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~~September 30, ~~2020~~.

2020.



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

For the transition period from ______ to ______

Commission file number 001-15373

ENTERPRISE FINANCIAL SERVICES CORP

Incorporated in the State of Delaware

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

Address: 150 North Meramec

Clayton,, MO63105

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

___________________

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

Title of each class

Trading Symbol(s)

Name of each exchange on which registered

Common Stock, par value $0.01 per share

EFSC

Nasdaq Global Select Market

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

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

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

Large accelerated filer

☒

Accelerated filer

☐

Non-accelerated filer

☐

Smaller reporting company

☐

Emerging growth company

☐

If an emerging growth company, indicate by check mark if the registrant has elected to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to section 13(a) of the Exchange Act. ☐

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

Yes ☐ No ☒

As of ~~July 22,~~October 21, 2020, the Registrant had ~~26,206,044~~26,209,739 shares of outstanding common stock, $0.01 par value per share.

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

ENTERPRISE FINANCIAL SERVICES CORP AND SUBSIDIARIES

TABLE OF CONTENTS


			Page
PART I - FINANCIAL INFORMATION

Item 1. Financial Statements

Condensed Consolidated Balance Sheets (Unaudited)					1

Condensed Consolidated Statements of Operations (Unaudited)					2

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

~~Item 1. Financial Statements~~

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

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

Condensed Consolidated Statements of Comprehensive Income (Unaudited)		3

Condensed Consolidated Statements of Shareholders’ Equity (Unaudited)					4

Condensed Consolidated Statements of Cash Flows (Unaudited)					5

Notes to Condensed Consolidated Financial Statements (Unaudited)					6

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations					2628

Item 3. Quantitative and Qualitative Disclosures About Market Risk					4952

Item 4. Controls and Procedures					5053

PART II - OTHER INFORMATION

Item 1. Legal Proceedings					5053

Item 1A. Risk Factors					5054

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds					5356

Item 3. Defaults Upon Senior Securities					5356

Item 4. Mine Safety Disclosures					5356

Item 5. Other Information					5356

Item 6. Exhibits					5457

Signatures					5659

Glossary of Acronyms, Abbreviations and Entities

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

ACL

Allowance for Credit Losses

~~FDIC~~FHLB

Federal ~~Deposit Insurance Corporation~~Home Loan Bank

ACLL

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

~~FHLB~~GAAP

~~Federal Home Loan Bank~~

~~ASC~~

~~Accounting Standards Codification~~

~~GAAP~~

Generally Accepted Accounting Principles (United States)

~~ASU~~ASC

Accounting Standards ~~Update~~Codification

LIBOR

London Interbank Offered Rate

~~Bank~~ASU

~~Enterprise Bank & Trust~~Accounting Standards Update

MD&A

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

Bank

Enterprise Bank & Trust

PCD

Purchased Credit Deteriorated

C&I

Commercial and Industrial

~~PCD~~PCI

Purchased Credit ~~Deteriorated~~Impaired

CECL

Current Expected Credit Loss

~~PCI~~PPP

~~Purchased Credit Impaired~~Paycheck Protection Program

Company

Enterprise Financial Services Corp and Subsidiaries

~~PPP~~SBA

~~Paycheck Protection Program~~Small Business Administration

CRE

Commercial Real Estate

~~SBA~~SCBH

~~Small Business Administration~~Seacoast Commerce Banc Holdings

DCF

Discounted Cash Flow

~~SEC~~Seacoast

Seacoast Commerce Bank

EFSC

Enterprise Financial Services Corp

SEC

Securities and Exchange Commission

~~EFSC~~Enterprise

~~Enterprise Financial Services Corp~~

~~SOFR~~

~~Secured Overnight Financing Rate~~

~~Enterprise~~

Enterprise Financial Services Corp and Subsidiaries

~~Trinity~~SOFR

~~Trinity Capital Corporation~~Secured Overnight Financing Rate

FASB

Financial Accounting Standards Board

Trinity

Trinity Capital Corporation

FDIC

Federal Deposit Insurance Corporation

PART 1 - ITEM 1 - FINANCIAL STATEMENTS

ENTERPRISE FINANCIAL SERVICES CORP AND SUBSIDIARIES

Condensed Consolidated Balance Sheets (Unaudited)


(in thousands, except share and per share data)	June 30, 2020			December 31, 2019			(in thousands, except share and per share data)	September 30, 2020		December 31, 2019
Assets							Assets
Cash and due from banks	$	100,804		$	74,769		Cash and due from banks	$	98,816	$	74,769
Federal funds sold	2,381			3,060			Federal funds sold	1,204		3,060
Interest-earning deposits (including $47,085 and $15,285 pledged as collateral, respectively)	245,542			89,427
Interest-earning deposits (including $45,525 and $15,285 pledged as collateral, respectively)							Interest-earning deposits (including $45,525 and $15,285 pledged as collateral, respectively)	292,195		89,427
Total cash and cash equivalents	348,727			167,256			Total cash and cash equivalents	392,215		167,256
Interest-earning deposits greater than 90 days	6,907			3,730			Interest-earning deposits greater than 90 days	8,374		3,730
Securities available-for-sale	998,104			1,135,317			Securities available-for-sale	1,005,426		1,135,317
Securities held-to-maturity, net	345,791			181,166			Securities held-to-maturity, net	327,049		181,166
Loans held-for-sale	16,029			5,570			Loans held-for-sale	14,032		5,570
Loans	6,140,051			5,314,337			Loans	6,126,307		5,314,337
Less: Allowance for credit losses on loans	110,270			43,288			Less: Allowance for credit losses on loans	123,270		43,288
Total loans, net	6,029,781			5,271,049			Total loans, net	6,003,037		5,271,049

Other investments	43,106			38,044			Other investments	43,456		38,044
Fixed assets, net	58,231			60,013			Fixed assets, net	56,807		60,013

Goodwill	210,344			210,344			Goodwill	210,344		210,344
Intangible assets, net	23,196			26,076			Intangible assets, net	21,820		26,076

Other assets	277,285			235,226			Other assets	285,416		235,226
Total assets	$	8,357,501		$	7,333,791		Total assets	$	8,367,976	$	7,333,791

Liabilities and Shareholders' Equity							Liabilities and Shareholders' Equity
Noninterest-bearing deposit accounts	$	1,965,868		$	1,327,348		Noninterest-bearing deposit accounts	$	1,929,540	$	1,327,348
Interest-bearing transaction accounts	1,508,535			1,367,444			Interest-bearing transaction accounts	1,499,756		1,367,444
Money market accounts	1,962,916			1,713,615			Money market accounts	2,019,222		1,713,615
Savings accounts	603,095			536,169			Savings accounts	615,663		536,169
Certificates of deposit:							Certificates of deposit:
Brokered	85,414			215,758			Brokered	65,209		215,758
Other	573,752			610,689			Other	546,836		610,689
Total deposits	6,699,580			5,771,023			Total deposits	6,676,226		5,771,023
Subordinated debentures and notes	203,384			141,258			Subordinated debentures and notes	203,510		141,258
FHLB advances	250,000			222,406			FHLB advances	250,000		222,406
Other borrowings	196,532			230,886			Other borrowings	209,038		230,886
Notes payable	31,429			34,286			Notes payable	30,000		34,286

Other liabilities	108,613			66,747			Other liabilities	116,935		66,747
Total liabilities	$	7,489,538		$	6,466,606		Total liabilities	$	7,485,709	$	6,466,606

Commitments and contingent liabilities (Note 5)
Commitments and contingent liabilities (Note 6)							Commitments and contingent liabilities (Note 6)

Shareholders' equity:							Shareholders' equity:
Preferred stock, $0.01 par value; 5,000,000 shares authorized; 0 shares issued and outstanding	—			—			Preferred stock, $0.01 par value; 5,000,000 shares authorized; 0 shares issued and outstanding	0		0
Common stock, $0.01 par value; 45,000,000 shares authorized; 28,176,087 and 28,067,087 shares issued, respectively	281			281
Common stock, $0.01 par value; 45,000,000 shares authorized; 28,189,670 and 28,067,087 shares issued, respectively							Common stock, $0.01 par value; 45,000,000 shares authorized; 28,189,670 and 28,067,087 shares issued, respectively	282		281
Treasury stock, at cost; 1,980,093 and 1,523,842 shares, respectively	(73,528		)	(58,181		)	Treasury stock, at cost; 1,980,093 and 1,523,842 shares, respectively	(73,528)		(58,181)
Additional paid in capital	527,734			526,599			Additional paid in capital	529,105		526,599
Retained earnings	380,667			380,737			Retained earnings	393,900		380,737
Accumulated other comprehensive income	32,809			17,749			Accumulated other comprehensive income	32,508		17,749
Total shareholders' equity	867,963			867,185			Total shareholders' equity	882,267		867,185
Total liabilities and shareholders' equity	$	8,357,501		$	7,333,791		Total liabilities and shareholders' equity	$	8,367,976	$	7,333,791

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

ENTERPRISE FINANCIAL SERVICES CORP AND SUBSIDIARIES

Condensed Consolidated Statements of Operations (Unaudited)


	Three months ended June 30,					Six months ended June 30,					Three months ended September 30,						Nine months ended September 30,
(in thousands, except per share data)	2020			2019		2020		2019		(in thousands, except per share data)	2020		2019		2020		2019
Interest income:										Interest income:
Interest and fees on loans	$	64,478		$	69,628	$	131,647	$	130,653	Interest and fees on loans	$	62,648	$	71,214	$	194,295	$	201,867
Interest on debt securities:										Interest on debt securities:
Taxable	6,587			7,757		14,144		13,232		Taxable	5,554		8,004		19,698		21,236
Nontaxable	1,812			861		3,301		1,308		Nontaxable	2,241		969		5,542		2,277

Interest on interest-earning deposits	87			703		387		1,150		Interest on interest-earning deposits	113		572		500		1,722
Dividends on equity securities	227			252		400		475		Dividends on equity securities	231		319		631		794
Total interest income	73,191			79,201		149,879		146,818		Total interest income	70,787		81,078		220,666		227,896
Interest expense:										Interest expense:

Deposits	4,383			13,119		14,271		24,939		Deposits	3,712		13,209		17,983		38,148
Subordinated debentures and notes	2,316			1,958		4,235		3,606		Subordinated debentures and notes	2,826		1,956		7,061		5,562
FHLB advances	455			1,696		1,350		3,094		FHLB advances	720		2,203		2,070		5,297
Notes payable and other borrowings	204			713		822		1,121		Notes payable and other borrowings	175		664		997		1,785
Total interest expense	7,358			17,486		20,678		32,760		Total interest expense	7,433		18,032		28,111		50,792
Net interest income	65,833			61,715		129,201		114,058		Net interest income	63,354		63,046		192,555		177,104
Provision for credit losses	19,591			1,722		41,855		3,198		Provision for credit losses	14,080		1,833		55,935		5,031
Net interest income after provision for credit losses	46,242			59,993		87,346		110,860		Net interest income after provision for credit losses	49,274		61,213		136,620		172,073
Noninterest income:										Noninterest income:
Service charges on deposit accounts	2,616			3,366		5,759		6,301		Service charges on deposit accounts	2,798		3,246		8,557		9,547
Wealth management revenue	2,326			2,661		4,827		4,653		Wealth management revenue	2,456		2,661		7,283		7,314
Card services revenue	2,225			2,461		4,472		4,251		Card services revenue	2,498		2,494		6,970		6,745

Tax credit income	(221		)	572		1,815		730		Tax credit income	748		1,238		2,563		1,968

Miscellaneous income	3,014			2,904		6,495		5,259		Miscellaneous income	4,129		3,925		10,624		9,184
Total noninterest income	9,960			11,964		23,368		21,194		Total noninterest income	12,629		13,564		35,997		34,758
Noninterest expense:										Noninterest expense:
Employee compensation and benefits	22,389			20,687		44,074		40,039		Employee compensation and benefits	22,040		20,845		66,114		60,884
Occupancy	3,185			3,188		6,532		5,825		Occupancy	3,408		3,179		9,940		9,004
Data processing	2,144			2,458		4,226		4,364		Data processing	2,167		2,051		6,393		6,415
Professional fees	1,287			1,037		2,149		1,783		Professional fees	755		1,064		2,904		2,847

Merger-related expenses	—			10,306		—		17,576		Merger-related expenses	1,563		393		1,563		17,969
Other	8,907			11,378		19,604		19,305		Other	9,591		10,707		29,195		30,012
Total noninterest expense	37,912			49,054		76,585		88,892		Total noninterest expense	39,524		38,239		116,109		127,131

Income before income tax expense	18,290			22,903		34,129		43,162		Income before income tax expense	22,379		36,538		56,508		79,700
Income tax expense	3,656			4,479		6,627		8,582		Income tax expense	4,428		7,469		11,055		16,051
Net income	$	14,634		$	18,424	$	27,502	$	34,580	Net income	$	17,951	$	29,069	$	45,453	$	63,649

Earnings per common share										Earnings per common share
Basic	$	0.56		$	0.69	$	1.04	$	1.36	Basic	$	0.68	$	1.09	$	1.73	$	2.46
Diluted	0.56			0.68		1.04		1.36		Diluted	0.68		1.08		1.73		2.45

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


	Three months ended September 30,						Nine months ended September 30,
(in thousands)	2020		2019		2020		2019
Net income	$	17,951	$	29,069	$	45,453	$	63,649
Other comprehensive income (loss), after-tax:
Change in unrealized gain on available-for-sale debt securities	94		7,018		21,642		31,362
Reclassification adjustment for realized gain on sale of available-for-sale debt securities	(314)		(254)		(317)		(34)
Reclassification of (gain) loss on held-to-maturity securities	(705)		10		(1,190)		15
Change in unrealized gain (loss) on cash flow hedges arising during the period	110		(669)		(6,247)		(2,886)
Reclassification of loss on cash flow hedges	514		32		871		36
Total other comprehensive income (loss), after-tax	(301)		6,137		14,759		28,493
Comprehensive income	$	17,650	$	35,206	$	60,212	$	92,142

Three months ended June 30, Six months ended June 30,
(in thousands) 2020 2019 2020 2019
Net income $ 14,634
$ 18,424
$ 27,502
$ 34,580
Other comprehensive income (loss), after-tax:
Change in unrealized gain on available-for-sale debt securities 10,984
12,842
21,548
24,344
Reclassification adjustment for realized (gain) loss on sale of available-for-sale debt securities —
—
(3 ) 220
Reclassification of (gain) loss on held-to-maturity securities (329 ) 3
(485 ) 5
Change in unrealized loss on cash flow hedges arising during the period (1,177 ) (1,265 ) (6,357 ) (2,217 )
Reclassification of loss on cash flow hedges 234
4
357
4
Total other comprehensive income, after-tax 9,712
11,584
15,060
22,356
Comprehensive income $ 24,346
$ 30,008
$ 42,562
$ 56,936

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

comprehensive income (loss)

shareholders’ equity

comprehensive income (loss)

shareholders’ equity

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

ENTERPRISE FINANCIAL SERVICES CORP AND SUBSIDIARIES

Condensed Consolidated Statements of Cash Flows (Unaudited)


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

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

Sale of state tax credits	(290)		(469)

Share-based compensation	3,069		3,016

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


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







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


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

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

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

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



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



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


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


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

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

Six months ended June 30,
(in thousands, except share data) 2020 2019
Cash flows from operating activities:
Net income $ 27,502
$ 34,580
Adjustments to reconcile net income to net cash provided by operating activities
Depreciation 3,048
2,743
Provision for credit losses 41,855
3,198
Deferred income taxes (4,937 ) 3,813
Net amortization of debt securities 2,756
1,189
Amortization of intangible assets 2,880
2,418
Mortgage loans originated-for-sale (94,536 ) (11,645 )
Proceeds from mortgage loans sold 84,799
10,629
Loss (gain) on:
Sale of investment securities (4 ) 292
Sale of other real estate 5
(48 )
Sale of state tax credits (211 ) (107 )
Share-based compensation 2,029
1,907
Net accretion of loan discount (4,049 ) (4,702 )
Changes in other assets and liabilities, net (2,277 ) (23,700 )
Net cash provided by operating activities 58,860
20,567
Cash flows from investing activities:
Acquisition cash purchase price, net of cash and cash equivalents acquired —
(23,377 )
Net increase in loans (815,437 ) (121,115 )
Proceeds received from:
Sale of debt securities, available-for-sale 207
263,298
Paydown or maturity of debt securities, available-for-sale 140,218
58,229
Paydown or maturity of debt securities, held-to-maturity 8,711
2,864
Redemption of other investments 25,978
31,138
Sale of state tax credits held for sale 1,924
2,252
Sale of other real estate 609
2,281
Settlement of bank-owned life insurance policies 974
—
Payments for the purchase of:
Available-for-sale debt securities (152,082 ) (363,900 )
Other investments (38,527 ) (43,589 )
State tax credits held for sale (3,730 ) (1,852 )
Fixed assets, net (1,532 ) (2,236 )
Net cash used in investing activities (832,687 ) (196,007 )
Cash flows from financing activities:
Net increase (decrease) in noninterest-bearing deposit accounts 638,520
(88,219 )
Net increase (decrease) in interest-bearing deposit accounts 290,036
(21,615 )
Proceeds from FHLB advances, net 27,700
312,500
Proceeds from notes payable —
40,000
Repayments of notes payable (2,857 ) (4,857 )
Proceeds from issuance of subordinated debentures, net 61,953
—
Net decrease in other borrowings (34,355 ) (60,490 )
Cash dividends paid on common stock (9,458 ) (7,798 )
Payments for the repurchase of common stock (15,347 ) —
Payments for the issuance of equity instruments, net (894 ) (1,233 )
Net cash provided by financing activities 955,298
168,288
Net increase (decrease) in cash and cash equivalents 181,471
(7,152 )
Cash and cash equivalents, beginning of period 167,256
196,552
Cash and cash equivalents, end of period $ 348,727
$ 189,400
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $ 20,574
$ 32,036
Income taxes 30
11,915
Noncash transactions:
Transfer to other real estate owned in settlement of loans $ —
$ 7,783
Sales of other real estate financed 48
—
Right-of-use assets obtained in exchange for lease obligations 200
—
Common shares issued in connection with acquisition —
171,885
Transfer of securities from available for sale to held to maturity 163,592
—

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

ENTERPRISE FINANCIAL SERVICES CORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Unaudited)

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

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

Business and Consolidation

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

Operating results for the three and ~~six~~nine months ended ~~June~~September 30, 2020 are not necessarily indicative of the results that may be expected for any other interim period or for the year ending December 31, 2020. For further information, refer to the consolidated financial statements and footnotes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019, 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, 2019.

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

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

Recently Adopted Accounting Pronouncements

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

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

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

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

The following table illustrates the impact of adoption:

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

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

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



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

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

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

Accounting Standards Issued but not yet Adopted

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 ~~$19.7~~$24.6 million at ~~June~~September 30, 2020 and was reported in Other Assets on the consolidated balance sheets.

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

Allowance for Credit Losses on Loans

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

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

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

The Company utilizes a DCF method to measure the ACL on loans collectively evaluated that are sub-segmented by credit risk levels. The DCF method incorporates assumptions for probability of default, loss given default, prepayments and curtailments over the contractual term of the loans. In determining the probability of default, the Company utilized a regression analysis to determine certain economic factors that are relevant loss drivers in the portfolio segments based on historical or peer evaluations. National unemployment is a loss driver used in nearly all portfolios, except Consumer. The annual percentage change in gross domestic product is also used in C&I, Construction, Agricultural and Consumer portfolios. The annual percentage change in a commercial real estate index, national house price index and the consumer price index are used in the CRE, Residential Real Estate and Consumer portfolios, respectively. The contractual term excludes expected extensions, renewals, and modifications unless either of the following applies: management has a reasonable expectation at the reporting date that a troubled debt restructuring will be executed with an individual borrower or the extension or renewal options are included in the original or modified contract at the reporting date and are not unconditionally cancellable by the Company.

The Company uses a one-year reasonable and supportable forecast that considers baseline, upside and downside economic scenarios. For periods beyond the forecast period, the Company reverts to historical loss rates on a straight-line basis over a ~~six-month~~one-year period.

Loans that do not share risk characteristics are evaluated on an individual basis. Loans evaluated individually are not also included in the collective evaluation. When management determines that foreclosure is probable, expected credit losses are based on the fair value of the collateral at the reporting date, adjusted for selling costs as appropriate.

NOTE 2 - ACQUISITIONS

Acquisition of Seacoast Commerce Banc Holdings.

On August 20, 2020, the Company and the Bank entered into a definitive agreement with Seacoast Commerce Banc Holdings (“SCBH”) and its wholly-owned bank subsidiary, Seacoast Commerce Bank (“Seacoast”), pursuant to which the Company will acquire SCBH and Seacoast. Based on the number of shares of Seacoast common stock and restricted stock awards outstanding as of the record date of September 24, 2020 and the closing price of Enterprise's common stock on Nasdaq of $27.27 on September 30, 2020, the implied value of the aggregate stock consideration would be approximately $135.3 million.

Pursuant to the terms of the definitive agreement, upon consummation of the proposed transaction, SCBH shareholders will receive 0.5061 shares of the Company’s common stock for each share of SCBH common stock they hold. Headquartered in San Diego, California, Seacoast has five full-service banking branches in California and Nevada, and loan and deposit production offices throughout Arizona, California, Colorado, Illinois, Indiana, Massachusetts, Michigan, Nevada, Ohio, Oregon, Texas, Utah and Washington. The proposed transaction has been approved by the FDIC and the Federal Reserve Bank of St. Louis. The closing of the proposed transaction, which is anticipated to occur during the fourth quarter of 2020, remains subject to the approval of Seacoast’s shareholders and the Missouri Division of Finance, as well as the satisfaction or waiver, as applicable, of all closing conditions.

NOTE 23 - EARNINGS PER SHARE

Basic earnings per common share data is calculated by dividing net income by the weighted average number of common shares outstanding during the period. Common shares outstanding include common stock and restricted stock awards where recipients have satisfied the vesting terms. Diluted earnings per common share gives effect to all dilutive potential common shares outstanding during the period using the treasury stock method.

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

Three months ended June 30, Six months ended June 30,
(in thousands, except per share data) 2020 2019 2020 2019
Net income as reported $ 14,634
$ 18,424
$ 27,502
$ 34,580

Weighted average common shares outstanding 26,180
26,887
26,325
25,415
Additional dilutive common stock equivalents 15
53
29
73
Weighted average diluted common shares outstanding 26,195
26,940
26,354
25,488

Basic earnings per common share: $ 0.56
$ 0.69
$ 1.04
$ 1.36
Diluted earnings per common share: 0.56
0.68
$ 1.04
$ 1.36


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








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

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

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

For the three and ~~six~~nine months ended ~~June~~September 30, 2020 common stock equivalents of approximately ~~157,000~~132,000 and ~~147,000,~~139,000, respectively, were excluded from the earnings per share calculations because their effect would have been anti-dilutive. Comparatively, there were ~~130,000~~21,000 and ~~99,000~~26,000 common stock equivalents excluded in the prior year periods, respectively.

NOTE 34 - INVESTMENTS

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


	December 31, 2019
(in thousands)	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
Available-for-sale securities:
Obligations of U.S. Government-sponsored enterprises	$	9,954	$	92	$	0	$	10,046
Obligations of states and political subdivisions	207,269		6,118		(363)		213,024
Agency mortgage-backed securities	888,129		15,083		(1,191)		902,021
U.S. Treasury Bills	9,971		255		0		10,226
Total securities available for sale	$	1,115,323	$	21,548	$	(1,554)	$	1,135,317
Held-to-maturity securities:

Obligations of states and political subdivisions	$	11,704	$	170	$	0	$	11,874
Agency mortgage-backed securities	46,346		675		0		47,021
Corporate debt securities	123,116		128		(200)		123,044
Total securities held to maturity	$	181,166	$	973	$	(200)	$	181,939

December 31, 2019
(in thousands) Amortized Cost Gross
Unrealized Gains Gross
Unrealized Losses Fair Value
Available-for-sale securities:
    Obligations of U.S. Government-sponsored enterprises $ 9,954
$ 92
$ —
$ 10,046
    Obligations of states and political subdivisions 207,269
6,118
(363 ) 213,024
    Agency mortgage-backed securities 888,129
15,083
(1,191 ) 902,021
U.S. Treasury Bills 9,971
255
—
10,226
          Total securities available for sale $ 1,115,323
$ 21,548
$ (1,554 ) $ 1,135,317
Held-to-maturity securities:
   Obligations of states and political subdivisions $ 11,704
$ 170
$ —
$ 11,874
   Agency mortgage-backed securities 46,346
675
—
47,021
Corporate debt securities 123,116
128
(200 ) 123,044
          Total securities held to maturity $ 181,166
$ 973
$ (200 )
$ 181,939

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

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

At ~~June~~September 30, 2020 and December 31, 2019, there were no holdings of securities of any one issuer in an amount greater than 10% of shareholders’ equity, other than U.S. Government agencies and sponsored enterprises. The agency mortgage-backed securities are all issued by U.S. Government agencies and sponsored enterprises. Securities having a fair value of ~~$449.9~~$449.5 million and $484.8 million at ~~June~~September 30, 2020 and December 31, 2019, respectively, were pledged as collateral to secure deposits of public institutions and for other purposes as required by law or contract provisions.

The amortized cost and estimated fair value of debt securities at ~~June~~September 30, 2020, by contractual maturity, are shown below. Expected maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. The weighted average life of the mortgage-backed securities is approximately 3 years.

Available for sale Held to maturity
(in thousands) Amortized Cost Estimated Fair Value Amortized Cost Estimated Fair Value
Due in one year or less $ 2,313
$ 2,345
$ —
$ —
Due after one year through five years 25,981
27,058
10,207
10,597
Due after five years through ten years 9,455
9,915
126,285
133,206
Due after ten years 230,153
237,795
82,591
82,542
Agency mortgage-backed securities 693,082
720,991
127,353
129,794
$ 960,984
$ 998,104

$ 346,436

$ 356,139

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

The unrealized losses at both ~~June~~September 30, 2020 and December 31, 2019 were primarily attributable to changes in market interest rates ~~since~~after the securities were purchased. Management systematically evaluates investment securities for other-than-temporary declines in fair value on a quarterly basis. This analysis requires management to consider various factors, which include among other considerations (1) the present value of the cash flows expected to be collected compared to the amortized cost of the security, (2) duration and magnitude of the decline in value, (3) the financial condition of the issuer or issuers, (4) structure of the security, and (5) the intent to sell the security or whether it is more likely than not the Company would be required to sell the security before its anticipated recovery in market value. At ~~June~~September 30, 2020, management performed its quarterly analysis of all securities with an unrealized loss and concluded

no individual securities were other-than-temporarily impaired. Accrued interest receivable on available-for-sale debt securities totaled ~~$3.6~~$4.0 million at ~~June~~September 30, 2020 and is excluded from the estimate of credit losses.

Accrued interest receivable on held-to-maturity debt securities totaled ~~$2.3~~$2.4 million at ~~June~~September 30, 2020 and is excluded from the estimate of expected credit losses. The estimate of expected credit losses considers historical credit loss information adjusted for current conditions and reasonable and supportable forecasts. At ~~June~~September 30, 2020, the ACL on held-to-maturity securities was $0.6 million.

~~Below is~~The following table presents a summary of loans by ~~category at June 30, 2020 and December 31, 2019:~~category:


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

PPP loans totaled ~~$830.2~~$838.6 million at ~~June~~September 30, 2020, or ~~$807.8~~$819.1 million net of unearned fees of ~~$22.4 million.~~$19.5 million. The loan balance at ~~June~~September 30, 2020 also includes a discount on acquired loans of ~~$22.2~~$19.8 million. At ~~June~~September 30, 2020 loans of $2.4 billion were pledged to FHLB and the Federal Reserve Bank.

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


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











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

(in thousands) Commercial and industrial CRE - investor owned
CRE -
owner occupied
Construction and land development Residential real estate Other Total
Allowance for credit losses on loans:
Balance at December 31, 2019 $ 27,455
$ 5,935
$ 4,873
$ 2,611
$ 1,280
$ 1,134
$ 43,288
CECL adoption 6,494
10,726
2,598
5,183
3,470
(84 ) 28,387
PCD loans immediately charged off —
(5 ) (57 ) (217 ) (1,401 ) —
(1,680 )
Balance at January 1, 2020 $ 33,949
$ 16,656
$ 7,414
$ 7,577
$ 3,349
$ 1,050
$ 69,995
Provision for credit losses 18,759
5,823
3,594
8,347
2,755
808
40,086
Charge-offs (3,366 ) (226 ) —
(31 ) (154 ) (191 ) (3,968 )
Recoveries 797
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

Reserves on enterprise value lending and agricultural lending, which are included in the categories above, represented ~~$15.8~~$20.1 million and ~~$2.4~~$1.8 million, ~~respectively.~~respectively, as of September 30, 2020.

On January 1, 2020, the Company adopted the CECL methodology which added $28.4 million to the ACLL. Upon adoption, $1.7 million of nonaccrual PCD loans ~~that were~~with individual outstanding balances of less than $100,000 were immediately charged-off. Under the CECL method, the Company recorded ~~a $18.4~~$14.0 million and ~~$40.1~~$54.1 million in provision for credit losses on loans in the three and ~~six~~nine months ended ~~June~~September 30, 2020, respectively, compared to ~~a $1.7~~$1.8 million and ~~$3.2~~$5.0 million in provision for loan losses in the prior year periods, respectively, under the incurred loss method. The increase in the provision for credit losses ~~on loans is~~in 2020 was primarily due to a change in economic forecasts from the ~~Company’s forecast~~end of ~~macroeconomic factors over the next 12 months, which significantly deteriorated in the first quarter 2020~~2019 due to the COVID-19 pandemic. The deterioration in the forecast ~~continued to worsen~~was most significant in the second quarter of 2020. The economic forecast improved in the third quarter of 2020 compared to the second quarter of 2020.

The CECL methodology incorporates various economic scenarios. The Company utilizes three forecasts in the model, a Moody’s baseline, a stronger near-term growth upside and a moderate recession downside forecast. The Company weights these scenarios at 80%, 10%, and 10%, ~~respectively.~~respectively, which added approximately $1.2 million to the ACL over the baseline model. These forecasts incorporate an accommodative monetary policy and the current and anticipated impact of government stimulus. ~~Accordingly,~~The Company has also recognized the ~~CECL model has not been adjusted for negative qualitative factors, such as~~risk posed by loans that have received multiple deferrals of principal and interest payments, including the ~~potential loss mitigation of loan deferrals and the PPP.~~hospitality sector, by allocating additional reserves to those segments. Some of the key risks to the forecasts that could result in future provision for credit losses are additional shutdowns and self-quarantines if ~~a second~~another significant wave of COVID hits, small-business bankruptcies occur at higher levels, unemployment increases, or ~~unemployment increases. The 80/10/10 weighting adds approximately $1.0 million to~~ the ~~ACL.~~next round of fiscal stimulus is delayed or does not occur.

The following tables present the recorded investment in nonperforming loans by ~~category at June 30, 2020 and December 31, 2019, is as follows:~~category:


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

June 30, 2020
(in thousands) Nonaccrual Restructured, accruing Loans over 90 days past due and still accruing interest Total nonperforming loans Nonaccrual loans with no allowance
Commercial and industrial $ 27,431
$ 3,642
$ 865
$ 31,938
$ 20,553
Real estate:
    Commercial - investor owned 2,389
—
—
2,389
1,677
    Commercial - owner occupied 2,400
—
—
2,400
1,403
    Construction and land development 207
—
—
207
207
    Residential 4,421
78
—
4,499
3,444
Other 19
—
21
40
—
       Total $ 36,867
$ 3,720

$ 886

$ 41,473
$ 27,284

December 31, 2019
(in thousands) Nonaccrual Restructured, accruing Loans over 90 days past due and still accruing interest Total nonperforming loans
Commercial and industrial $ 22,328
$ —
$ 250
$ 22,578
Real estate:
    Commercial - investor owned 2,303
—
—
2,303
    Commercial - owner occupied 213
—
—
213
    Residential 1,251
79
—
1,330
Other 1
—
—
1
       Total $ 26,096
$ 79
$ 250
$ 26,425
14


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

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

The following table presents the amortized cost basis of collateral-dependent nonperforming loans by class of loan at ~~June~~September 30, 2020:


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

Type of Collateral
(in thousands) Commercial Real Estate Residential Real Estate Blanket Lien
Commercial and industrial $ 13,124
$ —
$ 4,872
Real estate:
Commercial - investor owned 2,389
—
—
Commercial - owner occupied 1,811
—
—
Construction and land development —
207
—
Residential —
4,271
—
Total $ 17,324
$ 4,478
$ 4,872

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


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



Residential	1	217		217

Total	3	$	3,933	$	3,933

No troubled debt restructurings occurred during the three ~~and six~~ months ended ~~June~~September 30, 2019.

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



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

Commercial - owner occupied	0	0		0		1	188		188

Residential	3	372		372		2	332		332

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

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

In response to the COVID-19 pandemic, the Company has implemented short-term deferral programs allowing customers to primarily defer payments for up to 90 days. Deferrals under the CARES Act or interagency guidance are not included above as troubled debt restructurings. As of ~~June~~September 30, 2020, ~~$685.7~~$690.8 million in loans have participated in the programs, including ~~$361.4~~$355.8 million in loans deferring full principal and interest payments and ~~$324.3~~$335.0 million in

loans deferring principal only. As of September 30, 2020, $139.4 million loans remain in a deferral status. Interest of ~~$4.0~~$4.5 million has been deferred and will be collected upon final maturity. ~~The Company has moved all loans that have requested deferrals to a level~~ ~~six~~ ~~risk rating for additional monitoring.~~

The aging of the recorded investment in past due loans by class at ~~June~~September 30, 2020 is shown below.


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

June 30, 2020
(in thousands)
30-89 Days
Past Due

90 or More
Days
Past Due

Total
Past Due
Current Total
Commercial and industrial $ 6,684
$ 22,623
$ 29,307
$ 3,113,890
$ 3,143,197
Real estate:
Commercial - investor owned 116
2,095
2,211
1,307,684
1,309,895
Commercial - owner occupied 2,723
1,208
3,931
734,618
738,549
Construction and land development 58
—
58
481,163
481,221
Residential 951
1,738
2,689
324,303
326,992
Other 100
21
121
140,076
140,197
Total $ 10,632
$ 27,685

$ 38,317

$ 6,101,734

$ 6,140,051

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

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

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

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

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

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

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

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

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

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

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

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

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

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

The recorded investment by risk category of the loans by class at ~~June~~September 30, 2020, which is based upon the most recent analysis performed is as follows:

Term Loans by Origination Year
(in thousands) 2020 2019 2018 2017 2016 Prior Revolving Loans Converted to Term Loans Revolving Loans Total
Commercial and industrial
Pass (1-6) $ 1,239,062
$ 535,477
$ 318,046
$ 180,269
$ 47,210
$ 85,529
$ 14,954
$ 510,168
$ 2,930,715
Watch (7) 26,347
13,354
4,850
6,468
24,044
175
—
62,293
137,531
Classified (8-9) 3,775
15,068
8,155
3,950
5,093
3,673
295
23,222
63,231
Total Commercial and industrial $ 1,269,184
$ 563,899
$ 331,051
$ 190,687
$ 76,347
$ 89,377
$ 15,249
$ 595,683
$ 3,131,477

Commercial real estate-investor owned
Pass (1-6) $ 246,319
$ 321,849
$ 204,242
$ 126,567
$ 153,904
$ 181,761
$ 3,284
$ 35,460
$ 1,273,386
Watch (7) 5,136
4,220
1,192
369
12,681
1,275
—
—
24,873
Classified (8-9) —
966
8,286
455
249
1,680
—
—
11,636
Total Commercial real estate-investor owned $ 251,455
$ 327,035
$ 213,720
$ 127,391
$ 166,834
$ 184,716
$ 3,284
$ 35,460
$ 1,309,895

Commercial real estate-owner occupied
Pass (1-6) $ 147,313
$ 200,519
$ 92,624
$ 79,058
$ 44,990
$ 80,172
$ 2,756
$ 42,883
$ 690,315
Watch (7) 9,473
1,963
261
9,729
8,533
5,074
—
2,500
37,533
Classified (8-9) 601
1,156
4,267
458
—
4,219
—
—
10,701
Total Commercial real estate-owner occupied $ 157,387
$ 203,638
$ 97,152
$ 89,245
$ 53,523
$ 89,465
$ 2,756
$ 45,383
$ 738,549

Construction real estate
Pass (1-6) $ 75,983
$ 167,936
$ 121,909
$ 37,555
$ 28,060
$ 12,906
$ —
$ 20,631
$ 464,980
Watch (7) 2,408
722
1,254
11,047
—
546
—
—
15,977
Classified (8-9) —
227
—
—
—
37
—
—
264
Total Construction real estate $ 78,391
$ 168,885
$ 123,163
$ 48,602
$ 28,060
$ 13,489
$ —
$ 20,631
$ 481,221

Residential real estate
Pass (1-6) $ 26,448
$ 33,085
$ 22,074
$ 19,931
$ 34,427
$ 115,036
$ 591
$ 63,505
$ 315,097
Watch (7) 181
895
842
—
—
2,027
279
802
5,026
Classified (8-9) 184
1,265
758
13
213
3,445
—
50
5,928
Total residential real estate $ 26,813
$ 35,245
$ 23,674
$ 19,944
$ 34,640
$ 120,508
$ 870
$ 64,357
$ 326,051

Other
Pass (1-6) $ 8,758
$ 25,567
$ 20,615
$ 682
$ 3,705
$ 34,455
$ —
$ 43,971
$ 137,753
Watch (7) —
2
—
—
—
—
—
1
3
Classified (8-9) —
1
3
4
—
19
10
7
44
Total Other $ 8,758
$ 25,570
$ 20,618
$ 686
$ 3,705
$ 34,474
$ 10
$ 43,979
$ 137,800


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

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

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

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

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

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

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

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

The following table presents the recorded investment on loans based on payment activity:

June 30, 2020
(in thousands) Performing Non Performing Total
Commercial and industrial $ 11,682
$ 38
$ 11,720
Real estate:
Residential 941
—
941
Other 2,376
21
2,397
Total $ 14,999
$ 59
$ 15,058


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



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

The recorded investment by risk category of loans by class at December 31, 2019, was as follows:

*Excludes $90.3 million of loans accounted for as PCI

NOTE 56 - 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 ~~as of June 30, 2020, and December 31, 2019,~~ are as follows:

(in thousands) June 30, 2020 December 31, 2019
Commitments to extend credit $ 1,659,225
$ 1,469,413
Letters of credit 51,798
47,969

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~~September 30, 2020, and December 31, 2019, approximately ~~$161.3~~$170.0 million and $144.8 million, respectively, represent fixed rate loan commitments. Since certain of the commitments may expire without being drawn upon or may be revoked, the total commitment amounts do not necessarily represent future cash requirements. The Company evaluates each customer’s credit worthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Company upon extension of credit, is based on management’s credit evaluation of the borrower. Collateral held varies, but may include accounts receivable, inventory, premises and equipment, and real estate. Other liabilities includes ~~$4.9~~$5.2 million and $0.4 million for estimated losses attributable to the unadvanced commitments at ~~June~~September 30, 2020, and December 31, 2019, respectively.

Standby letters of credit are conditional commitments issued by the Company to guarantee the performance or payment of a customer to a third party. These standby letters of credit are issued to support contractual obligations of the Company’s customers. The credit risk involved in issuing letters of credit is essentially the same as the risk involved in extending loans to customers. As of ~~June~~September 30, 2020, the approximate remaining terms of standby letters of credit range from 1 month to 43 years,. 5 months.

Contingencies

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

NOTE 67 - 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. These cash flow hedges include: (1) swaps of variable three-month ~~LIBOR~~LIBOR on $62.0 million of junior subordinated debentures to a weighted-average-fixed rate of 2.62% over approximately six years, (2) a swap of the federal funds effective rate on $100.0 million of rolling

FHLB overnight

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

For derivatives designated and that qualify as cash flow hedges of interest rate risk, the gain or loss on the derivative is recorded in accumulated other comprehensive income and subsequently reclassified into interest expense in the same period(s) during which the hedged transaction affects earnings. Amounts reported in accumulated other comprehensive income related to derivatives will be reclassified to interest expense as interest payments are paid on the Company’s variable-rate debt. During the next twelve months, the Company estimates that an additional ~~$2.8~~$2.9 million will be reclassified as an increase to interest expense.

Non-designated Hedges

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

The table below presents the fair value of the Company’s derivative financial ~~instruments as well as their classification on the Balance Sheet as of June 30, 2020 and December 31, 2019.~~instruments:


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


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



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

Derivative Assets Derivative Liabilities
June 30, 2020 December 31, 2019 June 30, 2020 December 31, 2019
(in thousands) Notional Amount Balance Sheet Location Fair Value Notional Amount Balance Sheet Location Fair Value Balance Sheet Location Fair Value Balance Sheet Location Fair Value
Derivatives Designated as Hedging Instruments
Interest rate swap $ 261,962
Other Assets $ —
$ 61,962
Other Assets $ —
Other Liabilities $ 10,840
Other Liabilities $ 2,872
Total $ —
$ —
$ 10,840
$ 2,872

Derivatives not Designated as Hedging Instruments
Interest rate swap $ 1,021,528
Other Assets $ 35,728
$ 749,819
Other Assets $ 11,055
Other Liabilities $ 35,988
Other Liabilities $ 11,875
Total $ 35,728
$ 11,055
$ 35,988
$ 11,875

The table below presents a gross presentation, the effects of offsetting, and a net presentation of the Company’s financial instruments that are subject to ~~offsetting as of June 30, 2020 and December 31, 2019.~~offsetting. The gross amounts of assets or liabilities can be reconciled to the tabular disclosure of fair value. The ~~tabular disclosure of~~ fair value table above provides the location that financial assets and liabilities are presented on the Balance Sheet.


As of June 30, 2020
As of September 30, 2020													As of September 30, 2020
							Gross Amounts Not Offset in the Statement of Financial Position																	Gross Amounts Not Offset in the Statement of Financial Position
(in thousands)	Gross Amounts Recognized		Gross Amounts Offset in the Statement of Financial Position		Net Amounts of Assets presented in the Statement of Financial Position		Financial Instruments		Fair Value Collateral Posted		Net Amount		(in thousands)	Gross Amounts Recognized		Gross Amounts Offset in the Statement of Financial Position		Net Amounts of Assets presented in the Statement of Financial Position		Financial Instruments		Fair Value Collateral Posted		Net Amount
Assets:													Assets:
Interest rate swap	$	35,728	$	—	$	35,728	$	14	$	—	$	35,714	Interest rate swap	$	33,999	$	0	$	33,999	$	2	$	0	$	33,997

Liabilities:													Liabilities:
Interest rate swap	$	46,828	$	—	$	46,828	$	14	$	46,222	$	592	Interest rate swap	$	44,240	$	0	$	44,240	$	2	$	44,063	$	175
Securities sold under agreements to repurchase	196,532		—		196,532		—		196,532		—		Securities sold under agreements to repurchase	209,038		0		209,038		0		209,038		0

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

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

As of ~~June~~September 30, 2020, the fair value of derivatives in a net liability position, which includes accrued interest but excludes any adjustment for nonperformance risk, related to these agreements was ~~$46.8~~$45.2 million. Further, the Company has minimum collateral posting thresholds with certain of its derivative counterparties and has posted collateral of ~~$47.1 million.~~$45.5 million.

NOTE 78 - FAIR VALUE MEASUREMENTS

The following table summarizes financial instruments measured at fair value on a recurring basis ~~as of June 30, 2020 and December 31, 2019,~~ segregated by the level of the valuation inputs within the fair value hierarchy utilized to measure fair value:


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



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

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

June 30, 2020
(in thousands)
Quoted Prices in
Active Markets
for Identical Assets
(Level 1)

Significant
Other
Observable Inputs
(Level 2)

Significant
Unobservable
Inputs
(Level 3)

Total Fair
Value
Assets
Securities available for sale
Obligations of U.S. Government-sponsored enterprises $ —
$ 10,241
$ —
$ 10,241
Obligations of states and political subdivisions —
254,278
—
254,278
Agency mortgage-backed securities —
720,991
—
720,991
U.S. Treasury bills —
10,566
—
10,566
Corporate debt securities —
2,028
—
2,028
Total securities available for sale —
998,104

—

998,104
Derivatives —
35,728
—
35,728
Total assets $ —
$ 1,033,832

$ —

$ 1,033,832

Liabilities

Derivatives $ —
$ 46,828
$ —
$ 46,828
Total liabilities $ —
$ 46,828

$ —

$ 46,828


	December 31, 2019
(in thousands)	Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Total Fair Value
Assets
Securities available for sale
Obligations of U.S. Government-sponsored enterprises	$	0	$	10,046	$	0	$	10,046
Obligations of states and political subdivisions	0		213,024		0		213,024
Residential mortgage-backed securities	0		902,021		0		902,021
U.S. Treasury bills	0		10,226		0		10,226
Total securities available-for-sale	0		1,135,317		0		1,135,317



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

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

December 31, 2019
(in thousands)
Quoted Prices in
Active Markets
for Identical Assets
(Level 1)

Significant
Other
Observable Inputs
(Level 2)

Significant
Unobservable
Inputs
(Level 3)

Total Fair
Value
Assets
Securities available for sale
Obligations of U.S. Government-sponsored enterprises $ —
$ 10,046
$ —
$ 10,046
Obligations of states and political subdivisions —
213,024
—
213,024
Residential mortgage-backed securities —
902,021
—
902,021
U.S. Treasury bills —
10,226
—
10,226
Total securities available-for-sale —
1,135,317

—

1,135,317
Derivative financial instruments —
11,055
—
11,055
Total assets $ —
$ 1,146,372

$ —

$ 1,146,372

Liabilities

Derivatives $ —
$ 14,747
$ —
$ 14,747
Total liabilities $ —
$ 14,747

$ —

$ 14,747

From time to time, the Company measures certain assets at fair value on a nonrecurring basis. These include assets measured at the lower of cost or fair value that were recognized at fair value below cost at the end of the period.



	(1)		(1)		(1)		(1)
(in thousands)	Total Fair Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Total losses for the three months ended September 30, 2020		Total losses for the nine months ended September 30, 2020
Impaired loans	$	1,639	$	0	$	0	$	1,639	$	1,788	$	4,756
Other real estate	3,600		0		0		3,600		248		1,000
Total	$	5,239	$	0	$	0	$	5,239	$	2,036	$	5,756

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

(1) (1) (1) (1)
(in thousands) Total Fair Value
Quoted Prices in Active
Markets for
Identical
Assets
(Level 1)

Significant
Other
Observable
Inputs
(Level 2)

Significant
Unobservable
Inputs
(Level 3)
Total losses for the three
months ended June 30, 2020 Total losses for the six months ended June 30, 2020
Impaired loans $ 3,627
$ —
$ —
$ 3,627
$ 3,219
$ 3,230
Other real estate 3,899
—
—
3,899
79
777
Total $ 7,526
$ —

$ —

$ 7,526

$ 3,298
$ 4,007

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

Following is a summary of the carrying amounts and fair values of ~~the Company’s~~certain financial ~~instruments on the consolidated balance sheets at June 30, 2020 and December 31, 2019.~~instruments:


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




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

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


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

June 30, 2020 December 31, 2019
(in thousands) Carrying Amount Estimated fair value Level Carrying Amount Estimated fair value Level
Balance sheet assets
Securities held-to-maturity, net 345,791
356,139
Level 2 181,166
181,939
Level 2
Other investments 43,106
43,106
Level 2 38,044
38,044
Level 2
Loans held for sale 16,029
16,029
Level 2 5,570
5,570
Level 2
Loans, net 6,029,781
5,876,000
Level 3 5,271,049
5,205,651
Level 3
State tax credits, held for sale 38,820
44,164
Level 3 36,802
39,046
Level 3

Balance sheet liabilities
Certificates of deposit 659,166
665,374
Level 3 826,447
825,203
Level 3
Subordinated debentures and notes 203,384
192,852
Level 2 141,258
130,985
Level 2
FHLB advances 250,000
251,978
Level 2 222,406
221,402
Level 2
Other borrowings and notes payable 227,961
227,961
Level 2 265,172
265,172
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, 2019, as filed with the SEC.

NOTE 89 - SUBORDINATED DEBENTURES AND NOTES

The following table presents the amounts and terms of each issuance of ~~the Company’s~~EFSC’s subordinated debentures ~~at June 30, 2020~~ and ~~December 31, 2019 were as follows:~~notes:

Amount

Maturity Date

Initial Call Date⁽¹⁾

Interest Rate

(in thousands)

September 30, 2020

December 31, 2019

EFSC Clayco Statutory Trust I

3,196

December 17, 2033

December 17, 2008

Floats @ 3MO LIBOR + 2.85%

EFSC Capital Trust II

5,155

June 17, 2034

June 17, 2009

Floats @ 3MO LIBOR + 2.65%

EFSC Statutory Trust III

11,341

December 15, 2034

December 15, 2009

Floats @ 3MO LIBOR + 1.97%

EFSC Clayco Statutory Trust II

4,124

September 15, 2035

September 15, 2010

Floats @ 3MO LIBOR + 1.83%

EFSC Statutory Trust IV

10,310

December 15, 2035

December 15, 2010

Floats @ 3MO LIBOR + 1.44%

EFSC Statutory Trust V

4,124

September 15, 2036

September 15, 2011

Floats @ 3MO LIBOR + 1.60%

EFSC Capital Trust VI

14,433

March 30, 2037

March 30, 2012

Floats @ 3MO LIBOR + 1.60%

EFSC Capital Trust VII

4,124

December 15, 2037

December 15, 2012

Floats @ 3MO LIBOR + 2.25%

JEFFCO Stat Trust I⁽²⁾

7,786

7,886

February 22, 2031

February 22, 2011

Fixed @ 10.20%

JEFFCO Stat Trust II⁽²⁾

4,429

4,388

March 17, 2034

March 17, 2009

Floats @ 3MO LIBOR + 2.75%

Trinity Capital Trust III⁽²⁾

5,256

5,206

September 8, 2034

September 8, 2009

Floats @ 3MO LIBOR + 2.70%

Trinity Capital Trust IV⁽²⁾

10,310

10,302

November 23, 2035

August 23, 2010

Fixed @ 6.88%

Trinity Capital Trust V⁽²⁾

7,665

7,543

December 15, 2036

September 15, 2011

Floats @ 3MO LIBOR + 1.65%

Total junior subordinated debentures

92,253

92,132

5.75% Fixed-to-floating rate subordinated notes

63,250

June 1, 2030

June 1, 2025

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

4.75% Fixed-to-floating rate subordinated notes

50,000

November 1, 2026

November 1, 2021

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

Debt issuance costs

(1,993)

(874)

Total fixed-to-floating rate subordinated notes

111,257

49,126

Total subordinated debentures and notes

203,510

141,258

⁽¹⁾Callable each quarter after initial call date.

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

Amount Maturity Date
Initial Call Date⁽¹⁾
Interest Rate
(in thousands) June 30, 2020 December 31, 2019
EFSC Clayco Statutory Trust I $ 3,196
$ 3,196

December 17, 2033

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

June 17, 2034

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

December 15, 2034

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

September 15, 2035

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

December 15, 2035

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

September 15, 2036

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

March 30, 2037

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

December 15, 2037

December 15, 2012
Floats @ 3MO LIBOR + 2.25%
JEFFCO Stat Trust I⁽²⁾
7,819
7,886

February 22, 2031

February 22, 2011
Fixed @ 10.20%
JEFFCO Stat Trust II⁽²⁾
4,415
4,388

March 17, 2034

March 17, 2009
Floats @ 3MO LIBOR + 2.75%
Trinity Capital Trust III⁽²⁾
5,239
5,206

September 8, 2034

September 8, 2009
Floats @ 3MO LIBOR + 2.70%
Trinity Capital Trust IV⁽²⁾
10,310
10,302

November 23, 2035

August 23, 2010
Fixed @ 6.88%
Trinity Capital Trust V⁽²⁾
7,625
7,543

December 15, 2036

September 15, 2011
Floats @ 3MO LIBOR + 1.65%
Total junior subordinated debentures 92,215
92,132

5.75% Fixed-to-floating rate subordinated notes 63,250
—

June 1, 2030

June 1, 2025
Fixed @ 5.75% until
June 1, 2025, then floats @ Benchmark rate (3 month term SOFR) + 5.66%
4.75% Fixed-to-floating rate subordinated notes 50,000
50,000

November 1, 2026

November 1, 2021
Fixed @ 4.75% until
November 1, 2021, then floats @ 3MO LIBOR + 3.387%
Debt issuance costs (2,081 ) (874 )
Total fixed-to-floating rate subordinated notes 111,169
49,126

Total subordinated debentures and notes $ 203,384
$ 141,258

⁽¹⁾Callable each quarter after initial call date.
⁽²⁾ Purchase accounting adjustments are reflected in the balance and also impact the effective interest rate.

On May 21, 2020, ~~the Company~~EFSC issued $63.3 million of 5.75% fixed-to-floating rate subordinated notes due in 2030 in a public offering (the “2030 Notes”). From and including the date of issuance to, but excluding, June 1, 2025, the 2030 Notes will bear interest at a rate equal to 5.75% per annum, payable semiannually in arrears on each June 1 and December 1. From and including June 1, 2025 to, but excluding, the maturity date or the date of earlier redemption, the 2030 Notes will bear interest at a floating rate per annum equal to a benchmark rate (which is expected to be three-month term SOFR (as defined in the Indenture, dated May 21, 2020, between ~~the Company~~EFSC and U.S. Bank National Association, as trustee, and subsequent First Supplemental Indenture)), plus 566.0 basis points, payable quarterly in arrears on March 1, June 1, September 1 and December 1 of each year, commencing on September 1, 2025.

Notwithstanding the foregoing, in the event that the benchmark rate is less than zero, then the benchmark rate shall be deemed to be zero.

NOTE 910 - ACCUMULATED OTHER COMPREHENSIVE INCOME

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

(in thousands) Net Unrealized Gain (Loss) on Available-for-Sale Debt Securities Unamortized Gain (Loss) on Held-to-Maturity Securities Net Unrealized Loss on Cash Flow Hedges Total
Balance, 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

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

(in thousands) Net Unrealized Gain (Loss) on Available-for-Sale Debt Securities Unamortized Gain (Loss) on Held-to-Maturity Securities Net Unrealized Loss on Cash Flow Hedges Total
Balance, March 31, 2019 $ 2,675
$ (233 ) $ (952 ) $ 1,490
Net change 12,842
3
(1,261 ) 11,584
Balance, June 30, 2019 $ 15,517
$ (230 ) $ (2,213 ) $ 13,074

Balance, December 31, 2018 $ (9,047 ) $ (235 ) $ —
$ (9,282 )
Net change 24,564
5
(2,213 ) 22,356
Balance, June 30, 2019 $ 15,517
$ (230 ) $ (2,213 ) $ 13,074


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

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

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

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

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

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


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

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

Three months ended June 30,
(in thousands) 2020 2019
Pre-tax Tax effect After-tax Pre-tax Tax effect After-tax
Change in unrealized gain on available-for-sale debt securities $ 14,587
$ 3,603
$ 10,984
$ 17,054
$ 4,212
$ 12,842
Reclassification of (gain) loss on held-to-maturity securities^(b)
(437 ) (108 ) (329 ) 4
1
3
Change in unrealized loss on cash flow hedges arising during the period (1,563 ) (386 ) (1,177 ) (1,679 ) (414 ) (1,265 )
Reclassification of loss on cash flow hedges^(b)
311
77
234
5
1
4
Total other comprehensive income $ 12,898
$ 3,186
$ 9,712
$ 15,384
$ 3,800
$ 11,584

Six months ended June 30,
2020 2019
Pre-tax Tax effect After-tax Pre-tax Tax effect After-tax
Change in unrealized gain on available-for-sale debt securities $ 28,616
$ 7,068
$ 21,548
$ 32,329
$ 7,985
$ 24,344
Reclassification adjustment for realized (gain) loss on sale of available-for-sale debt securities^(a)
(4 ) (1 ) (3 ) 292
72
220
Reclassification of (gain) loss on held-to-maturity securities^(b)
(644 ) (159 ) (485 ) 7
2
5
Change in unrealized loss on cash flow hedges arising during the period (8,442 ) (2,085 ) (6,357 ) (2,944 ) (727 ) (2,217 )
Reclassification of loss on cash flow hedges^(b)
474
117
357
5
1
4
Total other comprehensive income $ 20,000
$ 4,940
$ 15,060
$ 29,689
$ 7,333
$ 22,356

^(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

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. ~~Forward-looking~~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, ~~but are not limited to,~~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.~~ subsidiaries, as well as statements about the Company’s expectations regarding revenue and asset growth, financial performance and profitability, loan and deposit growth, yields and returns, loan diversification and credit management, products and services, shareholder value creation and the impact of the SCBH acquisition and other acquisitions.Forward-looking statements are typically

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.

The COVID-19 pandemic is adversely affecting us, our customers, counterparties, employees, and third-party service providers, and the ultimate extent of the impacts on our business, financial position, results of operations, liquidity, and prospects is uncertain. Continued deterioration in general business and economic conditions, including further increases in unemployment rates, or turbulence in domestic or global financial markets could adversely affect our revenues and the values of our assets and liabilities, reduce the availability of funding, lead to a 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 integrate acquisitions, including the SCBH acquisition, into our operations, retain the customers of these businesses and grow the acquired operations; credit risk; changes in the appraised valuation of real estate securing impaired loans; our ability to recover our investment in loans; fluctuations in the fair value of collateral underlying loans; outcomes of litigation and other contingencies; exposure to general and local economic conditions; risks associated with rapid increases or decreases in prevailing interest rates; changes in business prospects that could impact goodwill estimates and assumptions; consolidation within the banking industry; competition from banks and other financial institutions; our ability to attract and retain relationship officers and other key personnel; burdens imposed by federal and state regulation; changes in regulatory requirements; changes in accounting policies and practices or accounting standards, including ASU 2016-13 (Topic 326), “Measurement of Credit Losses on Financial Instruments,” commonly referenced as 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 2019 Annual Report on Form 10-K and Item 1A of Part II of our Quarterly Report on Form 10-Q for the ~~quarter~~quarters ended March 31, 2020 and June 30, 2020, and other reports filed with the SEC, all of which could cause the Company’s actual results to differ from those set forth in the forward-looking statements.

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

identify all risk factors. Readers should carefully review all disclosures we file from time to time with the SEC which are available on our website at www.enterprisebank.com under “Investor Relations.”

Introduction

The following discussion describes the significant changes to the financial condition of the Company that have occurred during the first ~~six~~nine months of 2020 compared to the financial condition as of December 31, 2019. In addition, this discussion summarizes the significant factors affecting the results of operations, liquidity and cash flows of the Company for the three and ~~six~~nine months ended ~~June~~September 30, 2020, compared to the same periods in 2019. This discussion should be read in conjunction with the accompanying condensed consolidated financial statements included in this report and our Annual Report on Form 10-K for the year ended December 31, 2019.

COVID-19 Pandemic

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

The Company has taken proactive and disciplined steps to promote the safety and overall wellbeing of its ~~employees,~~associates, customers and stakeholders, as well as to manage its financial performance. Steps taken include activation of the Company’s business continuity plan, formation of a communication and action task force, cost containment measures,

restrictions on business travel, conversion of in-person meetings to virtual ~~and~~or with restrictions in certain markets, a work-from-home ~~mandate.~~mandate, branch lobby access restrictions, and multiple safety and social distancing protocols. The Company has also worked with its customers to implement appropriate loan deferral strategies in certain circumstances.

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

On April 7, 2020, the U.S. banking agencies issued an Interagency Statement on Loan Modifications and Reporting for Financial Institutions Working with Customers Affected by the Coronavirus (Revised). The statement describes accounting for COVID-19-related loan modifications, including clarifying the interaction between current accounting rules and the temporary relief provided by the CARES Act. The statement also encourages institutions to work constructively with borrowers affected by COVID-19 and states the agencies will not criticize supervised institutions for prudent loan modifications. Both the CARES Act and the interagency statement provide relief from the accounting and reporting implications of troubled debt restructurings. The Company has implemented short-term deferral programs allowing customers to primarily defer payments for up to 90 days. As of ~~June~~September 30, 2020, ~~$685.7~~loans of $139.4 million were in ~~loans have participated~~a deferral status of which $86.1 million represent second round deferrals. The deferral period expires in the ~~programs.~~fourth quarter 2020 for approximately 99% of loans in a deferral status.

Critical Accounting Policies

The following accounting policies are considered most critical to the understanding of the Company’s financial condition and results of operations. These critical accounting policies require management’s most difficult, subjective and complex judgments about matters that are inherently uncertain. Because these estimates and judgments are based on current circumstances, they may change over time or prove to be inaccurate based on actual experience. If different assumptions or conditions were to prevail, and depending upon the severity of such changes, the possibility of a materially different financial condition and/or results of operations could reasonably be expected. The impact and any associated risks related to our critical accounting policies on our business operations are discussed throughout “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” where such policies affect our reported and expected financial results. For a detailed discussion on the application of these and other accounting policies, see the Company’s Annual Report on Form 10-K for the year ended December 31, 2019.

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

Allowance for Credit Losses

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

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

Goodwill and Other Intangible Assets

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

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

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

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

As of ~~June~~September 30, 2020, while the Company has not recognized an ~~assessment of goodwill and intangibles was performed due to a decrease in the Company’s market capitalization below book value. The~~ impairment, ~~evaluation of goodwill and intangible balances did not identify any impairment in the second quarter 2020, though~~ there can be no assurance that prolonged market volatility resulting from the COVID-19 pandemic will not result in impairments to goodwill or other intangibles in future periods.

Executive Summary

The Company closed its acquisition of Trinity on March 8, 2019. The results of operations of Trinity are included in our results from this date forward, which may affect certain comparisons to the ~~six~~nine months ended ~~June~~September 30, 2019.

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


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

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

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

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

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

(in thousands, except per share data) At or for the three months ended At or for the six months ended
June 30,
2020 June 30,
2019 June 30,
2020 June 30,
2019
EARNINGS
Total interest income $ 73,191
$ 79,201
$ 149,879
$ 146,818
Total interest expense 7,358
17,486
20,678
32,760
Net interest income 65,833
61,715
129,201
114,058
Provision for credit losses 19,591
1,722
41,855
3,198
Net interest income after provision for credit losses 46,242
59,993
87,346
110,860
Total noninterest income 9,960
11,964
23,368
21,194
Total noninterest expense 37,912
49,054
76,585
88,892
Income before income tax expense 18,290
22,903
34,129
43,162
Income tax expense 3,656
4,479
6,627
8,582
Net income $ 14,634
$ 18,424
$ 27,502
$ 34,580

Basic earnings per share $ 0.56
$ 0.69
$ 1.04
$ 1.36
Diluted earnings per share $ 0.56
$ 0.68
$ 1.04
$ 1.36

Return on average assets 0.72 % 1.05 % 0.71 % 1.07 %
Return on average common equity 6.78 % 9.09 % 6.38 % 9.45 %
Return on average tangible common equity¹
9.28 % 12.92 % 8.76 % 12.93 %
Net interest margin (tax equivalent) 3.53 % 3.86 % 3.65 % 3.87 %
Core net interest margin¹
3.50 % 3.80 % 3.60 % 3.80 %
Efficiency ratio 50.02 % 66.58 % 50.20 % 65.72 %
Core efficiency ratio¹
50.66 % 53.30 % 50.94 % 53.65 %
Book value per common share $ 33.13
$ 30.68

Tangible book value per common share¹
$ 24.22
$ 21.74

ASSET QUALITY
Net charge-offs $ 309
$ 970
$ 1,491
$ 2,796
Nonperforming loans 41,473
19,842

Classified assets 96,678
91,715

Nonperforming loans to total loans 0.68 % 0.39 %
Nonperforming assets to total assets 0.55 % 0.42 %
ACLL to total loans 1.80 % 0.85 %
Net charge-offs to average loans (annualized) 0.02 % 0.08 % 0.05 % 0.12 %

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

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

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


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

Quarter ended
(in thousands) June 30, 2020
PPP loans outstanding, net of unearned fees $ 807,814
Average PPP loans outstanding, net 634,632
PPP average loan size 224
PPP interest and fee income 4,083
PPP unearned fees 22,414
PPP average yield 2.59 %

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

•For the three and ~~six~~nine months ended ~~June~~September 30, 2020, the Company had net income of ~~$14.6~~$18.0 million and ~~$27.5~~$45.5 million, respectively, compared to ~~$18.4~~$29.1 million and ~~$34.6~~$63.6 million, respectively, for the prior year periods. Earnings per diluted share for the three and ~~six~~nine months ended ~~June~~September 30, 2020 was ~~$0.56~~$0.68 and ~~$1.04 per diluted share,~~$1.73, respectively, and ~~$0.68~~$1.08 and ~~$1.36 per diluted share,~~$2.45, for the same respective periods in 2019. Net income and earnings per share for the three and ~~six~~nine months ended ~~June~~September 30, 2020 were impacted from ~~$19.6~~$14.1 million and ~~$41.9~~$55.9 million, respectively, on a pretax basis ($~~14.8~~10.6 million and ~~$31.5~~$42.1 million, respectively, after tax), of provision for credit losses. The increase in the provision for credit losses for the three ~~and six~~ months ending ~~June~~September 30, 2020 was primarily due to ~~deterioration~~an increase in individual reserves and qualitative reserves established for certain higher risk areas, including hospitality and loans that have received principal and interest deferrals partially offset by improvements in economic forecasts. Deterioration in the economic ~~forecast.~~forecasts during the first two quarters of 2020 primarily contributed to the increase for the nine months ended September 30, 2020. Net income and earnings per share for the three ~~and six~~ months ended ~~June~~September 30, 2020 and 2019 were impacted ~~from $10.3~~by $1.6 million and ~~$17.6~~$0.4 million, respectively, on a pretax basis ($1.2 million and $0.3 million, respectively, after tax), of merger-related expenses. For the nine months ended September 30, 2020 and 2019 net income and earnings per share were impacted by $1.6 million and $18.0 million, respectively, on a pretax basis ($~~8.0~~1.2 million and ~~$13.7~~$14.0 million, respectively, after tax), of ~~merger-related~~merger-related expenses.

•Net interest income for the three and ~~six~~nine months ended ~~June~~September 30, 2020 increased 7%$0.3 million and ~~13%,~~$15.5 million, respectively, over the prior year periods primarily from ~~higher~~reductions in rates on interest-bearing liabilities. Higher loan volumes, due to PPP loans in the three and ~~investment volumes, both of which benefited from~~nine month comparisons, and due to the Trinity acquisition ~~and growth~~ in the loan portfolio. The three-month period also benefited from higher loan volume due to PPP loans. The benefit to net interest income from higher earning-asset volumes and a decrease in funding costs was partiallynine month comparison, were offset by ~~the decrease~~reductions in ~~LIBOR in both~~loan yields of 139 basis points and 102 basis points for the three and ~~six months ended June 30, 2020.~~nine month comparisons, respectively.

The tax-equivalent net interest margin was ~~3.53%~~3.29% and ~~3.65%~~3.52% for the three and ~~six~~nine months ended ~~June~~September 30, 2020, respectively, compared to ~~3.86%~~3.81% and ~~3.87%~~3.85% in the prior year periods, respectively. The net interest margin was impacted by the decline in short-term rates as approximately 60% of the Company’s loan portfolio (excluding PPP) has variable rates, with most indexed to one-month LIBOR that has declined significantly over the past year. ~~An increase~~Average one-month LIBOR was 0.16% and 0.64% in the ~~investment portfolio~~three and ~~in PPP loans~~nine months ended September 30, 2020, respectively, compared to 2.18% and 2.37% in the second quarter 2020 contributed to growth in net interest income; however, the lower yields on these products compared to the loan portfolio yield excluding PPP reduced the net interest margin. The Company responded to interest rate trends by reducing the cost of certain managed money market and interest-bearing transaction accounts. Net interest income and margin both benefited from an 84-basis point decrease in the rate paid on interest-bearing deposits in the second quarter 2020 compared to the second quarter 2019. The rate on interest-bearing deposits for the six months ended June 30, 2020 declined 64 basis points compared to the prior-year period.comparable prior year periods, respectively.

•Noninterest income for the three and ~~six~~nine months ended ~~June~~September 30, 2020 decreased ~~$2.0~~$0.9 million and increased ~~$2.2~~$1.2 million, respectively, compared to the prior year periods. For the ~~second~~third quarter 2020, the increase in deposit balances provided more earnings credits to business customers on analysis, resulting in lower service charge income compared to the prior year ~~quarter. Lower transaction volumes on credit and debit cards impacted card services revenue~~periods. The increase in noninterest income for the ~~three~~nine months ended ~~June~~September 30, 2020. For the six months ended June 30, noninterest income increased due to a full period of income from the Trinity acquisition in wealth management and card services revenue. Tax credit income, swap fees and a claim on bank-owned life insurance also contributed to the year-over-year increase.

~~Noninterest expense for the three and six months ended June 30,~~ 2020 ~~decreased $11.1 million and $12.3 million, respectively,~~ compared to the prior year ~~periods. The decrease is~~period was primarily due to ~~a reduction~~the acquisition of Trinity in March 2019.

•Noninterest expense increased $1.3 million, or 3%, for the third quarter 2020, compared to the same period in 2019. The increase was primarily due to merger-related expenses. For the nine months ended September 30, 2020, noninterest expense decreased $11.0 million, or 9%, from the prior year period primarily due to higher merger-related expenses in the prior year period, partially offset by an increase in employee compensation from merit increases and the acquisition of Trinity.

Balance sheet highlights:

•Loans – Total loans grew ~~$825.7~~$812.0 million from December 31, 2019, or ~~15.1%~~15.3%, to $6.1 billion as of ~~June~~September 30, 2020. Growth in the loan portfolio was primarily driven by PPP loans.


•	~~Deposits~~ – Total deposits grew $928.6 million, or 15.5%, to $6.7 billion as of June 30, 2020 primarily due to PPP related deposits, government stimulus checks and organic growth. Noninterest deposit accounts represented 29.3% of total deposits at June 30, 2020, and the loan to deposit ratio was 91.6%.

•

~~Asset quality~~ – The allowance for credit losses on loans to total loans increased to 1.80% at June 30, 2020 from 0.81% at December 31, 2019. Nonperforming assets to total assets was 0.55% at June 30, 2020 compared to 0.45% at December 31, 2019. The adoption of CECL on January 1, 2020, increased nonperforming loans by $6.8 million due to the reclassification of loans previously accounted for in performing pools of loans.


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

•

~~Shareholders’ equity~~ ~~– Total shareholders’ equity was $868.0 million and the tangible common equity to tangible assets ratio~~Deposits – Total deposits grew $905.2 million, or 15.7%, to $6.7 billion as of September 30, 2020 primarily due to PPP related deposits, government stimulus checks and organic growth. Noninterest deposit accounts represented 28.9% of total deposits at September 30, 2020, and the loan to deposit ratio was 91.8%.

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

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

•Shareholders’ equity – Total shareholders’ equity was $882.3 million and the tangible common equity to tangible assets ratio¹ was 7.99% at September 30, 2020 compared to 8.89% at December 31, 2019. Balance sheet growth from the PPP was the primary cause of the decline in the tangible common equity to tangible assets ratio. Bank regulatory capital ratios remain “well-capitalized,” with a common equity tier 1 ratio of 12.0% and a total risk-based capital ratio of 13.3%.

¹ was 7.81% at June 30, 2020 compared to 8.89% at December 31, 2019. Balance sheet growth from the PPP was the primary cause of the decline in the tangible common equity to tangible assets ratio. Bank regulatory capital ratios remain “well-capitalized,” with a common equity tier 1 ratio of 11.75% and a total risk-based capital ratio of 13.00%.

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

RESULTS OF OPERATIONS

Net Interest Income

Average Balance Sheet

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


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



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

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

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

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

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

Three months ended June 30,
2020 2019
(in thousands) Average Balance Interest
Income/Expense
Average
Yield/
Rate
Average Balance Interest
Income/Expense
Average
Yield/
Rate
Assets
Interest-earning assets:
Taxable portfolio loans (1) $ 5,982,117
$ 63,250
4.25 % $ 5,056,172
$ 68,093
5.40 %
Tax-exempt portfolio loans (2) 36,864
447
4.88
26,821
453
6.77
Non-core acquired loans - contractual 13,095
172
5.28
12,188
284
9.35
Non-core acquired loans - incremental accretion 719
22.08
910
29.95
Total loans 6,032,076
64,588
4.31
5,095,181

69,740
5.49
Taxable debt and equity investments 1,076,158
6,814
2.55
1,120,526
8,009
2.87
Non-taxable debt and equity investments (2) 285,695
2,406
3.39
126,003
1,143
3.64
Short-term investments 177,267
87
0.20
111,291
703
2.53
Total securities and short-term investments 1,539,120
9,307
2.43
1,357,820

9,855
2.91
Total interest-earning assets 7,571,196
73,895
3.93
6,453,001
79,595
4.95
Noninterest-earning assets 587,008
604,604

Total assets $ 8,158,204
$ 7,057,605

Liabilities and Shareholders' Equity
Interest-bearing liabilities:
Interest-bearing transaction accounts $ 1,487,467
$ 244
0.07 % $ 1,384,090
$ 2,134
0.62 %
Money market accounts 1,941,874
995
0.21
1,576,333
6,996
1.78
Savings 590,104
45
0.03
562,503
231
0.16
Certificates of deposit 718,529
3,099
1.73
815,138
3,758
1.85
Total interest-bearing deposits 4,737,974
4,383
0.37
4,338,064

13,119
1.21
Subordinated debentures 169,311
2,316
5.50
141,059
1,958
5.57
FHLB advances 251,231
455
0.73
263,384
1,696
2.58
Securities sold under agreements to repurchase 192,117
57
0.12
164,037
338
0.83
Other borrowed funds 32,842
147
1.80
40,338
375
3.73
Total interest-bearing liabilities 5,383,475
7,358
0.55
4,946,882

17,486
1.42
Noninterest bearing liabilities:
Demand deposits 1,813,760
1,244,008

Other liabilities 92,806
53,609

Total liabilities 7,290,041
6,244,499

Shareholders' equity 868,163
813,106

Total liabilities & shareholders' equity $ 8,158,204
$ 7,057,605

Net interest income $ 66,537
$ 62,109

Net interest spread 3.38 % 3.53 %
Net interest margin 3.53 % 3.86 %
Core net interest margin (3) 3.50 % 3.80 %


~~(1)~~	Average balances include nonaccrual loans. The income on such loans is included in interest but is recognized only upon receipt. Loan fees, net of amortization of deferred loan origination fees and costs, included in interest income are approximately $3.6 million and $0.9 million for the three months ended June 30, 2020 and 2019 respectively.


~~(2)~~	~~Non-taxable income is presented on a tax-equivalent basis using a 24.7% tax rate in 2020 and 2019. The tax-equivalent adjustments were $0.7 million and $0.4 million for the~~ ~~three~~ ~~months ended June 30, 2020 and 2019, respectively.~~


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


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



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

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

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

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

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

Six months ended June 30,
2020 2019
(in thousands) Average Balance Interest
Income/Expense
Average
Yield/
Rate
Average Balance Interest
Income/Expense
Average
Yield/
Rate
Assets
Interest-earning assets:
Taxable portfolio loans (1) $ 5,640,977
$ 128,569
4.58 % $ 4,763,916
$ 127,320
5.39 %
Tax-exempt portfolio loans (2) 37,019
938
5.10
27,418
878
6.46
Non-core acquired loans - contractual 14,163
379
5.38
13,564
605
8.99
Non-core acquired loans - incremental accretion 1,992
28.29
2,067
30.74
Total loans 5,692,159
131,878
4.66
4,804,898
130,870
5.49
Taxable debt and equity investments 1,096,703
14,544
2.67
976,875
13,707
2.83
Non-taxable debt and equity investments (2) 257,707
4,384
3.42
95,823
1,737
3.66
Short-term investments 134,758
387
0.58
106,752
1,150
2.17
Total securities and short-term investments 1,489,168
19,315
2.61
1,179,450
16,594
2.84
Total interest-earning assets 7,181,327
151,193
4.23
5,984,348
147,464
4.97
Noninterest-earning assets 579,577
525,540

Total assets $ 7,760,904
$ 6,509,888

Liabilities and Shareholders' Equity
Interest-bearing liabilities:
Interest-bearing transaction accounts $ 1,431,311
$ 1,581
0.22 % $ 1,231,537
$ 3,924
0.64 %
Money market accounts 1,876,482
5,735
0.61
1,549,255
13,511
1.76
Savings 566,549
188
0.07
431,843
414
0.19
Certificates of deposit 755,871
6,767
1.80
763,988
7,090
1.87
Total interest-bearing deposits 4,630,213
14,271
0.62
3,976,623
24,939
1.26
Subordinated debentures 155,303
4,235
5.48
132,653
3,606
5.48
FHLB advances 235,842
1,350
1.15
239,535
3,094
2.60
Securities sold under agreements to repurchase 197,002
419
0.43
175,603
611
0.70
Other borrowed funds 33,556
403
2.42
27,689
510
3.71
Total interest-bearing liabilities 5,251,916
20,678
0.79
4,552,103
32,760
1.45
Noninterest bearing liabilities:
Demand deposits 1,564,513
1,166,595

Other liabilities 77,876
52,994

Total liabilities 6,894,305
5,771,692

Shareholders' equity 866,599
738,196

Total liabilities & shareholders' equity $ 7,760,904
$ 6,509,888

Net interest income $ 130,515
$ 114,704

Net interest spread 3.44 % 3.52 %
Net interest margin 3.65 % 3.87 %
Core net interest margin (3) 3.60 % 3.80 %


~~(1)~~	Average balances include non-accrual loans. The income on such loans is included in interest but is recognized only upon receipt. Loan fees, net of amortization of deferred loan origination fees and costs, included in interest income are approximately $4.9 million and $2.1 million for the six months ended June 30, 2020 and 2019 respectively.


~~(2)~~	Non-taxable income is presented on a fully tax-equivalent basis using a 24.7% tax rate in 2020 and 2019. The tax-equivalent adjustments were $1.3 million and $0.6 million for the six months ended June 30, 2020 and 2019, respectively.


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

Rate/Volume

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


	2020 compared to 2019																			2020 compared to 2019
	Three months ended June 30,									Six months ended June 30,										Three months ended September 30,										Nine months ended September 30,
	Increase (decrease) due to									Increase (decrease) due to										Increase (decrease) due to										Increase (decrease) due to
(in thousands)	Volume(1)			Rate(2)			Net			Volume(1)			Rate(2)			Net			(in thousands)	Volume(1)		Rate(2)		Net		Volume(1)		Rate(2)		Net
Interest earned on:																			Interest earned on:
Taxable loans	$	11,129		$	(15,972	)	$	(4,843	)	$	21,761		$	(20,512	)	$	1,249		Taxable loans	$	10,893	$	(18,251)	$	(7,358)	$	32,588	$	(38,695)	$	(6,107)
Tax-exempt loans (3)	141			(147		)	(6		)	269			(209		)	60			Tax-exempt loans (3)	142		(209)		(67)		409		(415)		(6)
Non-core acquired loans	83			(386		)	(303		)	116			(417		)	(301		)	Non-core acquired loans	(202)		(955)		(1,157)		40		(1,500)		(1,460)
Taxable debt and equity investments	(313		)	(882		)	(1,195		)	1,646			(809		)	837			Taxable debt and equity investments	(1,201)		(1,337)		(2,538)		380		(2,081)		(1,701)
Non-taxable debt and equity investments (3)	1,346			(83		)	1,263			2,766			(119		)	2,647			Non-taxable debt and equity investments (3)	1,852		(163)		1,689		4,612		(278)		4,334
Short-term investments	264			(880		)	(616		)	245			(1,008		)	(763		)	Short-term investments	377		(836)		(459)		772		(1,994)		(1,222)
Total interest-earning assets	$	12,650		$	(18,350	)	$	(5,700	)	$	26,803		$	(23,074	)	$	3,729		Total interest-earning assets	$	11,861	$	(21,751)	$	(9,890)	$	38,801	$	(44,963)	$	(6,162)

Interest paid on:																			Interest paid on:
Interest-bearing transaction accounts	$	147		$	(2,037	)	$	(1,890	)	$	557		$	(2,900	)	$	(2,343	)	Interest-bearing transaction accounts	$	230	$	(2,023)	$	(1,793)	$	784	$	(4,920)	$	(4,136)
Money market accounts	1,313			(7,314		)	(6,001		)	2,415			(10,191		)	(7,776		)	Money market accounts	1,194		(7,150)		(5,956)		3,607		(17,339)		(13,732)
Savings	10			(196		)	(186		)	102			(328		)	(226		)	Savings	23		(210)		(187)		123		(536)		(413)
Certificates of deposit	(426		)	(233		)	(659		)	(71		)	(252		)	(323		)	Certificates of deposit	(823)		(738)		(1,561)		(934)		(950)		(1,884)
Subordinated debentures	383			(25		)	358			628			1			629			Subordinated debentures	859		11		870		1,486		13		1,499
FHLB advances	(75		)	(1,166		)	(1,241		)	(47		)	(1,697		)	(1,744		)	FHLB advances	(597)		(886)		(1,483)		(741)		(2,486)		(3,227)
Securities sold under agreements to repurchase	50			(331		)	(281		)	68			(260		)	(192		)	Securities sold under agreements to repurchase	73		(341)		(268)		141		(601)		(460)
Other borrowings	(60		)	(168		)	(228		)	94			(201		)	(107		)	Other borrowings	(50)		(171)		(221)		45		(373)		(328)
Total interest-bearing liabilities	1,342			(11,470		)	(10,128		)	3,746			(15,828		)	(12,082		)	Total interest-bearing liabilities	909		(11,508)		(10,599)		4,511		(27,192)		(22,681)
Net interest income	$	11,308		$	(6,880	)	$	4,428		$	23,057		$	(7,246	)	$	15,811		Net interest income	$	10,952	$	(10,243)	$	709	$	34,290	$	(17,771)	$	16,519

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

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

(3) Nontaxable income is presented on a tax equivalent ~~basis using the combined statutory federal and state income tax rate in effect for each tax year.~~basis.

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

Net interest income (on a tax equivalent basis) for the three and ~~six~~nine months ended ~~June~~September 30, 2020 increased 7%1% and ~~13%~~9%, respectively, over the prior year periods primarily from ~~higher loan and investment volumes, both of which benefited from the Trinity acquisition and growth~~reductions in the loan portfolio. The three-month period also benefited from a higher loan volume due to PPP loans. The benefit to net interest income from higher earning-asset volumes and a decrease in funding costs was partiallyrates on interest-bearing liabilities offset by a ~~decrease~~decline in ~~earning-asset yields.~~the yield on earning assets. Loan yields declined 139 basis points and 102 basis points for the three and nine months ended September 30, 2020, respectively, compared to the comparable prior year periods primarily due to LIBOR resets as well as lower rates on new and renewing loans in addition to a lower yield on PPP loans. Higher average loan balances from PPP loans and an increase in short-term investment balances also negatively impacted the yield on earning assets.

~~the second quarter 2020 contributed to growth in net interest income; however, the lower yields on these products compared to the loan portfolio yield excluding PPP reduced the net interest margin.~~

The Company responded to interest rate trends by reducing the cost of certain managed money market and interest-bearing transaction accounts. Net interest income and margin both benefited from an ~~84-basis~~89 basis point decrease in the rate paid on interest-bearing deposits in the ~~second~~third quarter 2020 compared to the ~~second~~third quarter 2019. The rate on interest-bearing deposits for the ~~six~~nine months ended ~~June~~September 30, 2020 declined 6473 basis points compared to the prior-year period. In addition, ~~the new~~EFSC’s subordinated debt issuance in the second quarter of 2020 reduced net interest margin by two basis ~~points.~~points for the nine months ended September 30, 2020.

The Company manages its balance sheet to defend against pressures on core net interest margin, which could be negatively impacted from continued competition for deposits, current interest rate conditions, and movements in short-term rates.

Noninterest Income

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


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

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



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

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

2020 compared to 2019
Three months ended June 30, Six months ended June 30,
(in thousands) 2020 2019 Increase (decrease) 2020 2019 Increase (decrease)
Service charges on deposit accounts $ 2,616
$ 3,366
$ (750 ) (22 )% $ 5,759
$ 6,301
$ (542 ) (9 )%
Wealth management revenue 2,326
2,661
(335 ) (13 )% 4,827
4,653
174
4 %
Card services revenue 2,225
2,461
(236 ) (10 )% 4,472
4,251
221
5 %
Tax credit income (221 ) 572
(793 ) (139 )% 1,815
730
1,085
149 %
Miscellaneous income 3,014
2,904
110
4 % 6,495
5,259
1,236
24 %
Total noninterest income $ 9,960
$ 11,964
$ (2,004 ) (17 )% $ 23,368
$ 21,194
$ 2,174
10 %

Noninterest income decreased ~~$2.0~~$0.9 million, or ~~17%~~7%, for the three months ended ~~June~~September 30, 2020, compared to the same period in 2019. The increase in deposit account balances provided more earnings credits to business customers, resulting in lower service charge income compared to the prior year quarter. ~~Lower transaction volumes on credit and debit cards impacted card services revenue for the three months ended June 30, 2020.~~ The Company’s tax credit income decreased in the current quarter over the prior year period primarily due to the timing ~~delays~~ on projects.

Noninterest income increased ~~$2.2~~$1.2 million, or ~~10%~~4%, for the ~~six~~nine months ended ~~June~~September 30, 2020, compared to the same period in 2019. ~~Wealth management and card services benefited from a full period of income in 2020 from the Trinity acquisition compared to the prior year.~~ Tax credit income increased partially due to fair value adjustments on tax credits. The fair value of these projects increased due to a decline in the LIBOR component of the discount rate. Miscellaneous income increased ~~$1.2~~$1.4 million in 2020 over 2019 due primarily to ~~a $0.9 million~~an increase in swap ~~fees~~fee income and ~~a $0.7 million claim on a life insurance policy, partially offset by a $0.4 million decrease~~growth in ~~non-core acquired fee income.~~mortgage revenue.

Noninterest Expense

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


	2020 compared to 2019																							2020 compared to 2019
	Three months ended June 30,											Six months ended June 30,												Three months ended September 30,																				Nine months ended September 30,
(in thousands)	2020			2019			Increase (decrease)					2020			2019			Increase (decrease)					(in thousands)	2020			2019			Increase (decrease)								2020			2019			Increase (decrease)
Employee compensation and benefits	$	22,389		$	20,687		$	1,702		8	%	$	44,074		$	40,039		$	4,035		10	%	Employee compensation and benefits	$	22,040		$	20,845		$	1,195		6	%	$	66,114		$	60,884		$	5,230		9	%
Occupancy	3,185			3,188			(3		)	—	%	6,532			5,825			707			12	%	Occupancy	3,408			3,179			229			7	%	9,940			9,004			936			10	%
Data processing	2,144			2,458			(314		)	(13	)%	4,226			4,364			(138		)	(3	)%	Data processing	2,167			2,051			116			6	%	6,393			6,415			(22)			—	%
Professional fees	1,287			1,037			250			24	%	2,149			1,783			366			21	%	Professional fees	755			1,064			(309)			(29)	%	2,904			2,847			57			2	%

Merger-related expenses	—			10,306			(10,306		)	(100	)%	—			17,576			(17,576		)	(100	)%	Merger-related expenses	1,563			393			1,170			298	%	1,563			17,969			(16,406)			(91)	%
Other	8,907			11,378			(2,471		)	(22	)%	19,604			19,305			299			2	%	Other	9,591			10,707			(1,116)			(10)	%	29,195			30,012			(817)			(3)	%
Total noninterest expense	$	37,912		$	49,054		$	(11,142	)	(23	)%	$	76,585		$	88,892		$	(12,307	)	(14	)%	Total noninterest expense	$	39,524		$	38,239		$	1,285		3	%	$	116,109		$	127,131		$	(11,022)		(9)	%

Efficiency ratio	50.02		%	66.58		%	(16.56		)%			50.20		%	65.72		%	(15.52		)%			Efficiency ratio	52.02		%	49.91		%	2.11		%			50.80		%	60.01		%	(9.21)		%
Core efficiency ratio¹	50.66		%	53.30		%	(2.64		)%			50.94		%	53.65		%	(2.71		)%			Core efficiency ratio¹	51.04		%	51.73		%	(0.69)		%			50.97		%	52.96		%	(1.99)		%
¹A non-GAAP measure. A reconciliation has been included in this section under the caption “Use of Non-GAAP Financial Measures.”	¹A non-GAAP measure. A reconciliation has been included in this section under the caption “Use of Non-GAAP Financial Measures.”																						¹A non-GAAP measure. A reconciliation has been included in this section under the caption “Use of Non-GAAP Financial Measures.”

increases and the acquisition of Trinity.

Efficiency gains primarily from growth in net interest income ~~combined with reductions~~and managed increases in noninterest expense have resulted in continued improvements to the Company’s core efficiency ratio.¹ The core efficiency ratio was ~~50.66% in~~51.0% for the ~~second quarter~~nine months ended September 30, 2020 compared to ~~53.30%~~53.0% for the same period in ~~the second quarter~~ 2019.

The Company’s effective tax rate was ~~20.0%~~19.8% for the ~~second~~third quarter 2020, compared to ~~19.6%~~20.4% for the same period in 2019. For the ~~six~~nine months ended ~~June~~September 30, 2020, the effective tax rate was ~~19.4%~~19.6% compared to ~~19.9%~~20.1% for the same period in 2019.

Summary Balance Sheet


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

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

(in thousands) June 30,
2020 December 31,
2019 Increase (decrease)
Total cash and cash equivalents $ 348,727
$ 167,256
$ 181,471
108 %
Securities 1,343,895
1,316,483
27,412
2 %
Loans held for investment 6,140,051
5,457,517
682,534
13 %
Total assets 8,357,501
7,333,791
1,023,710
14 %
Deposits 6,699,580
5,771,023
928,557
16 %
Total liabilities 7,489,538
6,466,606
1,022,932
16 %
Total shareholders’ equity 867,963
867,185
778
— %

Assets

Loans by Type

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

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


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

(in thousands) June 30,
2020 December 31,
2019 Increase (decrease)
Commercial and industrial $ 3,143,197
$ 2,361,157
$ 782,040
33 %
Commercial real estate - investor owned 1,309,895
1,299,884
10,011
1 %
Commercial real estate - owner occupied 738,549
697,437
41,112
6 %
Construction and land development 481,221
457,273
23,948
5 %
Residential real estate 326,992
366,261
(39,269 ) (11 )%
Other 140,197
132,325
7,872
6 %
Loans held for investment $ 6,140,051
$ 5,314,337
$ 825,714
16 %

Loans grew ~~$825.7~~$812.0 million to $6.1 billion at ~~June~~September 30, 2020, from December 31, 2019. Loan growth was primarily due to ~~the $807.8 million~~ PPP loans ~~outstanding~~of $819.1 million at ~~June~~September 30, 2020. Revolving line utilization for C&I customers has decreased in ~~the second quarter~~ 2020, partially due to the influx of PPP funds to our customers. Revolving line utilization was 40.1% and 46.7% at September 30, 2020 and December 31, 2019, respectively. Low interest rates and higher refinance activity has reduced the residential real estate portfolio, while construction and owner-occupied commercial real estate loans have increased.

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



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

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

(in thousands) June 30,
2020 December 31,
2019 Increase (decrease)
C&I - general $ 1,057,899
$ 1,186,667
$ (128,768 ) (11 )%
CRE investor owned - general 1,302,235
1,290,258
11,977
1 %
CRE owner occupied - general 599,800
582,579
17,221
3 %
PPP 807,814
—
807,814
NM
Enterprise value lending¹
382,828
428,896
(46,068 ) (11 )%
Life insurance premium financing¹
520,705
472,822
47,883
10 %
Residential real estate - general 326,697
366,261
(39,564 ) (11 )%
Construction and land development - general 455,686
428,681
27,005
6 %
Tax credits¹
363,222
294,210
69,012
23 %
Agriculture¹
191,093
139,873
51,220
37 %
Other 132,072
124,090
7,982
6 %
Total loans $ 6,140,051
$ 5,314,337
$ 825,714
16 %

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

Specialized lending products, especially enterprise value lending, life insurance premium financing, and tax credits, consist of primarily C&I loans. These loans are sourced through relationships developed with estate planning firms and private equity funds and are not bound geographically by our four markets. These specialized loan products offer opportunities to expand and diversify geographically by entering ~~into~~ new markets. The Company continues to

focus on originating high-quality C&I relationships, as they typically have variable interest rates and allow for cross selling

opportunities involving other banking products. C&I loan growth, coupled with typically fixed-rate CRE lending, supports management’s efforts to maintain a flexible asset sensitive interest rate risk position. ~~The specialized~~Specialized lending products ~~declined in 2020, primarily due to a decrease in enterprise value loans, offset by an increase in~~consisting of life insurance premium financing and tax ~~credits.~~credits increased $119.4 million in 2020. Life insurance premium financing and tax credits are typically lower risk products due to the high collateral value securing the loans. Agriculture loans increased primarily due to ~~one relationship for~~ hog and pig ~~farming, and other loans increased~~farming. Enterprise value lending decreased in 2020 primarily due to ~~loans to financial institutions as part of the Company’s correspondent business unit.~~paydowns.

In response to the COVID-19 pandemic, the Company has processed $690.8 million of short-term deferrals allowing customers to defer payments. Approximately 99% of the deferrals are for 90 days or less. As of ~~June~~September 30, 2020, ~~$685.7~~loans of $139.3 million were still in ~~loans have received~~deferral status, including second round deferrals of ~~which 53% are deferring all principal and interest and 47% are paying interest only.~~$86.1 million.

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


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

(in thousands) June 30,
2020
Commercial and industrial $ 171,108
Commercial real estate 404,295
Construction and land development 88,368
Residential real estate 21,762
Other 134
Loans held for investment $ 685,667

Provision and Allowance for Credit Losses

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


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

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

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

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

Three months ended June 30, Six months ended June 30,
(in thousands) 2020 2019 2020 2019
Allowance, at beginning of period $ 92,187
$ 43,095
$ 43,288
$ 43,476
CECL adoption —
—
28,387
—
PCD loans immediately charged-off —
—
(1,680 ) —
Allowance at beginning of period, adjusted for adoption of CECL 92,187
43,095
69,995
43,476
Charge-offs:
Commercial and industrial (3,303 ) (1,380 ) (3,366 ) (3,233 )
Real estate:
Commercial (224 ) (431 ) (226 ) (587 )
Construction and land development —
—
(31 ) (45 )
Residential (32 ) (26 ) (154 ) (93 )
Other (105 ) (53 ) (191 ) (182 )
Total charge-offs (3,664 ) (1,890 )
(3,968 )
(4,140 )
Recoveries:
Commercial and industrial 293
32
797
61
Real estate:
Commercial 2,763
58
2,846
67
Construction and land development 29
489
69
498
Residential 226
124
383
488
Other 45
217
62
230
Total recoveries 3,356
920

4,157

1,344
Net (charge-offs) recoveries (308 ) (970 )
189

(2,796 )
Provision for credit losses 18,391
1,722
40,086
3,198
Other —
(25 ) —
(56 )
Allowance, at end of period $ 110,270
$ 43,822

$ 110,270

$ 43,822

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


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

Three months ended June 30, Six months ended June 30,
(in thousands) 2020 2019 2020 2019
Provision for loan losses $ 18,391
$ 1,722
$ 40,086
$ 3,198
Provision for off-balance sheet commitments 1,206
—
2,055
—
Provision for held-to-maturity securities 342
—
342
—
Recovery for accrued interest (348 ) —
(628 ) —
Provision for credit losses $ 19,591
$ 1,722
$ 41,855
$ 3,198
The following table summarizes the allocation of the ACL:


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

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

through the provision of credit losses. ~~Due to current economic conditions, the~~The provision for credit losses was ~~$19.6~~$14.1 million and ~~$41.9~~$55.9 million for the three and ~~six~~nine months ended ~~June~~September 30, 2020, respectively. CECL requires economic forecasts to be factored into determining estimated losses. As a result, CECL will typically require a higher level of provision at the start of an economic downturn. The increase in the provision for credit losses in 2020 was primarily due to a change in economic forecasts from the end of 2019, which worsened significantly starting in March 2020 due to the COVID-19 pandemic and the resulting slow-down of business activity. Two of the primary economic loss drivers used in estimating the ACL include the percentage change in GDP and unemployment. ~~The~~At September 30, 2020, the Company’s forecast of the percentage change in GDP included a range of ~~(10.0)~~(5.9)% to ~~8.0%. The Company’s forecast of~~11.8% and the percentage change in unemployment included a range of ~~7.9%~~6.5% to ~~11.8%~~11.3%. The Company utilizes a one-year reasonable and supportable forecast.

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

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

The Company had net charge-offs of ~~$1.5~~$2.5 million in the first ~~six~~nine months of 2020, primarily due to the administrative charge-off of nonaccrual loans less than $100,000 ~~under~~in individual outstanding principal amount in accordance with the Company’s credit policy. Most of these charge-offs were loans added to ~~nonaccual~~nonaccrual as part of the CECL adoption. The ACLL was ~~1.80%~~2.01% of loans at ~~June~~September 30, 2020, compared to 0.81% at December 31, 2019.

Nonperforming assets

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

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


(in thousands)	June 30, 2020			December 31, 2019			June 30, 2019			(in thousands)	September 30, 2020			December 31, 2019			September 30, 2019
Nonaccrual loans	$	36,867		$	26,096		$	15,659		Nonaccrual loans	$	35,037		$	26,096		$	15,430
Loans past due 90 days or more and still accruing interest	886			250			3,999			Loans past due 90 days or more and still accruing interest	951			250			60
Troubled debt restructurings	3,720			79			184			Troubled debt restructurings	3,635			79			79
Total nonperforming loans	41,473			26,425			19,842			Total nonperforming loans	39,623			26,425			15,569
Other real estate	4,874			6,344			10,531			Other real estate	4,835			6,344			8,498

Total nonperforming assets	$	46,347		$	32,769		$	30,373		Total nonperforming assets	$	44,458		$	32,769		$	24,067

Total assets	$	8,357,501		$	7,333,791		$	7,181,855		Total assets	$	8,367,976		$	7,333,791		$	7,346,791
Total loans	6,140,051			5,314,337			5,149,497			Total loans	6,126,307			5,314,337			5,228,014

Nonperforming loans to total loans	0.68		%	0.50		%	0.39		%	Nonperforming loans to total loans	0.65		%	0.50		%	0.30		%

Nonperforming assets to total assets	0.55		%	0.45		%	0.42		%	Nonperforming assets to total assets	0.53		%	0.45		%	0.33		%

ACLL to nonperforming loans	266		%	164		%	221		%	ACLL to nonperforming loans	311		%	164		%	286		%

Nonperforming loans increased ~~$15.1~~$13.2 million to ~~$41.5~~$39.6 million at ~~June~~September 30, 2020 from $26.4 million at December 31, ~~2019 partially due to the adoption of CECL that added $6.8 million in PCD loans that were previously accounted for in an accruing pool of loans.~~2019. The addition of a $5.0 million nonaccrual enterprise value loan and an $8.7 million hotel loan in 2020 also contributed to the increase. Other real estate decreased during 2020 primarily due to write-downs of ~~$0.9~~$1.1 million and sales of ~~$0.6~~$0.7 million.

Nonperforming loans based on loan type were as follows:

The following table summarizes the changes in nonperforming loans:

Six months ended June 30,
(in thousands) 2020 2019
Nonperforming loans, beginning of period $ 26,425
$ 16,745
CECL adoption 8,462
—
PCD loans immediately charged off (1,680 ) —
Nonperforming loans, January 1 $ 33,207
$ 16,745
Additions to nonaccrual loans 12,154
10,605
Additions to restructured loans 3,750
—
Charge-offs (3,970 ) (3,965 )
Other principal reductions (4,250 ) (5,136 )
Moved to other real estate —
(1,732 )
Moved to performing (6 ) (674 )
Loans past due 90 days or more and still accruing interest 588
3,999
Nonperforming loans, end of period $ 41,473
$ 19,842

Other real estate

Other real estate was ~~$4.9~~$4.8 million at ~~June~~ September 30, 2020 compared to ~~$10.5~~$8.5 million at ~~June~~September 30, 2019.

The following table summarizes the changes in other real estate:


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

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

Six months ended June 30,
(in thousands) 2020 2019
Other real estate beginning of period $ 6,344
$ 469
Additions and expenses capitalized to prepare property for sale —
7,783
Additions from acquisition —
4,512
Writedowns in value (856 ) —
Sales (615 ) (2,233 )
Other real estate end of period $ 4,873
$ 10,531

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

Deposits


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

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

(in thousands) June 30,
2020 December 31,
2019 Increase (decrease)
Noninterest-bearing deposit accounts $ 1,965,868
$ 1,327,348
$ 638,520
48 %
Interest-bearing transaction accounts 1,508,535
1,367,444
141,091
10 %
Money market accounts 1,962,916
1,713,615
249,301
15 %
Savings accounts 603,095
536,169
66,926
12 %
Certificates of deposit:
Brokered 85,414
215,758
(130,344 ) (60 )%
Other 573,752
610,689
(36,937 ) (6 )%
Total deposits $ 6,699,580
$ 5,771,023
$ 928,557
16 %

Non-time deposits / total deposits 90 % 86 %
Demand deposits / total deposits 29 % 23 %

Total deposits at ~~June~~September 30, 2020 were $6.7 billion, an increase of 16%, from December 31, 2019. The increase in deposits has been influenced by the PPP, as many of the recipients have maintained increased deposit levels since receiving PPP funding. Government stimulus checks and organic growth have also impacted deposit balances. Due to increased liquidity, the brokered certificates of deposit have been reduced in 2020. Noninterest bearing deposits as a percentage of total deposits was 29% at ~~June~~September 30, 2020, compared to 23% at December 31, 2019, respectively.

Shareholders’ Equity

Shareholders’ equity totaled ~~$868.0~~$882.3 million at ~~June~~September 30, 2020, an increase of ~~$0.8~~$15.1 million from December 31, 2019. Significant activity during the first ~~six~~nine months of 2020 was as follows:

•increase from net income of ~~$27.5~~$45.5 million,

•net increase in fair value of securities and cash flow hedges of ~~$15.1~~$14.8 million,

•decrease from CECL adoption of $18.1 million,

•decrease from dividends paid on common shares of ~~$9.5~~$14.2 million,

•increase from the issuance under equity compensation plans of ~~$1.1~~$2.5 million, and

•decrease from share repurchases of $15.3 million.

Liquidity and Capital Resources

Liquidity

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

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

The Bank’s Asset-Liability Management Committee oversees our liquidity position, the parameters of which are approved by the Bank’s Board of Directors. Our liquidity position is monitored monthly by measuring the amount of liquid versus non-liquid assets and liabilities. Our liquidity management framework includes measurement of several

key elements, such as the loan to deposit ratio, a liquidity ratio, and a dependency ratio. The Company’s liquidity framework also incorporates contingency planning to assess the nature and volatility of funding sources and to determine alternatives to these sources. While core deposits and loan and investment repayments are principal sources of liquidity, funding diversification is another key element of liquidity management and is achieved by strategically varying depositor types, terms, funding markets, and instruments.

The Bank has a variety of funding sources available to increase financial flexibility. In addition to amounts currently borrowed, at ~~June~~September 30, 2020, the Bank had borrowing capacity of ~~$562~~$545 million from the FHLB of Des Moines under blanket loan pledges, and has an additional ~~$879~~$763 million available from the Federal Reserve Bank under a pledged loan agreement. The Bank has unsecured federal funds lines with six correspondent banks totaling $90 million, and ~~$367~~$374 million of unsecured credit through the American Financial Exchange.

Investment securities are another important tool in managing the Bank’s liquidity objectives. Securities totaled ~~$1.4~~$1.3 billion at ~~June~~September 30, 2020, and included ~~$450~~$449 million pledged as collateral for deposits of public institutions, treasury, loan notes, and other requirements. The remaining ~~$904~~$895 million could be pledged or sold to enhance liquidity, if necessary.

In the normal course of business, the Bank enters into certain forms of off-balance sheet transactions, including unfunded loan commitments and letters of credit. These transactions are managed through the Bank’s various risk management processes. Management considers both on-balance sheet and off-balance sheet transactions in its evaluation of the Company’s liquidity. The Bank has ~~$1.7~~$1.8 billion in unused commitments as of ~~June~~September 30, 2020. The nature of these commitments is such that the likelihood of funding them in the aggregate at any one time is low.

~~Parent Company~~EFSC liquidity

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

~~The Company~~EFSC 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~~EFSC’s ability to offer securities pursuant to the registration statement depends on market conditions and the Company’s continuing eligibility to use the Form S-3 under rules of the SEC.

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

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

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

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

In March 2019, the Company entered into a five-year term note for $40 million that matures in March 2024. The Company principally used the proceeds from the issuance of the note to fund the cash consideration at the closing of the acquisition of Trinity. The remaining balance at June 30, 2020 was $31 million.

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

Management believes our current level of cash at the holding company of ~~$68~~$71 million, along with ~~the Company’s~~EFSC’s other available funding sources, will be sufficient to meet all projected cash needs for the remainder of 2020.

Capital Resources

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

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

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

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


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

¹ Not a required regulatory capital ratio

(in thousands) June 30,
2020 December 31, 2019 Well Capitalized Minimum % Minimum Capital Requirement Including Capital Conservation Buffer
Total capital to risk-weighted assets 14.40 % 12.90 % N/A 10.50 %
Tier 1 capital to risk-weighted assets 11.37
11.40
N/A 8.50
Common equity tier 1 capital to risk-weighted assets 9.91
9.90
N/A 7.00
Leverage ratio (Tier 1 capital to average assets) 9.16
10.05
N/A 4.00
Tangible common equity to tangible assets¹
7.81
8.89
N/A
Total risk-based capital $ 919,693
$ 804,273

Tier 1 capital 726,574
710,480

Common equity tier 1 capital 632,919
616,825

¹ Not a required regulatory capital ratio

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


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

(in thousands) June 30,
2020 December 31, 2019 Well Capitalized Minimum % Minimum Capital Requirement Including Capital Conservation Buffer
Total capital to risk-weighted assets 13.00 % 12.40 % 10.00 % 10.50 %
Tier 1 capital to risk-weighted assets 11.75
11.70
8.00
8.50
Common equity tier 1 capital to risk-weighted assets 11.75
11.69
6.50
7.00
Leverage ratio (Tier 1 capital to average assets) 9.48
10.31
5.00
4.00
Total risk-based capital $ 829,134
$ 769,254

Tier 1 capital 749,402
725,461

Common equity tier 1 capital 749,347
725,406

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~~September 30, 2020, the estimated impact of adopting CECL ~~methodology~~ would reduce the Common Equity Tier 1 Capital ratio by approximately 4449 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 GAAP and the prevailing practices in the banking industry. However, the Company provides other financial measures, such as core net interest income, core net interest margin, core efficiency ratios, tangible common equity, return on average tangible common equity, and the tangible common equity ratio, in this report that are considered “non-GAAP financial measures.” Generally, a non-GAAP financial measure is a numerical measure of a company’s financial performance, financial position, or cash flows that exclude (or include) amounts that are included in (or excluded from) the most directly comparable measure calculated and presented in accordance with GAAP.

The Company considers its core net interest income, core net interest margin, core efficiency ratio, tangible common equity, return on average tangible common equity, and the tangible common equity ratio, collectively “core performance measures,” presented in this report and the included tables as important measures of financial performance, even though they are non-GAAP measures, as they provide supplemental information by which to evaluate the impact of non-core acquired loans, which were acquired from the FDIC and previously covered by loss share agreements, and the related income and expenses, the impact of certain non-comparable items, and the Company’s operating performance on an ongoing basis. Core performance measures include contractual interest on non-core acquired loans, but exclude incremental accretion on these loans. Core performance measures also exclude expenses directly related to non-core acquired loans. Core performance measures also exclude certain other income and expense items, such as merger-related expenses, and the gain or loss on sale of investment securities, the Company believes to be not indicative of or useful to measure the Company’s operating performance on an ongoing basis. The attached tables contain a reconciliation of these core performance measures to the GAAP measures. The Company believes the tangible common equity ratio provides useful information to investors about the Company’s capital strength even though it is considered

to be a non-GAAP financial measure and is not part of the regulatory capital requirements to which the Company is subject.

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

Core Performance Measures


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

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


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

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



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

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


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



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













Core efficiency ratio	51.04		%	51.73		%	50.97		%	52.96		%

For the three months ended At or for the six months ended
(in thousands) June 30,
2020 June 30,
2019 June 30,
2020 June 30,
2019
Net interest income $ 65,833
$ 61,715
$ 129,201
$ 114,058
Less: Incremental accretion income 719
910
1,992
2,067
Core net interest income 65,114
60,805
127,209
111,991

Total noninterest income 9,960
11,964
23,368
21,194
Less: Gain on sale of investment securities —
—
4
—
Less: Other income from non-core acquired assets —
2
—
367
Less: Other non-core income 265
266
265
266
Core noninterest income 9,695
11,696
23,099
20,561

Total core revenue 74,809
72,501
150,308
132,552

Total noninterest expense 37,912
49,054
76,585
88,892
Less: Other expenses related to non-core acquired loans 12
103
24
206
Less: Merger related expenses —
10,306
—
17,576
Core noninterest expense 37,900
38,645
76,561
71,110

Core efficiency ratio 50.66 % 53.30 % 50.94 % 53.65 %

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


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

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

Three months ended June 30, Six months ended June 30,
(in thousands) 2020 2019 2020 2019
Net interest income $ 66,537
$ 62,109
$ 130,515
$ 114,704
Less: Incremental accretion income 719
910
1,992
2,067
Core net interest income, tax equivalent $ 65,818
$ 61,199
$ 128,523
$ 112,637

Average earning assets $ 7,571,196
$ 6,453,005
$ 7,181,327
$ 5,984,348
Reported net interest margin 3.53 % 3.86 % 3.65 % 3.87 %
Core net interest margin 3.50 % 3.80 % 3.60 % 3.80 %

Tangible Common Equity Ratio

(in thousands) June 30, 2020 December 31, 2019
Total shareholders' equity $ 867,963
$ 867,185
Less: Goodwill 210,344
210,344
Less: Intangible assets 23,196
26,076
Tangible common equity $ 634,423
$ 630,765

Total assets $ 8,357,501
$ 7,333,791
Less: Goodwill 210,344
210,344
Less: Intangible assets, net 23,196
26,076
Tangible assets $ 8,123,961
$ 7,097,371

Tangible common equity to tangible assets 7.81 % 8.89 %


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

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

Tangible common equity to tangible assets	7.99		%	8.89		%

Average Shareholders’ Equity and Average Tangible Common Equity

Three months ended June 30, Six months ended June 30,
(in thousands) 2020 2019 2020 2019
Average shareholder’s equity $ 868,163
$ 813,106
$ 866,599
$ 738,196
Less: Average goodwill 210,344
211,251
210,344
176,529
Less: Average intangible assets, net 23,873
29,965
24,587
22,261
Average tangible common equity $ 633,946
$ 571,890
$ 631,668
$ 539,406


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

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, 2019.

ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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

Interest Rate Risk

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

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

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



Rate Shock¹			Annual % change in net interest income
+ 300 bp			~~7.8%~~5.9%
+ 200 bp			~~4.9%~~3.1%
+ 100 bp			~~2.1%~~0.5%



¹Due 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. Generally, positive changes in rates result in higher levels of net interest income, while scenarios based on declining rates, particularly those involving decreases in long-term rates, result in reduced net interest income.

At ~~June~~September 30, 2020, model scenarios based on a flatter yield curve through a reduction in longer term rates result in a marginal decrease in net interest income, while those based on higher rates and a steeper yield curve result in an increase in net interest income over a 12 month horizon.

At ~~June~~September 30, 2020, the Company had ~~$3.1~~$3.0 billion in variable rate loans including $2.5 billion based on LIBOR and ~~$332~~$316 million based on Prime. Approximately 86% of the LIBOR based loans are indexed to one-month LIBOR. Of the total variable rate loans, ~~$1.2~~$1.3 billion, or ~~39%~~44%, had a rate floor of which approximately ~~$1.0~~$1.2 billion, or ~~86%~~89%, were currently priced at the floor.

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

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

ITEM 4: CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

Under the supervision and with the participation of the Company’s Chief Executive Officer (CEO) and the Chief Financial Officer (CFO), management has evaluated the effectiveness of the design and operation of the Company’s disclosure controls and procedures pursuant to Exchange Act Rule 13a-15, as of ~~June~~September 30, 2020. Disclosure controls and procedures include without limitation, controls and procedures designed to ensure that information required to be disclosed by an issuer in the reports that it files or submits under the Securities Exchange Act of 1934, as amended, is accumulated and communicated to the issuer’s management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.

Based on that evaluation, the CEO and CFO concluded the Company’s disclosure controls and procedures were effective as of ~~June~~September 30, 2020 to provide reasonable assurance of the achievement of the objectives described above.

Changes to Internal Controls

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

PART II - OTHER INFORMATION

ITEM 1: LEGAL PROCEEDINGS

Parshall Litigation

Following the announcement on August 20, 2020 of the execution of the definitive agreement related to the Company’s acquisition of SCBH and Seacoast, a lawsuit challenging the proposed transaction was filed in the U.S. District Court for the District of Delaware. The lawsuit is captioned Parshall v. Seacoast Commerce Banc Holdings, et al., No. 1:99-cv-01300 (filed September 28, 2020).

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

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

settlement of any lawsuit or claim that remains unresolved at the time the SCBH acquisition is completed may adversely affect EFSC’s business, financial condition, results of operations and cash flows. Such litigation is common in connection with acquisitions similar to the SCBH acquisition, regardless of any merits related to the underlying acquisition. In this instance, the defendants believe that the claims asserted against them in the lawsuit are without merit and intend to defend the litigation vigorously.

In addition to the lawsuit described above, the Company and its subsidiaries are, from time to time, parties to various legal proceedings arising out of their businesses. Management believes ~~there are no such~~that neither the lawsuit described above nor any other legal proceedings pending or threatened against the Company or its subsidiaries, ~~which,~~ if determined adversely, would have a material adverse effect on the business, consolidated financial condition, results of operations or cash flows of the Company or any of its subsidiaries.

ITEM 1A: RISK FACTORS

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

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

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

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

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

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

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

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

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

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

The Company is a participating lender in the PPP, a loan program administered through the SBA, that was created to help eligible businesses, organizations and self-employed persons fund their operational costs during the COVID-19

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

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

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

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

The COVID-19 pandemic could harm business and results of operations for each of the Company and SCBH and the combined company following the completion of the Seacoast acquisition.

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

To the extent COVID-19 results in business disruption, if the Company or SCBH are unable to recover from a business disruption on a timely basis, the merger and the combined company's business and financial conditions and results of operations following the completion of the merger would be adversely affected. The merger and efforts to integrate the businesses of the Company and SCBH may also be delayed and adversely affected by the COVID-19 outbreak.

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

The acquisition of SCBH will be an all-stock transaction valued at approximately $156 million as of the date of signing. The consideration payable to SCBH shareholders upon consummation of the acquisition will consist of whole shares of EFSC’s common stock and cash in lieu of fractional shares of EFSC’s common stock. We anticipate issuing approximately 4.9 million shares of common stock to SCBH shareholders in connection with the acquisition, and we anticipate that the transaction will result in initial tangible book value dilution of approximately 2.0% at the time of closing with an earnback period of less than three years. Future mergers or acquisitions, if any, may involve cash, debt or equity securities as transaction consideration. Acquisitions typically involve the payment of a premium over book and market values, and, therefore, some dilution of our stock’s tangible book value and net income per common share may occur in connection with any future transaction.

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

None.

ITEM 3: DEFAULTS UPON SENIOR SECURITIES

None.

ITEM 4: MINE SAFETY DISCLOSURES

Not applicable.

ITEM 5: OTHER INFORMATION

None.

Exhibit No.Description

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 24,~~October 23, 2020.

ENTERPRISE FINANCIAL SERVICES CORP

By:

/s/ James B. Lally

James B. Lally

Chief Executive Officer

By:

/s/ Keene S. Turner

Keene S. Turner

Chief Financial Officer


	Available for sale						Held to maturity
(in thousands)	Amortized Cost		Estimated Fair Value		Amortized Cost		Estimated Fair Value
Due in one year or less	$	3,139	$	3,161	$	0	$	0
Due after one year through five years	32,281		33,232		10,187		10,587
Due after five years through ten years	16,828		17,443		125,476		133,063
Due after ten years	335,239		345,641		82,077		82,850
Agency mortgage-backed securities	581,111		605,949		109,954		112,274

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


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


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

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

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


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

	December 31, 2019
			Less than 12 months							12 months or more					Total
(in thousands)	Fair Value			Unrealized Losses		Fair Value		Unrealized Losses			Fair Value		Unrealized Losses

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

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



	June 30, 2020					June 30, 2019
(in thousands, except for number of loans)	Number of loans	Pre-Modification Outstanding Recorded Balance		Post-Modification Outstanding Recorded Balance		Number of loans	Pre-Modification Outstanding Recorded Balance		Post-Modification Outstanding Recorded Balance
Commercial and industrial	1	$	3,731	$	3,731	—	$	—	$	—
Real estate:
Commercial - owner occupied	—	—		—		1	188		188
Residential	2	155		155		2	332		332
Total	3	$	3,886	$	3,886	3	$	520	$	520



(in thousands, except per share data)	At or for the three months ended						At or for the six months ended
(in thousands, except per share data)	June 30, 2020			June 30, 2019			June 30, 2020			June 30, 2019
EARNINGS
Total interest income	$	73,191		$	79,201		$	149,879		$	146,818
Total interest expense	7,358			17,486			20,678			32,760
Net interest income	65,833			61,715			129,201			114,058
Provision for credit losses	19,591			1,722			41,855			3,198
Net interest income after provision for credit losses	46,242			59,993			87,346			110,860
Total noninterest income	9,960			11,964			23,368			21,194
Total noninterest expense	37,912			49,054			76,585			88,892
Income before income tax expense	18,290			22,903			34,129			43,162
Income tax expense	3,656			4,479			6,627			8,582
Net income	$	14,634		$	18,424		$	27,502		$	34,580

Basic earnings per share	$	0.56		$	0.69		$	1.04		$	1.36
Diluted earnings per share	$	0.56		$	0.68		$	1.04		$	1.36

Return on average assets	0.72		%	1.05		%	0.71		%	1.07		%
Return on average common equity	6.78		%	9.09		%	6.38		%	9.45		%
Return on average tangible common equity¹	9.28		%	12.92		%	8.76		%	12.93		%
Net interest margin (tax equivalent)	3.53		%	3.86		%	3.65		%	3.87		%
Core net interest margin¹	3.50		%	3.80		%	3.60		%	3.80		%
Efficiency ratio	50.02		%	66.58		%	50.20		%	65.72		%
Core efficiency ratio¹	50.66		%	53.30		%	50.94		%	53.65		%
Book value per common share	$	33.13		$	30.68
Tangible book value per common share¹	$	24.22		$	21.74

ASSET QUALITY
Net charge-offs	$	309		$	970		$	1,491		$	2,796
Nonperforming loans	41,473			19,842
Classified assets	96,678			91,715
Nonperforming loans to total loans	0.68		%	0.39		%
Nonperforming assets to total assets	0.55		%	0.42		%
ACLL to total loans	1.80		%	0.85		%
Net charge-offs to average loans (annualized)	0.02		%	0.08		%	0.05		%	0.12		%

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


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


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


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


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


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


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


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


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


~~3.9~~	~~Amended and Restated Bylaws of Registrant (incorporated herein by reference to Exhibit 3.1 to Registrant's Current Report on Form 8-K filed on June 12, 2015 (File No. 001-15373)).~~


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


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


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


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