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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
 
FORM 10-Q
 
Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the quarterly period ended June 30, 2021.
Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the transition period from ______ to ______

Commission file number 001-15373

ENTERPRISE FINANCIAL SERVICES CORP

Incorporated in the State of Delaware
I.R.S. Employer Identification # 43-1706259
Address: 150 North Meramec
Clayton, MO 63105
Telephone: (314) 725-5500
___________________
 
Securities registered pursuant to Section 12(b) of the Act:
Title of each classTrading Symbol(s)Name of each exchange on which registered
Common Stock, par value $0.01 per shareEFSCNasdaq Global Select Market

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

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

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

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act)
Yes   No
 
As of July 28, 2021, the Registrant had 38,624,599 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)
 
Condensed Consolidated Statements of Operations (Unaudited)
Condensed Consolidated Statements of Comprehensive Income (Unaudited)
 
Condensed Consolidated Statements of Shareholders’ Equity (Unaudited)
 
Condensed Consolidated Statements of Cash Flows (Unaudited)
 
Notes to Condensed Consolidated Financial Statements (Unaudited)
  
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
  
Item 3. Quantitative and Qualitative Disclosures About Market Risk
  
Item 4. Controls and Procedures
 
PART II - OTHER INFORMATION
  
Item 1.  Legal Proceedings
Item 1A.  Risk Factors
Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds
Item 3. Defaults Upon Senior Securities
Item 4. Mine Safety Disclosures
Item 5. Other Information
Item 6. Exhibits
 
Signatures
 



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.
ACLAllowance for Credit LossesFHLBFederal Home Loan Bank
ASUAccounting Standards UpdateGAAPGenerally Accepted Accounting Principles (United States)
BankEnterprise Bank & TrustLIBORLondon Interbank Offered Rate
C&ICommercial and IndustrialMD&AManagement’s Discussion and Analysis of Financial Condition and Results of Operations
CECLCurrent Expected Credit LossNIMNet Interest Margin
CompanyEnterprise Financial Services CorpPCDPurchased Credit Deteriorated
CRECommercial Real EstatePPPPaycheck Protection Program
EFSCEnterprise Financial Services CorpSBASmall Business Administration
EnterpriseEnterprise Financial Services Corp SeacoastSeacoast Commerce Banc Holdings
FASBFinancial Accounting Standards BoardSECSecurities and Exchange Commission




PART 1 - ITEM 1 - FINANCIAL STATEMENTS
ENTERPRISE FINANCIAL SERVICES CORP AND SUBSIDIARIES
Condensed Consolidated Balance Sheets (Unaudited)
(in thousands, except share and per share data)June 30, 2021December 31, 2020
Assets  
Cash and due from banks$126,789 $99,760 
Federal funds sold115 1,519 
Interest-earning deposits (including $23,825 and $36,525 pledged as collateral, respectively)882,087 436,424 
Total cash and cash equivalents1,008,991 537,703 
Interest-earning deposits greater than 90 days7,758 7,626 
Securities available-for-sale1,084,223 912,429 
Securities held-to-maturity, net450,665 487,610 
Loans held-for-sale5,763 13,564 
Loans7,226,267 7,224,935 
Allowance for credit losses on loans(128,185)(136,671)
Total loans, net
7,098,082 7,088,264 
Other investments50,959 48,764 
Fixed assets, net50,972 53,169 
Goodwill260,567 260,567 
Intangible assets, net20,358 23,084 
Other assets308,655 318,791 
Total assets$10,346,993 $9,751,571 
Liabilities and Shareholders' Equity  
Noninterest-bearing deposit accounts$3,111,581 $2,711,828 
Interest-bearing transaction accounts2,013,129 1,768,497 
Money market accounts2,278,306 2,327,066 
Savings accounts722,154 627,903 
Certificates of deposit: 
Brokered50,209 50,209 
Other464,125 499,886 
Total deposits8,639,504 7,985,389 
Subordinated debentures and notes203,940 203,637 
FHLB advances50,000 50,000 
Other borrowings208,795 271,081 
Notes payable25,714 30,000 
Other liabilities100,739 132,489 
Total liabilities$9,228,692 $8,672,596 
Commitments and contingent liabilities (Note 5)
Shareholders' equity:  
Preferred stock, $0.01 par value;
5,000,000 shares authorized; 0 shares issued and outstanding
  
Common stock, $0.01 par value; 45,000,000 shares authorized; 33,165,056 and 33,190,306 shares issued, respectively330 332 
Treasury stock, at cost; 1,980,093 shares(73,528)(73,528)
Additional paid in capital688,945 697,839 
Retained earnings474,282 417,212 
Accumulated other comprehensive income28,272 37,120 
Total shareholders' equity1,118,301 1,078,975 
Total liabilities and shareholders' equity$10,346,993 $9,751,571 
The accompanying notes are an integral part of these consolidated financial statements.
1


ENTERPRISE FINANCIAL SERVICES CORP AND SUBSIDIARIES
Condensed Consolidated Statements of Operations (Unaudited)
 Three months ended June 30,Six months ended June 30,
(in thousands, except per share data)2021202020212020
Interest income:
Interest and fees on loans$79,064 $64,478 $156,037 $131,647 
Interest on debt securities:
Taxable4,318 6,587 8,858 14,144 
Nontaxable3,394 1,812 6,473 3,301 
Interest on interest-earning deposits237 87 426 387 
Dividends on equity securities388 227 567 400 
Total interest income87,401 73,191 172,361 149,879 
Interest expense:
Deposits2,467 4,383 5,130 14,271 
Subordinated debentures and notes2,847 2,316 5,666 4,235 
FHLB advances197 455 392 1,350 
Notes payable and other borrowings152 204 312 822 
Total interest expense5,663 7,358 11,500 20,678 
Net interest income81,738 65,833 160,861 129,201 
Provision (benefit) for credit losses(2,669)19,591 (2,623)41,855 
Net interest income after provision for credit losses84,407 46,242 163,484 87,346 
Noninterest income:
Deposit service charges3,862 2,616 6,946 5,759 
Wealth management revenue2,516 2,326 4,999 4,827 
Card services revenue2,975 2,225 5,471 4,472 
Tax credit income (expense)1,370 (221)329 1,815 
Miscellaneous income5,481 3,014 9,749 6,495 
Total noninterest income16,204 9,960 27,494 23,368 
Noninterest expense:
Employee compensation and benefits28,132 22,389 57,694 44,074 
Occupancy3,529 3,185 7,280 6,532 
Data processing2,850 2,144 5,740 4,226 
Professional fees1,300 1,287 2,288 2,149 
Merger-related expenses1,949  5,091  
Other14,696 8,907 27,247 19,604 
Total noninterest expense52,456 37,912 105,340 76,585 
Income before income tax expense48,155 18,290 85,638 34,129 
Income tax expense9,750 3,656 17,307 6,627 
Net income$38,405 $14,634 $68,331 $27,502 
Earnings per common share
Basic$1.23 $0.56 $2.19 $1.04 
Diluted1.23 0.56 2.18 1.04 
The accompanying notes are an integral part of these consolidated financial statements.
2



ENTERPRISE FINANCIAL SERVICES CORP AND SUBSIDIARIES
Condensed Consolidated Statements of Comprehensive Income (Unaudited)
Three months ended June 30,Six months ended June 30,
(in thousands)2021202020212020
Net income$38,405 $14,634 $68,331 $27,502 
Other comprehensive income (loss), after-tax:
Change in unrealized gain (loss) on available-for-sale debt securities2,850 10,984 (8,070)21,548 
Reclassification adjustment for realized gain on sale of available-for-sale debt securities   (3)
Reclassification of gain on held-to-maturity securities(837)(329)(1,986)(485)
Change in unrealized gain (loss) on cash flow hedges arising during the period(205)(1,177)642 (6,357)
Reclassification of loss on cash flow hedges287 234 566 357 
Total other comprehensive income (loss), after-tax2,095 9,712 (8,848)15,060 
Comprehensive income$40,500 $24,346 $59,483 $42,562 

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

3


ENTERPRISE FINANCIAL SERVICES CORP AND SUBSIDIARIES
Condensed Consolidated Statements of Shareholders’ Equity (Unaudited)
Three and six months ended June 30, 2021
(in thousands, except per share data)Common StockTreasury StockAdditional paid in capitalRetained earningsAccumulated
other
comprehensive income (loss)
Total
shareholders’ equity
Balance at March 31, 2021$332 $(73,528)$698,005 $441,511 $26,177 $1,092,497 
Net income   38,405  38,405 
Other comprehensive income     2,095 2,095 
Cash dividends paid on common shares, $0.18 per share   (5,634) (5,634)
Repurchase of common shares(2) (11,831)  (11,833)
Issuance under equity compensation plans, 44,364 shares, net  1,263   1,263 
Share-based compensation  1,508   1,508 
Balance at June 30, 2021$330 $(73,528)$688,945 $474,282 $28,272 $1,118,301 
Balance at December 31, 2020$332 $(73,528)$697,839 $417,212 $37,120 $1,078,975 
Net income   68,331  68,331 
Other comprehensive loss    (8,848)(8,848)
Cash dividends paid on common shares, $0.36 per share   (11,261) (11,261)
Repurchase of common shares(2) (11,831)  (11,833)
Issuance under equity compensation plans, 93,334 shares, net  154   154 
Share-based compensation  2,783   2,783 
Balance at June 30, 2021$330 $(73,528)$688,945 $474,282 $28,272 $1,118,301 
Three and six months ended June 30, 2020
(in thousands, except per share data)Common StockTreasury StockAdditional paid in capitalRetained earningsAccumulated
other
comprehensive income (loss)
Total
shareholders’ equity
Balance at March 31, 2020$281 $(73,528)$525,838 $370,748 $23,097 $846,436 
Net income   14,634  14,634 
Other comprehensive income    9,712 9,712 
Cash dividends paid on common shares, $0.18 per share   (4,715) (4,715)
Issuance under equity compensation plans, 35,485 shares, net  827   827 
Share-based compensation  1,069   1,069 
Balance at June 30, 2020$281 $(73,528)$527,734 $380,667 $32,809 $867,963 
Balance at December 31, 2019$281 $(58,181)$526,599 $380,737 $17,749 $867,185 
Net income   27,502  27,502 
Other comprehensive income    15,060 15,060 
Cash dividends paid on common shares, $0.36 per share   (9,458) (9,458)
Repurchase of common shares (15,347)   (15,347)
Issuance under equity compensation plans, 109,000 shares, net  (894)  (894)
Share-based compensation  2,029   2,029 
Reclassification for the adoption of ASU 2016-13 (CECL)— — — (18,114)— (18,114)
Balance at June 30, 2020$281 $(73,528)$527,734 $380,667 $32,809 $867,963 
The accompanying notes are an integral part of these consolidated financial statements.
4


ENTERPRISE FINANCIAL SERVICES CORP AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows (Unaudited)
 Six months ended June 30,
(in thousands, except share data)20212020
Cash flows from operating activities:  
Net income$68,331 $27,502 
Adjustments to reconcile net income to net cash provided by operating activities
Depreciation3,044 3,048 
Provision (benefit) for credit losses(2,623)41,855 
Deferred income taxes4,025 (4,937)
Net amortization of debt securities3,926 2,756 
Amortization of intangible assets2,726 2,880 
Mortgage loans originated-for-sale(87,299)(94,536)
Proceeds from mortgage loans sold94,327 84,799 
Loss (gain) on:
Sale of investment securities (4)
Sale of other real estate(596)5 
Sale of state tax credits(96)(211)
Share-based compensation2,783 2,029 
Net accretion of loan discount(1,386)(4,049)
Changes in other assets and liabilities, net(22,167)(2,277)
Net cash provided by operating activities64,995 58,860 
Cash flows from investing activities:  
Net increase in loans(9,370)(815,437)
Proceeds received from:
Sale of debt securities, available-for-sale 207 
Paydown or maturity of debt securities, available-for-sale131,948 140,218 
Paydown or maturity of debt securities, held-to-maturity32,698 8,711 
Redemption of other investments2,213 25,978 
Sale of state tax credits held for sale4,262 1,924 
Sale of other real estate5,542 609 
Settlement of bank-owned life insurance policies 974 
Payments for the purchase of:
Available-for-sale debt securities(316,743)(152,082)
Other investments(4,729)(38,527)
State tax credits held for sale(3,285)(3,730)
Fixed assets, net(847)(1,532)
Net cash used in investing activities(158,311)(832,687)
Cash flows from financing activities:  
Net increase in noninterest-bearing deposit accounts399,753 638,520 
Net increase in interest-bearing deposit accounts254,362 290,036 
Proceeds from FHLB advances, net 27,700 
Repayments of notes payable(4,286)(2,857)
Proceeds from issuance of subordinated debentures, net 61,953 
Net decrease in other borrowings(62,285)(34,355)
Cash dividends paid on common stock(11,261)(9,458)
Payments for the repurchase of common stock(11,833)(15,347)
Payments for the issuance of equity instruments, net154 (894)
Net cash provided by financing activities564,604 955,298 
Net increase in cash and cash equivalents471,288 181,471 
Cash and cash equivalents, beginning of period537,703 167,256 
Cash and cash equivalents, end of period$1,008,991 $348,727 
Supplemental disclosures of cash flow information:  
Cash paid during the period for:  
Interest$11,897 $20,574 
Income taxes34,571 30 
Noncash transactions:
Transfer to other real estate owned in settlement of loans$3,227 $ 
Sales of other real estate financed228 48 
Right-of-use assets obtained in exchange for lease obligations 200 
Transfer of securities from available for sale to held to maturity 163,592 

The accompanying notes are an integral part of these consolidated financial statements.
5


ENTERPRISE FINANCIAL SERVICES CORP AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited)
 
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

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

Business and Consolidation

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

Operating results for the three and six months ended June 30, 2021 are not necessarily indicative of the results that may be expected for any other interim period or for the year ending December 31, 2021. For further information, refer to the consolidated financial statements and footnotes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2020, as filed with the SEC.

Basis of Financial Statement Presentation

The accompanying unaudited condensed consolidated financial statements of the Company and its subsidiaries have been prepared in accordance with GAAP for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Except as disclosed herein, there has been no material change in the information disclosed in the Notes to Consolidated Financial Statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2020.

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

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

Recent Accounting Pronouncements

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


6


NOTE 2 - EARNINGS PER SHARE

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

The following table presents a summary of per common share data and amounts for the periods indicated.
 Three months ended June 30,Six months ended June 30,
(in thousands, except per share data)2021202020212020
Net income as reported$38,405 $14,634 $68,331 $27,502 
Weighted average common shares outstanding31,265 26,180 31,256 26,325 
Additional dilutive common stock equivalents47 15 49 29 
Weighted average diluted common shares outstanding31,312 26,195 31,305 26,354 
Basic earnings per common share:$1.23 $0.56 $2.19 $1.04 
Diluted earnings per common share:1.23 0.56 $2.18 $1.04 
For the three and six months ended June 30, 2021 common stock equivalents of approximately 154,000 and 133,000, respectively, were excluded from the earnings per share calculations because their effect would have been anti-dilutive. Comparatively, there were 157,000 and 147,000 common stock equivalents excluded in the prior year periods. respectively.

NOTE 3 - INVESTMENTS

The following tables present the amortized cost, gross unrealized gains and losses, allowance for credit losses and fair value of securities available for sale and held to maturity:
 
 June 30, 2021
(in thousands)Amortized CostGross
Unrealized Gains
Gross
Unrealized Losses
Fair Value
Available-for-sale securities:    
Obligations of U.S. Government-sponsored enterprises$99,490 $93 $(329)$99,254 
Obligations of states and political subdivisions475,710 6,328 (1,193)480,845 
Agency mortgage-backed securities464,288 14,393 (1,302)477,379 
U.S. Treasury bills10,985 361  11,346 
Corporate debt securities14,750 649  15,399 
          Total securities available for sale$1,065,223 $21,824 $(2,824)$1,084,223 
Held-to-maturity securities:
Obligations of states and political subdivisions$240,163 $1,845 $(763)$241,245 
Agency mortgage-backed securities84,544 1,403 (268)85,679 
Corporate debt securities126,407 5,694  132,101 
          Total securities held-to-maturity$451,114 $8,942 $(1,031)$459,025 
Allowance for credit losses(449)
          Total securities held-to-maturity, net$450,665 
7


 December 31, 2020
(in thousands)Amortized CostGross
Unrealized Gains
Gross
Unrealized Losses
Fair Value
Available-for-sale securities:    
    Obligations of U.S. Government-sponsored enterprises$14,978 $186 $(3)$15,161 
    Obligations of states and political subdivisions335,271 8,994 (33)344,232 
    Agency mortgage-backed securities506,703 20,190 (321)526,572 
U.S. Treasury Bills10,980 486  11,466 
Corporate debt securities14,750 248  14,998 
          Total securities available for sale$882,682 $30,104 $(357)$912,429 
Held-to-maturity securities:
   Obligations of states and political subdivisions$248,324 $2,814 $ $251,138 
   Agency mortgage-backed securities112,742 2,295 (496)114,541 
Corporate debt securities126,993 8,851  135,844 
          Total securities held to maturity$488,059 $13,960 $(496)$501,523 
Less: Allowance for credit losses449 
Total securities held-to-maturity, net$487,610 


At June 30, 2021 and December 31, 2020, there were no holdings of securities of any one issuer in an amount greater than 10% of shareholders’ equity, other than U.S. Government agencies and sponsored enterprises. The agency mortgage-backed securities are all issued by U.S. Government agencies and sponsored enterprises. Securities having a fair value of $489.4 million and $525.8 million at June 30, 2021 and December 31, 2020, respectively, were pledged as collateral to secure deposits of public institutions and for other purposes as required by law or contract provisions.

The amortized cost and estimated fair value of debt securities at June 30, 2021, by contractual maturity, are shown below. Expected maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. The weighted average life of the mortgage-backed securities is approximately 4 years.
Available for saleHeld to maturity
(in thousands)Amortized CostEstimated Fair ValueAmortized CostEstimated Fair Value
Due in one year or less$11,345 $11,435 $ $ 
Due after one year through five years70,321 70,640 12,469 12,839 
Due after five years through ten years65,658 66,316 137,489 143,056 
Due after ten years453,611 458,453 216,612 217,451 
Agency mortgage-backed securities464,288 477,379 84,544 85,679 
 $1,065,223 $1,084,223 $451,114 $459,025 

8


The following tables presents a summary of available-for-sale investment securities in an unrealized loss position:
 June 30, 2021
Less than 12 months12 months or moreTotal
(in thousands)Fair ValueUnrealized LossesFair ValueUnrealized LossesFair ValueUnrealized Losses
Obligations of U.S. Government-sponsored enterprises$76,671 $329 $ $ $76,671 $329 
Obligations of states and political subdivisions$142,099 $1,193 $ $ $142,099 $1,193 
Agency mortgage-backed securities116,819 1,301 74 1 116,893 1,302 
 $335,589 $2,823 $74 $1 $335,663 $2,824 
 December 31, 2020
Less than 12 months12 months or moreTotal
(in thousands)Fair ValueUnrealized LossesFair ValueUnrealized LossesFair ValueUnrealized Losses
Obligations of U.S. Government-sponsored enterprises$4,997 $3 $ $ $4,997 $3 
Obligations of states and political subdivisions$4,079 $33 $ $ $4,079 $33 
Agency mortgage-backed securities65,986 321   65,986 321 
 $75,062 $357 $ $ $75,062 $357 

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

Accrued interest receivable on held-to-maturity debt securities totaled $3.5 million at June 30, 2021 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 June 30, 2021, the ACL on held-to-maturity securities was $0.4 million.

During the three and six months ended June 30, 2021, there were no sales of available-for-sale investment securities. Proceeds from sales of available-for-sale investment securities during the six months ended June 30, 2020 were immaterial.

Other Investments
At June 30, 2021 and December 31, 2020, other investments totaled $51.0 million and $48.8 million, respectively. As a member of the FHLB system administered by the Federal Housing Finance Agency, the Bank is required to maintain a minimum investment in capital stock with the FHLB consisting of membership stock and activity-based stock. The FHLB capital stock of $12.0 million and $10.8 million at June 30, 2021 and December 31, 2020, respectively, is recorded at cost, which represents redemption value, and is included in other investments in the consolidated balance sheets. The remaining amounts in other investments primarily include various investments in SBICs, CDFIs, private equity investments, and the Company’s investment in unconsolidated trusts used to issue preferred securities to third parties.

9


NOTE 4 - LOANS

The following table presents a summary of loans by category:
 
(in thousands)June 30, 2021December 31, 2020
Commercial and industrial$2,943,048 $3,100,299 
Real estate:  
Commercial - investor owned1,646,021 1,589,419 
Commercial - owner occupied1,554,727 1,498,408 
Construction and land development556,776 546,686 
Residential305,497 319,179 
Total real estate loans4,063,021 3,953,692 
Other235,431 187,083 
Loans, before unearned loan fees7,241,500 7,241,074 
Unearned loan fees, net(15,233)(16,139)
Loans, including unearned loan fees$7,226,267 $7,224,935 

PPP loans totaled $408.9 million at June 30, 2021, or $396.7 million net of deferred fees of $12.2 million. The loan balance at June 30, 2021 also includes a net premium on acquired loans of $20.6 million. At June 30, 2021 loans of $2.8 billion were pledged to FHLB and the Federal Reserve Bank.

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

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

Accrued interest receivable totaled $24.6 million at June 30, 2021 and was reported in Other Assets on the consolidated balance sheets.

A summary of the activity in the ACL on loans by category for the three and six months ended June 30, 2021 is as follows:
(in thousands)Commercial and industrialCRE - investor ownedCRE -
owner occupied
Construction and land developmentResidential real estateOtherTotal
Allowance for credit losses on loans:       
Balance at March 31, 2021$55,941 $33,105 $20,219 $14,557 $4,305 $3,400 $131,527 
Provision (benefit) for credit losses(1,839)2,859 (4,449)(2,957)255 3,658 (2,473)
Charge-offs(1,451) (216) (44)(121)(1,832)
Recoveries700 39 10 32 161 21 963 
Balance at June 30, 2021$53,351 $36,003 $15,564 $11,632 $4,677 $6,958 $128,185 

10


(in thousands)Commercial and industrialCRE - investor ownedCRE -
owner occupied
Construction and land developmentResidential real estateOtherTotal
Allowance for credit losses on loans:       
Balance at December 31, 2020$58,812 $32,062 $17,012 $21,413 $4,585 $2,787 $136,671 
Provision (benefit) for credit losses(1,298)6,240 (1,223)(10,048)103 4,256 (1,970)
Charge-offs(5,190)(2,372)(244) (315)(185)(8,306)
Recoveries1,027 73 19 267 304 100 1,790 
Balance at June 30, 2021$53,351 $36,003 $15,564 $11,632 $4,677 $6,958 $128,185 

The ACL on sponsor finance loans, which is included in the categories above, represented $20.1 million and $19.0 million, respectively, as of June 30, 2021 and December 30, 2020.

A summary of the activity in the ACL on loans by category for the three and six months ended June 30, 2020 is as follows:
(in thousands)Commercial and industrialCRE - investor ownedCRE -
owner occupied
Construction and land developmentResidential real estateOtherTotal
Allowance for credit losses on loans:       
Balance at March 31, 2020$45,981 $19,892 $9,477 $9,895 $5,395 $1,547 $92,187 
Provision for credit losses7,168 2,599 1,600 6,038 744 242 18,391 
Charge-offs(3,303)(224)  (32)(105)(3,664)
Recoveries293 2,752 11 29 226 45 3,356 
Balance at June 30, 202050,139 25,019 11,088 15,962 6,333 1,729 110,270 

(in thousands)Commercial and industrialCRE - investor ownedCRE -
owner occupied
Construction and land developmentResidential real estateOtherTotal
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 adoption6,494 10,726 2,598 5,183 3,470 (84)28,387 
PCD loans immediately charged off (5)(57)(217)(1,401) (1,680)
Balance at January 1, 2020$33,949 $16,656 $7,414 $7,577 $3,349 $1,050 $69,995 
Provision for credit losses18,759 5,823 3,594 8,347 2,755 808 40,086 
Charge-offs(3,366)(226) (31)(154)(191)(3,968)
Recoveries797 2,766 80 69 383 62 4,157 
Balance at June 30, 2020$50,139 $25,019 $11,088 $15,962 $6,333 $1,729 $110,270 

The CECL methodology incorporates various economic scenarios. The Company utilizes three forecasts in the model: Moody’s baseline, a stronger near-term growth upside and a moderate recession downside forecast. The Company weights these scenarios at 70%, 5%, and 25%, respectively, which added approximately $12.9 million to the ACL over the baseline model. These forecasts incorporate an accommodative monetary policy and the current and anticipated impact of government stimulus. The Company has also recognized the risk posed by loans that have received multiple deferrals of principal and interest payments, loans in the hospitality sector, and loans with other specific identified risks by allocating additional reserves to those segments. Some of the key risks to the forecasts that could result in future provision for credit losses are additional shutdowns and self-quarantines if another significant wave of COVID hits, the vaccination process stalls, small-business bankruptcies occur at higher levels, or unemployment increases.

11


The following tables present the recorded investment in nonperforming loans by category: 
June 30, 2021
(in thousands)NonaccrualRestructured, accruingLoans over 90 days past due and still accruing interestTotal nonperforming loansNonaccrual loans with no allowance
Commercial and industrial$19,082 $2,965 $2,797 $24,844 $10,215 
Real estate:   
    Commercial - investor owned7,359   7,359 441 
    Commercial - owner occupied5,885   5,885 1,616 
    Construction and land development100   100 100 
    Residential3,961 77  4,038 2,695 
Other16  10 26  
       Total$36,403 $3,042 $2,807 $42,252 $15,067 

December 31, 2020
(in thousands)NonaccrualRestructured, accruingLoans over 90 days past due and still accruing interestTotal nonperforming loansNonaccrual loans with no allowance
Commercial and industrial$18,158 $3,482 $130 $21,770 $8,316 
Real estate: 
    Commercial - investor owned9,579   9,579 716 
    Commercial - owner occupied2,940   2,940 6,024 
    Residential4,112 77  4,189  
Other29   29 3,190 
       Total$34,818 $3,559 $130 $38,507 $18,246 

The total nonperforming loan balances at June 31, 2021 and December 31, 2020 exclude government guaranteed balances of $3.9 million for each period.

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

The amortized cost basis of collateral-dependent nonperforming loans by class of loan is presented for the periods indicated:
June 30, 2021
Type of Collateral
(in thousands)Commercial Real EstateResidential Real EstateBlanket LienOther
Commercial and industrial$11,941 $ $4,252 $ 
Real estate:
Commercial - investor owned7,141    
Commercial - owner occupied5,767    
Residential100 3,984   
Other   15 
Total$24,949 $3,984 $4,252 $15 

12


December 31, 2020
Type of Collateral
(in thousands)Commercial Real EstateResidential Real EstateBlanket LienOther
Commercial and industrial$8,316 $ $394 $ 
Real estate:
Commercial - investor owned9,579    
Commercial - owner occupied2,940    
Residential 4,135   
Other   17 
Total$20,835 $4,135 $394 $17 

There were no loans restructured during the three and six months ended June 30, 2021 or the three months ended June 30, 2020. The recorded investment by category for troubled debt restructurings that occurred during the six months ended June 30, 2020 are as follows:
June 30, 2020
(in thousands, except for number of loans)Number of loansPre-Modification Outstanding Recorded BalancePost-Modification Outstanding Recorded Balance
Commercial and industrial1 $3,731 $3,731 
Real estate:
Residential2 155 155 
Total3 $3,886 $3,886 

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

In response to the COVID-19 pandemic, the Company has implemented short-term deferral programs allowing customers to primarily defer payments for up to 90 days. Deferrals under the CARES Act or interagency guidance are not included above as troubled debt restructurings. As of June 30, 2021, $8.5 million loans remain in a deferral status. Interest of $4.1 million has been deferred and will be collected upon final maturity.
13


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

June 30, 2021
(in thousands)30-89 Days
 Past Due
90 or More
Days
Past Due
Total
Past Due
CurrentTotal
Commercial and industrial$8,245 $15,247 $23,492 $2,907,313 $2,930,805 
Real estate:     
Commercial - investor owned1,065 6,700 7,765 1,638,256 1,646,021 
Commercial - owner occupied4,710 512 5,222 1,549,505 1,554,727 
Construction and land development65 100 165 556,611 556,776 
Residential461 1,925 2,386 303,111 305,497 
Other62 25 87 232,354 232,441 
Total$14,608 $24,509 $39,117 $7,187,150 $7,226,267 

December 31, 2020
(in thousands)30-89 Days
 Past Due
90 or More
Days
Past Due
Total
Past Due
CurrentTotal
Commercial and industrial$8,652 $12,928 $21,580 $3,067,415 $3,088,995 
Real estate:     
Commercial - investor owned734 9,301 10,035 1,579,384 1,589,419 
Commercial - owner occupied328 4,647 4,975 1,493,433 1,498,408 
Construction and land development13  13 546,673 546,686 
Residential2,071 2,118 4,189 314,990 319,179 
Other1,731 50 1,781 180,467 182,248 
Total$13,529 $29,044 $42,573 $7,182,362 $7,224,935 

The Company categorizes loans into risk categories based on relevant information about the ability of borrowers to service their debt, such as current financial information, payment experience, credit documentation, and current economic factors among other factors. This analysis is performed on a quarterly basis. The Company uses the following definitions for risk ratings:
Grades 1, 2, and 3 – Includes loans to borrowers with a continuous record of strong earnings, sound balance sheet condition and capitalization, ample liquidity with solid cash flow, and whose management team has experience and depth within their industry.
Grade 4 – Includes loans to borrowers with positive trends in profitability, satisfactory capitalization and balance sheet condition, and sufficient liquidity and cash flow.
Grade 5 – Includes loans to borrowers that may display fluctuating trends in sales, profitability, capitalization, liquidity, and cash flow.
Grade 6 – Includes loans to borrowers where an adverse change or perceived weakness has occurred, but may be correctable in the near future. Alternatively, this rating category may also include circumstances where the borrower is starting to reverse a negative trend or condition, or has recently been upgraded from a 7, 8, or 9 rating.
Grade 7 – Watch credits are borrowers that have experienced financial setback of a nature that is not determined to be severe or influence ‘ongoing concern’ expectations. Although possible, no loss is anticipated at this time, due to strong collateral and/or guarantor support.
Grade 8Substandard 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.
14


Grade 9Doubtful 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.
15


The recorded investment by risk category of loans by class and year of origination is presented in the following tables as of the dates indicated:
June 30, 2021
Term Loans by Origination Year
(in thousands)20212020201920182017PriorRevolving Loans Converted to Term LoansRevolving LoansTotal
Commercial and industrial
Pass (1-6)$731,143 $649,462 $384,160 $183,888 $117,020 $76,679 $8,765 $564,593 $2,715,710 
Watch (7)31,131 33,339 13,864 8,671 4,163 12,402 7,628 58,428 169,626 
Classified (8-9)7,365 2,049 8,451 2,592 3,254 880 2,018 15,487 42,096 
Total Commercial and industrial$769,639 $684,850 $406,475 $195,151 $124,437 $89,961 $18,411 $638,508 $2,927,432 
Commercial real estate-investor owned
Pass (1-6)$249,960 $421,836 $327,290 $169,832 $111,808 $227,018 $3,690 $38,687 $1,550,121 
Watch (7)9,126 27,342 13,822 7,144  19,381   76,815 
Classified (8-9) 6,012 429 6,651  2,684   15,776 
Total Commercial real estate-investor owned$259,086 $455,190 $341,541 $183,627 $111,808 $249,083 $3,690 $38,687 $1,642,712 
Commercial real estate-owner occupied
Pass (1-6)$213,157 $398,971 $240,316 $181,078 $142,757 $229,030 $ $41,902 $1,447,211 
Watch (7)8,794 7,884 1,651 15,452 5,917 9,605  1,349 50,652 
Classified (8-9)1,085 895 11,363 6,112 4,660 8,231 88 63 32,497 
Total Commercial real estate-owner occupied$223,036 $407,750 $253,330 $202,642 $153,334 $246,866 $88 $43,314 $1,530,360 
Construction real estate
Pass (1-6)$174,256 $133,328 $116,620 $39,332 $7,784 $13,490 $195 $20,974 $505,979 
Watch (7)28,003 4,926  1,216 11,215 2,423   47,783 
Classified (8-9) 54  427  26  100 607 
Total Construction real estate$202,259 $138,308 $116,620 $40,975 $18,999 $15,939 $195 $21,074 $554,369 
Residential real estate
Pass (1-6)$38,535 $49,198 $21,357 $13,139 $11,177 $99,035 $171 $62,095 $294,707 
Watch (7)33 276 719 342  2,691  400 4,461 
Classified (8-9)569 706 575 77 13 3,408  74 5,422 
Total residential real estate$39,137 $50,180 $22,651 $13,558 $11,190 $105,134 $171 $62,569 $304,590 
Other
Pass (1-6)$86,875 $54,771 $19,687 $24,583 $8,414 $20,903 $ $13,144 $228,377 
Watch (7)   5  2,539  135 2,679 
Classified (8-9)  14 16  21  2 53 
Total Other$86,875 $54,771 $19,701 $24,604 $8,414 $23,463 $ $13,281 $231,109 
16


December 31, 2020
Term Loans by Origination Year
(in thousands)20202019201820172016PriorRevolving Loans Converted to Term LoansRevolving LoansTotal
Commercial and industrial
Pass (1-6)$1,402,276 $454,729 $262,258 $132,832 $25,057 $58,315 $14,118 $527,170 $2,876,755 
Watch (7)44,922 15,369 9,585 7,509 19,613 110  60,448 157,556 
Classified (8-9)6,602 9,219 3,115 3,964 4,490 1,080 1,281 22,432 52,183 
Total Commercial and industrial$1,453,800 $479,317 $274,958 $144,305 $49,160 $59,505 $15,399 $610,050 $3,086,494 
Commercial real estate-investor owned
Pass (1-6)$481,867 $338,843 $189,305 $131,718 $138,288 $161,439 $6,509 $32,058 $1,480,027 
Watch (7)32,308 19,722 6,656  9,647 17,370   85,703 
Classified (8-9) 5,278 8,716 5,830 1,245 2,620   23,689 
Total Commercial real estate-investor owned$514,175 $363,843 $204,677 $137,548 $149,180 $181,429 $6,509 $32,058 $1,589,419 
Commercial real estate-owner occupied
Pass (1-6)$419,142 $287,001 $215,181 $179,382 $104,470 $167,456 $2,672 $45,323 $1,420,627 
Watch (7)13,657 5,257 3,113 6,198 4,338 8,460 1,776 941 43,740 
Classified (8-9)2,420 7,427 5,822 6,140 1,309 10,860  63 34,041 
Total Commercial real estate-owner occupied$435,219 $299,685 $224,116 $191,720 $110,117 $186,776 $4,448 $46,327 $1,498,408 
Construction real estate
Pass (1-6)$223,069 $156,360 $45,460 $18,579 $11,539 $9,144 $ $28,880 $493,031 
Watch (7)2,544 86 34,179 11,632  2,499   50,940 
Classified (8-9)56 2,124 503 1  31   2,715 
Total Construction real estate$225,669 $158,570 $80,142 $30,212 $11,539 $11,674 $ $28,880 $546,686 
Residential real estate
Pass (1-6)$57,059 $27,907 $17,718 $17,138 $27,443 $92,657 $1,172 $66,902 $307,996 
Watch (7)210 840 526  514 1,603 287 511 4,491 
Classified (8-9)571 733 121 14 898 3,181  253 5,771 
Total residential real estate$57,840 $29,480 $18,365 $17,152 $28,855 $97,441 $1,459 $67,666 $318,258 
Other
Pass (1-6)$43,526 $28,195 $30,074 $9,646 $5,641 $17,027 $ $40,779 $174,888 
Watch (7) 1 8   2,637  1 2,647 
Classified (8-9) 18 19 13  17 8 4 79 
Total Other$43,526 $28,214 $30,101 $9,659 $5,641 $19,681 $8 $40,784 $177,614 

In the tables above, loan originations in 2021 and 2020 with a classification of watch or classified primarily represent renewals or modifications initially underwritten and originated in prior years.
17


For certain loans, primarily credit cards, the Company evaluates credit quality based on the aging status.
The following tables presents the recorded investment on loans based on payment activity as of the periods indicated:
June 30, 2021
(in thousands)PerformingNon PerformingTotal
Commercial and industrial$3,370 $3 $3,373 
Real estate:
Commercial - investor owned3,309  3,309 
Commercial - owner occupied24,367  24,367 
Construction and land development2,407  2,407 
Residential907  907 
Other1,322 10 1,332 
Total$35,682 $13 $35,695 
December 31, 2020
(in thousands)PerformingNon PerformingTotal
Commercial and industrial$2,502 $ $2,502 
Real estate:
Residential921  921 
Other4,612 21 4,633 
Total$8,035 $21 $8,056 

NOTE 5 - COMMITMENTS AND CONTINGENCIES

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

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

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

The contractual amounts of off-balance-sheet financial instruments are as follows:
(in thousands)June 30, 2021December 31, 2020
Commitments to extend credit$1,982,555 $1,946,068 
Letters of credit55,571 50,971 

18


Off-Balance Sheet Credit Risk

Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments usually have fixed expiration dates or other termination clauses, may have significant usage restrictions, and may require payment of a fee. Of the total commitments to extend credit at June 30, 2021, and December 31, 2020, approximately $167.3 million and $160.6 million, respectively, represent fixed rate loan commitments. Since certain of the commitments may expire without being drawn upon or may be revoked, the total commitment amounts do not necessarily represent future cash requirements. The Company evaluates each customer’s credit worthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Company upon extension of credit, is based on management’s credit evaluation of the borrower. Collateral held varies, but may include accounts receivable, inventory, premises and equipment, and real estate. Other liabilities includes $5.4 million and $5.7 million for estimated losses attributable to the unadvanced commitments at June 30, 2021, and December 31, 2020, respectively.

Standby letters of credit are conditional commitments issued by the Company to guarantee the performance or payment of a customer to a third party. These standby letters of credit are issued to support contractual obligations of the Company’s customers. The credit risk involved in issuing letters of credit is essentially the same as the risk involved in extending loans to customers. As of June 30, 2021, the approximate remaining terms of standby letters of credit range from 1 month to 3 years.

Contingencies

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


NOTE 6 - DERIVATIVE FINANCIAL INSTRUMENTS

Risk Management Objective of Using Derivatives

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

Cash Flow Hedges of Interest Rate Risk

The Company’s objectives in using interest rate derivatives are to add stability to interest expense and to manage its exposure to interest rate movements. To accomplish this objective, the Company primarily uses interest rate swaps as part of its interest rate risk management strategy. Interest rate swaps designated as cash flow hedges involve the receipt of variable amounts from a counterparty in exchange for the Company making fixed-rate payments over the life of the agreements without exchange of the underlying notional amount. These derivatives were used to hedge the variable cash flows associated with existing variable-rate debt. The Company has executed a series of cash flow hedges to fix the effective interest rate for payments due on $62.0 million of LIBOR-based junior subordinated debentures to a weighted-average-fixed rate of 2.62%.
19



Select terms of the hedges are as follows:
$ in thousands
Notional Fixed RateMaturity Date
$15,465 2.60 %March 15, 2024
$14,433 2.60 %March 30, 2024
$18,558 2.64 %March 15, 2026
$13,506 2.64 %March 17, 2026

For derivatives designated and that qualify as cash flow hedges of interest rate risk, the gain or loss on the derivative is recorded in accumulated other comprehensive income and subsequently reclassified into interest expense in the same period(s) during which the hedged transaction affects earnings. Amounts reported in accumulated other comprehensive income related to derivatives will be reclassified to interest expense as interest payments are paid on the Company’s variable-rate debt. During the next twelve months, the Company estimates that an additional $1.5 million will be reclassified as an increase to interest expense.

Non-designated Hedges

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

The table below presents the fair value of the Company’s derivative financial instruments:
Notional Amount Derivative AssetsDerivative Liabilities
(in thousands)June 30,
2021
December 31, 2020June 30,
2021
December 31, 2020June 30,
2021
December 31, 2020
Derivatives Designated as Hedging Instruments:
Interest rate swap$61,962 $61,962 $ $ $4,379 $5,987 
Derivatives not Designated as Hedging Instruments:
Interest rate swap$983,018 $1,026,016 $19,809 $28,703 $19,846 $28,980 
Derivative assets are classified on the balance sheet in other assets. Derivative liabilities are classified on the balance sheet in other liabilities.
20


The table below presents a gross presentation, the effects of offsetting, and a net presentation of the Company’s financial instruments that are subject to offsetting. The gross amounts of assets or liabilities can be reconciled to the tabular disclosure of fair value. The fair value table above provides the location that financial assets and liabilities are presented on the Balance Sheet.
As of June 30, 2021
Gross Amounts Not Offset in the Statement of Financial Position

(in thousands)
Gross Amounts RecognizedGross Amounts Offset in the Statement of Financial PositionNet Amounts of Assets presented in the Statement of Financial PositionFinancial InstrumentsFair Value Collateral PostedNet Amount
Assets:
Interest rate swap $19,809 $ $19,809 $570 $ $19,239 
Liabilities:
Interest rate swap$24,225 $ $24,225 $570 $23,312 $343 
Securities sold under agreements to repurchase208,795  208,795  208,795  
As of December 31, 2020
Gross Amounts Not Offset in the Statement of Financial Position

(in thousands)
Gross Amounts Recognized Gross Amounts Offset in the Statement of Financial PositionNet Amounts of Assets presented in the Statement of Financial PositionFinancial InstrumentsFair Value Collateral PostedNet Amount
Assets:
Interest rate swap$28,703 $ $28,703 $2 $ $28,701 
Liabilities:
Interest rate swap$34,967 $ $34,967 $2 $34,903 $62 
Securities sold under agreements to repurchase271,081  271,081  271,081  

As of June 30, 2021, the fair value of derivatives in a net liability position, which includes accrued interest but excludes any adjustment for nonperformance risk, related to these agreements was $25.0 million. Further, the Company has minimum collateral posting thresholds with certain of its derivative counterparties and has posted collateral of $23.3 million.

21


NOTE 7 - FAIR VALUE MEASUREMENTS

The following table summarizes financial instruments measured at fair value on a recurring basis segregated by the level of the valuation inputs within the fair value hierarchy utilized to measure fair value:
 
 June 30, 2021
(in thousands)Quoted Prices in
Active Markets
for Identical Assets
(Level 1)
Significant
Other
Observable Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
Total Fair
Value
Assets    
Securities available for sale    
Obligations of U.S. Government-sponsored enterprises$ $99,254 $ $99,254 
Obligations of states and political subdivisions 480,845  480,845 
Agency mortgage-backed securities 477,379  477,379 
U.S. Treasury bills 11,346  11,346 
Corporate debt securities 15,399  15,399 
Total securities available for sale 1,084,223  1,084,223 
Derivatives 19,809  19,809 
Total assets$ $1,104,032 $ $1,104,032 
Liabilities    
Derivatives$ $24,225 $ $24,225 
Total liabilities$ $24,225 $ $24,225 

December 31, 2020
(in thousands)Quoted Prices in
Active Markets
for Identical Assets
(Level 1)
Significant
Other
Observable Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
Total Fair
Value
Assets    
Securities available for sale    
Obligations of U.S. Government-sponsored enterprises$ $15,161 $ $15,161 
Obligations of states and political subdivisions 344,232  344,232 
Residential mortgage-backed securities 526,572  526,572 
Corporate debt securities 14,998  14,998 
U.S. Treasury bills 11,466  11,466 
Total securities available-for-sale 912,429  912,429 
Derivative financial instruments 28,703  28,703 
Total assets$ $941,132 $ $941,132 
Liabilities    
Derivatives$ $34,967 $ $34,967 
Total liabilities$ $34,967 $ $34,967 

From time to time, the Company measures certain assets at fair value on a nonrecurring basis. These include assets measured at the lower of cost or fair value that were recognized at fair value below cost at the end of the period. At June 30, 2021, no assets were measured on a nonrecurring basis.


22



Following is a summary of the carrying amounts and fair values of certain financial instruments:
 June 30, 2021December 31, 2020
(in thousands)Carrying AmountEstimated fair valueLevelCarrying AmountEstimated fair valueLevel
Balance sheet assets    
Securities held-to-maturity, net$450,665 $470,099 Level 2$487,610 $501,523 Level 2
Other investments50,959 50,959 Level 248,764 48,764 Level 2
Loans held for sale5,763 5,763 Level 213,564 13,564 Level 2
Loans, net7,098,082 7,093,710 Level 37,088,264 7,067,562 Level 3
State tax credits, held for sale34,710 38,629 Level 336,853 39,925 Level 3
Balance sheet liabilities    
Certificates of deposit$514,334 $515,877 Level 3$550,095 $553,946 Level 3
Subordinated debentures and notes203,940 193,136 Level 2203,637 192,889 Level 2
FHLB advances50,000 51,591 Level 250,000 51,871 Level 2
Other borrowings and notes payable234,509 234,509 Level 2301,081 301,081 Level 2

For information regarding the methods and assumptions used to estimate the fair value of each class of financial instruments refer to Note 19 – Fair Value Measurements in the Company’s Annual Report on Form 10-K for the year ended December 31, 2020, as filed with the SEC.


23




NOTE 8 - SHAREHOLDERS’ EQUITY AND COMPENSATION PLANS

Shareholders’ Equity
Accumulated Other Comprehensive Income (Loss)

The following tables present the changes in accumulated other comprehensive income after-tax by component:
Three months ended
(in thousands)Net Unrealized Gain on Available-for-Sale Debt SecuritiesUnamortized Gain (Loss) on Held-to-Maturity SecuritiesNet Unrealized Gain (Loss) on Cash Flow HedgesTotal
Balance, March 31, 2021$11,400 $18,159 $(3,382)$26,177 
Net change$2,850 $(837)$82 $2,095 
Balance, June 30, 2021$14,250 $17,322 $(3,300)$28,272 
Balance, March 31, 2020$25,538 $4,778 $(7,219)$23,097 
Net change$10,984 $(329)$(943)$9,712 
Transfer from available-for-sale to held-to-maturity(8,650)8,650   
Balance, June 30, 2020$27,872 $13,099 $(8,162)$32,809 
Six months ended
(in thousands)Net Unrealized Gain (Loss) on Available-for-Sale Debt SecuritiesUnamortized Gain (Loss) on Held-to-Maturity SecuritiesNet Unrealized Gain (Loss) on Cash Flow HedgesTotal
Balance, December 31, 2020$22,320 $19,308 $(4,508)$37,120 
Net change$(8,070)$(1,986)$1,208 $(8,848)
Balance, June 30, 2021$14,250 $17,322 $(3,300)$28,272 
Balance, December 31, 2019$14,977 $4,934 $(2,162)$17,749 
Net change$21,545 $(485)$(6,000)$15,060 
Transfer from available-for-sale to held-to-maturity$(8,650)$8,650 $ $ 
Balance, June 30, 2020$27,872 $13,099 $(8,162)$32,809 

24


The following tables present the pre-tax and after-tax changes in the components of other comprehensive income:
Three months ended June 30,
20212020
(in thousands)Pre-taxTax effectAfter-taxPre-taxTax effectAfter-tax
Change in unrealized gain on available-for-sale debt securities$3,795 $945 $2,850 $14,587 $3,603 $10,984 
Reclassification of gain on held-to-maturity securities(b)
(1,115)(278)(837)(437)(108)(329)
Change in unrealized loss on cash flow hedges arising during the period(273)(68)(205)(1,563)(386)(1,177)
Reclassification of loss on cash flow hedges(b)
382 95 287 311 77 234 
Total other comprehensive income$2,789 $694 $2,095 $12,898 $3,186 $9,712 
Six months ended June 30,
20212020
(in thousands)Pre-taxTax effectAfter-taxPre-taxTax effectAfter-tax
Change in unrealized gain (loss) on available-for-sale debt securities$(10,746)$(2,676)$(8,070)$28,616 $7,068 $21,548 
Reclassification adjustment for realized gain on sale of available-for-sale debt securities(a)
   (4)(1)(3)
Reclassification of gain on held-to-maturity securities(b)
(2,644)(658)(1,986)(644)(159)(485)
Change in unrealized gain (loss) on cash flow hedges arising during the period855 213 642 (8,442)(2,085)(6,357)
Reclassification of loss on cash flow hedges(b)
754 188 566 474 117 357 
Total other comprehensive income$(11,781)$(2,933)$(8,848)$20,000 $4,940 $15,060 
(a)The pre-tax amount is reported in noninterest income/expense in the Consolidated Statements of Operations
(b)The pre-tax amount is reported in interest income/expense in the Consolidated Statements of Operations

Compensation Plans
Employee Stock Options

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

Various information related to the stock options is shown below.
Employee Stock OptionsWeighted Average LifeWeighted Average PriceShares ExercisableWeighted Average Exercise Price
Options Outstanding, December 31, 2020 
Options granted111,804 $43.81  $ 
Options forfeited(1,500)
Options Outstanding, June 30, 2021110,304 9.7


25


NOTE 9 - SUBSEQUENT EVENT

On July 21, 2021 the Company completed its previously-announced merger with First Choice Bancorp (“FCBP”), the holding company of First Choice Bank (“First Choice”) pursuant to the Agreement and Plan of Merger, dated April 26, 2021. FCBP merged with and into EFSC, and First Choice subsequently merged with and into the Bank (with EFSC and the Bank as the surviving entities). As of June 30, 2021, First Choice had approximately $2.4 billion in assets, $2.0 billion in loans and $1.9 billion in deposits.

In connection with the merger, the Company issued approximately 7.8 million shares of Enterprise common stock valued at $44.01 per share, the closing price of Enterprise common stock on July 21, 2021. The value of the consideration was approximately $346 million.

Effective as of July 28, 2021, EFSC further amended its certificate of incorporation to increase the number of authorized shares of common stock from 45,000,000 shares to 75,000,000 (the “Amendment”). As previously disclosed on Form 8-K filed with the SEC on July 20, 2021, the stockholders of EFSC approved the Amendment at a special meeting of stockholders held on July 20, 2021.


26


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

Forward Looking Statements

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

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

Readers are cautioned not to place undue reliance on our forward-looking statements, which reflect management’s analysis and expectations only as of the date of such statements. Forward-looking statements speak only as of the date they are made, and the Company does not intend, and undertakes no obligation, to publicly revise or update forward-looking statements after the date of this report, whether as a result of new information, future events or otherwise, except as required by federal securities law. You should understand that it is not possible to predict or identify all risk factors. Readers should carefully review all disclosures we file from time to time with the SEC which are available on our website at www.enterprisebank.com under “Investor Relations.”
27



Introduction

The following discussion describes the significant changes to the financial condition of the Company that have occurred during the first six months of 2021 compared to the financial condition as of December 31, 2020. In addition, this discussion summarizes the significant factors affecting the results of operations of the Company for the three months ended June 30, 2021, compared to the linked first quarter (“linked quarter”) in 2021 and the results of operations, liquidity and cash flows for the six months ended June 30, 2021 compared to the same period in 2020. In light of the nature of the Company’s business, which is not seasonal, the Company’s management believes that the comparison to the linked quarter is the most relevant to understand the financial results from management’s perspective. For purposes of the Quarterly Report on Form 10-Q, the Company is presenting a comparison to the corresponding year-to-date period in 2020. This discussion should be read in conjunction with the accompanying condensed consolidated financial statements included in this report and our Annual Report on Form 10-K for the year ended December 31, 2020.

Critical Accounting Policies

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

A full description of our critical accounting policies and the impact and any associated risks related to those policies on our business operations are discussed throughout “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” where such policies affect our reported and expected financial results. For a detailed discussion on the application of these and other accounting policies, see the Company’s Annual Report on Form 10-K for the year ended December 31, 2020.

The Company has prepared the consolidated financial information in this report in accordance with GAAP. The Company makes estimates and assumptions that affect the reported amount of assets and liabilities, disclosure of contingent assets and liabilities at the date of the consolidated financial statements, and the reported amounts of revenue and expenses during the reporting period. Such estimates include the valuation of loans, goodwill, intangible assets, and other long-lived assets, along with assumptions used in the calculation of income taxes, among others. These estimates and assumptions are based on management’s best estimates and judgment. Management evaluates its estimates and assumptions on an ongoing basis using loss experience and other factors, including the current economic environment, which management believes to be reasonable under the circumstances. We adjust such estimates and assumptions when facts and circumstances dictate. The three months ended June 30, 2021 continued to be characterized by heightened uncertainty due to the COVID-19 pandemic which could impact estimates and assumptions made by management. As future events and their effects cannot be determined with precision, actual results could differ significantly from these estimates. Changes in estimates resulting from continuing changes in the economic environment will be reflected in the financial statement in future periods. There can be no assurances that actual results will not differ from those estimates.

Allowance for Credit Losses

Utilizing the CECL methodology, the Company maintains separate allowances for funded loans, unfunded loans, and held-to-maturity securities, collectively the ACL. The ACL is a valuation account to adjust the cost basis to the amount expected to be collected, based on management’s estimate of experience, current conditions, and reasonable and supportable forecasts. For purposes of determining the allowance for funded and unfunded loans, the portfolios are segregated into pools that share similar risk characteristics that are then further segregated by credit grades. Loans that do not share similar risk characteristics are evaluated on an individual basis and are not included in the
28


collective evaluation. The Company estimates the amount of the allowance based on loan loss experience, adjusted for current and forecasted economic conditions, including unemployment, changes in GDP, and commercial and residential real estate prices. The Company’s forecast of economic conditions uses internal and external information and considers a weighted average of a baseline, upside, and downside scenarios. Because economic conditions can change and are difficult to predict, the anticipated amount of estimated loan defaults and losses, and therefore the adequacy of the allowance, could change significantly and have a direct impact on the Company’s credit costs. The Company’s allowance for credit losses was $128.2 million at June 30, 2021 based on the weighting of the different economic scenarios. As a hypothetical example, if the Company had only used the upside scenario, the allowance would have decreased $19.1 million. Conversely, the allowance would have increased $40.0 million using only the downside scenario.




29


Executive Summary

The Company closed its acquisition of Seacoast on November 12, 2020. The results of operations of Seacoast are included in our results from this date forward, which may affect certain comparisons to the six months ended June 30, 2020.

Below are highlights of the Company’s financial performance for the periods indicated.
(in thousands, except per share data)At or for the three months endedAt or for the six months ended
June 30,
2021
March 31,
2021
June 30,
2020
June 30,
2021
June 30,
2020
EARNINGS
Total interest income$87,401 $84,960 $73,191 $172,361 $149,879 
Total interest expense5,663 5,837 7,358 11,500 20,678 
Net interest income81,738 79,123 65,833 160,861 129,201 
Provision for credit losses(2,669)46 19,591 (2,623)41,855 
Net interest income after provision for credit losses84,407 79,077 46,242 163,484 87,346 
Total noninterest income16,204 11,290 9,960 27,494 23,368 
Total noninterest expense52,456 52,884 37,912 105,340 76,585 
Income before income tax expense48,155 37,483 18,290 85,638 34,129 
Income tax expense9,750 7,557 3,656 17,307 6,627 
Net income$38,405 $29,926 $14,634 $68,331 $27,502 
Basic earnings per share$1.23 $0.96 $0.56 $2.19 $1.04 
Diluted earnings per share$1.23 0.96 $0.56 $2.18 $1.04 
Return on average assets1.50 %1.22 %0.72 %1.36 %0.71 %
Return on average common equity13.79 %11.07 6.78 %12.45 %6.38 %
Return on average tangible common equity1
18.44 %14.92 9.28 %16.71 %8.76 %
Net interest margin (tax equivalent)3.46 %3.50 3.53 %3.48 %3.65 %
Efficiency ratio53.56 %58.49 50.02 %55.93 %50.20 %
Core efficiency ratio1
51.86 %55.02 50.66 %53.38 %50.94 %
Book value per common share$35.86 $34.95 $33.13 
Tangible book value per common share1
$26.85 25.92 $24.22 
ASSET QUALITY
Net charge-offs $869 $5,647 $309 $6,516 $1,491 
Nonperforming loans42,252 36,659 41,473 
Classified assets100,063 114,713 96,678 
Nonperforming loans to total loans0.58 %0.50 %0.68 %
Nonperforming assets to total assets0.44 %0.42 0.55 %
ACL on loans to total loans1.77 %1.80 1.80 %
Net charge-offs to average loans (annualized)0.05 %0.32 0.02 %0.18 %0.05 %
(1) A non-GAAP measure. A reconciliation has been included in this section under the caption “Use of Non-GAAP Financial Measures.”

30


Financial results and other notable items include:

The Company was active in continuing to support its customers in the PPP. Details of the PPP loans are noted in the following table:
At or for the three months endedAt or for the six months ended
(in thousands)June 30, 2021March 31, 2021June 30, 2021June 30, 2020
PPP loans outstanding, net of deferred fees$396,660 $737,660 $396,660 $807,814 
Average PPP loans outstanding, net664,375 692,161 678,268 634,632 
PPP average loan size171 220 196 224 
PPP interest and fee income7,940 8,475 16,415 4,083 
PPP deferred fees12,243 16,676 12,243 22,414 
PPP average yield4.79 %4.97 %4.88 %1.29 %

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

Pre-provision net revenue1 (“PPNR”) of $47.4 million in the second quarter 2021 increased $6.8 million from the linked quarter PPNR of $40.7 million. PPNR for the six months ended June 30, 2021 of $88.1 million increased $12.1 million from $76.0 million in the prior year period. The increase from the linked quarter was primarily due to a stronger noninterest income and an increase in net interest income. The increase for the six months ended June 30, 2021 compared to the prior year period was primarily from the Seacoast acquisition that was completed in the fourth quarter 2020 and income from PPP that started in the second quarter 2020.

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

Net interest income of $81.7 million for the second quarter 2021 increased $2.6 million, or 3.3%, from the linked quarter, primarily due to higher loan and investment volumes. Net interest margin (“NIM”) was 3.46% for the second quarter 2021, compared to 3.50% for the linked quarter. Net interest income was $160.9 million for the six months ended June 30, 2021, compared to $129.2 million in the prior year period. NIM was 3.48% for the six months ended June 30, 2021, compared to 3.53% for the prior year period. Net interest income in 2021 increased over the prior year due to the Seacoast acquisition and PPP loan fees and interest. NIM for the six months ended June 30, 2021, declined from the prior year period primarily due to a lower rate environment and an increase in cash on the balance sheet.

Noninterest income of $16.2 million for the second quarter 2021 increased $4.9 million from the linked quarter, primarily due to higher tax credit activity. For the six months ended June 30, 2021, noninterest income was $27.5 million, compared to $23.4 million in the prior year period. The increase was primarily due to the Seacoast acquisition, income on private equity investments and higher gains on mortgage sales, offset by a decline in tax credit and swap fee income.

Balance sheet highlights:

Loans – Total loans were $7.2 billion at both June 30, 2021 and December 31, 2020. PPP loans declined $302.0 million during the first half of 2021 due to higher loan forgiveness and the end of the statutory deadline for new PPP originations. Excluding PPP, loans increased $303.3 million in the first half of 2021, primarily due to specialty lending.
31


Deposits – Total deposits increased $654.1 million, or 8.1%, to $8.6 billion at June 30, 2021 from $8.0 billion at December 31, 2020. Deposits from PPP loans and the low-rate environment has contributed to the increase during the first half of 2021. Specialty deposits increased $316.4 million in 2021 primarily due to community associations and sponsor finance. Noninterest deposit accounts represented 36.0% of total deposits and the loan to deposit ratio was 83.6% at June 30, 2021.
Asset quality – The allowance for credit losses on loans to total loans was 1.77% at June 30, 2021, compared to 1.80% at December 31, 2020. Nonperforming assets to total assets was 0.44% at June 30, 2021 compared to 0.42% at December 31, 2020. The decline in the allowance to total loans ratio in the first half of 2021 was primarily due to net loan charge-offs of $6.5 million, improved credit metrics, and continued improvement in economic forecasts.
Shareholders’ equity – Total shareholders’ equity was $1.1 billion at both June 30, 2021 and December 31, 2020, and the tangible common equity to tangible assets ratio2 was 8.32% and 8.40%, respectively. The Company and the Bank’s regulatory capital ratios exceeded the “well-capitalized” level at June 30, 2021.

The Company has 1,748,363 shares available for repurchase under its common stock repurchase authorization. The Company repurchased 251,637 shares totaling $11.8 million in the first half of 2021.

The Company’s Board of Directors approved a quarterly dividend of $0.19 per common share, payable on September 30, 2021 to shareholders of record as of September 15, 2021, an increase of $0.01 from the prior dividend.

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




32


RESULTS OF OPERATIONS
Net Interest Income
Average Balance Sheet
The following tables present, for the periods indicated, certain information related to our average interest-earning assets and interest-bearing liabilities, as well as the corresponding interest rates earned and paid, all on a tax equivalent basis.
 Three months ended June 30,Three months ended March 31,
 20212021
(in thousands)Average BalanceInterest
Income/Expense
Average
Yield/
Rate
Average BalanceInterest
Income/Expense
Average
Yield/
Rate
Assets      
Interest-earning assets:      
Taxable loans (1)$7,272,209 $78,769 4.34 %$7,157,961 $76,674 4.34 %
Tax-exempt loans (2)34,262 393 4.60 34,815 399 4.65 
Total loans7,306,471 79,162 4.35 7,192,776 77,073 4.35 
Taxable debt and equity investments856,439 4,706 2.20 849,123 4,719 2.25 
Non-taxable debt and equity investments (2)646,143 4,520 2.81 568,182 4,099 2.93 
Short-term investments806,928 237 0.12 679,659 189 0.11 
Total securities and short-term investments2,309,510 9,463 1.64 2,096,964 9,007 1.74 
Total interest-earning assets9,615,981 88,625 3.70 9,289,740 86,080 3.76 
Noninterest-earning assets665,363   650,312   
 Total assets$10,281,344   $9,940,052   
Liabilities and Shareholders' Equity      
Interest-bearing liabilities:      
Interest-bearing transaction accounts$1,985,811 $336 0.07 %$1,887,059 $328 0.07 %
Money market accounts2,344,871 988 0.17 2,350,592 975 0.17 
Savings718,193 52 0.03 654,662 48 0.03 
Certificates of deposit522,633 1,091 0.84 537,166 1,312 0.99 
Total interest-bearing deposits5,571,508 2,467 0.18 5,429,479 2,663 0.20 
Subordinated debentures203,849 2,847 5.60 203,694 2,819 5.61 
FHLB advances50,000 197 1.58 50,000 195 1.58 
Securities sold under agreements to repurchase209,062 58 0.11 231,527 60 0.11 
Other borrowed funds27,147 94 1.39 28,650 100 1.42 
Total interest-bearing liabilities6,061,566 5,663 0.37 5,943,350 5,837 0.40 
Noninterest bearing liabilities:      
Demand deposits3,008,703   2,777,900   
Other liabilities94,106   122,321   
Total liabilities9,164,375   8,843,571   
Shareholders' equity1,116,969   1,096,481   
Total liabilities & shareholders' equity$10,281,344   $9,940,052   
Net interest income $82,962   $80,243 
Net interest spread  3.33 % 3.36 %
Net interest margin  3.46 % 3.50 %
(1)Average balances include nonaccrual loans. Interest income includes loan fees of $7.6 million, and $8.1 million for the three months ended June 30, 2021 and December 31, 2020, respectively.
(2)Interest income and yields have been adjusted to reflect a tax-equivalent basis.
33


 Six months ended June 30,
 20212020
(in thousands)Average BalanceInterest
Income/Expense
Average
Yield/
Rate
Average BalanceInterest
Income/Expense
Average
Yield/
Rate
Assets      
Interest-earning assets:      
Taxable loans (1)$7,215,401 $155,442 4.34 %$5,655,140 $130,940 4.66 %
Tax-exempt loans (2)34,537 792 4.62 37,019 938 5.10 
Total loans7,249,938 156,234 4.35 5,692,159 131,878 4.66 
Taxable debt and equity investments852,802 9,425 2.23 1,096,703 14,544 2.67 
Non-taxable debt and equity investments (2)607,377 8,619 2.86 257,707 4,384 3.42 
Short-term investments743,645 426 0.12 134,758 387 0.58 
Total securities and short-term investments2,203,824 18,470 1.69 1,489,168 19,315 2.61 
Total interest-earning assets9,453,762 174,704 3.73 7,181,327 151,193 4.23 
Noninterest-earning assets657,879   579,577   
Cash and due from banks115,699   92,341   
Other assets676,096   573,806   
Allowance for loan losses(133,916)  (86,570)  
 Total assets$10,111,641   $7,760,904   
Liabilities and Shareholders' Equity      
Interest-bearing liabilities:      
Interest-bearing transaction accounts$1,936,707 $664 0.07 %$1,431,311 $1,581 0.22 %
Money market accounts2,347,716 1,963 0.17 1,876,482 5,735 0.61 
Savings686,603 100 0.03 566,549 188 0.07 
Certificates of deposit529,860 2,403 0.91 755,871 6,767 1.80 
Total interest-bearing deposits5,500,886 5,130 0.19 4,630,213 14,271 0.62 
Subordinated debentures203,772 5,666 5.61 155,303 4,235 5.48 
FHLB advances50,000 392 1.58 235,842 1,350 1.15 
Securities sold under agreements to repurchase220,233 118 0.11 197,002 419 0.43 
Other borrowed funds27,894 194 1.40 33,556 403 2.42 
Total interest-bearing liabilities6,002,785 11,500 0.39 5,251,916 20,678 0.79 
Noninterest bearing liabilities:      
Demand deposits2,893,939   1,564,513   
Other liabilities108,135   77,876   
Total liabilities9,004,859   6,894,305   
Shareholders' equity1,106,782   866,599   
Total liabilities & shareholders' equity$10,111,641   $7,760,904   
Net interest income $163,204   $130,515 
Net interest spread  3.34 %  3.44 %
Net interest margin  3.48 % 3.65 %
(1)Average balances include nonaccrual loans. Interest income includes loan fees of $15.6 million, and $4.9 million for the six months ended June 30, 2021 and 2020, respectively.
(2)Interest income and yields have been adjusted to reflect a tax-equivalent basis.
34


Rate/Volume

The following table sets forth, on a tax-equivalent basis for the periods indicated, a summary of the changes in interest income and interest expense resulting from changes in yield/rates and volume.
Three months ended June 30, 2021Six months ended June 30, 2021
compared to compared to
 Three months ended March 31, 2021Six months ended June 30, 2020
Increase (decrease) due toIncrease (decrease) due to
(in thousands)Volume(1)Rate(2)NetVolume(1)Rate(2)Net
Interest earned on:   
Taxable loans$2,095 $— $2,095 $33,792 $(9,290)$24,502 
Tax-exempt loans (3)(4)(2)(6)(62)(84)(146)
Taxable debt and equity investments56 (69)(13)(2,944)(2,175)(5,119)
Non-taxable debt and equity investments (3)586 (165)421 5,056 (821)4,235 
Short-term investments32 16 48 558 (519)39 
Total interest-earning assets$2,765 $(220)$2,545 $36,400 $(12,889)$23,511 
Interest paid on:   
Interest-bearing transaction accounts$$— $$425 $(1,342)$(917)
Money market accounts13 — 13 1,164 (4,936)(3,772)
Savings— 34 (122)(88)
Certificates of deposit(34)(187)(221)(1,650)(2,714)(4,364)
Subordinated debentures11 17 28 1,335 96 1,431 
FHLB advances(1,332)374 (958)
Securities sold under agreements to repurchase(2)— (2)44 (345)(301)
Other borrowings(4)(2)(6)(60)(149)(209)
Total interest-bearing liabilities(3)(171)(174)(40)(9,138)(9,178)
Net interest income$2,768 $(49)$2,719 $36,440 $(3,751)$32,689 
(1) Change in volume multiplied by yield/rate of prior period.
(2) Change in yield/rate multiplied by volume of prior period.
(3) Nontaxable income is presented on a tax equivalent basis.
NOTE: The change in interest due to both rate and volume has been allocated to rate and volume changes in proportion to the relationship of the absolute dollar amounts of the change in each.

Net interest income (on a tax equivalent basis) for the three months ended June 30, 2021 increased $2.7 million, or 3%, over the linked quarter prior primarily due to higher volumes on loans and investments. While PPP loans decreased in the current quarter, forgiveness of these loans by the SBA accelerates deferred loan fees into income that benefits net interest income. In addition, the reduction in PPP loans that bear a 1% interest rate have mostly been replaced with loans at a higher yield.

During the six months ended June 30, 2021, tax equivalent net interest income increased $32.7 million from the six months ended June 30, 2020, primarily due to the Seacoast acquisition and income from PPP loans that began originating in the second quarter 2020. These increases were partially offset by a decline in the yield on earning assets from 4.23% in the first half of 2020 to 3.73% in the first half of 2021. The decline in yield was due to the Federal Open Markets Committee reduction of the target federal funds rate by 150 basis points in the first quarter of 2020.

NIM was 3.46% for the second quarter, compared to 3.50% in the linked quarter. NIM decreased four basis points from the linked quarter to 3.46% during the current quarter primarily due to a six-basis point decrease in earning asset yields. The decrease in the earning asset yield was primarily due to higher levels of cash related to payoffs of PPP loans and deposit growth (5 basis points), and lower yields on investment securities (1 basis point), partially
35


offset by loans (1 basis point) and lower cost of funds (1 basis point). The cost of interest-bearing liabilities declined two basis points from the linked quarter, primarily due to lower rates on time deposits.

NIM was 3.48% for the six months ended June 30, 2021, a 17 basis point decrease compared to 3.65% in the prior year period. NIM was impacted by the decline in short-term rates as approximately 60% of the loan portfolio (excluding PPP) has variable rates, with most indexed to one-month LIBOR. LIBOR has declined significantly over the past year in conjunction with the decrease in the target federal funds rate discussed above. Higher levels of low-yielding, short-term investments also contributed to the decline in NIM, as the average balance increased $608.9 million.

Noninterest Income

The following table presents a comparative summary of the major components of noninterest income for the periods indicated.
Linked quarter comparisonPrior year comparison
Quarter endedSix months ended
(in thousands)June 30, 2021March 31, 2021Increase (decrease)June 30, 2021June 30, 2020Increase (decrease)
Deposit service charges$3,862 $3,084 $778 25 %$6,946 $5,759 $1,187 21 %
Wealth management revenue2,516 2,483 33 %4,999 4,827 172 %
Card services revenue2,975 2,496 479 19 %5,471 4,472 999 22 %
Tax credit income (expense)1,370 (1,041)2,411 (232)%329 1,815 (1,486)(82)%
Miscellaneous income5,481 4,268 1,213 28 %9,749 6,495 3,254 50 %
Total noninterest income$16,204 $11,290 $4,914 44 %$27,494 $23,368 $4,126 18 %

Total noninterest income for the first quarter 2021 was $16.2 million, an increase of $4.9 million from the linked quarter. The increase from the linked quarter was primarily due to tax credit income, along with a private equity fund distribution and gain on sale of other real estate reported in miscellaneous income. Deposit service charges and card services revenue increased over the linked quarter due to improving activity levels.

Noninterest income for the six months ended June 30, 2021, increased $4.1 million compared to the prior year period due to the Seacoast acquisition ($2.7 million), private equity income ($2.5 million), card fee income ($1.0 million) and gains on the sale of other real estate owned ($0.6 million). These increases were offset by a decrease in tax credit income of $1.5 million and a decline in customer swap fee income of $1.4 million.
36


Noninterest Expense

The following table presents a comparative summary of the major components of noninterest expense for the periods indicated.
Linked quarter comparisonPrior year comparison
Quarter endedSix months ended
(in thousands)June 30, 2021March 31, 2021Increase (decrease)June 30, 2021June 30, 2020Increase (decrease)
Employee compensation and benefits$28,132 $29,562 $(1,430)(5)%$57,694 $44,074 $13,620 31 %
Occupancy3,529 3,751 (222)(6)%7,280 6,532 748 11 %
Data processing2,850 2,890 (40)(1)%5,740 4,226 1,514 36 %
Professional fees1,300 988 312 32 %2,288 2,149 139 %
Merger-related expenses1,949 3,142 (1,193)(38)%5,091 — 5,091 — %
Other14,696 12,551 2,145 17 %27,247 19,604 7,643 39 %
Total noninterest expense$52,456 $52,884 $(428)(1)%$105,340 $76,585 $28,755 38 %
Efficiency ratio53.56 %58.49 %(4.93)%55.93 %50.20 %5.73 %
Core efficiency ratio1
51.86 %55.02 %(3.16)%53.38 %50.94 %0.92 %
1 Core efficiency ratio is a non-GAAP measure. Refer to discussion and reconciliation of this measure in the accompanying financial tables.
Noninterest expense was $52.5 million for the second quarter 2021, compared to $52.9 million for the linked quarter. Employee compensation and benefits expense declined $1.4 million from the linked quarter due to seasonally higher payroll taxes in the first quarter. Merger-related expenses also declined and were $1.9 million and $3.1 million in the current and linked quarter, respectively. These decreases were offset by a $2.1 million increase in Other expense, primarily attributed to higher customer deposit and card servicing costs due to higher volumes.
Noninterest expense was $105.3 million for the six months ended June 30, 2021, compared to $76.6 million for the prior year period. The increase from the prior year was primarily due to the Seacoast acquisition ($21.4 million) and merger-related expenses ($5.1 million).

Income Taxes

The Company’s effective tax rate was 20.2% for both the first and second quarter of 2021 and 20.2% and 19.4% for the six months ended June 30, 2021 and 2020, respectively. The increase in the effective tax rate in the first half of 2021 over the comparable period in 2020 was partially due to higher state tax expense from the Company’s expanded geographic footprint.

Summary Balance Sheet
(in thousands)June 30,
2021
December 31,
2020
Increase (decrease)
Total cash and cash equivalents$1,008,991 $537,703 $471,288 88 %
Securities1,534,888 1,400,039 134,849 10 %
Loans (excluding PPP)6,829,606 6,551,121 278,485 %
PPP loans, net396,660 698,645 (301,985)(43)%
Total assets10,346,993 9,751,571 595,422 %
Deposits8,639,504 7,985,389 654,115 %
Total liabilities9,228,692 8,672,596 556,096 %
Total shareholders’ equity1,118,301 1,078,975 39,326 %

37


Assets

Loans by Type

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

The following table summarizes the composition of the Company’s loan portfolio:
(in thousands)June 30,
2021
December 31,
2020
Increase (decrease)
Commercial and industrial$2,930,805 $3,088,995 $(158,190)(5)%
Commercial real estate - investor owned1,646,021 1,589,419 56,602 %
Commercial real estate - owner occupied1,554,727 1,498,408 56,319 %
Construction and land development556,776 546,686 10,090 %
Residential real estate305,497 319,179 (13,682)(4)%
Other232,441 182,248 50,193 28 %
   Loans held for investment$7,226,267 $7,224,935 $1,332 — %

The following table illustrates the change in loans:
(in thousands)June 30,
2021
December 31,
2020
Increase (decrease)
C&I $1,116,229 $1,103,060 $13,169 %
CRE investor owned 1,467,243 1,420,905 46,338 %
CRE owner occupied 789,220 825,846 (36,626)(4)%
SBA Loans*1,010,727 895,930 114,797 13 %
Sponsor finance*463,744 396,487 67,257 17 %
Life insurance premium financing*564,366 534,092 30,274 %
Tax credits*423,258 382,602 40,656 11 %
SBA PPP loans396,660 698,645 (301,985)(43)%
Residential real estate302,007 318,091 (16,084)(5)%
Construction and land development 467,586 474,399 (6,813)(1)%
Other225,227 174,878 50,349 29 %
Total loans$7,226,267 $7,224,935 $1,332 — %
Note: Certain prior period amounts have been reclassified among the categories to conform to the current period presentation.
*Specialty loan category

Loans totaled $7.2 billion at both June 30, 2021, and December 31, 2020. PPP loans declined $302.0 million in the first half of 2021, as PPP forgiveness by the SBA accelerated and the deadline for new originations passed during the second quarter 2021. Specialty loans, particularly SBA and sponsor finance loans, increased in the first half of 2021. At June 30, 2021, line draw utilization was 38.9% compared to 38.1% at December 31, 2020.

Specialty lending products, especially sponsor finance, life insurance premium financing, and tax credits, consist primarily of C&I loans. These loans are sourced through relationships developed with estate planning firms and private equity funds and are not bound geographically by our four markets. These specialized loan products offer opportunities to expand and diversify geographically by entering new markets. The Company continues to focus on originating high-quality C&I relationships, as they typically have variable interest rates and allow for cross selling
38


opportunities involving other banking products. Life insurance premium financing and tax credits are typically lower risk products due to the high collateral value securing the loans.

SBA loans are also generated on a national basis, and primarily consist of loans collateralized by first lien, owner-occupied real estate properties. These loans typically have a 75% guarantee from the SBA. Occasionally, the Company may sell the guaranteed portion of the loan and retain servicing rights. At June 30, 2021, the Company was servicing $275.8 million of SBA loans sold to third parties. Guaranteed portions of SBA loans totaled $686.4 million at June 30, 2021.

In response to the COVID-19 pandemic, the Company provided short-term payment deferrals to certain customers in 2020, primarily for 90 days or less. As of June 30, 2021, only $8.5 million of these loans remain in deferral status.


39


Provision and Allowance for Credit Losses

The adoption of CECL on January 1, 2020 increased the ACL on loans by $28.4 million, or 65%, and the allowance for unfunded commitments by $2.4 million. These increases were primarily offset in retained earnings and did not impact the consolidated statement of operations. The following table summarizes changes in the ACL on loans arising from CECL adoption; loan charge-offs and recoveries by loan category, and additions to the allowance charged to expense.
Three months endedSix months ended June 30,
(in thousands)June 30, 2021March 31, 202120212020
Allowance, at beginning of period$131,527 $136,671 $136,671 $43,288 
CECL adoption— — — 28,387 
PCD loans immediately charged-off— — — (1,680)
Allowance at beginning of period, adjusted for adoption of CECL131,527 136,671 136,671 69,995 
Provision (benefit) for credit losses(2,473)503 (1,970)40,086 
Charge-offs:   
Commercial and industrial(1,451)(3,739)(5,190)(3,366)
Real estate:   
Commercial(216)(2,400)(2,616)(226)
Construction and land development— — — (31)
Residential(44)(271)(315)(154)
Other(121)(64)(185)(191)
Total charge-offs(1,832)(6,474)(8,306)(3,968)
Recoveries:  
Commercial and industrial700 327 1,027 797 
Real estate:   
Commercial49 43 92 2,846 
Construction and land development32 235 267 69 
Residential161 143 304 383 
Other21 79 100 62 
Total recoveries963 827 1,790 4,157 
Net (charge-offs) recoveries(869)(5,647)(6,516)189 
Allowance, at end of period$128,185 $131,527 $128,185 $110,270 

The following table presents the components of the provision for credit losses:
Quarter endedSix months ended June 30,
(in thousands)June 30, 2021March 31, 202120212020
Provision (benefit) for loan losses$(2,473)$503 $(1,970)$40,086 
Provision (benefit) for off-balance sheet commitments38 (370)(332)2,055 
Provision for held-to-maturity securities— — — 342 
Accrued interest(234)(87)(321)(628)
Provision (benefit) for credit losses$(2,669)$46 $(2,623)$41,855 

40


The following table summarizes the allocation of the ACL:
June 30, 2021December 31, 2020
(in thousands)AllowancePercent AllowancePercent
Commercial and industrial$53,351 41.6 %$58,812 43.0 %
Real estate:
Commercial 51,567 40.2 %49,074 35.9 %
Construction and land development11,632 9.1 %21,413 15.7 %
Residential4,677 3.7 %4,585 3.4 %
Other6,958 5.4 %2,787 2.0 %
Total$128,185100.0 %$136,671100.0 %

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 a benefit of $2.7 million for both the second quarter 2021 and the first six months of 2021, compared to an expense of $46 thousand for the linked quarter and an expense of $41.9 million in the first half of 2020. Gross charge-offs of $1.8 million in the quarter primarily consisted of one retail loan that had previously defaulted and was fully reserved for in a prior period. During the first half of 2020, gross charge-offs totaled $8.3 million. The Company’s strong asset quality metrics and strengthening customer credit risk profiles, along with an improvement in the economic forecast, particularly GDP and unemployment, led to a decline in the allowance for credit losses in the second quarter 2021. Conversely, the Company was at the in the middle of the pandemic at June 30, 2020 when economic forecasts were severely constrained, which led to the provision expense of $41.9 million.

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

The ACL on loans was 1.77% of loans at June 30, 2021, compared to 1.80% at March 31, 2021 and 1.89% at December 31, 2020.

41


Nonperforming assets

The following table presents the categories of nonperforming assets and other ratios, excluding government guaranteed portions, as of the dates indicated.
(in thousands)June 30,
2021
December 31,
2020
Nonaccrual loans$36,403 $34,818 
Loans past due 90 days or more and still accruing interest2,807 130 
Troubled debt restructurings3,042 3,559 
Total nonperforming loans42,252 38,507 
Other real estate 3,612 5,330 
Total nonperforming assets$45,864 $43,837 
Total assets$10,346,993 $9,751,571 
Total loans7,226,267 7,224,935 
Nonperforming loans to total loans0.58 %0.53 %
Nonperforming assets to total assets0.44 %0.45 %
ACL on loans to nonperforming loans303 %355 %

Nonperforming loans increased $3.8 million to $42.3 million at June 30, 2021 from $38.5 million at December 31, 2020. Other real estate decreased during the first half of 2021 due to six property sales totaling $4.9 million, including one commercial property of $3.6 million, partially offset by four additions totaling $3.2 million.

Nonperforming loans 

Nonperforming loans based on loan type were as follows:
 
(in thousands)June 30, 2021December 31, 2020
Commercial and industrial$24,844 $21,770 
Commercial real estate13,244 12,519 
Construction and land development100 — 
Residential real estate4,038 4,189 
Other26 29 
Total$42,252 $38,507 

The following table summarizes the changes in nonperforming loans:
 Six months ended
(in thousands)June 30, 2021
Nonperforming loans, beginning of period$38,507 
Additions to nonaccrual loans16,058 
Charge-offs(8,306)
Other principal reductions(3,765)
Moved to other real estate(1,937)
Moved to performing(983)
Change in loans past due 90 days or more and still accruing interest2,678 
Nonperforming loans, end of period$42,252 

42


Other real estate

Other real estate was $3.6 million at June 30, 2021 compared to $5.3 million at December 31, 2020.

The following table summarizes the changes in other real estate:
 Six months ended
(in thousands)June 30, 2021
Other real estate beginning of period$5,330 
Additions and expenses capitalized to prepare property for sale3,227 
Sales(4,945)
Other real estate end of period$3,612 

Gains and losses are recognized in noninterest income as a component of Miscellaneous income.


Deposits
(in thousands)June 30,
2021
December 31,
2020
Increase (decrease)
Noninterest-bearing deposit accounts$3,111,581 $2,711,828 $399,753 15 %
Interest-bearing transaction accounts2,013,129 1,768,497 244,632 14 %
Money market accounts2,278,306 2,327,066 (48,760)(2)%
Savings accounts722,154 627,903 94,251 15 %
Certificates of deposit:
Brokered50,209 50,209 — — %
Other464,125 499,886 (35,761)(7)%
Total deposits$8,639,504 $7,985,389 $654,115 %
Core deposits / total deposits94 %93 %
Demand deposits / total deposits36 %34 %

Core deposits, defined as total deposits excluding certificates of deposits, were $8.1 billion at June 30, 2021, an increase of $689.9 million from December 31, 2020. The increase was primarily from noninterest-bearing and interest-bearing deposits, that have increased due to elevated deposits from customers who received PPP loans and customers who have retained excess liquidity due to the low yield of alternative short-term investments. Noninterest-bearing deposits were $3.1 billion at June 30, 2021, or 36.0% of total deposits. The Company has a specialty deposit portfolio focusing on property management, community associations, and escrow industries, in addition to deposits related to its specialty lending products. These deposits totaled $1.4 billion at June 30, 2021 and $1.1 billion at December 31, 2020.

The total cost of deposits was 0.12% for the current quarter compared to 0.13% for the linked quarter.

Shareholders’ Equity

Shareholders’ equity totaled $1.1 billion at June 30, 2021, an increase of $39.3 million from December 31, 2020. Significant activity during the first six months of 2021 was as follows:

increase from net income of $68.3 million,
net decrease in fair value of securities and cash flow hedges of $8.8 million,
decrease from shares repurchased of $11.8 million, and
decrease from dividends paid on common shares of $11.3 million.

43


Liquidity and Capital Resources

Liquidity

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

Additionally, liquidity is provided from lines of credit with the FHLB, the Federal Reserve, and correspondent banks; the ability to acquire large and brokered deposits, sales of the securities portfolio, and the ability to sell loan participations to other banks. These alternatives are an important part of our liquidity plan and provide flexibility and efficient execution of the asset-liability management strategy. The company also has a high-quality investment portfolio that has been structured to provide a continuous flow of cash payments.

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

Liquidity from asset categories is provided through cash and interest-bearing deposits with other banks, which totaled $1.0 billion at June 30, 2021, compared to $545.3 million at December 31, 2020. The low interest rate environment, coupled with an uncertain outlook and government stimulus, such as the PPP, have increased liquidity for the banking industry, including the Company. Investment securities are another important tool to the Company’s liquidity objectives. Securities totaled $1.5 billion at June 30, 2021, and included $489 million pledged as collateral for deposits of public institutions, treasury, loan notes, and other requirements. The remaining $1.1 billion could be pledged or sold to enhance liquidity, if necessary.

Liability liquidity funding sources are available to increase financial flexibility. In addition to amounts currently borrowed, at June 30, 2021, the Bank could borrow an additional $1.0 billion from the FHLB of Des Moines under blanket loan pledges, and has an additional $835 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.

In the normal course of business, the Company enters into certain forms of off-balance sheet transactions, including unfunded loan commitments and letters of credit. These transactions are managed through the Company’s various risk management processes. Management considers both on-balance sheet and off-balance sheet transactions in its evaluation of the Company’s liquidity. The Company has $2.0 billion in unused commitments as of June 30, 2021. The nature of these commitments is such that the likelihood of funding them in the aggregate at any one time is low.

At the holding company level, our primary funding sources are dividends and payments from the Bank and proceeds from the issuance of equity (i.e. stock option exercises, stock offerings) and debt instruments. The main use of this liquidity is to provide the funds necessary to pay dividends to shareholders, service debt, invest in subsidiaries as necessary, and satisfy other operating requirements. The holding company maintains a revolving line of credit for an aggregate amount up to $25 million, all of which is available at June 30, 2021. The line of credit has a one-year term and matures in February 2022. The proceeds can be used for general corporate purposes.

The Company has an effective automatic shelf registration statement on Form S-3 allowing for the issuance of various forms of equity and debt securities. The Company’s ability to offer securities pursuant to the registration
44


statement depends on market conditions and the Company’s continuing eligibility to use the Form S-3 under rules of the SEC.

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

Capital Resources

EFSC and the Bank are subject to various regulatory capital requirements administered by the Federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possible additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company and its bank affiliate must meet specific capital guidelines that involve quantitative measures of assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices. The banking affiliate’s capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings and other factors.
 
Quantitative measures established by regulation to ensure capital adequacy require EFSC and the Bank to maintain minimum amounts and ratios (set forth in the following table) of total, Tier 1, and common equity tier 1 capital to risk-weighted assets, and of Tier 1 capital to average assets. To be categorized as “well capitalized”, banks must maintain minimum total risk-based (10%), Tier 1 risk-based (8%), common equity tier 1 risk-based (6.5%), and Tier 1 leverage ratios (5%). As of June 30, 2021, and December 31, 2020, EFSC and the Bank met all capital adequacy requirements to which they are subject and exceeded the amounts required to be “well capitalized”.
 

The following table summarizes EFSC’s capital ratios at the dates indicated:
(in thousands)June 30,
2021
December 31, 2020Minimum Capital Requirement to be considered “Well Capitalized” Including Capital Conservation Buffer
Total capital to risk-weighted assets14.9 %14.9 %10.5 %
Tier 1 capital to risk-weighted assets12.3 %12.1 %8.5 %
Common equity tier 1 capital to risk-weighted assets11.1 %10.9 %7.0 %
Leverage ratio (Tier 1 capital to average assets)9.4 %10.0 %4.0 %
Tangible common equity to tangible assets1
8.3 %8.4 %
Total risk-based capital$1,140,433 $1,094,601 
Tier 1 capital937,840 889,527 
Common equity tier 1 capital844,188 795,873 
1 Not a required regulatory capital ratio


45


The following table summarizes the Bank’s various capital ratios at the dates indicated:
(in thousands)June 30,
2021
December 31, 2020Well Capitalized Minimum %Minimum Capital Requirement to be considered “Well Capitalized” Including Capital Conservation Buffer
Total capital to risk-weighted assets13.4 %13.7 %10.0 %10.5 %
Tier 1 capital to risk-weighted assets12.3 %12.5 %8.0 %8.5 %
Common equity tier 1 capital to risk-weighted assets12.3 %12.5 %6.5 %7.0 %
Leverage ratio (Tier 1 capital to average assets)9.3 %10.3 %5.0 %4.0 %
Total risk-based capital$1,020,956 $1,004,839 
Tier 1 capital931,614 913,169 
Common equity tier 1 capital931,561 913,116 

In March 2020, the U.S. banking agencies issued an interim final rule that provides banking organizations that implement CECL before the end of 2020 the option to delay for two years an estimate of CECL’s effect on regulatory capital followed by a three-year transition period. The Company adopted CECL on January 1, 2020. For additional information regarding the adoption of CECL, see “Item 1. Note 1 – Summary of Significant Accounting Policies.” The Company has elected the transition provisions provided by the U.S. banking agencies’ rule. Accordingly, the regulatory capital effects resulting from adoption of the CECL methodology will not be fully reflected in the Company’s regulatory capital until January 1, 2025. Based on the Company’s regulatory capital position as of June 30, 2021, the estimated impact of adopting CECL would reduce the Common Equity Tier 1 Capital ratio by approximately 43 basis points. The actual impact of adopting CECL on the regulatory capital ratios may change as the final impact is not determined until the end of the second year of the transition period.

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

Use of Non-GAAP Financial Measures:

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

The Company considers its tangible common equity, PPNR, PPNR ROAA, financial metrics adjusted for PPP impact, core efficiency ratio, and the tangible common equity ratio, collectively “core performance measures,” presented in this earnings release and the included tables as important measures of financial performance, even though they are non-GAAP measures, as they provide supplemental information by which to evaluate the impact of certain non-comparable items, and the Company’s operating performance on an ongoing basis. Core performance measures exclude certain other income and expense items, such as merger-related expenses, facilities charges, and the gain or loss on sale of investment securities, the Company believes to be not indicative of or useful to measure the Company’s operating performance on an ongoing basis. The attached tables contain a reconciliation of these core performance measures to the GAAP measures. The Company believes that the tangible common equity ratio provides useful information to investors about the Company’s capital strength even though it is considered to be a non-GAAP financial measure and is not part of the regulatory capital requirements to which the Company is subject.
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The Company believes these non-GAAP measures and ratios, when taken together with the corresponding GAAP measures and ratios, provide meaningful supplemental information regarding the Company’s performance and capital strength. The Company’s management uses, and believes that investors benefit from referring to, these non-GAAP measures and ratios in assessing the Company’s operating results and related trends and when forecasting future periods. However, these non-GAAP measures and ratios should be considered in addition to, and not as a substitute for or preferable to, ratios prepared in accordance with GAAP. In the attached tables, the Company has provided a reconciliation of, where applicable, the most comparable GAAP financial measures and ratios to the non-GAAP financial measures and ratios, or a reconciliation of the non-GAAP calculation of the financial measures for the periods indicated.

Core Performance Measures
Three months endedSix months ended
(in thousands)June 30,
2021
March 31,
2021
June 30,
2020
June 30,
2021
June 30,
2020
Net interest income$81,738 $79,123 $65,833 $160,861 $129,201 
Less: Incremental accretion income— — 719 — 1,992 
Core net interest income81,738 79,123 65,114 160,861 127,209 
Total noninterest income16,204 11,290 9,960 27,494 23,368 
Less: Gain on sale of investment securities— — — — 
Less: Gain on sale of other real estate 549 — — 549 — 
Less: Other non-core income— 265 — 265 
Core noninterest income15,655 11,290 9,695 26,945 23,099 
Total core revenue97,393 90,413 74,809 187,806 150,308 
Total noninterest expense52,456 52,884 37,912 105,340 76,585 
Less: Other expenses related to non-core acquired loans— — 12 — 24 
Less: Merger related expenses1,949 3,142 — 5,091 — 
Core noninterest expense50,507 49,742 37,900 100,249 76,561 
Core efficiency ratio51.86 %55.02 %50.66 %53.38 %50.94 %


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Tangible Common Equity Ratio
(in thousands)June 30, 2021December 31, 2020
Total shareholders' equity$1,118,301 $1,078,975 
Less: Goodwill260,567 260,567 
Less: Intangible assets20,358 23,084 
Tangible common equity$837,376 $795,324 
Total assets$10,346,993 $9,751,571 
Less: Goodwill260,567 260,567 
Less: Intangible assets, net20,358 23,084 
Tangible assets$10,066,068 $9,467,920 
Tangible common equity to tangible assets8.32 %8.40 %
Average Shareholders’ Equity and Average Tangible Common Equity
For the three months ended
(in thousands)June 30,
2021
March 31,
2021
June 30,
2020
Average shareholder’s equity$1,116,969 $1,096,481 $868,163 
Less: Average goodwill260,567 260,567 210,344 
Less: Average intangible assets, net20,997 22,346 23,873 
Average tangible common equity$835,405 $813,568 $633,946 

Critical Accounting Policies

The impact and any associated risks related to the Company’s critical accounting policies on business operations are described throughout “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” where such policies affect our reported and expected financial results. For a detailed description on the application of these and other accounting policies, see the Company’s Annual Report on Form 10-K for the year ended December 31, 2020.

ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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

Interest Rate Risk 

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

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

The following table summarizes the expected impact of interest rate shocks on net interest income:
Rate Shock1
Annual % change
in net interest income
+ 300 bp15.2%
+ 200 bp8.9%
+ 100 bp3.0%
1 Due to the current levels of interest rates, the downward shock scenarios are not shown.

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

The Company occasionally uses interest rate derivative financial instruments as an asset/liability management tool to hedge mismatches in interest rate exposure indicated by the net interest income simulation described above. They are used to modify the Company’s exposures to interest rate fluctuations and provide more stable spreads between loan yields and the rate on their funding sources. At June 30, 2021, the Company had $62.0 million in derivative contracts used to manage interest rate risk. Derivative financial instruments are also discussed in “Item 1. Note 6 – Derivative Financial Instruments.”

At June 30, 2021, the Company had $4.1 billion in variable rate loans including $2.6 billion based on LIBOR and $1.4 billion based on Prime. Approximately 88% of the LIBOR based loans are indexed to one-month LIBOR. Of the total variable rate loans, $1.7 billion, or 24%, had a rate floor of which approximately $1.7 billion, or 93%, were currently priced at the floor.

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ITEM 4: CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

Under the supervision and with the participation of the Company’s Chief Executive Officer (CEO) and the Chief Financial Officer (CFO), management has evaluated the effectiveness of the design and operation of the Company’s disclosure controls and procedures pursuant to Exchange Act Rule 13a-15, as of June 30, 2021. Disclosure controls and procedures include without limitation, controls and procedures designed to ensure that information required to be disclosed by an issuer in the reports that it files or submits under the Securities Exchange Act of 1934, as amended, is accumulated and communicated to the issuer’s management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.

Based on that evaluation, the CEO and CFO concluded the Company’s disclosure controls and procedures were effective as of June 30, 2021 to provide reasonable assurance of the achievement of the objectives described above.

Changes to Internal Controls

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

PART II - OTHER INFORMATION


ITEM 1: LEGAL PROCEEDINGS

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


ITEM 1A: RISK FACTORS

For information regarding risk factors affecting the Company, please see the cautionary language regarding forward-looking statements in the introduction to Item 2 of Part I of this Report on Form 10-Q, and Part I, Item 1A of our Report on Form 10-K for the fiscal year ended December 31, 2020. There have been no material changes to the risk factors described in such Annual Report on Form 10-K.


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

PeriodTotal number of shares purchased (a)Weighted-average price paid per shareTotal number of shares purchased as part of publicly announced plans or programsMaximum number of shares that may yet be purchased under the plans or programs
April 1, 2021 through April 30, 2021— — — 2,000,000 
May 1, 2021 through May 31, 202112,348 48.01 12,348 1,987,652 
June 1, 2021 through June 30, 2021239,289 46.97 239,289 1,748,363 
Total251,637 $47.02 251,637 1,748,363 
(a) In April 2021, the Company’s board of directors authorized the repurchase of up to two million shares of the Company’s common stock. The repurchases may be made from time to time in the open market or through privately negotiated transactions.

ITEM 3: DEFAULTS UPON SENIOR SECURITIES

None.

ITEM 4: MINE SAFETY DISCLOSURES

Not applicable.

ITEM 5: OTHER INFORMATION

Effective as of July 28, 2021, EFSC further amended its certificate of incorporation to increase the number of authorized shares of common stock from 45,000,000 shares to 75,000,000 (the “Amendment”). As previously disclosed on Form 8-K filed with the SEC on July 20, 2021, the stockholders of EFSC approved the Amendment at a special meeting of stockholders held on July 20, 2021.

The forgoing summary of the Amendment does not purport to be complete and is qualified in its entirety by reference to the full text of the Amendment, a copy of which is filed as Exhibit 3.9 hereto.

ITEM 6: EXHIBITS

Exhibit No.    Description

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

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

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

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

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

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

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

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

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

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

*3.9    Amendment to Certificate of Incorporation of Registrant, dated July 28, 2021.

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

4.1    Long-term borrowing instruments are omitted pursuant to Item 601(b)(4)(iii) of Regulation S-K. The Company undertakes to furnish copies of such instruments to the Securities and Exchange Commission upon request.
    
*31.1    Chief Executive Officer’s Certification required by Rule 13(a)-14(a).

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

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

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

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

101.SCH    Inline XBRL Taxonomy Extension Schema Document.

101.CAL    Inline XBRL Taxonomy Extension Calculation Linkbase Document.

101.LAB    Inline XBRL Taxonomy Extension Label Linkbase Document.

101.PRE    Inline XBRL Taxonomy Extension Presentation Linkbase Document.

101.DEF    Inline XBRL Taxonomy Extension Definitions Linkbase Document.

104    The cover page of Enterprise Financial Services Corp’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2021, formatted in Inline XBRL (contained in Exhibit 101).

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

Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Clayton, State of Missouri, on the day of July 30, 2021.
 
ENTERPRISE FINANCIAL SERVICES CORP
  
 By:/s/ James B. Lally 
James B. Lally
Chief Executive Officer
  
 By: /s/ Keene S. Turner 
Keene S. Turner
Chief Financial Officer


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