1)			Rate(2)			Net			(in thousands)	Volume(1)		Rate(2)		Net		Volume(1)		Rate(2)		Net
Interest earned on:																			Interest earned on:
Taxable loans	$	12,487		$	1,736		$	14,223		$	29,304		$	11,564		$	40,868		Taxable loans	$	10,893	$	(18,251)	$	(7,358)	$	32,588	$	(38,695)	$	(6,107)
Tax-exempt loans (3)	(128		)	127			(1		)	(387		)	300			(87		)	Tax-exempt loans (3)	142		(209)		(67)		409		(415)		(6)
Non-core acquired loans	(698		)	2,306			1,608			(2,135		)	4,417			2,282			Non-core acquired loans	(202)		(955)		(1,157)		40		(1,500)		(1,460)
Taxable debt and equity investments	3,213			305			3,518			6,968			1,636			8,604			Taxable debt and equity investments	(1,201)		(1,337)		(2,538)		380		(2,081)		(1,701)
Non-taxable debt and equity investments (3)	933			5			938			1,927			14			1,941			Non-taxable debt and equity investments (3)	1,852		(163)		1,689		4,612		(278)		4,334
Short-term investments	244			22			266			673			272			945			Short-term investments	377		(836)		(459)		772		(1,994)		(1,222)
Total interest-earning assets	$	16,051		$	4,501		$	20,552		$	36,350		$	18,203		$	54,553		Total interest-earning assets	$	11,861	$	(21,751)	$	(9,890)	$	38,801	$	(44,963)	$	(6,162)

Interest paid on:																			Interest paid on:
Interest-bearing transaction accounts	$	809		$	440		$	1,249		$	1,753		$	1,797		$	3,550		Interest-bearing transaction accounts	$	230	$	(2,023)	$	(1,793)	$	784	$	(4,920)	$	(4,136)
Money market accounts	436			1,100			1,536			1,048			6,201			7,249			Money market accounts	1,194		(7,150)		(5,956)		3,607		(17,339)		(13,732)
Savings	167			(92		)	75			402			(185		)	217			Savings	23		(210)		(187)		123		(536)		(413)
Certificates of deposit	650			442			1,092			1,804			2,141			3,945			Certificates of deposit	(823)		(738)		(1,561)		(934)		(950)		(1,884)
Subordinated debentures	308			165			473			677			580			1,257			Subordinated debentures	859		11		870		1,486		13		1,499
FHLB advances	385			89			474			(255		)	1,117			862			FHLB advances	(597)		(886)		(1,483)		(741)		(2,486)		(3,227)
Borrowed funds	47			422			469			76			1,148			1,224
Securities sold under agreements to repurchase																			Securities sold under agreements to repurchase	73		(341)		(268)		141		(601)		(460)
Other borrowings																			Other borrowings	(50)		(171)		(221)		45		(373)		(328)
Total interest-bearing liabilities	2,802			2,566			5,368			5,505			12,799			18,304			Total interest-bearing liabilities	909		(11,508)		(10,599)		4,511		(27,192)		(22,681)
Net interest income	$	13,249		$	1,935		$	15,184		$	30,845		$	5,404		$	36,249		Net interest income	$	10,952	$	(10,243)	$	709	$	34,290	$	(17,771)	$	16,519

(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 using the combined statutory federal and state income tax rate in effect for each tax year.~~basis.

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

Net interest income (on a tax equivalent basis) for the three and nine months ended September 30, ~~2019~~2020 increased ~~31%~~1% and ~~26%~~9%, respectively, over the prior year periods primarily from ~~higher loan and investment volumes. Loan and investment volumes benefited from the Trinity acquisition and organic growth~~reductions in rates on interest-bearing liabilities offset by a decline in the loan portfolio. In addition to an increase in interest rates in the current-year periods that positively impacted net interest income, incremental accretion on non-core acquired loans also contributed to the increase. The increase in incremental accretion was due to successful loan workouts on several non-core acquired loans.

The tax-equivalent net interest margin was 3.81% and 3.85% for the three and nine months ended September 30, 2019, respectively, compared to 3.78% in both the prior year periods. The net interest margin benefited from the impact of interest rate increases on the Company's asset sensitive balance sheet and the incremental accretion on non-core acquired loans. While the overall yield on ~~interest-earning assets increased in 2019 over the prior year periods, short-term interest rates at September 30, 2019 have~~earning assets. Loan yields declined from September 30, 2018. An increase in the investment portfolio in 2019 over 2018 has contributed to growth in net interest income, but the shift in earning assets between loans and investments has also reduced the net interest margin. Total investments were 22% of average interest earning assets for the three months ended September 30, 2019, compared to 16% in the prior year period. Partially offsetting the increase from earning assets was the cost of total interest-bearing liabilities that increased seven139 basis points and 28102 basis points for the three and nine months ended September 30, ~~2019,~~2020, respectively, compared to the comparable prior year ~~periods.~~ periods primarily due to LIBOR resets as well as lower rates on new and renewing loans in addition to a lower yield on PPP loans. Higher average loan balances from PPP loans and an increase in short-term investment balances also negatively impacted the yield on earning assets.

The ~~increase~~

tax-equivalent net interest margin was 3.29% and 3.52% for the three and nine months ended September 30, 2020, respectively, compared to 3.81% and 3.85% in the prior year periods, respectively. The net interest ~~rate paid on deposits reflects market~~margin was impacted by the decline in short-term rates as approximately 60% of the Company’s loan portfolio (excluding PPP) has variable rates, with most indexed to one-month LIBOR that has declined significantly over the past year. Average one-month LIBOR was 0.16% and 0.64% in the three and nine months ended September 30, 2020, respectively, compared to 2.18% and 2.37% in the comparable prior year periods, respectively.

The Company responded to interest rate trends as the Company continues to defend existing and attract new core deposit relationships. Deposit pricing adjustments typically lag market movements in interest rates. While short-term interest rates have declined in 2019, the impact of these declines has not yet been reflected inby reducing the cost of ~~deposits. The Company has $3.5 billion in~~certain managed money market and interest-bearing ~~deposit accounts which experienced~~transaction accounts. Net interest income and margin both benefited from an ~~increase~~89 basis point decrease in ~~yield over~~ the ~~past several quarters as interest rates have risen. Within those categories, we have approximately $600 million directly indexed~~rate paid on interest-bearing deposits in the third quarter 2020 compared to ~~federal funds.~~the third quarter 2019. The rate on interest-bearing deposits for the nine months ended September 30, 2020 declined 73 basis points compared to the prior-year period. In addition, ~~there are other wholesale and brokered funds that have and will continue to adjust with~~EFSC’s subordinated debt issuance in the ~~federal funds rate and other indices.~~

~~The Company manages its balance sheet to defend against pressures on core~~second quarter of 2020 reduced net interest margin ~~which could be negatively impacted~~ by ~~continued competition~~two basis points for ~~deposits, current interest rate conditions, and downward movement in short-term rates.~~the nine months ended September 30, 2020.

Noninterest Income

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


	2020 compared to 2019
	Three months ended September 30,														Nine months ended September 30,
(in thousands)	2020		2019		Increase (decrease)						2020		2019		Increase (decrease)
Service charges on deposit accounts	$	2,798	$	3,246	$	(448)	(14)	%	$	8,557	$	9,547	$	(990)	(10)	%
Wealth management revenue	2,456		2,661		(205)		(8)	%	7,283		7,314		(31)		—	%
Card services revenue	2,498		2,494		4		—	%	6,970		6,745		225		3	%

Tax credit income	748		1,238		(490)		(40)	%	2,563		1,968		595		30	%



Miscellaneous income	4,129		3,925		204		5	%	10,624		9,184		1,440		16	%

Total noninterest income	$	12,629	$	13,564	$	(935)	(7)	%	$	35,997	$	34,758	$	1,239	4	%

2019 compared to 2018
Three months ended September 30, Nine months ended September 30,
(in thousands) 2019 2018 Increase (decrease) 2019 2018 Increase (decrease)
Service charges on deposit accounts $ 3,246
$ 2,997
$ 249
8 % $ 9,547
$ 8,855
$ 692
8 %
Wealth management revenue 2,661
2,012
649
32 % 7,314
6,267
1,047
17 %
Card services revenue 2,494
1,760
734
42 % 6,745
4,926
1,819
37 %
Tax credit income 1,238
192
1,046
545 % 1,968
508
1,460
287 %
Gain on sale of investment securities 337
—
337
NM
337
9
328
3,644 %
Miscellaneous income 3,588
1,449
2,139
148 % 8,847
7,080
1,767
25 %
Total noninterest income $ 13,564
$ 8,410
$ 5,154
61 % $ 34,758
$ 27,645
$ 7,113
26 %

NM - Not meaningful

Noninterest income decreased $0.9 million, or 7%, for the three months ended September 30, 2020, compared to the same period in 2019. The increase in deposit account balances provided more earnings credits to business customers, resulting in lower service charge income compared to the prior year quarter. The Company’s tax credit income decreased in the current quarter over the prior year period primarily due to the timing on projects.

Noninterest income increased ~~$5.2~~$1.2 million, or ~~61%, and $7.1 million, or 26%~~4%, for the ~~three and~~ nine months ended September 30, ~~2019, respectively,~~2020, compared to the same ~~periods~~period in ~~2018. Both periods~~2019. Tax credit income increased partially due to fair value adjustments on tax credits. The fair value of these projects increased due to a decline in ~~2019 benefited from~~ the ~~Trinity acquisition that comprised most~~LIBOR component of the ~~increases~~discount rate. Miscellaneous income increased $1.4 million in 2020 over ~~the prior year periods. Trinity’s noninterest~~2019 due primarily to an increase in swap fee income ~~sources will primarily increase the Company’s wealth management~~ and card services revenue, and other income to a lesser extent. The acquisition of Trinity initially added $406 million of additional assets under management. The Company’s tax credit income has increased in 2019 over 2018 due to stronger activity in the current year.

~~The Company expects~~ growth in ~~noninterest income of a high single digit percentage for 2019 and 2020 over the previous year’s level, exclusive of the impact of the Trinity acquisition.~~mortgage revenue.

Noninterest Expense

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


	2019 compared to 2018																							2020 compared to 2019
	Three months ended September 30,											Nine months ended September 30,												Three months ended September 30,																				Nine months ended September 30,
(in thousands)	2019			2018			Increase (decrease)					2019			2018			Increase (decrease)					(in thousands)	2020			2019			Increase (decrease)								2020			2019			Increase (decrease)
Employee compensation and benefits	$	20,845		$	16,297		$	4,548		28	%	$	60,884		$	49,370		$	11,514		23	%	Employee compensation and benefits	$	22,040		$	20,845		$	1,195		6	%	$	66,114		$	60,884		$	5,230		9	%
Occupancy	3,179			2,394			785			33	%	9,004			7,142			1,862			26	%	Occupancy	3,408			3,179			229			7	%	9,940			9,004			936			10	%
Data processing	2,051			1,634			417			26	%	6,415			4,634			1,781			38	%	Data processing	2,167			2,051			116			6	%	6,393			6,415			(22)			—	%
Professional fees	1,064			1,023			41			4	%	2,847			2,619			228			9	%	Professional fees	755			1,064			(309)			(29)	%	2,904			2,847			57			2	%
Merger related expenses	393			—			393			—	%	17,969			—			17,969			—	%

Merger-related expenses																							Merger-related expenses	1,563			393			1,170			298	%	1,563			17,969			(16,406)			(91)	%
Other	10,707			8,574			2,133			25	%	30,012			24,519			5,493			22	%	Other	9,591			10,707			(1,116)			(10)	%	29,195			30,012			(817)			(3)	%
Total noninterest expense	$	38,239		$	29,922		$	8,317		28	%	$	127,131		$	88,284		$	38,847		44	%	Total noninterest expense	$	39,524		$	38,239		$	1,285		3	%	$	116,109		$	127,131		$	(11,022)		(9)	%

Efficiency ratio	49.91		%	52.96		%	(3.05		)%			60.01		%	52.25		%	7.76		%			Efficiency ratio	52.02		%	49.91		%	2.11		%			50.80		%	60.01		%	(9.21)		%
Core efficiency ratio¹	51.73		%	52.23		%	(0.5		)%			52.96		%	52.86		%	0.1		%			Core efficiency ratio¹	51.04		%	51.73		%	(0.69)		%			50.97		%	52.96		%	(1.99)		%
¹A non-GAAP measure. A reconciliation has been included in this section under the caption “Use of Non-GAAP Financial Measures.”	¹A non-GAAP measure. A reconciliation has been included in this section under the caption “Use of Non-GAAP Financial Measures.”																						¹A non-GAAP measure. A reconciliation has been included in this section under the caption “Use of Non-GAAP Financial Measures.”

Noninterest expense increased ~~$8.3~~$1.3 million, or ~~28%, and $38.8 million, or 44%~~3%, for the ~~three and nine months ended September 30, 2019, respectively,~~third quarter 2020, compared to the same ~~periods~~period in ~~2018.~~2019. The increase from the prior year ~~periods were~~period was primarily impacted by merger-related ~~expenses of $0.4 million and $18.0 million for~~expenses. For the ~~three and~~ nine months ended September 30, ~~2019, respectively. In addition, increased operating expenses~~2020, noninterest expense decreased $11.0 million, or 9%, from the ~~Trinity acquisition, most notably~~prior year period primarily due to higher merger-related expenses in the prior year period, partially offset by an increase in employee compensation from merit increases and ~~benefits, will be included in~~ the ~~Company’s ongoing expense run-rate. The three-month period ended September 30, 2019 incorporates a majority~~acquisition of ~~the cost-saving measures from the acquisition. The Company expects its noninterest expense to range between $37 million and $39 million in the fourth quarter of 2019.~~Trinity.

Efficiency ~~improvements that have resulted~~gains primarily from growth in net interest income and ~~noninterest income growth exceeding the growth~~managed increases in noninterest expense ~~excluding merger expenses,~~ have resulted in continued improvements to the Company’s core efficiency ratio. The core efficiency ratio was 51.0% for the nine months ended September 30, 2020 compared to 53.0% for the same period in 2019.

Income Taxes

The Company’s effective tax rate was ~~20.4% and 20.1%~~19.8% for the ~~three and~~third quarter 2020, compared to 20.4% for the same period in 2019. For the nine months ended September 30, 2019, respectively, compared to 7.4% and 13.7% for the same periods in 2018. Reduced excess tax benefits from the vesting of stock-based compensation and nondeductible merger-related expenses in 2019 contributed to the increase in2020, the effective tax rate ~~in 2019. Additionally, tax credit investments and a tax benefit recognized in the third quarter of 2018 upon the finalization of the 2017 tax return benefited the prior year periods.~~

~~The Company expects its effective tax rate~~was 19.6% compared to 20.1% for the ~~full year of 2019 to be approximately 20%, excluding potential tax planning strategies.~~same period in 2019.

Summary Balance Sheet


(in thousands)	September 30, 2020		December 31, 2019		Increase (decrease)
Total cash and cash equivalents	$	392,215	$	167,256	$	224,959	134	%
Securities	1,332,475		1,316,483		15,992		1	%
Loans (excluding PPP)	5,307,207		5,314,337		(7,130)		—	%

PPP loans, net	819,100		—		819,100		NM
Total assets	8,367,976		7,333,791		1,034,185		14	%
Deposits	6,676,226		5,771,023		905,203		16	%
Total liabilities	7,485,709		6,466,606		1,019,103		16	%
Total shareholders’ equity	882,267		867,185		15,082		2	%

~~The Trinity acquisition added $1.2 billion of assets and $1.1 billion of liabilities to the balance sheet in 2019.~~

(in thousands) September 30,
2019 December 31,
2018 Increase (decrease)
Total cash and cash equivalents $ 256,502
$ 196,552
$ 59,950
31 %
Securities 1,308,119
787,048
521,071
66
Loans held for investment 5,228,014
4,350,001
878,013
20
Total assets 7,346,791
5,645,662
1,701,129
30
Deposits 5,624,380
4,587,985
1,036,395
23
Total liabilities 6,500,696
5,041,858
1,458,838
29
Total shareholders’ equity 846,095
603,804
242,291
40

Assets

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 summarizes the composition of the Company’s loan portfolio:

(in thousands) September 30,
2019 December 31,
2018 Increase (decrease)
Commercial and industrial $ 2,303,495
$ 2,123,167
$ 180,328
8 %
Commercial real estate - investor owned 1,287,020
867,667
419,353
48
Commercial real estate - owner occupied 680,868
614,167
66,701
11
Construction and land development 433,486
334,645
98,841
30
Residential real estate 386,173
305,026
81,147
27
Consumer and other 136,972
105,329
31,643
30
Loans held for investment $ 5,228,014
$ 4,350,001
$ 878,013
20 %


(in thousands)	September 30, 2020		December 31, 2019		Increase (decrease)
Commercial and industrial	$	3,152,394	$	2,361,157	$	791,237	34	%
Commercial real estate - investor owned	1,292,182		1,299,884		(7,702)		(1)	%
Commercial real estate - owner occupied	735,704		697,437		38,267		5	%
Construction and land development	474,727		457,273		17,454		4	%
Residential real estate	321,792		366,261		(44,469)		(12)	%
Other	149,508		132,325		17,183		13	%
Loans held for investment	$	6,126,307	$	5,314,337	$	811,970	15	%

~~Loa~~
ns

Loans grew ~~$878~~$812.0 million to~~$5.2~~ $6.1 billion at September 30, ~~2019, when compared to~~2020, from December 31, ~~2018. The increase is~~2019. Loan growth was primarily ~~attributable~~due to PPP loans of $819.1 million at September 30, 2020. Revolving line utilization for C&I customers has decreased in 2020, partially due to the ~~acquisition~~influx of ~~Trinity along with growth in~~PPP funds to our customers. Revolving line utilization was 40.1% and 46.7% at September 30, 2020 and December 31, 2019, respectively. Low interest rates and higher refinance activity has reduced the ~~C&I, CRE,~~residential real estate portfolio, while construction and life insurance premium finance categories, partially offset by paydowns outpacing growth in the other categories. We expect continued loan growth in 2019 and 2020 to be 6-8% excluding Trinity acquired loans.owner-occupied commercial real estate loans have increased.

The following table illustrates ~~portfolio loan growth with selected specialized lending detail:~~the change in loans:



(in thousands)	September 30, 2020		December 31, 2019		Increase (decrease)
C&I	$	1,080,860	$	1,186,667	$	(105,807)	(9)	%
CRE investor owned	1,284,351		1,290,258		(5,907)		—	%
CRE owner occupied	583,430		582,579		851		—	%
PPP, net	819,100		—		819,100		NM
Enterprise value lending¹	367,337		428,896		(61,559)		(14)	%
Life insurance premium financing¹	517,559		472,822		44,737		9	%
Residential real estate	321,482		366,261		(44,779)		(12)	%
Construction and land development	450,225		428,681		21,544		5	%
Tax credits¹	368,908		294,210		74,698		25	%
Agriculture¹	190,969		139,873		51,096		37	%
Other	142,086		124,090		17,996		15	%
Total loans	$	6,126,307	$	5,314,337	$	811,970	15	%

Note: Certain prior period amounts have been reclassified among the categories to conform to the current period presentation.
¹Specialized categories may include a mix of C&I, CRE, construction and land development, or other loans.

(in thousands) September 30,
2019 December 31,
2018 Increase (decrease)
C&I - general $ 1,174,569
$ 995,491
$ 179,078
18 %
CRE investor owned - general 1,281,332
862,423
418,909
49
CRE owner occupied - general 566,219
496,835
69,384
14
Enterprise value lending¹
417,521
465,992
(48,471 ) (10 )
Life insurance premium financing¹
468,051
417,950
50,101
12
Residential real estate - general 386,174
304,671
81,503
27
Construction and land development - general 403,590
310,832
92,758
30
Tax credits¹
265,626
262,735
2,891
1
Agriculture¹
136,249
136,188
61
—
Consumer and other - general 128,683
96,884
31,799
33
Total loans $ 5,228,014
$ 4,350,001
$ 878,013
20 %

Note: Certain prior period amounts have been reclassified among the categories to conform to the current period presentation.
¹Specialized categories may include a mix of C&I, CRE, construction and land development, or consumer and other loans.

Specialized lending products, especially enterprise value lending, life insurance premium financing, and tax credits, consist of primarily 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 four markets. These specialized loan products offer opportunities to expand and diversify geographically by entering ~~into~~ 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. C&I loan growth, coupled with typically fixed-rate CRE lending, supports management’s efforts to maintain a flexible asset sensitive interest rate risk position. Specialized lending products consisting of life insurance premium financing and tax credits increased $119.4 million in 2020. Life insurance premium financing and tax credits are typically lower risk products due to the high collateral value securing the loans. Agriculture loans increased primarily due to hog and pig farming. Enterprise value lending decreased in 2020 primarily due to paydowns.

In response to the COVID-19 pandemic, the Company has processed $690.8 million of short-term deferrals allowing customers to defer payments. Approximately 99% of the deferrals are for 90 days or less. As of September 30, 2020, loans of $139.3 million were still in deferral status, including second round deferrals of $86.1 million.

The following table summarizes the loans in deferral status by category at September 30, 2020:


(in thousands)	Total Loans in Deferral Status		2nd Round Deferrals in Deferral Status
Commercial real estate	$	48,081	$	38,932
Commercial and industrial	46,041		23,822
Construction and land development	44,243		23,348
Residential real estate	974		—
Other	12		—
Total	$	139,351	$	86,102

Provision and Allowance for ~~Loan~~Credit Losses

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


	Three months ended September 30,						Nine months ended September 30,
(in thousands)	2020		2019		2020		2019
Allowance, at beginning of period	$	110,270	$	43,821	$	43,288	$	43,476

CECL adoption	—		—		28,387		—
PCD loans immediately charged-off	—		—		(1,680)		—

Allowance at beginning of period, adjusted for adoption of CECL	110,270		43,821		69,995		43,476

Charge-offs:
Commercial and industrial	(2,006)		(1,295)		(5,372)		(4,528)
Real estate:
Commercial	(302)		(22)		(528)		(609)
Construction and land development	—		—		(31)		(45)
Residential	(173)		(255)		(327)		(348)
Other	(103)		(86)		(294)		(268)
Total charge-offs	(2,584)		(1,658)		(6,552)		(5,798)
Recoveries:
Commercial and industrial	808		209		1,605		270
Real estate:
Commercial	323		14		3,169		81
Construction and land development	83		260		152		758
Residential	303		65		686		553
Other	40		40		102		270
Total recoveries	1,557		588		5,714		1,932
Net charge-offs	(1,027)		(1,070)		(838)		(3,866)
Provision for credit losses	14,027		1,833		54,113		5,031
Other	—		(29)		—		(86)
Allowance, at end of period	$	123,270	$	44,555	$	123,270	$	44,555

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


	Three months ended September 30,						Nine months ended September 30,
(in thousands)	2020		2019		2020		2019
Provision for loan losses	$	14,027	$	1,833	$	54,113	$	5,031
Provision for off-balance sheet commitments	295		—		2,350		—
Provision for held-to-maturity securities	—		—		342		—
Recovery of accrued interest	(242)		—		(870)		—
Provision for credit losses	$	14,080	$	1,833	$	55,935	$	5,031

Three months ended September 30, Nine months ended September 30,
(in thousands) 2019 2018 2019 2018
Allowance at beginning of period, for portfolio loans $ 42,935
$ 42,007
$ 42,295
$ 38,166
Loans charged off:
Commercial and industrial (1,295 ) (2,405 ) (4,528 ) (4,093 )
Real estate:
Commercial (22 ) (22 ) (609 ) (22 )
Construction and land development —
—
(45 ) —
Residential (255 ) (122 ) (348 ) (414 )
Consumer and other (86 ) (46 ) (268 ) (128 )
Total loans charged off (1,658 ) (2,595 )
(5,798 )
(4,657 )
Recoveries of loans previously charged off:
Commercial and industrial 209
2
270
1,076
Real estate:
Commercial 14
12
81
37
Construction and land development 260
21
758
395
Residential 65
88
553
220
Consumer and other 40
25
270
67
Total recoveries of loans 588
148

1,932

1,795
Net loan charge-offs (1,070 ) (2,447 )
(3,866 )
(2,862 )
Provision for loan losses 1,833
2,332
5,269
6,588
Allowance at end of period, for portfolio loans $ 43,698
$ 41,892

$ 43,698

$ 41,892

Allowance at beginning of period, for purchased credit impaired loans $ 886
$ 2,363
$ 1,181
$ 4,411
Loans charged off —
—
—
—
Recoveries of loans —
—
—
—
Net loan charge-offs —
—
—
—
Provision reversal for purchased credit impaired loan losses —
(69 ) (238 ) (2,064 )
Other (29 ) —
(86 ) (53 )
Allowance at end of period, for purchased credit impaired loans $ 857
$ 2,294

$ 857

$ 2,294

Total allowance at end of period $ 44,555
$ 44,186
$ 44,555
$ 44,186

Portfolio loans, average $ 5,164,409
$ 4,230,090
$ 4,916,631
$ 4,178,900
Total loans, average 5,178,009
4,252,525
4,930,635
4,205,585
Total loans, ending 5,228,014
4,267,430

Net charge-offs to average loans 0.08 % 0.23 % 0.11 % 0.09 %
Allowance for loan losses to total loans 0.85 % 1.04 % 0.85 % 1.04 %
The following table summarizes the allocation of the ACL:


	September 30, 2020						December 31, 2019
(in thousands)	Allowance		Percent by Category to Total Loans		Allowance		Percent by Category to Total Loans
Commercial and industrial	$	57,870	47.0	%	$	27,455	44.4	%
Real estate:
Commercial	39,143		31.8	%	10,808		37.6	%
Construction and land development	18,918		15.3	%	2,611		8.6	%
Residential	5,331		4.3	%	1,703		6.9	%
Other	2,008		1.6	%	711		2.5	%
Total	$123,270		100.0	%	$43,288		100.0	%

The provision for credit losses, which includes a provision for losses on unfunded commitments, is a charge to earnings to maintain the ACL at a level consistent with management’s assessment of expected losses in the loan portfolio at the balance sheet date. The Company also records reversals of interest on nonaccrual loans and interest recoveries directly through the provision of credit losses. The provision for credit losses was $14.1 million and $55.9 million for the three and ninemonths ended September 30, ~~2019~~2020, respectively. CECL requires economic forecasts to be factored into determining estimated losses. As a result, CECL will typically require a higher level of provision at the start of an economic downturn. The increase in the provision for credit losses in 2020 was ~~$1.8 million~~primarily due to a change in economic forecasts from the end of 2019, which worsened significantly starting in March 2020 due to the COVID-19 pandemic and ~~$5.0 million, respectively,~~the resulting slow-down of business activity. Two of the primary economic loss drivers used in estimating the ACL include the percentage change in GDP and unemployment. At September 30, 2020, the Company’s forecast of the percentage change in GDP included a range of (5.9)% to 11.8% and the percentage change in unemployment included a range of 6.5% to 11.3%. The Company utilizes a one-year reasonable and supportable forecast.

In the third quarter 2020, economic forecasts improved slightly compared to ~~$2.3 million~~the first and ~~$4.5 million~~second quarters of 2020 reducing the provision for ~~same~~credit losses. This improvement was offset by an increase in individual reserves and in qualitative reserves established for certain higher risk areas, including hospitality and loans that have received principal and interest deferrals.

To the extent the Company does not recognize charge-offs and economic forecasts improve in future periods, ~~in 2018, respectively.~~the Company could recognize a reversal of provision for credit losses. Conversely, if economic conditions and the Company’s forecast worsens, the Company could recognize elevated levels of provision for credit losses. The provision is also reflective of ~~loan growth and~~ charge-offs in the period.

The ~~allowance for loan losses~~Company had net charge-offs of $2.5 million in the first nine months of 2020, primarily due to the administrative charge-off of nonaccrual loans less than $100,000 in individual outstanding principal amount in accordance with the Company’s credit policy. Most of these charge-offs were loans added to nonaccrual as part of the CECL adoption. The ACLL was ~~0.85%~~2.01% of loans at September 30, ~~2019,~~2020, compared to ~~1.04%~~0.81% at September 30, 2018. The decrease in the ratio of allowance for loan losses to total loans was primarily due to the acquisition of Trinity loans that were recorded at fair value and did not have a corresponding allowance for loan losses. The Company recorded a credit mark on the Trinity loan portfolio of $24.4 million at acquisition.December 31, 2019.

~~Management believes the allowance for loan losses is adequate to absorb inherent losses in the loan portfolio.~~

Nonperforming assets

Prior to the adoption of CECL, PCI loans were accounted for in performing pools of loans and were not individually identified as nonaccrual or classified. Under the CECL accounting model, the Company elected not to maintain PCI pools for certain loans which are now accounted for individually and are now included in nonperforming and classified loans. PCI loans are referred to as PCD under CECL.

The following table presents the categories of nonperforming assets and other ratios as of the dates indicated.


(in thousands)	September 30, 2019			December 31, 2018			September 30, 2018			(in thousands)	September 30, 2020			December 31, 2019			September 30, 2019
Non-accrual loans	$	15,430		$	16,520		$	14,935
Nonaccrual loans										Nonaccrual loans	$	35,037		$	26,096		$	15,430
Loans past due 90 days or more and still accruing interest	60			—			1,289			Loans past due 90 days or more and still accruing interest	951			250			60
Restructured loans	79			225			820
Troubled debt restructurings										Troubled debt restructurings	3,635			79			79
Total nonperforming loans	15,569			16,745			17,044			Total nonperforming loans	39,623			26,425			15,569
Other real estate	8,498			469			408			Other real estate	4,835			6,344			8,498

Total nonperforming assets	$	24,067		$	17,214		$	17,452		Total nonperforming assets	$	44,458		$	32,769		$	24,067

Total assets	$	7,346,791		$	5,645,662		$	5,517,539		Total assets	$	8,367,976		$	7,333,791		$	7,346,791
Total loans	5,132,391			4,350,001			4,267,430			Total loans	6,126,307			5,314,337			5,228,014
Total loans plus other real estate	5,236,512			4,350,470			4,267,430

Nonperforming loans to total loans	0.30		%	0.38		%	0.40		%	Nonperforming loans to total loans	0.65		%	0.50		%	0.30		%

Nonperforming assets to total assets	0.33			0.30			0.32			Nonperforming assets to total assets	0.53		%	0.45		%	0.33		%
Allowance for loan losses to nonperforming loans	286		%	260		%	259		%

ACLL to nonperforming loans										ACLL to nonperforming loans	311		%	164		%	286		%

Nonperforming loans ~~decreased $1.2~~increased $13.2 million to ~~$15.6~~$39.6 million at September 30, ~~2019~~2020 from ~~$16.7~~$26.4 million at December 31, ~~2018. Net charge-offs~~2019. The addition of a $5.0 million nonaccrual enterprise value loan and an $8.7 million hotel loan in ~~2019, that~~2020 also contributed to the decline in nonperforming loans, are comprised primarily of two loan relationships identified as nonperforming loans at the end of 2018. The charge-off of these loans did not significantly impact the provision for loan losses, as the credits were specifically reserved at the end of 2018.

increase. Other real estate ~~increased in 2019~~decreased during 2020 primarily due to ~~the foreclosure~~write-downs of ~~a $5.4~~$1.1 million commercial property that was a purchased credit impaired loan from our acquisition of Jefferson County Bancshares Inc., along with the addition of 15 properties with the acquisition of Trinity totaling $4.5 million. The foreclosure of the commercial property did not result in a write-down of the asset. These additions were partially offset by other real estateand sales of ~~$4.3~~$0.7 million.

Nonperforming loans

~~Nonperforming loans exclude PCI loans that are accounted for on a pool basis. See Item 1, Note 5 –~~ ~~Loans~~ ~~for more information on these loans.~~

Nonperforming loans based on loan type were as follows:



(in thousands)	September 30, 2020		December 31, 2019		September 30, 2019
Commercial and industrial	$	23,586	$	22,578	$	11,433
Commercial real estate	11,361		2,516		2,858
Construction and land development	200		—		—
Residential real estate	4,394		1,330		1,267
Other	82		1		11
Total	$	39,623	$	26,425	$	15,569

(in thousands) September 30, 2019 December 31, 2018 September 30, 2018
Commercial and industrial $ 11,433
$ 12,950
$ 12,197
Commercial real estate 2,858
1,206
2,058
Construction and land development —
—
—
Residential real estate 1,267
2,277
2,477
Consumer and other 11
312
312
Total $ 15,569
$ 16,745

$ 17,044

The following table summarizes the changes in nonperforming loans:


	Nine months ended September 30,
(in thousands)	2020		2019
Nonperforming loans, beginning of period	$	26,425	$	16,745
CECL adoption	8,462		—
PCD loans immediately charged off	(1,680)		—
Nonperforming loans, January 1	$	33,207	$	16,745
Additions to nonaccrual loans	22,699		14,861
Additions to restructured loans	3,750		—
Charge-offs	(6,552)		(5,470)
Other principal reductions	(13,915)		(8,221)
Moved to other real estate	(261)		(1,732)
Moved to performing	(6)		(674)
Loans past due 90 days or more and still accruing interest	701		60
Nonperforming loans, end of period	$	39,623	$	15,569

Nine months ended September 30,
(in thousands) 2019 2018
Nonperforming loans beginning of period $ 16,745
$ 15,687
Additions to nonaccrual loans 14,861
6,966
Additions to restructured loans —
274
Charge-offs (5,470 ) (4,546 )
Other principal reductions (8,221 ) (2,426 )
Moved to other real estate (1,732 ) (200 )
Moved to performing (674 ) —
Loans past due 90 days or more and still accruing interest 60
1,289
Nonperforming loans end of period $ 15,569
$ 17,044

Other real estate

Other real estate was$4.8 million at September 30, 2020 compared to $8.5 million at September 30, ~~2019 compared to $0.4 million at September 30, 2018.~~2019.

The following table summarizes the changes in other real estate:


	Nine months ended September 30,
(in thousands)	2020		2019
Other real estate beginning of period	$	6,344	$	469
Additions and expenses capitalized to prepare property for sale	261		7,964
Additions from acquisition	—		4,512

Writedowns in value	(1,104)		(126)
Sales	(666)		(4,321)
Other real estate end of period	$	4,835	$	8,498

Nine months ended September 30,
(in thousands) 2019 2018
Other real estate beginning of period $ 469
$ 498
Additions and expenses capitalized to prepare property for sale 7,964
408
Additions from acquisition 4,512
—
Writedowns in value (126 ) (44 )
Sales (4,321 ) (454 )
Other real estate end of period $ 8,498
$ 408

Writedowns in fair value are recorded in other noninterest expense based on current market activity shown in the appraisals.

~~Liabilities~~

Liabilities totaled $6.5 billion at September 30, 2019, compared to $5.0 billion at December 31, 2018. The increase in liabilities was due to $1.0 billion of growth in total deposits primarily attributable to the acquisition of Trinity and a $391.4 million increase in Federal Home Loan Bank (“FHLB”) advances, partially offset by a decrease of $23.8 million in other borrowings and notes payable. The increase in Federal Home Loan Bank advances supported the increase in the investment portfolio, the reduction in higher-cost other borrowings and the Company’s share repurchase plan.

Deposits


(in thousands)	September 30, 2020			December 31, 2019			Increase (decrease)
Noninterest-bearing deposit accounts	$	1,929,540		$	1,327,348		$	602,192	45	%
Interest-bearing transaction accounts	1,499,756			1,367,444			132,312		10	%
Money market accounts	2,019,222			1,713,615			305,607		18	%
Savings accounts	615,663			536,169			79,494		15	%
Certificates of deposit:
Brokered	65,209			215,758			(150,549)		(70)	%
Other	546,836			610,689			(63,853)		(10)	%
Total deposits	$	6,676,226		$	5,771,023		$	905,203	16	%

Non-time deposits / total deposits	91		%	86		%
Demand deposits / total deposits	29		%	23		%

(in thousands) September 30,
2019 December 31,
2018 Increase (decrease)
Demand deposits $ 1,295,450
$ 1,100,718
$ 194,732
18 %
Interest-bearing transaction accounts 1,307,855
1,037,684
270,171
26 %
Money market accounts 1,652,394
1,565,729
86,665
6 %
Savings 548,658
199,425
349,233
175 %
Certificates of deposit:
Brokered 209,754
198,981
10,773
5 %
Other 610,269
485,448
124,821
26 %
Total deposits $ 5,624,380
$ 4,587,985
$ 1,036,395
23 %

Non-time deposits / total deposits 85 % 85 %
Demand deposits / total deposits 23 % 24 %

Total deposits at September 30, ~~2019~~2020 were ~~$5.6~~$6.7 billion, an increase of ~~23%~~16%, from December 31, ~~2018.~~2019. The increase ~~is due~~in deposits has been influenced by the PPP, as many of the recipients have maintained increased deposit levels since receiving PPP funding. Government stimulus checks and organic growth have also impacted deposit balances. Due to increased liquidity, the ~~acquisition~~brokered certificates of ~~Trinity, partially offset by a decline~~deposit have been reduced in ~~interest-bearing deposits.~~2020. Noninterest bearing deposits as a percentage of total deposits was ~~23%~~29% at September 30, ~~2019~~2020, compared to ~~24%~~23% at December 31, 2018. The deposit portfolio acquired with Trinity had a lower percentage of noninterest-bearing deposit accounts as part of the total deposit base. However, the cost of funds on the Trinity interest-bearing deposit portfolio was relatively lower than the Company’s deposits prior to the acquisition.2019, respectively.

Shareholders’ Equity

Shareholders’ equity totaled ~~$846.1~~$882.3 million at September 30, ~~2019,~~2020, an increase of ~~$242.3~~$15.1 million from December 31, ~~2018.~~2019. Significant activity during the first nine months ~~ended September 30, 2019~~of 2020 was as follows:

~~issuance of approximately 4.0 million shares of common stock for the Trinity acquisition reflecting approximately $171.9 million of consideration,~~

•increase from net income of ~~$63.6~~$45.5 million,

•net increase in fair value of securities and cash flow hedges of ~~$28.5~~$14.8 million,

•decrease from CECL adoption of $18.1 million,

•decrease from dividends paid on common shares of ~~$12.1~~$14.2 million,

•increase from the issuance under equity compensation plans of ~~$1.2~~$2.5 million, and

•decrease from share repurchases of ~~$11.8~~$15.3 million.

Liquidity and Capital Resources

Liquidity

~~The~~Our objective of liquidity management is to ensure we ~~have the ability to~~can 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 run-off from demand deposits, maturing time deposits which are not renewed, and fundings under credit commitments

to customers. Funds are available from ~~a number of~~several sources, such as from the core deposit base and from loans and securities repayments and maturities.

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

The Bank’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 monthly by measuring the amount of liquid versus non-liquid assets and liabilities. 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.

~~Parent Company liquidity~~

The parent company’s liquidity is managed to provide the funds necessary to pay dividends to shareholders, service debt, invest in subsidiaries as necessary, and satisfy other operating requirements. The parent company’s primary funding sources to meet its liquidity requirements are dividends and payments from the Bank and proceeds from the issuance of equity (i.e. stock option exercises, stock offerings). Another source of funding for the parent company includes the issuance of subordinated debentures and other debt instruments.

The Company has an effective shelf registration statement on Form S-3 registering up to $100 million of common stock, preferred stock, debt securities, and various other securities, including combinations of such 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.

On ~~November 1, 2016, the Company issued $50 million aggregate principal amount of 4.75% fixed-to-floating rate subordinated notes with a maturity date of~~ ~~November 1, 2026, which initially bear an annual interest rate of 4.75%, with interest payable semiannually. Beginning~~ ~~November 1, 2021, the interest rate resets quarterly to the three-month LIBOR rate plus a spread of 338.7 basis points, payable quarterly.~~

The Company has a senior unsecured revolving credit agreement (the “Revolving Agreement”) with another bank allowing for borrowings up to $25 million that matures in February 2020. The proceeds can be used for general corporate purposes. The Revolving Agreement is subject to ongoing compliance with a number of customary affirmative and negative covenants as well as specified financial covenants. As of September 30, 2019, there was $1 million outstanding under the Revolving Agreement.

The Company has a five-year term note for $40 million that matures in March 2024. The Company principally used the proceeds from the issuance of the note to fund the cash consideration at the closing of the acquisition of Trinity.

As of September 30, 2019, the Company had $92 million of outstanding subordinated debentures as part of 13 statutory trusts which includes $23 million acquired in the Trinity acquisition. These debentures are classified as debt but are included in regulatory capital and the related interest expense is tax-deductible, which makes them an attractive source of funding.

Management believes our current level of cash at the holding company of $6 million, along with the Company’s other available funding sources, will be sufficient to meet all projected cash needs for the remainder of 2019.

~~Bank liquidity~~

The Bank has a variety of funding sources available to increase financial flexibility. In addition to amounts currently borrowed, at September 30, ~~2019,~~2020, the Bank had borrowing capacity of ~~$532~~$545 million from the FHLB of Des Moines under blanket loan pledges, and has an additional ~~$1 billion~~$763 million available from the Federal Reserve Bank under a pledged loan agreement. The Bank has unsecured federal funds lines with six correspondent banks totaling $90 million, and ~~$296~~$374 million of unsecured credit through the American Financial Exchange.

Investment securities are another important tool in managing the Bank’s liquidity objectives. Securities totaled $1.3 billion at September 30, ~~2019,~~2020, and included ~~$416~~$449 million pledged as collateral for deposits of public institutions, treasury, loan notes, and other requirements. The remaining ~~$893~~$895 million could be pledged or sold to enhance liquidity, if necessary.

In the normal course of business, the Bank enters into certain forms of off-balance sheet transactions, including unfunded loan commitments and letters of credit. These transactions are managed through the Bank’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 Bank has ~~$1.5~~$1.8 billion in unused commitments as of September 30, ~~2019.~~2020. The nature of these commitments is such that the likelihood of funding them in the aggregate at any one time is low.

EFSC liquidity

EFSC’s liquidity is managed to provide the funds necessary to pay dividends to shareholders, service debt, invest in subsidiaries as necessary, and satisfy other operating requirements. EFSC’s primary funding sources to meet its liquidity requirements are dividends and payments from the Bank and proceeds from the issuance of equity (i.e. stock option exercises, stock offerings). Another source of funding for the parent company includes the issuance of subordinated debentures and other debt instruments.

EFSC has an effective automatic shelf registration statement on Form S-3 allowing for the issuance of various forms of equity and debt securities. EFSC’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.

On November 1, 2016, EFSC issued $50 million aggregate principal amount of 4.75% fixed-to-floating rate subordinated notes with a maturity date of November 1, 2026, which initially bear an annual interest rate of 4.75%, with interest payable semiannually. Beginning November 1, 2021, the interest rate resets quarterly to the three-month LIBOR rate plus a spread of 338.7 basis points, payable quarterly.

In March 2019, EFSC entered into a five-year term note for $40 million that matures in March 2024. EFSC principally used the proceeds from the issuance of the note to fund the cash consideration at the closing of the acquisition of Trinity. The remaining balance at September 30, 2020 was $30 million.

On May 21, 2020, EFSC issued $63.3 million aggregate principal amount of 5.75% fixed-to-floating rate subordinated notes with a maturity date of June 1, 2030, which initially bear an annual interest rate of 5.75%, with interest payable semiannually. Beginning June 1, 2025, the interest rate resets quarterly to the three-month SOFR rate plus a spread of 566.0 basis points, payable quarterly.

EFSC has a senior unsecured revolving credit agreement (the ��Revolving Agreement”) with another bank allowing for borrowings up to $25 million that matures in February 2021. The proceeds can be used for general corporate purposes. The Revolving Agreement is subject to ongoing compliance with a number of customary affirmative and negative covenants as well as specified financial covenants. As of September 30, 2020, no amount was outstanding under the Revolving Agreement.

As of September 30, 2020, EFSC had $92 million of outstanding junior subordinated debentures as part of 13 statutory trusts. These debentures are classified as debt but are included in regulatory capital and the related interest expense is tax-deductible, which makes them an attractive source of funding.

Management believes our current level of cash at the holding company of $71 million, along with EFSC’s other available funding sources, will be sufficient to meet all projected cash needs for the remainder of 2020.

Capital Resources

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

Quantitative measures established by regulation to ensure capital adequacy require ~~the Company~~EFSC and the Bank to maintain minimum amounts and ratios (set forth in the following table) of total, Tier 1, and common equity tier 1 capital to risk-weighted assets, and of Tier 1 capital to average assets. To be categorized as “well capitalized”, banks must maintain minimum total risk-based (10%), Tier 1 risk-based (8%), common equity tier 1 risk-based (6.5%), and Tier 1 leverage ratios (5%). As of September 30, ~~2019,~~2020, and December 31, ~~2018, the Company~~2019, EFSC and the Bank met all capital adequacy requirements to which they are subject.

The Bank continues to exceed regulatory standards and met the definition of “well-capitalized” (the highest category) at September 30, ~~2019.~~2020.

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


(in thousands)	September 30, 2020			December 31, 2019			Well Capitalized Minimum %	Minimum Capital Requirement Including Capital Conservation Buffer
Total capital to risk-weighted assets	14.6		%	12.9		%	N/A	10.5	%
Tier 1 capital to risk-weighted assets	11.6		%	11.4		%	N/A	8.5	%
Common equity tier 1 capital to risk-weighted assets	10.2		%	9.9		%	N/A	7.0	%
Leverage ratio (Tier 1 capital to average assets)	9.2		%	10.1		%	N/A	4.0	%
Tangible common equity to tangible assets¹	8.0		%	8.9		%	N/A
Total risk-based capital	$	938,907		$	804,273
Tier 1 capital	745,397			710,480
Common equity tier 1 capital	651,742			616,825

¹ Not a required regulatory capital ratio

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


(in thousands)	September 30, 2020			December 31, 2019			Well Capitalized Minimum %		Minimum Capital Requirement Including Capital Conservation Buffer
Total capital to risk-weighted assets	13.3		%	12.4		%	10.0	%	10.5	%
Tier 1 capital to risk-weighted assets	12.0		%	11.7		%	8.0	%	8.5	%
Common equity tier 1 capital to risk-weighted assets	12.0		%	11.7		%	6.5	%	7.0	%
Leverage ratio (Tier 1 capital to average assets)	9.5		%	10.3		%	5.0	%	4.0	%
Total risk-based capital	$	850,665		$	769,254
Tier 1 capital	770,550			725,461
Common equity tier 1 capital	770,495			725,406

(in thousands) September 30,
2019 December 31, 2018 Well Capitalized Minimum % Minimum Capital Requirement Including Capital Conservation Buffer
Total capital to risk-weighted assets 12.53 % 12.26 % 10.00 % 10.50 %
Tier 1 capital to risk-weighted assets 11.79
11.38
8.00
8.50
Common equity tier 1 capital to risk-weighted assets 11.79
11.37
6.50
7.00
Leverage ratio (Tier 1 capital to average assets) 10.38
10.52
5.00
4.00
Total risk-based capital $ 765,025
$ 611,197

Tier 1 capital 719,965
567,296

Common equity tier 1 capital 719,908
567,239

In March 2020, the U.S. banking agencies issued an interim final rule that provides banking organizations that implement CECL before the end of 2020 the option to delay for two years an estimate of CECL’s effect on regulatory capital followed by a three-year transition period. The ~~following table summarizes~~Company adopted CECL on January 1, 2020. For additional information regarding the adoption of CECL, see “Item 1. Note 1 – Summary of Significant Accounting Policies.” The Company has elected the transition provisions provided by the U.S. banking agencies’ rule. Accordingly, the regulatory capital effects resulting from adoption of the CECL methodology will not be fully reflected in the Company’s ~~various~~regulatory capital until January 1, 2025. Based on the Company’s regulatory capital position as of September 30, 2020, the estimated impact of adopting CECL would reduce the Common Equity Tier 1 Capital ratio by approximately 49 basis points. The actual impact of adopting CECL on the regulatory capital ratios atmay change as the ~~dates indicated:~~final impact is not determined until the end of the second year of the transition period.

(in thousands) September 30,
2019 December 31, 2018 Well Capitalized Minimum % Minimum Capital Requirement Including Capital Conservation Buffer
Total capital to risk-weighted assets 12.72 % 13.02 % N/A 10.50 %
Tier 1 capital to risk-weighted assets 11.17
11.14
N/A 8.50
Common equity tier 1 capital to risk-weighted assets 9.64
9.79
N/A 7.00
Leverage ratio (Tier 1 capital to average assets) 9.83
10.29
N/A 4.00
Tangible common equity to tangible assets¹
8.54
8.66
N/A
Total risk-based capital $ 779,655
$ 650,859

Tier 1 capital 684,595
556,958

Common equity tier 1 capital 590,938
489,301

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”)~~GAAP and the prevailing practices in the banking industry. However, the Company provides other financial measures, such as core net interest income, core net interest margin, core efficiency ratios, tangible common equity, return on average ~~assets, return on average~~tangible common equity, 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 core net interest income, core net interest margin, core efficiency ratio, ~~return on average assets, return on average~~tangible common equity, ~~and~~ return on average tangible common equity, 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 non-core acquired loans, which were acquired from the FDIC and previously covered by loss share agreements, and the related income and expenses, the impact of certain non-comparable items, and the Company’s operating performance on an ongoing basis. Core performance measures include contractual interest on non-core acquired loans, but exclude incremental accretion on these loans. Core performance measures also exclude expenses directly related to non-core acquired loans. Core performance measures also exclude certain other income and expense items, such as merger-related expenses, and the gain or loss on sale of investment securities, the Company believes to be not indicative of or useful to measure the Company’s operating performance on an ongoing basis. The attached tables contain a reconciliation of these core performance measures to the GAAP measures. The Company believes ~~that~~ the tangible common equity ratio provides useful information to investors about the Company’s capital strength even though it is considered to be a non-GAAP financial measure and is not part of the regulatory capital requirements to which the Company is subject.

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

Core Performance Measures


	For the three months ended									At or for the nine months ended
(in thousands)	September 30, 2020			September 30, 2019			September 30, 2020			September 30, 2019
Net interest income	$	63,354		$	63,046		$	192,555		$	177,104
Less: Incremental accretion income	1,235			2,140			3,227			4,207
Core net interest income	62,119			60,906			189,328			172,897

Total noninterest income	12,629			13,564			35,997			34,758


Less: Gain on sale of investment securities	417			337			421			337
Less: Other income from non-core acquired assets	—			1,001			—			1,368
Less: Other non-core income	—			—			265			266
Core noninterest income	12,212			12,226			35,311			32,787

Total core revenue	74,331			73,132			224,639			205,684



Total noninterest expense	39,524			38,239			116,109			127,131

Less: Other expenses related to non-core acquired loans	25			18			49			224


Less: Merger related expenses	1,563			393			1,563			17,969



Core noninterest expense	37,936			37,828			114,497			108,938













Core efficiency ratio	51.04		%	51.73		%	50.97		%	52.96		%

For the three months ended For the nine months ended
(in thousands) September 30,
2019 September 30,
2018 September 30,
2019 September 30,
2018
Net interest income $ 63,046
$ 48,093
$ 177,104
$ 141,312
Less: Incremental accretion income 2,140
535
4,207
1,592
Core net interest income 60,906
47,558
172,897
139,720

Total noninterest income 13,564
8,410
34,758
27,645
Less: Gain on sale of investment securities 337
—
337
9
Less: Other income from non-core acquired assets 1,001
7
1,368
1,038
Less: Other non-core income —
—
266
649
Core noninterest income 12,226
8,403
32,787
25,949

Total core revenue 73,132
55,961
205,684
165,669

Total noninterest expense 38,239
29,922
127,131
88,284
Less: Other expenses related to non-core acquired loans 18
12
224
(203 )
Less: Merger related expenses 393
—
17,969
—
Less: Facilities disposal charge —
—
—
239
Less: Non-recurring excise tax —
682
—
682
Core noninterest expense 37,828
29,228
108,938
87,566

Core efficiency ratio 51.73 % 52.23 % 52.96 % 52.86 %

Net Interest Margin to Core Net Interest Margin (tax equivalent)


	Three months ended September 30,									Nine months ended September 30,
(in thousands)	2020			2019			2020			2019
Net interest income	$	64,192		$	63,483		$	194,707		$	178,187
Less: Incremental accretion income	1,235			2,140			3,227			4,207
Core net interest income, tax equivalent	$	62,957		$	61,343		$	191,480		$	173,980

Average earning assets	$	7,770,084		$	6,604,083		$	7,379,013		$	6,193,197
Reported net interest margin	3.29		%	3.81		%	3.52		%	3.85		%
Core net interest margin	3.22		%	3.69		%	3.47		%	3.76		%

Three months ended September 30, Nine months ended September 30,
(in thousands) 2019 2018 2019 2018
Net interest income $ 63,483
$ 48,299
$ 178,187
$ 141,939
Less: Incremental accretion income 2,140
535
4,207
1,592
Core net interest income, tax equivalent $ 61,343
$ 47,764
$ 173,980
$ 140,347

Average earning assets $ 6,604,083
$ 5,072,573
$ 6,193,197
$ 5,015,471
Reported net interest margin 3.81 % 3.78 % 3.85 % 3.78 %
Core net interest margin 3.69 % 3.74 % 3.76 % 3.74 %

Tangible Common Equity Ratio

(in thousands) September 30, 2019 December 31, 2018
Total shareholders' equity $ 846,095
$ 603,804
Less: Goodwill 211,251
117,345
Less: Intangible assets 27,626
8,553
Tangible common equity $ 607,218
$ 477,906

Total assets $ 7,346,791
$ 5,645,662
Less: Goodwill 211,251
117,345
Less: Intangible assets, net 27,626
8,553
Tangible assets $ 7,107,914
$ 5,519,764

Tangible common equity to tangible assets 8.54 % 8.66 %


(in thousands)	September 30, 2020			December 31, 2019
Total shareholders' equity	$	882,267		$	867,185
Less: Goodwill	210,344			210,344
Less: Intangible assets	21,820			26,076
Tangible common equity	$	650,103		$	630,765

Total assets	$	8,367,976		$	7,333,791
Less: Goodwill	210,344			210,344
Less: Intangible assets, net	21,820			26,076
Tangible assets	$	8,135,812		$	7,097,371

Tangible common equity to tangible assets	7.99		%	8.89		%

Average Shareholders’ Equity and Average Tangible Common Equity


	Three months ended September 30,						Nine months ended September 30,
(in thousands)	2020		2019		2020		2019
Average shareholder’s equity	$	885,496	$	843,974	$	872,944	$	773,843
Less: Average goodwill	210,344		211,251		210,344		188,231
Less: Average intangible assets, net	22,489		28,392		23,882		24,327
Average tangible common equity	$	652,663	$	604,331	$	638,718	$	561,285

Three months ended September 30, Nine months ended September 30,
(in thousands) 2019 2018 2019 2018
Average shareholder’s equity $ 843,974
$ 586,765
$ 773,843
$ 569,915
Less: Average goodwill 211,251
117,345
188,231
117,345
Less: Average intangible assets, net 28,392
9,445
24,327
10,074
Average tangible common equity $ 604,331
$ 459,975
$ 561,285
$ 442,496

~~Impact of Merger Related Expenses~~

Three months ended September 30, Nine months ended September 30,
(in thousands) 2019 2018 2019 2018
Net income - GAAP $ 29,069
$ 22,516
$ 63,649
$ 65,688
Merger-related expenses 393
—
17,969
—
Related tax effect (97 ) —
(3,963 ) —
Adjusted net income - Non-GAAP $ 29,365
$ 22,516
$ 77,655
$ 65,688

Average assets $ 7,222.357
$ 5,471.504
$ 6,749,988
$ 5,409,404
ROAA - GAAP net income 1.60 % 1.63 % 1.26 % 1.62 %
ROAA - Adjusted net income 1.61
1.63
1.54
1.62

Average shareholder’s equity $ 843,974
$ 586,765
$ 773,843
$ 569,915
ROAE - GAAP net income 13.66 % 15.22 % 11.00 % 15.41 %
ROAE - Adjusted net income 13.80
15.22
13.42
15.41

Average tangible common equity $ 604,331
$ 459,975
$ 561,285
$ 442,496
ROATCE - GAAP net income 19.08 % 19.42 % 15.16 % 19.85 %
ROATCE - Adjusted net income 19.28
19.42
18.50
19.85

Critical Accounting Policies

The impact and any associated risks related to the Company’s critical accounting policies on business operations are described throughout “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” where such policies affect our reported and expected financial results. For a detailed description on the application of these and other accounting policies, see the Company’s Annual Report on Form 10-K for the year ended December 31, ~~2018.~~2019.

ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The disclosures set forth in this item are qualified by the section captioned “Safe Harbor Statement Under the Private Securities Litigation Reform Act of 1995” included in Item 2 – Management’s Discussion and Analysis of Financial Condition and Results of Operations of this report and other cautionary statements set forth elsewhere in this report.

Interest Rate Risk

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

The Company determines the sensitivity of its short-term future earnings to a hypothetical plus or minus 100 to 300 basis point parallel rate shock through the use of simulation modeling (due to the current level of interest rates, the ~~300 basis point~~ downward shock ~~scenario is~~scenarios are not shown in the table below.) The simulation of earnings includes the modeling of the balance sheet as an ongoing entity. Future business assumptions involving administered rate products, prepayments for future rate-sensitive balances, and the reinvestment of maturing assets and liabilities are included. These items are then modeled to project net interest income based on a hypothetical change in interest rates. The resulting net interest income for the next 12-month period is compared to the net interest income amount calculated using flat rates. ~~This difference represents the Company’s~~The Company uses an earning sensitivity model to track earnings sensitivity to a plus or minus 100 basis points parallel rate shock.

The following table summarizes the expected impact of interest rate shocks on net interest income:


Rate Shock¹		Annual % change in net interest income
+ 300 bp		5.9%
+ 200 bp		3.1%
+ 100 bp		0.5%


~~Rate Shock~~		~~Annual % change~~ ~~in net interest income~~
~~+ 300 bp~~ ¹Due to the current levels of interest rates, the downward shock scenarios are not shown.			~~6.0%~~
~~+ 200 bp~~	~~4.1%~~
~~+ 100 bp~~	~~2.3%~~
~~- 100 bp~~	~~(3.8)%~~
~~- 200 bp~~	~~(7.6)%~~

In addition to the rate shocks shown in the table above, the Company models net interest income under various dynamic

interest rate scenarios. Generally, positive changes in rates result in higher levels of net interest income, while scenarios based on declining rates, particularly those involving decreases in long-term rates, result in reduced net interest income.

At September 30, ~~2019, models resulting in~~2020, model scenarios based on a ~~steeper~~flatter yield curve through a reduction in ~~short-term~~longer term rates ~~over a 12-month horizon, as well as those based on stable short-term and modestly lower long-term rates, all~~ result in a marginal decrease toin net interest income, while those based on higher rates and a steeper yield curve result in an increase in net interest income over a ~~one-year forecast.~~12 month horizon.

At September 30, ~~2019,~~2020, the Company had ~~$2.5~~$3.0 billion in variable rate loans ~~that are~~including $2.5 billion based on LIBOR and ~~$0.4~~$316 million ~~that are~~ based on Prime. Approximately ~~80%~~86% of the LIBOR based loans are indexed to one-month LIBOR. Of the total variable rate loans, $1.3 billion, or 44%, had a rate floor of which approximately $1.2 billion, or 89%, were currently priced at the floor.

The Company occasionally uses interest rate derivative financial instruments as an asset/liability management tool to hedge mismatches in interest rate exposure indicated by the net interest income simulation described above. They

are used to modify the Company’s exposures to interest rate fluctuations and provide more stable spreads between loan yields and the rate on their funding sources.

ITEM 4: CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

Under the supervision and with the participation of the Company’s Chief Executive Officer (CEO) and the Chief Financial Officer (CFO), management has evaluated the effectiveness of the design and operation of the Company’s disclosure controls and procedures pursuant to Exchange Act Rule 13a-15, as of September 30, ~~2019.~~2020. 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, ~~2019~~2020 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

~~In connection with its~~Parshall Litigation

Following the announcement on August 20, 2020 of the execution of the definitive agreement related to the Company’s acquisition of ~~Trinity/LANB,~~SCBH and Seacoast, a lawsuit challenging the ~~Company, as successor-in-interest to Trinity, is a party to certain consolidated proceedings pending~~proposed transaction was filed in the ~~First Judicial Circuit~~U.S. District Court for the ~~State~~District of ~~New Mexico, styled Trinity Capital Corporation, et al v. Atlantic Specialty Ins. Co., et al.~~Delaware. The lawsuit is captioned Parshall v. Seacoast Commerce Banc Holdings, et al., No. 1:99-cv-01300 (filed September 28, 2020).

This lawsuit challenging the proposed transaction is a putative class action filed on behalf of the shareholders of SCBH and names as defendants SCBH, its directors and EFSC. The complaint alleges that SCBH and its directors violated Section 14(a) of the Exchange Act by failing to disclose certain facts about the financial projections of SCBH and EFSC and financial analysis performed by SCBH’s financial advisor. The complaint further alleges that EFSC and SCBH’s board of directors violated Section 20(a) of the Exchange Act by acting as control persons. The action seeks, ~~declaratory~~among other relief, ~~defense~~an order enjoining completion of the proposed transaction.

The outcome of the pending litigation is uncertain. If the case is not resolved, this lawsuit could prevent or delay completion of the proposed transaction and result in substantial costs, the magnitude of which cannot be predicted at this time, to EFSC and ~~damages~~SCBH, including any costs associated with the indemnification of directors and officers. One of the conditions to the closing of the SCBH acquisition is that no injunction, order, judgement or decree prohibiting or making illegal completion of the transaction or any of the other transactions contemplated by the definitive agreement related to the transaction will be in effect. As such, if plaintiff were successful in obtaining an injunction prohibiting the completion of the SCBH acquisition on the agreed-upon terms, then such injunction may prevent the acquisition from being completed, or from being completed within the expected timeframe. The defense or

settlement of any lawsuit or claim that remains unresolved at the time the SCBH acquisition is completed may adversely affect EFSC’s business, financial condition, results of operations and cash flows. Such litigation is common in connection with acquisitions similar to the SCBH acquisition, regardless of any merits related to the underlying acquisition. In this instance, the defendants believe that the claims ~~for bad faith breach of insurance contracts and violations of New Mexico insurance statutes. The insurance coverage at issue~~asserted against them in the lawsuit ~~relates~~are without merit and intend to ~~regulatory proceedings commenced by~~defend the OCC against LANB and the SEC against Trinity following an OCC bank examination in 2012. At the time, Trinity had in place a director and officer insurance policy that included coverage for the cost of defending against certain regulatory proceedings. Coverage was denied by the insurance company based on an alleged failure to give timely notice of a claim. Former Trinity/LANB officers, William Enloe, Jill Cook and Mark Pierce, also filed suits against the insurance company and Trinity/LANB which have been consolidated in the proceeding. The claims of William Enloe against Trinity/LANB relate to an alleged failure to provide timely noticelitigation vigorously.

In addition to the insurance company. The claims of Jill Cook and Mark Pierce relate to indemnification and alleged wrongful termination. The officers’ claims against Trinity/LANB have been stayed pending resolution of the claims against the insurance company. To date, the Company has received notice that all three former Trinity/LANB officers have each individually settled their claims with the insurance company.

In December 2018, the Court granted summary judgment in favor of Trinity/LANB finding that they had delivered timely notice to the insurance company as a matter of law. The insurance company filed a motion to reconsider which was subsequently heard and denied. The Company will next seek to prove up its damages at trial which is anticipated to occur in the first quarter of 2020. The Company also plans to vigorously defend itself against the officers’ claims. Due to the complex nature of this lawsuit ~~the outcome and timing of ultimate resolution and recovery by the Company is uncertain.~~

~~In addition,~~described above, 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~~that neither the lawsuit described above nor any other legal 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.

ITEM 1A: RISK FACTORS

For information regarding risk factors affecting the Company, please see the cautionary language regarding forward-looking statements in the introduction to Item 2 of Part I of this Report on Form 10-Q, and Part I, Item 1A of our Report on Form 10-K for the fiscal year ended December 31, ~~2018,~~2019, which is supplemented by the additional risk ~~factor~~factors set forth below. ~~There~~

The recent global coronavirus (COVID-19) pandemic has led to periods of significant volatility in financial, commodities and other markets and could harm our business and results of operations.

In December 2019, a novel strain of coronavirus (COVID-19) was first reported in Wuhan, Hubei Province, China. Since then, COVID-19 infections have spread to additional countries including the United States. In March 2020, the World Health Organization declared COVID-19 to be a pandemic. Given the ongoing and dynamic nature of the circumstances, it is difficult to predict the impact of the COVID-19 pandemic on our business, and there is no guarantee that our efforts to address or mitigate the adverse impacts of the COVID-19 pandemic will be effective. The impact to date has included periods of significant volatility in financial, commodities and other markets. This volatility, if it continues, could have an adverse impact on our customers and on our business, financial condition and results of operations as well as our growth strategy.

Our business is dependent upon the willingness and ability of our customers to conduct banking and other financial transactions. The spread of COVID-19 has caused and could continue to cause severe disruptions in the U.S. economy at large, and has resulted and may continue to result in disruptions to our customers’ businesses, and a decrease in consumer confidence and business generally. In addition, recent actions by US federal, state and local governments to address the pandemic, including travel bans, stay-at-home orders and school, business and entertainment venue closures, may have a significant adverse effect on our customers and the markets in which we conduct our business. The extent of impacts resulting from the COVID-19 pandemic and other events beyond our control will depend on future developments, which are highly uncertain and cannot be predicted, including new information which may emerge concerning the severity of the COVID-19 pandemic and actions taken to contain the COVID-19 or its impact, among others.

Disruptions to our customers could result in increased risk of delinquencies, defaults, foreclosures and losses on our loans as well as declines in wealth management revenues. The escalation of the pandemic may also negatively impact regional economic conditions for a period of time, resulting in declines in local loan demand, liquidity of loan guarantors, loan collateral (particularly in real estate), loan originations and deposit availability. If the global response to contain COVID-19 escalates or is unsuccessful, we could experience a material adverse effect on our business, financial condition, results of operations and cash flows.

The Company has implemented restrictions on employee business travel, conversion of in-person meetings to virtual, and a work-from home mandate. The Company has also worked with its customers to implement appropriate loan deferral strategies in certain circumstances. These actions in response to the COVID-19 pandemic,

and similar actions by our vendors and business partners, have not materially impaired our ability to support our employees, conduct our business and serve our customers, but there is no assurance these actions will be sufficient to successfully mitigate the risks presented by COVID-19 or that our ability to operate will not be materially affected going forward. For instance, our business operations may be disrupted if key personnel or significant portions of our employees are unable to work effectively, including because of illness, quarantines, government actions, or other restrictions in connection with the COVID-19 pandemic. Similarly, if any of our vendors or business partners become unable to continue to provide their products and services, which we rely upon to maintain our day-to-day operations, our ability to serve our customers could be impacted.

The spread of the COVID-19 outbreak and the governmental responses may disrupt banking and other financial activity in the areas in which we operate and could potentially create widespread business continuity issues for us.

The outbreak of COVID-19 and the US federal, state and local governmental responses may result in a disruption in the services we provide. We rely on our third-party vendors to conduct business and to process, record, and monitor transactions. If any of these vendors are unable to continue to provide us with these services or experience interruptions in their ability to provide us with these services, it could negatively impact our ability to serve our customers. Furthermore, the COVID-19 pandemic could negatively impact the ability of our employees and customers to engage in banking and other financial transactions in the geographic areas in which we operate and could create widespread business continuity issues for us. We also could be adversely affected if key personnel or a significant number of employees were to become unavailable due to infection, quarantine or other effects and restrictions of a COVID-19 outbreak in our market areas. Although we have business continuity plans and other safeguards in place, there is no assurance that such plans and safeguards will be effective. If we are unable to promptly recover from such business disruptions, our business and financial conditions and results of operations would be adversely affected. We also may incur additional costs to remedy damages caused by such disruptions, which could adversely affect our financial condition and results of operations.

Our participation in the SBA PPP loan program exposes us to risks related to noncompliance with the PPP, as well as litigation risk related to our administration of the PPP loan program, which could have a material adverse impact on our business, financial condition and results of operations.

The Company is a participating lender in the PPP, a loan program administered through the SBA, that was created to help eligible businesses, organizations and self-employed persons fund their operational costs during the COVID-19 pandemic. Under this program, the SBA guarantees 100% of the amounts loaned under the PPP. The PPP opened on April 3, 2020; however, because of the short window between the passing of the CARES Act and the opening of the PPP, there is some ambiguity in the laws, rules and guidance regarding the operation of the PPP, which exposes the Company to risks relating to noncompliance with the PPP. For instance, other financial institutions have experienced litigation related to their process and procedures used in processing applications for the PPP. Any financial liability, litigation costs or reputational damage caused by PPP related litigation could have a material adverse impact on our business, financial condition and results of operations. In addition, the Company may be exposed to credit risk on PPP loans if a determination is made by the SBA that there is a deficiency in the manner in which the loan was originated, funded, or serviced. If a deficiency is identified, the SBA may deny its liability under the guaranty, reduce the amount of the guaranty, or, if it has already paid under the guaranty, seek recovery of any loss related to the deficiency from the Company.

Unpredictable future developments related to or resulting from the COVID-19 pandemic could materially and adversely affect our business and results of operations.

Because there have been no ~~material changes~~comparable recent global pandemics that resulted in similar global impact, we do not yet know the full extent of the COVID-19 pandemic’s effects on our business, operations, or the global economy as a whole. Any future development will be highly uncertain and cannot be predicted, including the scope and duration of the pandemic, the effectiveness of our work from home arrangements, third party providers’ ability to support our operation, and any actions taken by governmental authorities and other third parties in response to the ~~risk factors~~pandemic. We are continuing to monitor the COVID-19 pandemic and related risks, although the rapid development and

fluidity of the situation precludes any specific prediction as to its ultimate impact on us. However, if the COVID-19 outbreak continues to spread or otherwise results in a continuation or worsening of the current economic and commercial environments, our business, financial condition, results of operations and cash flows as well as our regulatory capital and liquidity ratios could be materially adversely affected and many of the risks described in ~~such~~our Annual Report on Form ~~10-K.~~10-K for the year ended December 31, 2019 will be heightened.

~~Increased regulatory oversight, uncertainty relating~~The COVID-19 pandemic could harm business and results of operations for each of the Company and SCBH and the combined company following the completion of the Seacoast acquisition.

The effect of COVID-19 and related events, including those described above and those not yet known or knowable, could have a negative effect on the stock price, business prospects, financial condition and results of operations of the Company, SCBH and the combined company. Notwithstanding any actions by national, state and local governments to mitigate the ~~LIBOR calculation process~~impact of COVID-19 or by the Company, SCBH and ~~potential phasing out~~the combined company to address the adverse impacts of ~~LIBOR after 2021~~COVID-19, there can be no assurance that any of the foregoing activities will be successful in mitigating or preventing significant adverse effects on the Company, SCBH or the combined company. In particular, it may become more costly or more difficult for the combined company to realize anticipated synergies and cost savings in the amounts estimated or in the time frame contemplated or at all. Each of the Company, SCBH and the combined company may also incur additional costs to remedy damages caused by such disruptions, which could adversely affect ~~the~~its financial condition and results of ~~our~~ operations.

~~On July 27, 2017,~~To the ~~United Kingdom’s Financial Conduct Authority, which regulates~~extent COVID-19 results in business disruption, if the ~~London Interbank Offering Rate (“LIBOR”), announced that it intends~~Company or SCBH are unable to ~~stop persuading or compelling banks~~recover from a business disruption on a timely basis, the merger and the combined company's business and financial conditions and results of operations following the completion of the merger would be adversely affected. The merger and efforts to ~~submit rates for~~integrate the ~~calculation~~businesses of ~~LIBOR after 2021.~~ the Company and SCBH may also be delayed and adversely affected by the COVID-19 outbreak.

The ~~announcement indicates~~pending SCBH acquisition will, and future acquisitions may, dilute tangible book value.

The acquisition of SCBH will be an all-stock transaction valued at approximately $156 million as of the date of signing. The consideration payable to SCBH shareholders upon consummation of the acquisition will consist of whole shares of EFSC’s common stock and cash in lieu of fractional shares of EFSC’s common stock. We anticipate issuing approximately 4.9 million shares of common stock to SCBH shareholders in connection with the acquisition, and we anticipate that the ~~continuation~~transaction will result in initial tangible book value dilution of ~~LIBOR on~~approximately 2.0% at the ~~current basis cannot~~time of closing with an earnback period of less than three years. Future mergers or acquisitions, if any, may involve cash, debt or equity securities as transaction consideration. Acquisitions typically involve the payment of a premium over book and ~~will not be guaranteed after 2021. It is impossible to predict whether~~market values, and, to what extent banks will continue to provide LIBOR submissions to the administrator of LIBOR, whether LIBOR rates will cease to be published or supported before or after 2021 or whether any additional reforms to LIBOR may be enacted in the United Kingdom or elsewhere. Efforts in the United States to identify a set of alternative U.S. dollar reference interest rates include proposals by the ARRC of the Federal Reserve Board and the Federal Reserve Bank of New York. Uncertainty as to the nature of alternative reference rates and as to potential changes in other reforms to LIBOR may adversely affect LIBOR rates and the value of LIBOR-based loans, and to a lesser extent securities in our portfolio, and may impact the availability and cost of hedging instruments and borrowings, including the rates we pay on our subordinated debentures. The Company has material contracts that are indexed to LIBOR. If LIBOR rates are no longer available, any successor or replacement interest rates may perform differently and we may incur significant costs to transition both our borrowing arrangements and the loan agreements with our customers from LIBOR, which may have an adverse effect on our results of operations. The impact of alternatives to LIBOR on the valuations, pricing and operationtherefore, some dilution of our ~~financial instruments is not yet known.~~stock’s tangible book value and net income per common share may occur in connection with any future transaction.

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

None.

Period Total number of shares purchased (a) Weighted-average price paid per share Total number of shares purchased as part of publicly announced plans or programs Maximum number of shares that may yet be purchased under the plans or programs
July 1, 2019 through July 31, 2019 32,113
39.51
32,113
916,782
August 1, 2019 through August 31, 2019 223,183
38.96
223,183
693,599
September 1, 2019 through September 30, 2019 47,460
39.05
47,460
646,139
Total 302,756
$ 39.03
302,756
646,139

(a) In May 2015, the Company’s board of directors authorized the repurchase of up to two million shares of the Company’s common stock. The repurchases may be made in open market or privately negotiated transactions and the stock repurchase program will remain in effect until fully utilized or until modified, superseded or terminated. The timing and exact amount of common stock repurchases will depend on a number of factors including, among others, market and general economic conditions, economic capital and regulatory capital considerations, alternative uses of capital, the potential impact on our credit ratings, and contractual and regulatory limitations.

ITEM 3: DEFAULTS UPON SENIOR SECURITIES

~~None~~None.

ITEM 4: MINE SAFETY DISCLOSURES

Not applicable.

ITEM 5: OTHER INFORMATION

~~Douglas N. Bauche Amended and Restated Executive Employment Agreement~~

On October 24, 2019, the Company entered into an Amended and Restated Executive Employment Agreement with Douglas N. Bauche. Mr. Bauche is employed as the Chief Credit Officer & St. Louis President of the Company. Under the Amended and Restated Employment Agreement, Mr. Bauche will receive an annual base salary of $293,733 to be reviewed at least annually by the Company, and annual targeted incentives of 35% of the applicable salary for the year under the Company’s long-term and short-term incentive plans. Mr. Bauche will also participate in standard benefits offered to employees generally and under terms of plans pursuant to which benefits are provided.

The foregoing description of the Executive Employment Agreement is qualified in its entirety by reference to the full and complete copy of the Executive Employment Agreement listed as Exhibit 10.1 of this quarterly report.

~~Nicole M. Iannacone Executive Employment Agreement~~

On October 24, 2019, the Company entered into an Executive Employment Agreement with Nicole M. Iannacone. Ms. Iannacone is employed as the EVP, Chief Risk Officer and General Counsel of the Company. Under the Employment Agreement, Ms. Iannacone will receive an annual base salary of $253,399 to be reviewed at least annually by the Company, and annual targeted incentives of 35% of the applicable salary for the year under the Company’s long-term and short-term incentive plans. Ms. Iannacone will also participate in standard benefits offered to employees generally and under terms of plans pursuant to which benefits are provided.

~~Mark G. Ponder Executive Employment Agreement~~

On October 24, 2019, the Company entered into an Executive Employment Agreement with Mark G. Ponder. Mr. Ponder is employed as the Chief Administrative Officer of the Company. Under the Employment Agreement, Mr. Ponder will receive an annual base salary of $252,840 to be reviewed at least annually by the Company, and annual targeted incentives of 35% of the applicable salary for the year under the Company’s long-term and short-term incentive plans. Mr. Ponder will also participate in standard benefits offered to employees generally and under terms of plans pursuant to which benefits are provided.

None.

ITEM 6: EXHIBITS


~~Exhibit No.~~	~~Description~~

Exhibit No.Description

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

2.2 Agreement and Plan of Merger, among Enterprise Financial Services Corp, Enterprise Bank & Trust, Trinity Capital Corporation and Los Alamos National Bank, dated November 1, 2018 (incorporated herein by reference to Exhibit 2.1 to Registrant’s Current Report on Form 8-K filed on November 2, 2018 (File No. 001-15373)).

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

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

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

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

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

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

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

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

3.9 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,~~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 ~~instruments defining~~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 ~~rights~~Sarbanes-Oxley Act of ~~holders of each issue of long-term debt of Registrant and~~2002.

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


~~2.1~~	Agreement and Plan of Merger, among Enterprise Financial Services Corp, Enterprise Bank & Trust, Trinity Capital Corporation and Los Alamos National Bank, dated November 1, 2018 (incorporated herein by reference to Exhibit 2.1 to Registrant’s Current Report on Form 8-K filed on November 2, 2018 (File No. 001-15373)).


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


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


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


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


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


~~3.6~~	Certificate of Designations of Registrant for Fixed Rate Cumulative Perpetual Preferred Stock, Series A, dated December 17, 2008 (incorporated herein by reference to Exhibit 3.1 to Registrant's Current Report on Form 8-K filed on December 23, 2008 (File No. 001-15373)).


~~3.7~~	Amendment to the Certificate of Incorporation of Registrant (incorporated herein by reference to Exhibit 3.1 to the Registrant's Quarterly Report on Form 10-Q for the period ending June 30, 2014 (File No. 001-15373)).


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


~~3.9~~	~~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)).~~


*10.1	~~Amended and Restated Executive Employment Agreement dated as of October 24, 2019 by and between Enterprise Financial Services Corp and Douglas N. Bauche (filed herewith).~~


*10.2	~~Executive Employment Agreement dated as of October 24, 2019 by and between Enterprise Financial Services Corp and Nicole M. Iannacone (filed herewith).~~


*10.3	~~Executive Employment Agreement dated as of October 24, 2019 by and between Enterprise Financial Services Corp and Mark G. Ponder (filed herewith).~~


*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.SCH XBRL Taxonomy Extension Schema Document.


~~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.CAL XBRL Taxonomy Extension Calculation Linkbase Document.


~~101.SCH~~	~~XBRL Taxonomy Extension Schema Document~~


~~101.CAL~~	~~XBRL Taxonomy Extension Calculation Linkbase Document~~

101.LAB XBRL Taxonomy Extension Label Linkbase ~~Document~~Document.

101.PRE XBRL Taxonomy Extension Presentation Linkbase ~~Document~~Document.

101.DEF XBRL Taxonomy Extension Definitions Linkbase ~~Document~~Document.

104 The cover page of Enterprise Financial Services Corp’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2020, 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 ~~25, 2019.~~23, 2020.

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



(in thousands)	As Recorded by Trinity		Adjustments				As Recorded by EFSC
Assets acquired:
Cash and cash equivalents	$	13,899	$	—			$	13,899
Interest-earning deposits greater than 90 days	100		—				100
Securities	428,715		(619		)	(a)	428,096
Loans	705,057		(20,743		)	(b)	684,314
Other real estate	5,284		(772		)	(c)	4,512
Other investments	6,673		—				6,673
Fixed assets	27,586		(300		)	(d)	27,286
Accrued interest receivable	3,997		—				3,997
Intangible assets	—		23,066			(e)	23,066
Deferred tax assets	10,708		(1,057		)	(f)	9,651
Other assets	35,045		(5,008		)	(g)	30,037
Total assets acquired	$	1,237,064	$	(5,433	)		$	1,231,631

Liabilities assumed:
Deposits	$	1,081,151	$	36		(h)	$	1,081,187
Subordinated debentures	26,806		(3,972		)	(i)	22,834
Federal Home Loan Bank advances	6,800		171			(j)	6,971
Accrued interest payable	370		—				370
Other liabilities	5,842		(827		)	(k)	5,015
Total liabilities assumed	$	1,120,969	$	(4,592	)		$	1,116,377

Net assets acquired	$	116,095	$	(841	)		$	115,254

Consideration paid:
Cash							$	37,275
Common stock							171,885
Total consideration paid							$	209,160

Goodwill							$	93,906



	Pro Forma
	Nine months ended September 30,
(in thousands, except per share data)	2019		2018
Total revenues (net interest income plus noninterest income)	$	221,055	$	211,004
Net income	78,055		59,473
Diluted earnings per common share	3.00		2.18



	September 30, 2019
(in thousands)	Unpaid Contractual Principal Balance		Recorded Investment With No Allowance		Recorded Investment With Allowance		Total Recorded Investment		Related Allowance		Average Recorded Investment
Commercial and industrial	$	24,233	$	1,096	$	10,337	$	11,433	$	2,023	$	12,429
Real estate:
Commercial - investor owned	3,312		1,135		1,502		2,637		258		2,525
Commercial - owner occupied	245		221		—		221		—		27
Construction and land development	—		—		—		—		—		—
Residential	1,388		1,021		246		1,267		116		1,782
Consumer and other	1		—		11		11		11		11
Total	$	29,179	$	3,473	$	12,096	$	15,569	$	2,408	$	16,774



	September 30, 2019
(in thousands)	Non-accrual		Restructured, accruing		Loans over 90 days past due and still accruing interest		Total
Commercial and industrial	$	11,409	$	—	$	24	$	11,433
Real estate:
Commercial - investor owned	2,637		—		—		2,637
Commercial - owner occupied	221		—		—		221
Construction and land development	—		—		—		—
Residential	1,162		79		26		1,267
Consumer and other	1		—		10		11
Total	$	15,430	$	79	$	60	$	15,569



	September 30, 2018
(in thousands, except for number of loans)	Number of loans	Pre-Modification Outstanding Recorded Balance		Post-Modification Outstanding Recorded Balance
Commercial and industrial	1	$	187	$	187
Total	1	$	187	$	187



(in thousands)	Contractual Cashflows			Non-accretable Difference			Accretable Yield			Carrying Amount
Balance December 31, 2018	$	73,157		$	15,299		$	12,638		$	45,220
Acquisitions	111,963			13,542			30,238			68,183
Principal reductions and interest payments	(33,548		)	—			—			(33,548		)
Accretion of loan discount	—			—			(8,014		)	8,014
Changes in contractual and expected cash flows due to remeasurement	10,490			(2,057		)	(86		)	12,633
Reductions due to disposals	(9,121		)	(3,345		)	(40		)	(5,736		)
Balance September 30, 2019	$	152,941		$	23,439		$	34,736		$	94,766

Balance December 31, 2017	$	112,710		$	29,005		$	13,964		$	69,741
Principal reductions and interest payments	(38,165		)	—			—			(38,165		)
Accretion of loan discount	—			—			(5,118		)	5,118
Changes in contractual and expected cash flows due to remeasurement	4,341			(8,939		)	3,179			10,101
Balance September 30, 2018	$	78,886		$	20,066		$	12,025		$	46,795



	For the three months ended		For the nine months ended
(in thousands)	September 30, 2019		September 30, 2019
Operating lease cost	$	821	$	2,434
Short-term lease cost	81		215
Total lease cost	$	902	$	2,649



	As of
(in thousands)	September 30, 2019
Operating lease right-of-use assets, included in other assets	$	13,849
Operating lease liabilities, included in other liabilities	14,440

Operating leases
Weighted average remaining lease term	5 years
Weighted average discount rate	3.0		%



(in thousands)
Year	Amount
2019	$	818
2020	3,329
2021	3,355
2022	2,795
2023	2,191
Thereafter	3,143
Total operating lease liabilities, payments	15,631
Less: present value adjustment	1,191
Operating lease liabilities	$	14,440



	Amount of Loss Recognized in OCI						Amount of Loss Reclassified from Accumulated OCI into Income
(in thousands)	Three months ended September 30, 2019			Nine months ended September 30, 2019			Three months ended September 30, 2019			Nine months ended September 30, 2019
Derivatives in Cash Flow Hedging Relationships
Interest rate swap	$	(846	)	$	(3,785	)	$	(42	)	$	(48	)
Total	$	(846	)	$	(3,785	)	$	(42	)	$	(48	)



	Nine months ended
(in thousands)	September 30, 2019
Gross core deposit intangible, beginning of period	$	20,574
Additions from acquisition	23,066
Gross core deposit intangible, end of period	43,640
Accumulated amortization	(16,014		)
Core deposit intangible, net, end of period	$	27,626



Year	Core Deposit Intangible (in thousands)
2019	$	1,550
2020	5,608
2021	4,814
2022	4,085
2023	3,456
After 2023	8,113
	$	27,626



Period	Total number of shares purchased (a)	Weighted-average price paid per share		Total number of shares purchased as part of publicly announced plans or programs	Maximum number of shares that may yet be purchased under the plans or programs
July 1, 2019 through July 31, 2019	32,113	39.51		32,113	916,782
August 1, 2019 through August 31, 2019	223,183	38.96		223,183	693,599
September 1, 2019 through September 30, 2019	47,460	39.05		47,460	646,139
Total	302,756	$	39.03	302,756	646,139

(a) In May 2015, the Company’s board of directors authorized the repurchase of up to two million shares of the Company’s common stock. The repurchases may be made in open market or privately negotiated transactions and the stock repurchase program will remain in effect until fully utilized or until modified, superseded or terminated. The timing and exact amount of common stock repurchases will depend on a number of factors including, among others, market and general economic conditions, economic capital and regulatory capital considerations, alternative uses of capital, the potential impact on our credit ratings, and contractual and regulatory limitations.