ENTERPRISE FINANCIAL SERVICES CORP 10-K

ITEM 8: FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Enterprise Financial Services Corp and Subsidiaries Page Number Report of Independent Registered Public Accounting Firm, PCAOB ID 34 60 Consolidated Balance Sheets at December 31, 2021 and 2020 64 Consolidated Statements of Operations for the years ended December 31, 2021, 2020, and 2019 65 Consolidated Statements of Comprehensive Income for the years ended December 31, 2021, 2020, and 2019 66 Consolidated Statements of Shareholders’ Equity for the years ended December 31, 2021, 2020, and 2019 67 Consolidated Statements of Cash Flows for the years ended December 31, 2021, 2020, and 2019 68 Notes to Consolidated Financial Statements 70 59 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the shareholders and Board of Directors of Enterprise Financial Services Corp Opinion on the Consolidated Financial Statements We have audited the accompanying consolidated balance sheets of Enterprise Financial Services Corp and subsidiaries (the “Company”) as of December 31, 2021 and 2020, the related consolidated statements of operations, comprehensive income, shareholders’ equity, and cash flows, for each of the three years in the period ended December 31, 2021, and the related notes (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2021 and 2020, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2021, in conformity with accounting principles generally accepted in the United States of America. We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’s internal control over financial reporting as of December 31, 2021, based on criteria established in Internal Control—Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated February 25, 2022 expressed an unqualified opinion on the Company’s internal control over financial reporting. Change in Accounting Principles As discussed in Note 1 to the financial statements, on January 1, 2020, the Company adopted ASU 2016-13 “Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments,” applicable to financial assets measured at amortized cost including loan receivables and held to maturity debt securities. Basis for Opinion These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the US federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion. Critical Audit Matters The critical audit matters communicated below are matters arising from the current-period audit of the financial statements that were communicated or required to be communicated to the audit committee and that (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate. 60 Allowance for Credit Losses — Refer to Note 1 to the financial statements Critical Audit Matter Description The Company utilizes a discounted cash flow (“DCF”) method to measure the Allowance for Credit Losses (“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 such as unemployment or gross domestic product. Additionally, the Company applies qualitative adjustments to address risks not directly captured in the quantitative reserve; including to address macroeconomic uncertainty by weighting the forecasted baseline, upside, and downside economic factors. We identified the allowance for credit losses as a critical audit matter because of the complexity of the Company’s model and the significant assumptions used by management. Auditing the allowance for credit losses required a high degree of auditor judgment and an increased extent of effort, including the need to involve credit specialists when performing audit procedures to evaluate the reasonableness of management’s models and assumptions. How the Critical Audit Matter Was Addressed in the Audit Our audit procedures related to the Company’s ACL included the following, among others: a. We tested the design and operating effectiveness of management’s controls covering the key data, assumptions and judgments impacting the allowance for credit losses. b. We evaluated the appropriateness of the Company’s accounting policies, methodologies, and elections involved in determining the allowance. c. We involved credit specialists to assist us in evaluating the Company’s development of the CECL model, including the selection of and calibration to economic factors. d. We assessed the reasonableness of the Company’s qualitative methodology, tested key calculations utilized within the qualitative estimate and agreed underlying data within the calculation to source documents. Acquisition of First Choice Bancorp (“FCB”) – Valuation of Loans – Refer to Note 2 to the financial statements Critical Audit Matter Description On July 21, 2021, the Company closed its acquisition of 100% of First Choice Bancorp and its wholly-owned subsidiary, First Choice Bank. The value of the transaction consideration was approximately $346 million. The acquisition of FCB has been accounted for as a business combination using the acquisition method of accounting which requires assets acquired and liabilities assumed to be recognized at fair value as of the acquisition date. Goodwill arising from the acquisition consists largely of the synergies and economies of scale expected from combining the operations into the Company. Given that the fair value determination of net assets, specifically the credit assumptions related to the acquired loan balance, required management to make significant estimates and assumptions related to the associated credit risk, performing audit procedures to evaluate the reasonableness of these estimates and assumptions required a high degree of auditor judgment and an increased extent of effort, including the need to involve our fair value specialists. How the Critical Audit Matter Was Addressed in the Audit Our audit procedures related to management’s determination of the credit risk associated with these loans included the following, among others: • We tested the design and operating effectiveness of controls over the valuation of the acquired loans, including management’s controls over the determination of credit risk. 61 • With the assistance of our fair value specialists, we obtained an understanding and evaluated the reasonableness of the Company’s valuation methodology and assumptions. • We compared the accuracy of the Company’s fair value pricing to the pricing independently developed by our fair value specialists. /s/ Deloitte & Touche LLP St. Louis, Missouri February 25, 2022 We have served as the Company’s auditor since 2010. 62 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the shareholders and Board of Directors of Enterprise Financial Services Corp Opinion on Internal Control over Financial Reporting We have audited the internal control over financial reporting of Enterprise Financial Services Corp and subsidiaries (the “Company”) as of December 31, 2021, based on criteria established in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2021, based on criteria established in Internal Control — Integrated Framework (2013) issued by COSO. We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated financial statements as of and for the year ended December 31, 2021, of the Company and our report dated February 25, 2022, expressed an unqualified opinion on those financial statements and included an explanatory paragraph regarding the Company’s adoption of accounting standard update (ASU) 2016-13 “Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments” . Basis for Opinion The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Assessment of Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion. Definition and Limitations of Internal Control over Financial Reporting A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. /s/ Deloitte & Touche LLP St. Louis, Missouri February 25, 2022 63 ENTERPRISE FINANCIAL SERVICES CORP AND SUBSIDIARIES Consolidated Balance Sheets As of December 31, 2021 and 2020 ($ in thousands, except per share data) December 31, 2021 December 31, 2020 Assets Cash and due from banks $ 209,177 $ 99,760 Federal funds sold 1,356 1,519 Interest-earning deposits (including $14,595 and $36,525 pledged as collateral, respectively) 1,811,156 436,424 Total cash and cash equivalents 2,021,689 537,703 Interest-earning deposits greater than 90 days 6,996 7,626 Securities available-for-sale 1,366,006 912,429 Securities held-to-maturity, net 429,681 487,610 Loans held-for-sale 6,389 13,564 Loans 9,017,642 7,224,935 Allowance for credit losses on loans ( 145,041 ) ( 136,671 ) Total loans, net 8,872,601 7,088,264 Other investments 59,896 48,764 Fixed assets, net 47,915 53,169 Goodwill 365,164 260,567 Intangible assets, net 22,286 23,084 Other assets 338,735 318,791 Total assets $ 13,537,358 $ 9,751,571 Liabilities and Shareholders' equity Noninterest-bearing demand accounts $ 4,578,436 $ 2,711,828 Interest-bearing demand accounts 2,465,884 1,768,497 Money market accounts 2,890,976 2,327,066 Savings accounts 800,210 627,903 Certificates of deposit: Brokered 128,970 50,209 Other 479,323 499,886 Total deposits 11,343,799 7,985,389 Subordinated debentures and notes 154,899 203,637 FHLB advances 50,000 50,000 Other borrowings 353,863 301,081 Other liabilities 105,681 132,489 Total liabilities 12,008,242 8,672,596 Commitments and contingent liabilities (Note 18) Shareholders' equity: Preferred stock, $0.01 par value; 5,000,000 shares authorized; 75,000 and 0 shares issued and outstanding, respectively ($1,000 per share liquidation preference) 71,988 — Common stock, $0.01 par value; 75,000,000 and 45,000,000 shares authorized; 39,799,615 and 33,190,306 shares issued, respectively 398 332 Treasury stock, at cost; 1,980,093 shares ( 73,528 ) ( 73,528 ) Additional paid in capital 1,018,799 697,839 Retained earnings 492,682 417,212 Accumulated other comprehensive income 18,777 37,120 Total shareholders' equity 1,529,116 1,078,975 Total liabilities and shareholders' equity $ 13,537,358 $ 9,751,571 See accompanying notes to consolidated financial statements. 64 ENTERPRISE FINANCIAL SERVICES CORP AND SUBSIDIARIES Consolidated Statements of Operations Years ended December 31, 2021, 2020, and 2019 Year ended December 31, ($ in thousands, except per share data) 2021 2020 2019 Interest income: Loans $ 348,615 $ 270,238 $ 269,406 Debt securities: Taxable 18,030 24,629 29,030 Nontaxable 13,814 8,397 3,515 Interest-earning deposits 1,496 620 2,128 Dividends on equity securities 1,275 895 1,055 Total interest income 383,230 304,779 305,134 Interest expense: Deposits 10,668 21,049 49,856 Subordinated debentures and notes 10,960 9,885 7,507 FHLB advances 803 2,673 6,668 Other borrowings 605 1,171 2,386 Total interest expense 23,036 34,778 66,417 Net interest income 360,194 270,001 238,717 Provision for credit losses 13,385 65,398 6,372 Net interest income after provision for credit losses 346,809 204,603 232,345 Noninterest income: Service charges on deposit accounts 15,428 11,717 12,801 Wealth management revenue 10,259 9,732 9,932 Card services revenue 11,880 9,481 9,154 Tax credit income 8,028 6,611 5,393 Miscellaneous income 22,148 16,962 11,896 Total noninterest income 67,743 54,503 49,176 Noninterest expense: Employee compensation and benefits 124,904 92,288 81,295 Occupancy 16,286 13,457 12,465 Data processing 12,242 9,050 8,242 Professional fees 4,289 3,940 3,683 Branch-closure expenses 3,441 — — Merger-related expenses 22,082 4,174 17,969 Other 62,675 44,250 41,831 Total noninterest expense 245,919 167,159 165,485 Income before income tax expense 168,633 91,947 116,036 Income tax expense 35,578 17,563 23,297 Net income $ 133,055 $ 74,384 $ 92,739 Earnings per common share Basic $ 3.86 $ 2.76 $ 3.56 Diluted 3.86 2.76 3.55 See accompanying notes to consolidated financial statements. 65 ENTERPRISE FINANCIAL SERVICES CORP AND SUBSIDIARIES Consolidated Statements of Comprehensive Income Years ended December 31, 2021, 2020, and 2019 Year ended December 31, ($ in thousands) 2021 2020 2019 Net income $ 133,055 $ 74,384 $ 92,739 Other comprehensive income (loss), net of tax: Change in unrealized gain (loss) on available-for-sale debt securities ( 17,049 ) 23,944 29,189 Reclassification adjustment for realized (gain) loss on the sale of available-for-sale debt securities — ( 317 ) 37 Reclassification of gain on held-to-maturity securities ( 3,624 ) ( 1,910 ) ( 33 ) Change in unrealized gain (loss) on cash flow hedges arising during the period 1,161 ( 5,947 ) ( 2,262 ) Reclassification of loss on cash flow hedges 1,169 3,601 100 Other comprehensive income (loss), net ( 18,343 ) 19,371 27,031 Total comprehensive income $ 114,712 $ 93,755 $ 119,770 See accompanying notes to consolidated financial statements. 66 ENTERPRISE FINANCIAL SERVICES CORP AND SUBSIDIARIES Consolidated Statements of Shareholders’ Equity Years ended December 31, 2021, 2020, and 2019 ($ in thousands, except per share data) Preferred Stock Common Stock Treasury Stock Additional paid in capital Retained earnings Accumulated other comprehensive income (loss) Total shareholders’ equity Balance December 31, 2018 $ — $ 239 $ ( 42,655 ) $ 350,936 $ 304,566 $ ( 9,282 ) $ 603,804 Net income $ — $ — $ — $ — $ 92,739 $ — $ 92,739 Other comprehensive loss, net — — — — — 27,031 27,031 Cash dividends paid on common shares, $0.62 per share — — — — ( 16,568 ) — ( 16,568 ) Repurchase of common shares, 396,737 shares — — ( 15,526 ) — — — ( 15,526 ) Issuance under equity compensation plans, 137,271 shares, net — 2 — ( 214 ) — — ( 212 ) Shares issued in connection with acquisition of Trinity Capital Corporation, 3,990,822 shares 40 — 171,845 — — 171,885 Share-based compensation — — — 4,032 — — 4,032 Balance December 31, 2019 $ — $ 281 $ ( 58,181 ) $ 526,599 $ 380,737 $ 17,749 $ 867,185 Net income $ — $ — $ — $ — $ 74,384 $ — $ 74,384 Other comprehensive income, net — — — — — 19,371 19,371 Cash dividends paid on common shares, $0.72 per share — — — — ( 19,795 ) — ( 19,795 ) Repurchase of common shares, 456,251 shares — — ( 15,347 ) — — — ( 15,347 ) Issuance under equity compensation plans, 146,005 shares, net — 1 — 77 — — 78 Shares issued in connection with acquisition of Seacoast Commerce Banc Holdings, 4,977,214 shares — 50 — 166,985 — — 167,035 Share-based compensation — — — 4,178 — — 4,178 Reclassification for the adoption of ASU 2016-13 (CECL) — — — ( 18,114 ) — ( 18,114 ) Balance December 31, 2020 $ — $ 332 $ ( 73,528 ) $ 697,839 $ 417,212 $ 37,120 $ 1,078,975 Net income $ — $ — $ — $ — $ 133,055 $ — $ 133,055 Other comprehensive loss, net — — — — — ( 18,343 ) ( 18,343 ) Cash dividends paid on common shares, $0.75 per share — — — — ( 26,153 ) — ( 26,153 ) Repurchase of common shares, 1,299,527 shares — ( 12 ) — ( 30,518 ) ( 30,059 ) — ( 60,589 ) Issuance under equity compensation plans, 131,564 shares, net — — — 2,549 ( 663 ) — 1,886 Shares issued in connection with acquisition of First Choice Bancorp, 7,777,272 shares, net (gross issuance 7,808,459 shares) — 78 — 342,912 ( 710 ) — 342,280 Preferred stock issuance, net of $3,012 issuance cost 71,988 — — — — — 71,988 Share-based compensation — — — 6,017 — — 6,017 Balance December 31, 2021 $ 71,988 $ 398 $ ( 73,528 ) $ 1,018,799 $ 492,682 $ 18,777 $ 1,529,116 See accompanying notes to consolidated financial statements. 67 ENTERPRISE FINANCIAL SERVICES CORP AND SUBSIDIARIES Consolidated Statements of Cash Flows Years ended December 31, 2021, 2020, and 2019 Year ended December 31, ($ in thousands) 2021 2020 2019 Cash flows from operating activities: Net income $ 133,055 $ 74,384 $ 92,739 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation 6,147 6,152 5,719 Provision for credit losses 13,385 65,398 6,372 Deferred income taxes 545 ( 12,578 ) 5,800 Net amortization of debt securities 7,343 6,745 2,973 Net accretion of loan discount ( 1,140 ) ( 7,767 ) ( 10,494 ) Amortization of intangible assets 5,690 5,673 5,543 Amortization of servicing assets 2,311 37 — Mortgage loans originated-for-sale ( 159,670 ) ( 223,094 ) ( 81,941 ) Proceeds from mortgage loans sold 163,864 217,934 77,302 Loss (gain) on: Sale of investment securities — ( 421 ) 49 Sale of other real estate ( 931 ) 13 ( 113 ) Sale of state tax credits ( 2,220 ) ( 2,016 ) ( 2,549 ) Asset impairment 3,441 — — Share-based compensation 6,017 4,178 4,032 Changes in other assets and liabilities, net ( 17,262 ) 876 ( 12,975 ) Net cash provided by operating activities 160,575 135,514 92,457 Cash flows from investing activities: Acquisition cash purchase price, net of cash and cash equivalents acquired 212,642 62,114 ( 23,377 ) Net decrease (increase) in loans 138,455 ( 700,096 ) ( 284,235 ) Proceeds received from: Sale of debt securities, available-for-sale 27,135 20,221 357,976 Paydown or maturity of debt securities, available-for-sale 306,360 329,350 146,132 Paydown or maturity of debt securities, held-to-maturity 49,947 41,377 7,447 Redemption of other investments 18,159 43,555 61,917 Sale of state tax credits held-for-sale 18,507 14,252 14,689 Sale of other real estate 5,915 652 4,798 Settlement of bank-owned life insurance policies — 1,993 — Payments for the purchase of: Available-for-sale debt securities ( 779,481 ) ( 452,541 ) ( 577,211 ) Other investments ( 9,564 ) ( 50,421 ) ( 68,963 ) State tax credits held-for-sale ( 8,689 ) ( 11,026 ) ( 11,356 ) Fixed assets ( 2,500 ) ( 2,259 ) ( 6,337 ) Net cash used in investing activities ( 23,114 ) ( 702,829 ) ( 378,520 ) 68 Year ended December 31, ($ in thousands) 2021 2020 2019 Cash flows from financing activities: Net increase in noninterest-bearing deposit accounts $ 869,203 $ 627,756 $ 57,551 Net increase in interest-bearing deposit accounts 648,778 505,604 44,300 Proceeds from the issuance of subordinated notes — 61,953 — Payments for the redemption of subordinated notes ( 50,000 ) — — Proceeds (repayments) from short-term FHLB advances, net ( 160,000 ) ( 172,300 ) 95,500 Proceeds from long-term FHLB advances — — 50,000 Repayment of PPPLF advances — ( 86,096 ) — Proceeds from notes payable — — 41,000 Repayments of notes payable ( 7,143 ) ( 4,286 ) ( 8,714 ) Net increase in other borrowings 59,925 40,195 9,436 Cash dividends paid on common stock ( 26,153 ) ( 19,795 ) ( 16,568 ) Repurchase of common stock ( 60,589 ) ( 15,347 ) ( 15,526 ) Proceeds from issuance of preferred stock, net 71,988 — — Other, net 516 78 ( 212 ) Net cash provided by financing activities 1,346,525 937,762 256,767 Net increase (decrease) in cash and cash equivalents 1,483,986 370,447 ( 29,296 ) Cash and cash equivalents, beginning of period 537,703 167,256 196,552 Cash and cash equivalents, end of period $ 2,021,689 $ 537,703 $ 167,256 Supplemental disclosures of cash flow information: Cash paid during the period for: Interest $ 23,957 $ 35,423 $ 65,667 Income taxes 56,845 7,514 13,582 Noncash investing and financing transactions: Transfer to other real estate owned in settlement of loans $ 3,227 $ 798 $ 8,148 Sales of other real estate financed 228 48 621 Transfer of securities from available-for-sale to held-to-maturity — 352,665 116,303 Transfer to loans from fixed assets for deconsolidation of partnership — 3,336 — Right-of-use assets obtained in exchange for lease obligations 5,658 1,623 5,208 Common shares issued in connection with acquisitions 343,650 167,035 171,885 See accompanying notes to consolidated financial statements. 69 ENTERPRISE FINANCIAL SERVICES CORP AND SUBSIDIARIES Notes to Consolidated Financial Statements NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The significant accounting policies used by the Company in the preparation of the consolidated financial statements are summarized below. Business and Consolidation Enterprise is a financial holding company that provides a full range of banking and wealth management services to individuals and corporate customers primarily located in the Arizona, California, Kansas, Missouri, Nevada, and New Mexico markets through its banking subsidiary, Enterprise Bank & Trust. All intercompany accounts and transactions have been eliminated. The Company and its banking subsidiary are subject to the regulations of certain federal and state agencies and undergo periodic examinations by those regulatory agencies. The Company has one operating segment. Use of Estimates The consolidated financial statements of the Company have been prepared in conformity with GAAP. In preparing the consolidated financial statements, management is required to make estimates and assumptions, which significantly affect the reported amounts in the consolidated financial statements. 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 experience and other factors, including the current economic environment, which management believes to be reasonable under the circumstances. Management adjusts such estimates and assumptions when facts and circumstances dictate. As future events and their effects cannot be determined with precision, actual results could differ significantly from these estimates. Changes in those estimates resulting from continuing changes in the economic environment will be reflected in the financial statements in future periods. Cash Flow Information For purposes of reporting cash flows, the Company considers cash and due from banks, interest-bearing deposits and federal funds sold that mature within 90 days of the balance sheet date to be cash and cash equivalents. The balances at December 31, 2021 and 2020 were not subject to reserve requirements from the Federal Reserve. Recent Accounting Pronouncements ASU 2021-01, Reference Rate Reform (Topic 848): Scope (ASU 2021-01). ASU 2021-01 was issued in January 2021 and provided optional expedients and exceptions in ASC 848 to contracts, hedging relationships, and other transactions affected by reference rate reform if certain criteria are met. The amendment only applies to contracts, hedging relationships, and other transactions that reference LIBOR or another reference rate expected to be discontinued because of reference rate reform. The expedients and exceptions provided by the amendments will not apply to contract modifications made and hedging relationships entered into or evaluated after December 31, 2022, except for hedging relationships existing as of December 31, 2022, that an entity has elected certain optional expedients for and that are retained through the end of the hedging relationship. The amendments in this update were effective immediately upon issuance and did not have a material effect on the consolidated financial statements. Investments The Company has classified all investments in debt securities as available-for-sale or held-to-maturity. Securities classified as available-for-sale are carried at fair value. Unrealized holding gains and losses for available-for-sale securities are excluded from earnings and reported as a net amount in a separate component of 70 shareholders’ equity until realized. All previous fair value adjustments included in the separate component of shareholders’ equity are reversed upon sale. Securities classified as held-to-maturity are carried at amortized cost and adjusted for amortization of premiums and accretion of discounts. Prior to the adoption of ASU 2016-13 on January 1, 2020, declines in the fair value of securities below their cost deemed to be other-than-temporary were reflected in operations as realized losses. In estimating other-than-temporary impairment losses, management evaluated investment securities for other-than-temporary declines in fair value on a quarterly basis. This analysis required management to consider various factors, which included (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’s more likely than not the Company would be required to sell the security before its anticipated recovery in market value. An ACL on held-to-maturity securities is deducted from the amortized cost basis of the securities to reflect the expected amount to be collected. When it is determined that a security will not be collected, the balance is written-off through the allowance. In evaluating the need for an ACL, securities with similar risk characteristics are grouped and an estimate of expected cash flows is determined using loss experience, adjusted for current and reasonable and supportable forecasts of economic conditions. For available-for-sale securities in a loss position, the Company evaluates whether the decline in fair value below amortized cost resulted from a credit loss or other factors. Losses attributed to credit are recognized through an ACL on available-for-sale securities, limited to the amount that the fair value of securities is less than the amortized cost basis. In assessing credit loss, the Company considers, among other things, (1) the extent to which fair value is less than the amortized cost basis, (2) adverse conditions specific to the security or industry, (3) historical payment patterns, (4) the likelihood of future payments, and (5) changes to the rating of a security by a rating agency. The Company has elected to exclude accrued interest receivable balances from the estimate of the ACL as these amounts are timely written off as a credit loss expense. Adjustments to the ACL on held-to-maturity and available-for-sale securities are recognized as a component of the provision for credit losses in the Consolidated Statements of Operations. Premiums and discounts are amortized or accreted over the expected lives of the respective securities as an adjustment to yield using the interest method. Dividend and interest income is recognized when earned. Realized gains and losses are included in earnings and are derived using the specific identification method for determining the cost of securities sold. Loans Held-for-Sale and Servicing Assets The Company provides long-term financing of one-to-four-family residential real estate by originating fixed and variable rate loans. Long-term fixed and variable rate loans are usually sold into the secondary market with limited recourse. Upon receipt of an application for a real estate loan, the Company determines whether the loan will be sold into the secondary market or retained in the Company’s loan portfolio. The interest rates on the loans sold are locked with the buyer and the Company bears no interest rate risk related to these loans. Mortgage loans held-for-sale are carried at the lower of cost or fair value, which is determined on a specific identification method. The Company does not retain servicing on these loans. The Company also originates SBA7(a) loans that generally provide for a guarantee of 75% up to a maximum amount. The guaranteed portion of the loan can be sold in an active secondary market. For the years ended December 31, 2021 and 2020, all SBA7(a) loans are considered held-for-investment; however, as the Company makes the determination to sell the loans, they will be moved into the held-for-sale category. Sales of SBA guaranteed loans are executed on a servicing retained basis, and the Company retains the rights and obligations to service the loans. At December 31, 2021, the Company was servicing SBA loans that had been sold and has 71 recorded a related servicing asset of $ 6.7 million. The servicing asset is accounted for under the amortization method and is evaluated for impairment. Amortization of the servicing asset is recorded as a reduction to servicing income. Gains on the sale of loans held-for-sale are reported net of direct origination fees and costs in the Company’s Consolidated Statements of Operations. Loans Loans are reported at the principal balance outstanding, net of unearned fees, costs, and premiums or discounts on acquired loans. Loan origination fees, direct origination costs, and premiums or discounts resulting from acquired loans are deferred and recognized over the lives of the related loans as a yield adjustment using the interest method. Interest on loans is accrued to income based on the principal balance outstanding. The recognition of interest income is discontinued when a loan becomes 90 days past due or a significant deterioration in the borrower’s credit has occurred which, in management’s judgment, negatively impacts the collectibility of the loan. Unpaid interest on such loans is reversed at the time the loan becomes uncollectible and subsequent interest payments received are generally applied to principal if any doubt exists as to the collectibility of such principal. Loans that have not been restructured are returned to accrual status when management believes full collectibility of principal and interest is expected. Non-accrual loans that have been restructured will remain in a non-accrual status until the borrower has made at least six months of consecutive contractual payments. 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 $ 31.1 million and $ 30.6 million at December 31, 2020 and 2021, respectively, and were reported in Other Assets on the consolidated balance sheets. Acquired Loans Prior to the adoption of ASU 2016-13 on January 1, 2020, PCI loans were acquired in a business combination or transaction, had evidence of deterioration of credit quality since origination and for which it was probable, at acquisition, that the Company would be unable to collect all contractually required payments receivable. PCI loans were initially recorded at fair value (as determined by the present value of expected future cash flows) with no valuation allowance. The difference between the undiscounted cash flows expected at acquisition and the investment in the loans, or the “accretable yield,” was recognized as interest income on a level-yield method over the life of the loans. Contractually required payments for interest and principal that exceeded the undiscounted cash flows expected at acquisition, or the “nonaccretable difference,” were not recognized as a yield adjustment or as a loss accrual or a valuation allowance. The Company aggregated individual loans with common risk characteristics into pools of loans. Increases in expected cash flows subsequent to the initial investment were recognized prospectively through adjustment of the yield on the loans over their remaining lives. Decreases in expected cash flows due to an inability to collect contractual cash flows were recognized as impairment through the provision for loan losses account. Any allowance for loan loss on these pools reflected only losses incurred after the acquisition. Disposals of loans, including sales of loans, paydowns, payments in full or foreclosures resulted in the removal or reduction of the loan from the loan pool. Subsequent to the adoption of ASU 2016-13, acquired loans are separated into two categories based on the credit risk characteristics of the underlying borrowers as either PCD, for loans which have experienced more than insignificant credit deterioration since origination, or loans with no credit deterioration (non-PCD). At the date of acquisition, an ACL on PCD loans is determined and added to the amortized cost basis of the individual loans. 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. The ACL on PCD loans is recorded in the acquisition accounting and no provision for credit losses is recognized at the acquisition date. Subsequent changes 72 to the ACL are recorded through provision expense. For non-PCD loans, an ACL is established immediately after the acquisition through a charge to the provision for credit losses. The ACL for both PCD and non-PCD is determined by pooling loans with similar risk characteristics and using the approach discussed below under “Allowance for Credit Losses on Loans”. Impaired Loans Loans are considered “impaired” when it becomes probable that the Company will be unable to collect all amounts due according to the loan’s contractual terms. Non-accrual loans, loans past due greater than 90 days and still accruing, unless adequately secured and in the process of collection, and restructured loans qualify as “impaired loans.” Restructured loans involve the granting of a concession on the terms of a loan to a borrower experiencing financial difficulty. Concessions may be granted in various forms, including changes in payment schedule or interest rate. When measuring impairment, the expected future cash flows of an impaired loan are discounted at the loan’s effective interest rate at origination. Alternatively, impairment can be measured by reference to an observable market price, if one exists, or the fair value of the collateral for a collateral-dependent loan. Loans and leases, which are deemed uncollectible, are charged off to the allowance for credit losses, while recoveries of amounts previously charged off are credited to the allowance for credit losses. Loans are generally placed on non-accrual status when contractually past due 90 days or more as to interest or principal payments. Additionally, whenever management becomes aware of facts or circumstances that may adversely impact the collectability of principal or interest on loans, it is management’s practice to place such loans on non-accrual status immediately, rather than delaying such action until the loans become 90 days past due. Previously accrued and uncollected interest on such loans is reversed. Income is recorded only to the extent a determination has been made that the principal balance of the loan is collectible and the interest payments are subsequently received in cash, or for a restructured loan, the borrower has made six consecutive contractual payments. If collectibility of the principal is in doubt, payments received are applied to loan principal. Loans past due 90 days or more but still accruing interest are also generally included in nonperforming loans. Loans past due 90 days or more but still accruing are classified as such where the underlying loans are both well secured (the collateral value covers principal and accrued interest) and in the process of collection. Allowance for Credit Losses on Loans The ACL on loans 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 ACL on loans is measured on a collective basis when similar risk characteristics exist. The Company has identified the following portfolio segments: C&I – C&I loans consist of loans to small and medium-sized businesses in a wide variety of industries. These loans are generally collateralized by inventory, accounts receivable, equipment, real estate and other commercial assets, and may be supported by other credit enhancements such as personal guarantees. Risk arises primarily due to a difference between expected and actual cash flows of the borrower. However, the recoverability of these loans is also dependent on other factors primarily dictated by the type of collateral securing these loans. The fair value of the 73 collateral securing these loans may fluctuate as market conditions change. Included within C&I are revolving loans supported by borrowing bases that fluctuate depending on the amount of underlying collateral. A portion of C&I loans consists of sponsor finance, which are loans with senior debt exposure to private equity backed companies. CRE – CRE loans include various types of loans for which the Company holds real property as collateral. Commercial real estate lending activity is typically restricted to owner-occupied properties or to investor properties that are owned by customers with a current banking relationship. The primary risks of CRE loans include the borrower’s inability to pay, material decreases in the value of the real estate being held as collateral and significant increases in interest rates, which may make the real estate mortgage loan unprofitable. Real estate loans may be more adversely affected by conditions in the real estate markets or in the general economy. Construction and Land Development – The Company originates loans to finance construction projects including 1-4 family residences, multifamily residences, commercial office, and industrial projects. Construction loans are generally collateralized by first liens on the real estate and have floating interest rates. Construction loans are considered to have higher risks due to construction completion and timing risk, and the ultimate repayment being sensitive to interest rate changes, governmental regulation of real property and the availability of long-term financing. Additionally, economic conditions may impact the Company’s ability to recover its investment in construction loans. Adverse economic conditions may negatively impact the real estate market which could affect the borrowers’ ability to complete and sell the project. Additionally, the fair value of the underlying collateral may fluctuate as market conditions change. Residential Real Estate – The Company originates loans to finance one- to four-family residences, secured by both first and second liens. Repayment of these loans is dependent on the borrowers’ ability to pay and the fair value of the underlying collateral. Residential loans with a second lien are inherently riskier due to the junior lien position. Agricultural – Agricultural loans are generally secured with equipment, livestock, crops or other non-real property and at times the underlying real property. Agricultural loans are primarily included as a component of CRE and C&I loans. Consumer – The Company provides a broad range of consumer loans to customers, including personal lines of credit, credit cards, recreational vehicles, yachts and automobile loans. Repayment of these loans is dependent on the borrowers’ ability to pay and the fair value of the underlying collateral. Consumer loans are included as a component of Other loans. 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 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 and first lien Residential Real Estate. The annual percentage change in gross domestic product is also used in C&I, Construction, Agricultural first lien Residential Real Estate, and Consumer portfolios. The annual percentage change in a commercial real estate index, national house price index and national retail sales are used in the CRE, second lien 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 one-year period. 74 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 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. Loan Charge-Offs Loans are charged-off when the primary and secondary sources of repayment (cash flow, collateral, guarantors, etc.) are less than their carrying value. Other Real Estate Other real estate represents property acquired through foreclosure or deeded to the Company in lieu of foreclosure on loans on which the borrowers have defaulted on the payment of principal or interest. Other real estate is recorded on an individual asset basis at the lower of cost or fair value less estimated costs to sell. The fair value of other real estate is based upon estimates of future cash flows, market value of similar assets, if available, or independent appraisals. These estimates involve significant uncertainties and judgments. As a result, fair value estimates may not be realizable in a current sale or settlement of the other real estate. Subsequent reductions in fair value are expensed within noninterest expense. Gains and losses resulting from the sale of other real estate are credited or charged to current period earnings. Costs of maintaining and operating other real estate are expensed as incurred, and expenditures to complete or improve other real estate properties are capitalized if the expenditures are expected to be recovered upon ultimate sale of the property. Fixed Assets Buildings, leasehold improvements, furniture, fixtures, and equipment are stated at cost less accumulated depreciation. All categories are computed using the straight-line method over their respective estimated useful lives. Furniture, fixtures and equipment is depreciated over three to ten years and buildings and leasehold improvements over ten to forty years , based upon estimated lives or lease obligation periods. State Tax Credits The Company has purchased the rights to receive 10-year streams of state tax credits at agreed upon discount rates and sells such tax credits to its clients and others. State tax credits are accounted for at cost. The Company is also a minority partner in a joint venture, accounted for as an equity method investment, that purchases state income tax credits for resale to customers. Income from both the sale of state tax credits and earnings from the joint venture are reported as tax credit income in the Consolidated Statements of Operations. Cash Surrender Value of Life Insurance The Company has purchased bank-owned life insurance policies on certain bank officers. Bank-owned life insurance is recorded at its cash surrender value. Changes in the cash surrender values, including death benefits in excess of the carrying amount, are included in noninterest income. Federal Home Loan Bank Stock The Bank, as a member of the FHLB, is required to maintain an investment in the capital stock of the FHLB. The stock is redeemable at par by the FHLB, and is, therefore, carried at cost and periodically evaluated for impairment. The Company records FHLB dividends in interest income. Goodwill and Other Intangible Assets The Company tests goodwill for impairment on an annual basis and whenever events or changes in circumstances indicate the Company may not be able to recover the respective asset’s carrying amount. The Company’s annual test for impairment was performed in the fourth quarter of December 31, 2021. Such tests involve the use of estimates and assumptions. Potential impairments to goodwill must first be identified by performing a qualitative assessment which evaluates relevant events or circumstances to determine whether it is more likely than not that the fair value of a reporting unit 75 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. Core deposit intangibles are amortized using an accelerated method over an estimated useful life of approximately 10 years. Impairment of Long-Lived Assets Long-lived assets, such as fixed assets and purchased intangibles subject to amortization, 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 in the amount by which the carrying amount of the asset exceeds the fair value of the asset. Assets to be disposed of are separately presented in the balance sheet and reported at the lower of the carrying amount or fair value less costs to sell, and are no longer depreciated. The assets and liabilities of a disposal group classified as held-for-sale are presented separately in the appropriate asset and liability sections of the balance sheet. Derivative Financial Instruments and Hedging Activities The Company uses derivative financial instruments to assist in managing interest rate sensitivity and to modify the repricing, maturity and option characteristics of certain assets and liabilities. In addition, the Company also offers an interest rate hedge program that includes interest rate swaps to assist its customers in managing their interest rate risk profile. In order to eliminate the interest rate risk associated with offering these products, the Company enters into derivative contracts with third parties to offset the customer contracts. Derivative instruments are required to be measured at fair value and recognized as either assets or liabilities in the consolidated financial statements. Fair value represents the payment the Company would receive or pay if the item were sold or bought in a current transaction. The accounting for changes in fair value (gains or losses) of a hedged item is dependent on whether the related derivative is designated and qualifies for “hedge accounting.” The Company assigns derivatives to one of these categories at the purchase date: cash flow hedge, fair value hedge, or non-designated hedges as part of a customer interest-rate swap product. An assessment of the expected and ongoing hedge effectiveness of any derivative designated a fair value hedge or cash flow hedge is performed as required by the accounting standards. Derivatives are included in other assets and other liabilities in the consolidated balance sheets. The fair value amounts recognized for derivative instruments and the fair value amounts recognized for the right to reclaim or obligation to return cash collateral are not offset when represented under a master netting arrangement. Generally, the only derivative instruments used by the Company have been interest rate swaps, forward currency contracts, and interest rate caps. Certain derivative financial instruments are not designated as cash flow or as fair value hedges for accounting purposes. These non-designated derivatives are intended to provide interest rate protection on net interest income or noninterest income but do not meet hedge accounting treatment. Customer accommodation interest rate swap contracts are not designated as hedging instruments. Changes in the fair value of these instruments are recorded in interest income or noninterest income in the consolidated statements of income depending on the underlying hedged item. Income Taxes The Company and its subsidiaries file a consolidated federal income tax return. Deferred tax assets and liabilities are recognized for the estimated future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates in effect for the year in which those temporary differences are expected to be recovered or settled. The need for deferred tax asset valuation allowances is based on a more-likely-than-not standard. The ability to realize deferred tax assets depends on the ability to generate sufficient positive taxable 76 income within the carryback or carryforward periods provided for in the laws for each applicable taxing jurisdiction. The following possible sources of taxable income are considered: future reversal patterns of existing taxable temporary differences, future taxable income exclusive of reversing temporary differences, taxable income in prior carryback years and the availability of qualified tax planning strategies. The assessment regarding whether a valuation allowance is required or should be adjusted depends on all available positive and negative factors including, but not limited to, nature, frequency, and severity of recent losses, duration of available carryforward periods, experience with tax attributes expiring unused and near and medium term financial outlook. Because of the complexity of tax laws and regulations, interpretation can be difficult and subject to legal judgment given specific facts and circumstances. It is possible that others, given the same information, may at any point in time reach different reasonable conclusions regarding the estimated amounts of accrued taxes. Stock-Based Compensation Stock-based compensation is recognized as an expense for stock options, restricted stock awards, performance stock units, and restricted stock units granted to employees, directors, and advisors in return for service. Equity classified awards are measured at the grant date fair value using either an observable market value or a valuation methodology, and are recognized over the requisite service period on a straight-line basis. Forfeitures are recorded as they occur. A description of the Company’s stock-based employee compensation plan is included in “Note 16 - Shareholders’ Equity and Compensation Plans.” Acquisitions and Divestitures Acquisitions and business combinations are accounted for using the acquisition method of accounting. The assets and liabilities of the acquired entities have been recorded at their estimated fair values at the date of acquisition. Goodwill represents the excess of the purchase price over the fair value of net assets acquired, including the amount assigned to identifiable intangible assets. The purchase price allocation process requires an estimation of the fair values of the assets acquired and the liabilities assumed. When a business combination agreement provides for an adjustment to the cost of the combination contingent on future events, the Company includes an estimate of the acquisition-date fair value as part of the cost of the combination. To determine the fair values, the Company relies on third party valuations, such as appraisals, or internal valuations based on discounted cash flow analyses or other valuation techniques. The results of operations of the acquired business are included in the Company’s consolidated financial statements from the date of acquisition. Merger-related expenses include costs directly related to merger or acquisition activity and include legal and professional fees, system consolidation and conversion costs, and compensation costs such as severance and retention incentives for employees impacted by acquisition activity. The Company accounts for merger-related expenses in the periods in which the costs are incurred and the services are received. For divestitures, the Company measures an asset (disposal group) classified as held-for-sale at the lower of its carrying value at the date the asset is initially classified as held-for-sale or its fair value less costs to sell. The Company reports the results of operations of an entity or group of components that either has been disposed of or held-for-sale as discontinued operations only if the disposal of that component represents a strategic shift that has or will have a major effect on an entity’s operations and financial results. Any incremental direct costs incurred to transact the sale are allocated against the gain or loss on the sale. These costs would include items such as legal fees, title transfer fees, broker fees, etc. Any goodwill and intangible assets associated with the portion of the reporting unit to be disposed of is included in the carrying amount of the business in determining the gain or loss on the sale. Basic and Diluted Earnings Per Common Share Basic earnings per common share data is calculated by dividing net income available to common shareholders by the weighted average number of common shares outstanding during the period. 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. 77 Consolidated Statement of Comprehensive Income The Consolidated Statement of Comprehensive Income includes the amount and the related tax impact that have been reclassified from accumulated other comprehensive income to net income. The classification adjustment for unrealized loss/gain on sale of securities included in net income has been recorded through the gain on sale of investment securities line item, within noninterest income, in the Company’s Consolidated Statements of Operations. Share Repurchases The Company periodically adopts share repurchase plans that authorize open market repurchases of common stock. Shares acquired through the repurchase plan are classified as treasury stock or the shares are immediately retired upon settlement, depending on plan authorization. When shares are retired, the excess of repurchase price over par is allocated between additional paid in capital and retained earnings. The amount allocated to additional paid in capital is limited to the pro rata portion of additional paid in capital at the time of repurchase. Reclassifications Certain amounts reported in prior periods have been reclassified to conform to the current presentation. The reclassifications had no effect on net income or shareholders’ equity. NOTE 2 - ACQUISITIONS The acquisition noted below has been accounted for as a business combination using the acquisition method of accounting which requires assets acquired and liabilities assumed to be recognized at fair value as of the acquisition date. Goodwill arising from the acquisitions consist largely of the synergies and economies of scale expected from combining the operations into Enterprise. None of the goodwill recognized is expected to be deductible for income tax purposes. Acquisition of First Choice Bancorp On July 21, 2021, the Company closed its acquisition of 100% of First Choice and its wholly-owned subsidiary, FCB, which operated eight full-service branches in California. First Choice shareholders received 0.6603 shares of EFSC common stock for each First Choice common share and cash in lieu of any fractional shares. In connection with the merger, Enterprise issued approximately 7.8 million shares of EFSC Common Stock valued at $ 44.01 per share, which was the closing price of Enterprise common stock on July 21, 2021. The value of the transaction consideration was approximately $ 346 million, which includes approximately $ 2.1 million payable to holders of First Choice stock options. For the year ended December 31, 2021, the Company recognized $ 18.8 million of merger-related costs recorded in noninterest expense in the statement of operations related to the First Choice acquisition. 78 The following tables present the assets acquired and liabilities assumed. The consideration exchanged, assets acquired and liabilities assumed of First Choice were recorded at estimated fair value on the date of acquisition. Fair values are considered preliminary until final fair values are determined, or the measurement period has passed, which is no later than one year from the date of acquisition. (in thousands) As Recorded by First Choice Adjustments As Recorded by EFSC Assets acquired: Cash and cash equivalents $ 214,794 $ — $ 214,794 Securities 34,533 ( 44 ) (a) 34,489 Loans 1,937,635 5,508 (b) 1,943,143 Allowance ( 19,626 ) 12,620 (b) ( 7,006 ) Other investments 19,178 138 (c) 19,316 Fixed assets 1,869 ( 870 ) (c) 999 Accrued interest receivable 7,131 20 (c) 7,151 Goodwill 73,425 ( 73,425 ) (d) — Intangible assets 4,517 375 (e) 4,892 Deferred tax assets 7,558 ( 1,943 ) (c) 5,615 Other assets 23,024 1,645 (c) 24,669 Total assets acquired $ 2,304,038 $ ( 55,976 ) $ 2,248,062 Liabilities assumed: Deposits $ 1,840,716 $ ( 287 ) (c) $ 1,840,429 FHLB advances 160,000 — 160,000 Accrued interest payable 124 — 124 Other liabilities 8,464 ( 2,160 ) (c) 6,304 Total liabilities assumed $ 2,009,304 $ ( 2,447 ) $ 2,006,857 Net assets acquired $ 294,734 $ ( 53,529 ) $ 241,205 Consideration paid: Cash $ 2,152 Common stock 1 343,650 Total consideration paid $ 345,802 Goodwill $ 104,597 1 Common stock consideration was $ 342,280 , net of $ 1,370 for shares withheld on the settlement of share-based awards of FCBP employees. (a) Fair value adjustments based on the Company’s evaluation of the acquired securities portfolio. (b) Fair value adjustments based on the Company’s evaluation of the acquired loan portfolio, write-off of net deferred loan costs and elimination of the allowance for loan losses recorded by FCBP. (c) Other miscellaneous fair value adjustments. (d) Adjustment to eliminate goodwill. (e) Eliminate acquired intangibles and record the core deposit intangible asset on the acquired core deposit accounts. Amount to be amortized using a sum-of-years digits method over a useful life of 10 years. The following table provides the unaudited pro forma information for the results of operations for the twelve months ended December 31, 2021 and 2020, as if the acquisition had occurred on January 1, 2020. The pro forma results combine the historical results of FCBP with the Company’s Consolidated Statements of Income, adjusted for the impact of the application of the acquisition method of accounting including amortization and accretion of fair value adjustments. The pro forma results have been prepared for comparative purposes only and are not necessarily indicative of the results that would have been obtained had the acquisition actually occurred on January 1, 2020. No 79 assumptions have been applied to the pro forma results of operations regarding possible revenue enhancements, expense efficiencies or asset dispositions. Only the acquisition-related expenses that have been incurred as of December 31, 2021 are included in net income in the table below. Twelve months ended December 31, (in thousands, except per share data) 2021 2020 Total revenues (net interest income plus noninterest income) $ 488,280 $ 420,487 Net income 188,416 67,275 Diluted earnings per common share 4.86 1.94 For the year ended December 31, 2021, total revenue and pre-tax net income from FCBP of $ 40.5 million and $ 25.9 million (excluding the provision for credit losses of $ 25.4 million on the acquired loan portfolio and unfunded loan commitments) were included in the Company’s consolidated results. NOTE 3 - EARNINGS PER SHARE The following table presents a summary of earnings per common share data and amounts for the periods indicated. Year ended December 31, ($ in thousands, except per share data) 2021 2020 2019 Net income available to common shareholders $ 133,055 $ 74,384 $ 92,739 Weighted average common shares outstanding 34,436 26,954 26,045 Additional dilutive common stock equivalents 60 35 114 Weighted average diluted common shares outstanding 34,496 26,989 26,159 Basic earnings per common share $ 3.86 $ 2.76 $ 3.56 Diluted earnings per common share $ 3.86 $ 2.76 $ 3.55 For 2021, 2020 and 2019, common stock equivalents of approximately 158,000 , 156,000 and 21,000 , respectively, were excluded from the earnings per share calculation because their effect would have been anti-dilutive. 80 NOTE 4 - INVESTMENTS The following table presents the amortized cost, gross unrealized gains and losses and fair value of securities available-for-sale and held-to-maturity: December 31, 2021 ($ in thousands) Amortized Cost Gross Unrealized Gains Gross Unrealized Losses Fair Value Available-for-sale securities: Obligations of U.S. Government-sponsored enterprises $ 175,409 $ 3 $ ( 1,901 ) $ 173,511 Obligations of states and political subdivisions 571,587 5,907 ( 2,410 ) 575,084 Agency mortgage-backed securities 509,243 8,485 ( 3,869 ) 513,859 Corporate debt securities 11,750 632 — 12,382 U.S. Treasury Bills 90,971 220 ( 21 ) 91,170 Total securities available-for-sale $ 1,358,960 $ 15,247 $ ( 8,201 ) $ 1,366,006 Held-to-maturity securities: Obligations of states and political subdivisions $ 236,379 $ 1,794 $ ( 730 ) $ 237,443 Agency mortgage-backed securities 68,105 940 ( 666 ) 68,379 Corporate debt securities 125,811 3,039 — 128,850 Total securities held-to-maturity $ 430,295 $ 5,773 $ ( 1,396 ) $ 434,672 Allowance for credit losses ( 614 ) Total securities held-to-maturity, net $ 429,681 December 31, 2020 ($ in thousands) Amortized Cost Gross Unrealized Gains Gross Unrealized Losses Fair Value Available-for-sale securities: Obligations of U.S. Government-sponsored enterprises $ 14,978 $ 186 $ ( 3 ) $ 15,161 Obligations of states and political subdivisions 335,271 8,994 ( 33 ) 344,232 Agency mortgage-backed securities 506,703 20,190 ( 321 ) 526,572 Corporate debt securities 14,750 248 — 14,998 U.S. Treasury Bills 10,980 486 — 11,466 Total securities available-for-sale $ 882,682 $ 30,104 $ ( 357 ) $ 912,429 Held-to-maturity securities: Obligations of states and political subdivisions $ 248,324 $ 2,814 $ — $ 251,138 Agency mortgage-backed securities 112,742 2,295 ( 496 ) 114,541 Corporate debt securities 126,993 8,851 — 135,844 Total securities held-to-maturity $ 488,059 $ 13,960 $ ( 496 ) $ 501,523 Allowance for credit losses ( 449 ) Total securities held-to-maturity, net $ 487,610 During 2020, the Company transferred securities with a book value of $ 331.0 million and fair value of $ 352.6 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 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. Accordingly, the 81 balance of held-to-maturity securities in the “Amortized cost” column in the table above includes a net unamortized unrealized gain of $ 21.0 million and $ 25.6 million at December 31, 2021 and 2020, respectively. Such amounts are amortized over the remaining life of the securities. In January 2022, the Company transferred securities with a book value of $116.7 million from available-for-sale to held-to-maturity. At December 31, 2021, and 2020, there were no holdings of securities of any one issuer in an amount greater than 10 % of shareholders’ equity, other than the U.S. Government agencies and sponsored enterprises. The agency mortgage-backed securities are all issued by U.S. Government-sponsored enterprises. Securities having a fair value of $ 752.7 million and $ 525.8 million at December 31, 2021, and December 31, 2020, respectively, were pledged as collateral to secure deposits of public institutions and for other purposes as required by law or contract provisions. The amortized cost and estimated fair value of debt securities at December 31, 2021, by contractual maturity, are shown below. Expected maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. Available-for-sale Held-to-maturity ($ in thousands) Amortized Cost Estimated Fair Value Amortized Cost Estimated Fair Value Due in one year or less $ 81,809 $ 81,797 $ 211 $ 214 Due after one year through five years 166,470 165,161 13,793 13,998 Due after five years through ten years 40,130 40,568 143,900 146,933 Due after ten years 561,308 564,621 204,286 205,148 Agency mortgage-backed securities 509,243 513,859 68,105 68,379 $ 1,358,960 $ 1,366,006 $ 430,295 $ 434,672 There were approximately 290 available-for-sale securities and 30 available-for-sale securities in an unrealized loss position as of December 31, 2021 and December 31, 2020, respectively, included in the following tables: December 31, 2021 Less than 12 months 12 months or more Total ($ in thousands) Fair Value Unrealized Losses Fair Value Unrealized Losses Fair Value Unrealized Losses Obligations of U.S. Government-sponsored enterprises $ 163,634 $ 1,775 $ 4,874 $ 126 $ 168,508 $ 1,901 Obligations of states and political subdivisions 242,188 2,361 1,776 49 243,964 2,410 Agency mortgage-backed securities 259,047 3,685 6,467 184 265,514 3,869 U.S. Treasury Bills 60,961 21 — — 60,961 21 $ 725,830 $ 7,842 $ 13,117 $ 359 $ 738,947 $ 8,201 December 31, 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 U.S. Government-sponsored enterprises $ 4,997 $ 3 $ — $ — $ 4,997 $ 3 Obligations of states and political subdivisions 4,079 33 — — 4,079 33 Agency mortgage-backed securities 65,986 321 — — 65,986 321 $ 75,062 $ 357 $ — $ — $ 75,062 $ 357 82 The unrealized losses at both December 31, 2021, and 2020, were primarily attributable to changes in market interest rates since the securities were purchased. At both December 31, 2021 and 2020, the Company had not recorded an ACL on available-for-sale securities. Accrued interest receivable on held-to-maturity debt securities totaled $ 3.4 million and $ 3.6 million at December 31, 2021 and 2020, respectively, and is excluded from the estimate of expected credit losses. The estimate of expected credit losses considers historical credit loss information adjusted for current conditions and reasonable and supportable forecasts. At December 31, 2021 and 2020, the ACL on held-to-maturity securities was $ 0.6 million and $ 0.4 million, respectively. The proceeds, gross gains and losses realized from sales of available-for-sale investment securities were as follows: December 31, ($ in thousands) 2021 2020 2019 Gross gains realized $ — $ 421 $ 400 Gross losses realized — — ( 449 ) Proceeds from sales 27,135 20,221 357,976 Other Investments At December 31, 2021, and 2020, other investments totaled $ 59.9 million and $ 48.8 million, respectively. As a member of the FHLB system administered by the Federal Housing Finance Agency, the Bank is required to maintain a minimum investment in capital stock with the FHLB consisting of membership stock and activity-based stock. The FHLB capital stock of $ 12.1 million, and $ 10.8 million at December 31, 2021, and 2020, respectively, is recorded at cost, which represents redemption value, and is included in other investments in the consolidated balance sheets. The remaining amounts in other investments primarily include various investments in SBICs, CDFIs, and the Company’s investment in unconsolidated trusts used to issue preferred securities to third parties, see “Note 11 – Subordinated Debentures.” 83 NOTE 5 - LOANS Below is a summary of loans by category at December 31, 2021 and 2020: ($ in thousands) December 31, 2021 December 31, 2020 Commercial and industrial $ 3,396,590 $ 3,100,299 Real estate loans: Commercial - investor owned 2,141,143 1,589,419 Commercial - owner occupied 2,035,785 1,498,408 Construction and land development 734,073 546,686 Residential 454,052 319,179 Total real estate loans 5,365,053 3,953,692 Other 265,137 187,083 Loans, before unearned loan fees 9,026,780 7,241,074 Unearned loan fees, net ( 9,138 ) ( 16,139 ) Loans, including unearned loan fees $ 9,017,642 $ 7,224,935 PPP loans totaled $ 276.2 million at December 31, 2021, or $ 272.0 million net of unearned fees of $ 4.2 million. PPP loans totaled $ 709.9 million at December 31, 2020, or $ 698.6 million net of unearned fees of $ 11.3 million. The loan balance includes a net premium on acquired loans of $ 11.9 million and $ 16.1 million at December 31, 2021 and 2020, respectively. At December 31, 2021 loans of $ 2.5 billion were pledged to the FHLB and the Federal Reserve. Loans to executive officers and directors, or to entities in which such individuals had beneficial interests as a shareholder, officer, or director totaled $ 5.7 million for each year ended December 31, 2021 and 2020. Such loans were made in the normal course of business on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with other customers and did not involve more than the normal risk of collectibility. 84 A summary of the activity, by loan category, in the allowance for loan losses for 2019, excluding the allowance on PCI loans, and the ACL on loans for 2020 and 2021 is as follows: ($ in thousands) Commercial and industrial CRE - investor owned CRE - owner occupied Construction and land development Residential real estate Other Total Balance at December 31, 2019 Allowance for loan losses: Balance, beginning of year $ 29,039 $ 4,683 $ 4,239 $ 1,987 $ 1,616 $ 731 $ 42,295 Provision for loan losses 4,801 1,708 673 ( 237 ) ( 330 ) 67 6,682 Charge-offs ( 6,882 ) ( 551 ) ( 58 ) ( 54 ) ( 667 ) ( 382 ) ( 8,594 ) Recoveries 338 95 19 776 661 295 2,184 Balance, end of year $ 27,296 $ 5,935 $ 4,873 $ 2,472 $ 1,280 $ 711 $ 42,567 Balance at December 31, 2020 Allowance for loan losses: Balance at December 31, 2019 $ 27,296 $ 5,935 $ 4,873 $ 2,472 $ 1,280 $ 711 $ 42,567 PCI allowance at December 31, 2019 159 — — 139 — 423 721 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, beginning of year $ 33,949 $ 16,656 $ 7,414 $ 7,577 $ 3,349 $ 1,050 $ 69,995 Provision for loan losses 28,373 11,037 7,845 13,438 674 2,012 63,379 Initial allowance on acquired PCD loans 23 2,026 1,427 45 3 — 3,524 Charge-offs ( 5,381 ) ( 498 ) ( 30 ) ( 31 ) ( 408 ) ( 391 ) ( 6,739 ) Recoveries 1,848 2,841 356 384 967 116 6,512 Balance, end of year $ 58,812 $ 32,062 $ 17,012 $ 21,413 $ 4,585 $ 2,787 $ 136,671 Balance at December 31, 2021 Allowance for credit losses: Balance, beginning of year $ 58,812 $ 32,062 $ 17,012 $ 21,413 $ 4,585 $ 2,787 $ 136,671 Provision (benefit) for loan losses 14,361 568 ( 550 ) ( 7,365 ) 3,900 2,079 12,993 Initial allowance on acquired PCD loans 1,077 3,651 1,504 37 — 737 7,006 Charge-offs ( 12,113 ) ( 2,487 ) ( 602 ) ( 3 ) ( 1,521 ) ( 459 ) ( 17,185 ) Recoveries 1,688 2,083 196 454 963 172 5,556 Balance, end of year $ 63,825 $ 35,877 $ 17,560 $ 14,536 $ 7,927 $ 5,316 $ 145,041 The ACL on sponsor finance loans, which is included in the categories above, represented $ 18.2 million and $ 19.0 million as of December 31, 2021 and 2020, respectively. On January 1, 2020, the Company adopted the CECL methodology which added $ 28.4 million to the ACL on loans. Upon adoption, $ 1.7 million of nonaccrual PCD loans with individual outstanding balances of less than $ 100,000 were immediately charged-off. Under the CECL method, the Company recorded $ 13.0 million and $ 63.4 million in provision for credit losses on loans for the years ended December 31, 2021 and 2020, respectively. An additional provision for credit losses of $ 0.4 million and $ 2.0 million was recorded in 2021 and 2020, respectively, for HTM securities, unfunded commitments and the recapture of accrued interest on nonaccrual loans. In 2019, a $ 6.7 million provision for loan losses (excluding the allowance release on PCI loans) was recorded under the incurred loss method. Acquisition-related provision expense of $ 25.4 million and $ 8.6 million in 2021 and 2020, respectively, was included in the provision for credit losses. This expense, commonly referred to as the “CECL double-count”, is recognized when a loan portfolio is acquired. The CECL methodology incorporates various economic scenarios. The Company utilizes three forecasts in the model; Moody’s baseline, a stronger near-term growth upside and a moderate recession downside forecast. The Company weights these scenarios at 40%, 30%, and 30%, respectively, which added approximately $ 17.5 million to the ACL over the baseline model. These forecasts incorporate an expectation that government stimulus will decline, the Federal Reserve will wind down quantitative easing and begin raising the federal funds rate, and that the 85 pandemic will begin to slowly recede. The Company has also recognized the risk posed by loans that have received multiple deferrals of principal and interest payments, including the hospitality sector, by allocating additional reserves to those segments. Some of the key risks to the forecasts that could result in future provision for credit losses are additional shutdowns and self-quarantines from another significant wave of COVID, continued or worsening supply-chain issues, labor supply and job growth worsens, or financial market conditions tighten. In addition to the CECL methodology, the Company incorporates qualitative adjustments into the ACL on loans to capture credit risks inherent within the loan portfolio that are not captured in the DCF model. Included in these risks are 1) changes in lending policies and procedures, 2) actual and expected changes in business and economic conditions, 3) changes in the nature and volume of the portfolio, 4) changes in lending management, 5) changes in volume and the severity of past due loans, 6) changes in the quality of the loan review system, 7) changes in the value of underlying collateral, 8) the existence and effect of concentrations of credit and 9) other factors such as the regulatory, legal and competitive environments and events such as natural disasters and pandemics. At December 31, 2021, the ACL on loans included a qualitative adjustment of approximately $ 39.1 million. Of this amount, approximately $ 8.6 million was allocated to Sponsor Finance loans due to their unsecured nature. The recorded investment in nonperforming loans by category at December 31, 2021 and 2020 is as follows: December 31, 2021 ($ in thousands) Non-accrual Restructured, accruing Loans over 90 days past due and still accruing interest Total nonperforming loans Nonaccrual loans with no allowance Commercial and industrial $ 17,052 $ 2,783 $ 1,703 $ 21,538 $ 5,685 Real estate: Commercial - investor owned 1,575 — — 1,575 168 Commercial - owner occupied 2,839 — — 2,839 2,550 Residential 1,971 76 1 2,048 1,348 Other 12 — 12 24 — Total $ 23,449 $ 2,859 $ 1,716 $ 28,024 $ 9,751 December 31, 2020 ($ in thousands) Non-accrual Restructured, accruing Loans over 90 days past due and still accruing interest Total nonperforming loans Nonaccrual loans with no allowance Commercial and industrial $ 18,158 $ 3,482 $ 130 $ 21,770 $ 8,316 Real estate: Commercial - investor owned 9,579 — — 9,579 716 Commercial - owner occupied 2,940 — — 2,940 6,024 Residential 4,112 77 — 4,189 — Other 29 — — 29 3,190 Total $ 34,818 $ 3,559 $ 130 $ 38,507 $ 18,246 86 The amortized cost basis of collateral-dependent nonperforming loans by class of loan is presented for the periods indicated: December 31, 2021 Type of Collateral (in thousands) Commercial Real Estate Residential Real Estate Blanket Lien Commercial and industrial $ 4,271 $ 209 $ 9,312 Real estate: Commercial - investor owned 169 1,200 — Commercial - owner occupied 2,807 32 — Residential — 2,048 — Total $ 7,247 $ 3,489 $ 9,312 December 31, 2020 Type of Collateral (in thousands) Commercial Real Estate Residential Real Estate Blanket Lien Other Commercial and industrial $ 8,316 $ — $ 394 $ — Real estate: Commercial - investor owned 9,579 — — — Commercial - owner occupied 2,940 — — — Residential — 4,135 — — Other — — — 17 Total $ 20,835 $ 4,135 $ 394 $ 17 The recorded investment by category for loans restructured during the years ended December 31, 2021 and 2020 is as follows: Year ended December 31, 2021 Year ended December 31, 2020 ($ 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 Real estate: Residential 1 221 221 3 372 372 Total 1 $ 221 $ 221 6 $ 7,819 $ 7,819 Restructured loans primarily resulted from interest rate concessions. As of December 31, 2021, the Company allocated an immaterial amount in specific reserves to loans that have been restructured. Loans restructured that subsequently defaulted during the year ended December 31, 2021 are as follows: Year ended December 31, 2021 ($ in thousands, except for number of loans) Number of Loans Recorded Balance Real Estate: Residential 1 148 There were no restructured loans that subsequently defaulted during the year ended December 31, 2020. 87 In response to the COVID-19 pandemic, the Company 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 December 31, 2021, substantially all of these loans have returned to a current payment status. The aging of the recorded investment in past due loans by class and category at December 31, 2021 and 2020 is shown below: December 31, 2021 ($ in thousands) 30-89 Days Past Due 90 or More Days Past Due Total Past Due Current Total Commercial and industrial $ 24,447 $ 14,158 $ 38,605 $ 3,353,770 $ 3,392,375 Real estate: Commercial - investor owned 3,880 — 3,880 2,137,263 2,141,143 Commercial - owner occupied 10,070 289 10,359 2,025,426 2,035,785 Construction and land development 24 — 24 734,049 734,073 Residential 3,181 1,305 4,486 449,566 454,052 Other 37 11 48 260,166 260,214 Total $ 41,639 $ 15,763 $ 57,402 $ 8,960,240 $ 9,017,642 December 31, 2020 ($ in thousands) 30-89 Days Past Due 90 or More Days Past Due Total Past Due Current Total Commercial and industrial $ 8,652 $ 12,928 $ 21,580 $ 3,067,415 $ 3,088,995 Real estate: Commercial - investor owned 734 9,301 10,035 1,579,384 1,589,419 Commercial - owner occupied 328 4,647 4,975 1,493,433 1,498,408 Construction and land development 13 — 13 546,673 546,686 Residential 2,071 2,118 4,189 314,990 319,179 Other 1,731 50 1,781 180,467 182,248 Total $ 13,529 $ 29,044 $ 42,573 $ 7,182,362 $ 7,224,935 The Company categorizes loans into risk categories based on relevant information about the ability of borrowers to service their debt, such as current financial information, historical 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. 88 • Grade 7 – Watch credits are borrowers that have experienced financial setback of a nature that is not determined to be severe or influence ‘ongoing concern’ expectations. Although possible, no loss is anticipated, due to strong collateral and/or guarantor support. • Grade 8 – Substandard credits will include those borrowers characterized by significant losses and sustained downward trends in balance sheet condition, liquidity, and cash flow. Repayment reliance may have shifted to secondary sources. Collateral exposure may exist and additional reserves may be warranted. • Grade 9 – Doubtful credits include borrowers that may show deteriorating trends that are unlikely to be corrected. Collateral values may appear insufficient for full recovery, therefore requiring a partial charge-off, or debt renegotiation with the borrower. The borrower may have declared bankruptcy or bankruptcy is likely in the near term. All doubtful rated credits will be on non-accrual. 89 The recorded investment by risk category of the loans by class and year of origination is presented in the following tables as of the dates indicated: December 31, 2021 Term Loans by Origination Year (in thousands) 2021 2020 2019 2018 2017 Prior Revolving Loans Converted to Term Loans Revolving Loans Total Commercial and industrial Pass (1-6) $ 1,180,601 $ 477,374 $ 317,869 $ 132,851 $ 116,738 $ 82,846 $ 11,648 $ 854,102 $ 3,174,029 Watch (7) 35,005 17,502 9,404 9,880 12,217 10,979 4,037 53,595 152,619 Classified (8-9) 14,917 3,530 3,840 1,689 2,988 813 787 10,996 39,560 Total Commercial and industrial $ 1,230,523 $ 498,406 $ 331,113 $ 144,420 $ 131,943 $ 94,638 $ 16,472 $ 918,693 $ 3,366,208 Commercial real estate-investor owned Pass (1-6) $ 651,740 $ 476,946 $ 346,245 $ 146,107 $ 112,043 $ 217,808 $ 3,625 $ 68,236 $ 2,022,750 Watch (7) 16,871 35,908 32,755 1,003 502 17,478 300 2,062 106,879 Classified (8-9) 1,376 3,135 835 817 1,159 4,141 — 50 11,513 Total Commercial real estate-investor owned $ 669,987 $ 515,989 $ 379,835 $ 147,927 $ 113,704 $ 239,427 $ 3,925 $ 70,348 $ 2,141,142 Commercial real estate-owner occupied Pass (1-6) $ 604,975 $ 423,263 $ 278,830 $ 164,210 $ 140,515 $ 235,973 $ 250 $ 48,349 $ 1,896,365 Watch (7) 12,825 13,585 4,301 16,774 10,274 15,764 — 300 73,823 Classified (8-9) 2,048 556 9,181 17,016 6,432 6,959 — — 42,192 Total Commercial real estate-owner occupied $ 619,848 $ 437,404 $ 292,312 $ 198,000 $ 157,221 $ 258,696 $ 250 $ 48,649 $ 2,012,380 Construction real estate Pass (1-6) $ 310,140 $ 229,396 $ 70,531 $ 35,936 $ 14,860 $ 7,180 $ 568 $ 2,992 $ 671,603 Watch (7) 28,947 15,348 60 1,199 11,068 2,330 — — 58,952 Classified (8-9) — — 387 419 — 22 — — 828 Total Construction real estate $ 339,087 $ 244,744 $ 70,978 $ 37,554 $ 25,928 $ 9,532 $ 568 $ 2,992 $ 731,383 Residential real estate Pass (1-6) $ 116,352 $ 66,481 $ 21,356 $ 14,841 $ 24,778 $ 103,840 $ 9,980 $ 87,146 $ 444,774 Watch (7) 2,425 2 622 1,157 248 1,305 — 79 5,838 Classified (8-9) 414 169 554 — 12 2,024 — — 3,173 Total residential real estate $ 119,191 $ 66,652 $ 22,532 $ 15,998 $ 25,038 $ 107,169 $ 9,980 $ 87,225 $ 453,785 Other Pass (1-6) $ 108,209 $ 68,806 $ 22,684 $ 23,145 $ 6,924 $ 13,832 $ 1,500 $ 9,166 $ 254,266 Watch (7) — — — 4 — 2,440 — 1 2,445 Classified (8-9) — — 10 10 — 16 — 2 38 Total Other $ 108,209 $ 68,806 $ 22,694 $ 23,159 $ 6,924 $ 16,288 $ 1,500 $ 9,169 $ 256,749 Total loans classified by risk category $ 3,086,845 $ 1,832,001 $ 1,119,464 $ 567,058 $ 460,758 $ 725,750 $ 32,695 $ 1,137,076 $ 8,961,647 Total loans classified by performing status 55,995 Total loans $ 9,017,642 90 December 31, 2020 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) $ 1,402,276 $ 454,729 $ 262,258 $ 132,832 $ 25,057 $ 58,315 $ 14,118 $ 527,170 $ 2,876,755 Watch (7) 44,922 15,369 9,585 7,509 19,613 110 — 60,448 157,556 Classified (8-9) 6,602 9,219 3,115 3,964 4,490 1,080 1,281 22,432 52,183 Total Commercial and industrial $ 1,453,800 $ 479,317 $ 274,958 $ 144,305 $ 49,160 $ 59,505 $ 15,399 $ 610,050 $ 3,086,494 Commercial real estate-investor owned Pass (1-6) $ 481,867 $ 338,843 $ 189,305 $ 131,718 $ 138,288 $ 161,439 $ 6,509 $ 32,058 $ 1,480,027 Watch (7) 32,308 19,722 6,656 — 9,647 17,370 — — 85,703 Classified (8-9) — 5,278 8,716 5,830 1,245 2,620 — — 23,689 Total Commercial real estate-investor owned $ 514,175 $ 363,843 $ 204,677 $ 137,548 $ 149,180 $ 181,429 $ 6,509 $ 32,058 $ 1,589,419 Commercial real estate-owner occupied Pass (1-6) $ 419,142 $ 287,001 $ 215,181 $ 179,382 $ 104,470 $ 167,456 $ 2,672 $ 45,323 $ 1,420,627 Watch (7) 13,657 5,257 3,113 6,198 4,338 8,460 1,776 941 43,740 Classified (8-9) 2,420 7,427 5,822 6,140 1,309 10,860 — 63 34,041 Total Commercial real estate-owner occupied $ 435,219 $ 299,685 $ 224,116 $ 191,720 $ 110,117 $ 186,776 $ 4,448 $ 46,327 $ 1,498,408 Construction real estate Pass (1-6) $ 223,069 $ 156,360 $ 45,460 $ 18,579 $ 11,539 $ 9,144 $ — $ 28,880 $ 493,031 Watch (7) 2,544 86 34,179 11,632 — 2,499 — — 50,940 Classified (8-9) 56 2,124 503 1 — 31 — — 2,715 Total Construction real estate $ 225,669 $ 158,570 $ 80,142 $ 30,212 $ 11,539 $ 11,674 $ — $ 28,880 $ 546,686 Residential real estate Pass (1-6) $ 57,059 $ 27,907 $ 17,718 $ 17,138 $ 27,443 $ 92,657 $ 1,172 $ 66,902 $ 307,996 Watch (7) 210 840 526 — 514 1,603 287 511 4,491 Classified (8-9) 571 733 121 14 898 3,181 — 253 5,771 Total residential real estate $ 57,840 $ 29,480 $ 18,365 $ 17,152 $ 28,855 $ 97,441 $ 1,459 $ 67,666 $ 318,258 Other Pass (1-6) $ 43,526 $ 28,195 $ 30,074 $ 9,646 $ 5,641 $ 17,027 $ — $ 40,779 $ 174,888 Watch (7) — 1 8 — — 2,637 — 1 2,647 Classified (8-9) — 18 19 13 — 17 8 4 79 Total Other $ 43,526 $ 28,214 $ 30,101 $ 9,659 $ 5,641 $ 19,681 $ 8 $ 40,784 $ 177,614 Total loans classified by risk category $ 2,730,229 $ 1,359,109 $ 832,359 $ 530,596 $ 354,492 $ 556,506 $ 27,823 $ 825,765 $ 7,216,879 Total loans classified by performing status 8,056 Total loans $ 7,224,935 91 In the tables above, loan originations in 2021 and 2020 with a classification of watch or classified primarily represent renewals or modifications initially underwritten and originated in prior years. For certain loans, primarily credit cards, the Company evaluates credit quality based on the aging status. The following tables present the recorded investment on loans based on aging status: December 31, 2021 (in thousands) Performing Non Performing Total Commercial and industrial $ 26,166 $ 1 $ 26,167 Real estate: Commercial - investor owned 1 — 1 Commercial - owner occupied 23,405 — 23,405 Construction and land development 2,690 — 2,690 Residential 267 — 267 Other 3,453 12 3,465 Total $ 55,982 $ 13 $ 55,995 December 31, 2020 (in thousands) Performing Non Performing Total Commercial and industrial $ 2,502 $ — $ 2,502 Real estate: Residential 921 — 921 Other 4,612 21 4,633 Total $ 8,035 $ 21 $ 8,056 The Company has purchased loans, for which there was, at acquisition, evidence of more than insignificant deterioration of credit quality since origination. The carrying amount of those loans is as follows: ($ in thousands) At July 21, 2021 Par value of acquired loans $ 180,440 Allowance for credit losses ( 7,006 ) Non-credit discount ( 6,428 ) Purchase price of acquired loans $ 167,006 92 NOTE 6 - LEASES The Company has banking and limited-service facilities, datacenters, and certain equipment lea sed under agreements. Most of the leases expire between 2022 and 2027 and include one or more renewal options for up to 5 years. One lease expires in 2031. All leases are classified as operating leases. For the twelve months ended ($ in thousands) December 31, 2021 December 31, 2020 Operating lease cost $ 4,877 $ 3,207 Short-term lease cost 833 201 Total lease cost $ 5,710 $ 3,408 Payments on operating leases included in the measurement of lease liabilities during the twelve months ended December 31, 2021 and 2020 totaled $ 5.2 million and $ 3.3 million, respectively. Right-of-use assets obtained in exchange for lease obligations totaled $ 5.7 million and $ 1.6 million during the twelve months ended December 31, 2021 and 2020, respectively. The additions in 2021 and 2020 were primarily from the First Choice acquisition and Seacoast acquisition, respectively. In 2021, an impairment of $ 1.1 million was recognized on right-of-use assets concurrent with the announced closure of certain leased locations. For further discussion see “Note 8 - Fixed Assets.” Supplemental balance sheet information related to leases is as follows: ($ in thousands) December 31, 2021 December 31, 2020 Operating lease right-of-use assets, included in other assets $ 13,483 $ 13,636 Operating lease liabilities, included in other liabilities 14,865 14,152 Operating leases Weighted average remaining lease term 4 years 5 years Weighted average discount rate 2.0 % 2.5 % Maturities of operating lease liabilities are as follows: ($ in thousands) Year Amount 2022 $ 5,191 2023 3,688 2024 2,670 2025 1,326 2026 1,138 Thereafter 1,566 Total operating lease liabilities, payments 15,579 Less: present value adjustment 714 Operating lease liabilities $ 14,865 Lessor income was $ 1.9 million and $ 1.8 million during the twelve months ended December 31, 2021, and 2020, respectively. 93 NOTE 7 - 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. The Company has executed a series of cash flow hedges to fix the effective interest rate for payments due on $ 62.0 million of LIBOR-based junior subordinated debentures to a weighted-average-fixed rate of 2.62 %. Select terms of the hedges are as follows: $ in thousands Notional Fixed Rate Maturity Date $ 15,465 2.60 % March 15, 2024 $ 14,433 2.60 % March 30, 2024 $ 18,558 2.64 % March 15, 2026 $ 13,506 2.64 % March 17, 2026 For derivatives designated and qualified 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 an additional $ 1.3 million will be reclassified as an increase to interest expense. Concurrently with the repayment of $ 200 million of variable-rate FHLB advances in the fourth quarter of 2020, the Company terminated two interest rate swaps with a notional value of $ 200.0 million. A loss of $ 3.2 million was recognized on the termination of the swaps. Non-designated Hedges Derivatives not designated as hedges are not considered speculative and result from a service the Company provides to certain customers. The Company executes interest rate swaps with commercial banking customers to facilitate their respective risk management strategies. Those interest rate swaps are simultaneously hedged by offsetting derivatives that the Company executes with a third party, such that the Company minimizes its net risk exposure resulting from such transactions. As the interest rate derivatives associated with this program do not meet the strict hedge accounting requirements, changes in the fair value of both the customer derivatives and the offsetting derivatives are recognized directly in earnings as a component of other noninterest income. 94 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 December 31, 2021 and December 31, 2020. Notional Amount Derivative Assets Derivative Liabilities ($ in thousands) December 31, 2021 December 31, 2020 December 31, 2021 December 31, 2020 December 31, 2021 December 31, 2020 Derivatives designated as hedging instruments Interest rate swaps $ 61,962 $ 61,962 $ — $ — $ 2,911 $ 5,987 Derivatives not designated as hedging instruments Interest rate swaps $ 918,698 $ 1,026,016 $ 12,869 $ 28,703 $ 12,883 $ 28,980 The tables below present a gross presentation, the effects of offsetting, and a net presentation of the Company’s financial instruments subject to offsetting as of December 31, 2021 and December 31, 2020. The gross amounts of assets or liabilities can be reconciled to the tabular disclosure of fair value. The tabular disclosure of fair value provides the location that financial assets and liabilities are presented on the Balance Sheet. As of December 31, 2021 Gross Amounts Not Offset in the Statement of Financial Position ($ in thousands) Gross Amounts Recognized Gross Amounts Offset in the Statement of Financial Position Net Amounts of Assets presented in the Statement of Financial Position Financial Instruments Fair Value Collateral Posted Net Amount Assets: Interest rate swaps $ 12,869 $ — $ 12,869 $ 1,033 $ — $ 11,836 Liabilities: Interest rate swaps $ 15,794 $ — $ 15,794 $ 1,033 $ 14,031 $ 730 Securities sold under agreements to repurchase 331,006 — 331,006 — 331,006 — As of December 31, 2020 Gross Amounts Not Offset in the Statement of Financial Position ($ in thousands) Gross Amounts Recognized Gross Amounts Offset in the Statement of Financial Position Net Amounts of Assets presented in the Statement of Financial Position Financial Instruments Fair Value Collateral Posted Net Amount Assets: Interest rate swaps $ 28,703 $ — $ 28,703 $ 2 $ — $ 28,701 Liabilities: Interest rate swaps $ 34,967 $ — $ 34,967 $ 2 $ 34,903 $ 62 Securities sold under agreements to repurchase 271,081 — 271,081 — 271,081 — As of December 31, 2021, the fair value of derivatives in a net liability position, which includes accrued interest but excludes any adjustment for nonperformance risk, related to these agreements was $ 16.6 million. Further, the Company has minimum collateral posting thresholds with certain of its derivative counterparties and has posted collateral of $ 14.0 million. 95 NOTE 8 - FIXED ASSETS A summary of fixed assets at December 31, 2021 and 2020, is as follows: December 31, ($ in thousands) 2021 2020 Land $ 12,849 $ 13,389 Buildings and leasehold improvements 52,012 53,007 Furniture, fixtures and equipment 18,821 17,933 83,682 84,329 Less accumulated depreciation and amortization 35,767 31,160 Total fixed assets $ 47,915 $ 53,169 Depreciation and amortization of fixed assets included in noninterest expense amounted to $ 6.1 million, $ 6.2 million, and $ 5.7 million in 2021, 2020, and 2019, respectively. In 2021 the Company commenced the process to close three branch locations in California related to the First Choice acquisition. A lease and fixed asset impairment charge of $ 0.4 million was recognized and reported in merger-related expenses. Additionally, the Company also commenced the process to close two branches in St. Louis and consolidate the operations and customers of these branches with other nearby locations. An impairment charge of $ 3.4 million on these branches was recognized in 2021 for buildings, leases and fixed assets. NOTE 9 - GOODWILL AND INTANGIBLE ASSETS The table below presents a summary of goodwill: ($ in thousands) Years ended December 31, 2021 2020 Goodwill, beginning of year $ 260,567 $ 210,344 Additions from acquisition 104,597 50,223 Goodwill, end of year $ 365,164 $ 260,567 The table below presents a summary of intangible assets: ($ in thousands) Years ended December 31, 2021 2020 Core deposit intangible, net, beginning of year $ 23,084 $ 26,076 Additions from acquisition 4,892 2,681 Amortization ( 5,690 ) ( 5,673 ) Core deposit intangible, net, end of year $ 22,286 $ 23,084 Amortization expense on the core deposit intangibles was $ 5.7 million for the each of the years ended December 31, 2021 and 2020, and $ 5.5 million for the year ended December 31, 2019. The core deposit intangibles are being amortized over a 10 -year period. 96 The following table reflects the amortization schedule for the core deposit intangible at December 31, 2021. Year Core Deposit Intangible ($ in thousands) 2022 $ 5,367 2023 4,601 2024 3,834 2025 3,068 2026 2,301 After 2026 3,115 $ 22,286 NOTE 10 - DEPOSITS Following is a summary of certificates of deposit maturities at December 31, 2021: ($ in thousands) Brokered Customer Total Less than 1 year $ 10,062 $ 365,902 $ 375,964 Greater than 1 year and less than 2 years 61,173 67,859 129,032 Greater than 2 years and less than 3 years 37,847 21,010 58,857 Greater than 3 years and less than 4 years 19,888 14,238 34,126 Greater than 4 years and less than 5 years — 5,564 5,564 Greater than 5 years — 4,750 4,750 $ 128,970 $ 479,323 $ 608,293 Certificates of deposit balances over the FDIC insurance limit of $250,000 were $ 93.7 million as of December 31, 2021. At December 31, 2021, deposit accounts of executive officers and directors, or to entities in which such individuals had beneficial interests as a shareholder, officer, or director totaled $ 5.7 million. The Company is a participant in the Promontory Interfinancial Network, a network that offers deposit placement services such as CDARS and ICS, which offers products that qualify large deposits for FDIC insurance. At December 31, 2021, the Company had $ 22.0 million of CDARS deposits and $ 118.2 million of ICS deposits. At December 31, 2021 and 2020, overdraft deposits of $ 1.3 million and $ 1.0 million, respectively, were reclassified to loans. 97 NOTE 11 - SUBORDINATED DEBENTURES The amounts and terms of each issuance of the Company’s subordinated debentures at December 31, 2021 and 2020 were as follows: Amount Maturity Date Initial Call Date (1) Interest Rate ($ in thousands) 2021 2020 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) 7,732 7,752 February 22, 2031 February 22, 2011 Fixed @ 10.20% JEFFCO Stat Trust II (2) 4,496 4,443 March 17, 2034 March 17, 2009 Floats @ 3MO LIBOR + 2.75% Trinity Capital Trust III (2) 5,339 5,272 September 8, 2034 September 8, 2009 Floats @ 3MO LIBOR + 2.70% Trinity Capital Trust IV 10,310 10,310 November 23, 2035 August 23, 2010 Fixed @ 6.88% Trinity Capital Trust V (2) 7,869 7,706 December 15, 2036 September 15, 2011 Floats @ 3MO LIBOR + 1.65% Total junior subordinated debentures 92,553 92,290 5.75% Fixed-to-floating rate subordinated notes 63,250 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 ( 904 ) ( 1,903 ) Total fixed-to-floating rate subordinated notes 62,346 111,347 Total subordinated debentures and notes $ 154,899 $ 203,637 (1) Callable each quarter after initial call date. (2) Purchase accounting adjustments are reflected in the balance and also impact the effective interest rate. The Company has 13 unconsolidated statutory business trusts. These trusts issued preferred securities that were sold to third parties. The sole purpose of the trusts was to invest the proceeds in junior subordinated debentures of the Company that have terms identical to the trust preferred securities. The subordinated debentures, which are the sole assets of the trusts, are subordinate and junior in right of payment to all present and future senior and subordinated indebtedness and certain other financial conditions of the Company. The Company fully and unconditionally guarantees each trust’s securities obligations. Under current regulations, the trust preferred securities are included in tier 1 capital for regulatory capital purposes, subject to certain limitations. The trust preferred securities are redeemable in whole or in part on or after their respective call dates. Mandatory redemption dates may be shortened if certain conditions are met. The securities are classified as subordinated debentures in the Company’s consolidated balance sheets. Interest on the subordinated debentures held by the trusts is recorded as interest expense in the Company’s consolidated statements of operations. The Company’s investment of $ 2.9 million at December 31, 2021, in these trusts is included in other investments in the consolidated balance sheets. The Company has fixed the interest rate on a portion of its junior subordinated debentures through a series of interest rate swaps. For further discussion of the interest rate swaps and the corresponding terms, see “Note 7 - Derivative Financial Instruments.” 98 On November 1, 2016, the Company issued $ 50 million of fixed-to-floating rate subordinated notes. The notes initially bore a fixed annual interest rate of 4.75%, with interest payable semiannually in arrears on May 1 and November 1 of each year, commencing May 1, 2017. On November 1, 2021, the Company redeemed the $50.0 million of subordinated debentures at par. A loss of $0.7 million on the redemption was recognized for the write-off of unamortized debt issuance costs. On May 21, 2020, 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 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 event that the benchmark rate is less than zero, then the benchmark rate shall be deemed to be zero. The Company’s obligation to make payments of principal and interest on the notes is subordinate and junior in right of payment to all of its senior debt. Current regulatory guidance allows for this subordinated debt to be treated as tier 2 regulatory capital for the first five years of its term, subject to certain limitations, and then phased out of tier 2 capital pro rata over the next five years. NOTE 12 - FEDERAL HOME LOAN BANK ADVANCES FHLB advances are collateralized by 1-4 family residential real estate loans, business loans, and certain commercial real estate loans. At December 31, 2021 and 2020, the carrying value of the loans pledged to the FHLB of Des Moines was $ 1.4 billion at both periods. The secured line of credit had availability of approximately $ 708.6 million at December 31, 2021. The following table summarizes the type, maturity, and rate of the Company’s FHLB advances at December 31: 2021 2020 ($ in thousands) Term Outstanding Balance Weighted Rate Outstanding Balance Weighted Rate Non-amortizing fixed advance Greater than 1 year $ 50,000 1.56 % $ 50,000 1.56 % In August 2019, the Company entered into agreements totaling $ 50 million for convertible advances with a weighted average rate of 1.56 % that mature in 2024 and are currently puttable by the FHLB. At December 31, 2021, the Company used $ 60.0 million of collateral value to secure confirming letters of credit for public unit deposits and industrial development bonds. NOTE 13 - OTHER BORROWINGS Securities Sold Under Agreement to Repurchase The Company enters into sales of securities under agreements to repurchase. The agreements are transacted with deposit customers and are utilized as an overnight investment product. The amounts received under these agreements represent short-term borrowings and are reflected as a liability in the consolidated balance sheets. The securities underlying these agreements are included in investment securities in the Consolidated Balance Sheets. The Company has no control over the market value of the securities, which fluctuates due to market conditions. However, the Company is obligated to promptly transfer additional securities if the market value of the securities falls below the repurchase agreement price. The Company manages this risk by maintaining an unpledged securities 99 portfolio that it believes is sufficient to cover a decline in the market value of the securities sold under agreements to repurchase. A summary of securities sold under agreements to repurchase is as follows: December 31, ($ in thousands) 2021 2020 Securities sold under agreement to repurchase $ 331,006 $ 271,081 Average balance during the year 225,895 206,338 Maximum balance outstanding at any month-end 331,006 271,081 Average interest rate during the year 0.10 % 0.23 % Average interest rate at December 31 0.06 % 0.07 % Federal Reserve Line The Bank also has a line with the Federal Reserve Bank of St. Louis which provides additional liquidity to the Company. As of December 31, 2021, $ 1.1 billion was available under this line. This line is secured by a pledge of certain eligible loans aggregating $ 1.3 billion. There were no amounts drawn on the Federal Reserve line of credit as of December 31, 2021. Federal Reserve PPPLF The Company acquired $ 86.1 million of Federal Reserve PPPLF funds from the Seacoast acquisition which were paid off in November 2020. Revolving Credit Line In February 2016, the Company entered into a senior unsecured revolving credit agreement (the “Revolving Agreement”) with another bank. The Revolving Agreement has a one-year term, maturing on February 22, 2022. It allows for borrowings up to $ 25 million. The interest rate is the one-month LIBOR plus 125 basis points. 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. In February 2022, the Revolving Agreement was renewed for a one-year term and the interest rate was amended to one-month Term SOFR plus 136 basis points. The revolving credit line was not accessed in 2021 or 2020. Term Loan In February 2019, the Company entered into a five year, $ 40.0 million unsecured term loan agreement (the “Term Loan”) with another bank with the proceeds primarily used to fund the company’s cash portion of an acquisition in 2019. The interest rate is one-month LIBOR plus 125 basis points. In February 2022, the interest rate on the Term Loan was amended to one-month Term SOFR plus 136 basis points. A summary of the Term Loan is as follows: December 31, ($ in thousands) 2021 2020 Term Loan $ 22,857 $ 30,000 Average balance during the year 26,427 32,123 Maximum balance outstanding at any month-end 28,571 34,286 Weighted average interest rate during the year 1.40 % 1.96 % Average interest rate at December 31 1.38 % 1.44 % 100 NOTE 14 - LITIGATION AND OTHER 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 legal proceedings pending or threatened against the Company or its subsidiaries in the ordinary course of business, directly, indirectly, or in the aggregate that, 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 15 - REGULATORY CAPITAL Quantitative measures established by regulation to ensure capital adequacy require the Bank to maintain minimum 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. Management believes, as of December 31, 2021 and 2020, that the Company met all capital adequacy requirements to which it is subject. As of December 31, 2021 and 2020, the Bank was categorized as “well-capitalized” under the regulatory framework for prompt corrective action. To be categorized as “well-capitalized” the Bank must maintain minimum total risk-based capital, tier 1 risk-based capital, common equity tier 1 risk-based capital, and tier 1 leverage ratios as set forth in the table. In addition, the Company must maintain an additional CCB above the regulatory minimum ratio requirements. The CCB is designed to insulate banks from periods of stress and impose constraints on dividends, share repurchases and discretionary bonus payments when capital levels fall below prescribed levels. The capital ratios are presented in the following table: December 31, 2021 December 31, 2020 EFSC Bank EFSC Bank To Be Well-Capitalized Minimum Ratio with CCB Common Equity Tier 1 Capital to Risk Weighted Assets 11.3 % 12.5 % 10.9 % 12.5 % 6.5 % 7.0 % Tier 1 Capital to Risk Weighted Assets 13.0 % 12.5 % 12.1 % 12.5 % 8.0 % 8.5 % Total Capital to Risk Weighted Assets 14.7 % 13.5 % 14.9 % 13.7 % 10.0 % 10.5 % Leverage Ratio (Tier 1 Capital to Average Assets) 9.7 % 9.3 % 10.0 % 10.3 % 5.0 % 4.0 % 101 NOTE 16 - SHAREHOLDERS’ EQUITY AND COMPENSATION PLANS Shareholders’ Equity Common Stock At December 31, 2021 and 2020, the Company has reserved the following shares of its authorized but unissued common stock for possible future issuance in connection with the following: December 31, 2021 December 31, 2020 Outstanding performance units (maximum issuance) 169,244 125,176 Outstanding RSU’s 181,657 157,428 Outstanding options and appreciation rights 112,927 — 2018 Stock Incentive Plan 670,326 339,691 Non-Management Director Plan 73,618 86,616 2018 Employee Stock Purchase Plan 571,064 635,890 Total 1,778,836 1,344,801 Common Stock Repurchase Plan In April 2021, the Company’s board of directors authorized the repurchase of up to two million shares of the Company’s common stock. The repurchases may be made in open market or privately negotiated transactions and the stock repurchase program will remain in effect until fully utilized or until modified, superseded or terminated. At December 31, 2021, there were 700,473 shares available for repurchase under the plan. Preferred Stock The Company has 5,000,000 shares of authorized preferred stock with a par value of $ 0.01 with 75,000 shares issued and outstanding at the end of 2021. The Board of Directors has the right to set for each series of preferred stock, subject to the laws of the State of Delaware, the dividend rate, conversion and redemption terms, voting rights and liquidation preferences, among others. In the fourth quarter 2021, the Company issued and sold 3,000,000 depositary shares, each representing 1/40th interest in a share of the Company’s 5% Noncumulative, Perpetual Preferred Stock, Series A (“Series A Preferred Stock”), totaling $ 72.0 million, net of issuance costs. The depositary shares trade under the ticker “EFSCP”. The Series A Preferred Stock may be redeemed at the Company’s option, subject to prior regulatory approval, in whole or in part on any dividend payment date on or after December 15, 2026 or within 90 days following a regulatory capital event, as defined in the offering documents. If any Series A Preferred Stock are redeemed, a proportionate number of depositary shares will also be redeemed. Dividends, when and if declared by the board of directors, are payable, quarterly in arrears, on March 15, June 15, September 15 and December 15 of each year. If dividends on the Series A Preferred stock have not been declared or paid in six quarterly periods, whether or not consecutive, the number of directors on the board will automatically be increased by two and the holders of the Series A preferred stock will be entitled to vote for the additional directors. Dividends The Company’s ability to pay dividends to its shareholders is generally dependent upon the payment of dividends by the Bank to the parent company. The Bank cannot pay dividends to the extent it would be deemed undercapitalized by the FDIC after making such dividend. Dividends on the Company’s capital stock are prohibited under the terms of the junior subordinated debenture agreements, see “Note 11 - Subordinated Debentures,” if the Company is in continuous default on its payment obligations to the capital trusts, has elected to defer interest payments on the debentures or extends the interest payment period. Furthermore, unless dividends on all outstanding shares of the Series A Preferred Stock for the most recently completed dividend period have been paid or declared, dividends on, and repurchases of, common stock is prohibited. At December 31, 2021, the Company was not in default on any of the junior subordinated debenture issuances or preferred stock. 102 Accumulated Other Comprehensive Income (Loss) The following table presents the changes in accumulated other comprehensive income (loss) 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, December 31, 2018 $ ( 9,047 ) $ ( 235 ) $ — $ ( 9,282 ) Net change 29,226 ( 33 ) ( 2,162 ) 27,031 Transfer from available-for-sale to held-to-maturity ( 5,202 ) 5,202 — — Balance, December 31, 2019 $ 14,977 $ 4,934 $ ( 2,162 ) $ 17,749 Net change 23,627 ( 1,910 ) ( 2,346 ) 19,371 Transfer from available-for-sale to held-to-maturity ( 16,284 ) 16,284 — — Balance, December 31, 2020 $ 22,320 $ 19,308 $ ( 4,508 ) $ 37,120 Net change ( 17,049 ) ( 3,624 ) 2,330 ( 18,343 ) Balance, December 31, 2021 $ 5,271 $ 15,684 $ ( 2,178 ) $ 18,777 The following table presents the pre-tax and after-tax changes in the components of other comprehensive income: 2021 2020 2019 ($ in thousands) Pre-tax Tax effect After-tax Pre-tax Tax effect After-tax Pre-tax Tax effect After-tax Change in unrealized gain (loss) on available-for-sale debt securities $ ( 22,701 ) $ ( 5,652 ) $ ( 17,049 ) $ 31,798 $ 7,854 $ 23,944 $ 38,764 $ 9,575 $ 29,189 Reclassification adjustment for realized (gain) loss on sale of available-for-sale debt securities(a) — — — ( 421 ) ( 104 ) ( 317 ) 49 12 37 Reclassification of gain on held-to-maturity securities(b) ( 4,672 ) ( 1,048 ) ( 3,624 ) ( 2,537 ) ( 627 ) ( 1,910 ) ( 44 ) ( 11 ) ( 33 ) Change in unrealized gain (loss) on cash flow hedges arising during the period(b) 1,533 372 1,161 ( 7,898 ) ( 1,951 ) ( 5,947 ) ( 3,004 ) ( 742 ) ( 2,262 ) Reclassification of loss on cash flow hedges(b) 1,543 374 1,169 4,782 1,181 3,601 133 33 100 Total other comprehensive income (loss) $ ( 24,297 ) $ ( 5,954 ) $ ( 18,343 ) $ 25,724 $ 6,353 $ 19,371 $ 35,898 $ 8,867 $ 27,031 (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, except for a $3.2 million termination fee in 2020 recognized in noninterest expense. Compensation Plans The Company has adopted share-based compensation plans to reward and provide long-term incentive for directors and key employees of the Company including its subsidiaries. These plans provide for the granting of stock, stock options, stock-settled stock appreciation rights, and restricted stock units (“RSUs”), and may contain performance terms for key employees as designated by the Company’s Board of Directors upon the recommendation of the Compensation Committee of the Board. The Company uses authorized and unissued shares to satisfy share award exercises. 103 The total excess income tax benefit (expense) for share-based compensation arrangements was $( 0.1 ) million, $ 0.2 million, and $ 0.5 million for the years ended December 31, 2021, 2020, and 2019, respectively. At December 31, 2021, there was $ 8.2 million of total unrecognized compensation cost related to unvested share-based compensation awards. The cost is expected to be recognized over a weighted-average term of 2 years. The following table summarizes share-based compensation expense: ($ in thousands) 2021 2020 2019 Performance stock units $ 1,777 $ 1,097 $ 1,699 Restricted stock units 3,109 2,613 1,969 Stock options 396 — — Employee stock purchase plan 735 468 364 Total share-based compensation expense $ 6,017 $ 4,178 $ 4,032 Performance Units The Company has entered into long-term incentive agreements with certain key employees. These awards are conditioned on certain performance criteria and market criteria measured against a group of peer banks over a three-year period for each grant. The awards contain minimum (threshold), target, and maximum (exceptional) performance levels. In the event of a change in control, as defined in the plan, the awards will vest at a minimum of the target level. The amount of the awards is determined at the end of the three-year vesting and performance period. The fair value of performance units vesting in 2021, 2020, and 2019 were $ 0.9 million, $ 2.8 million, and $ 4.6 million, respectively. Information related to the outstanding grants at December 31, 2021 is shown below: ($ in thousands) 2019 - 2021 Cycle 2020 - 2022 Cycle 2021 - 2023 Cycle Shares issuable at target 19,576 24,674 40,372 Maximum shares issuable 39,152 49,348 80,744 Unrecognized compensation cost $ 27 $ 538 $ 1,981 Weighted average grant date fair value $ 47.46 $ 38.09 $ 47.16 Maximum Shares Issuable Outstanding at December 31, 2020 125,176 Granted 84,628 Vested (issued 23,251 shares) ( 31,452 ) Forfeited ( 9,108 ) Outstanding at December 31, 2021 169,244 104 Restricted Stock Units The Company awards nonvested stock, in the form of RSUs to employees. RSUs generally are subject to continued employment and generally vest ratably over three to five years. Vesting is accelerated upon a change in control or the employee meeting certain retirement criteria. RSUs do not carry voting or dividend rights until vested. Sales of the units are restricted prior to vesting. Various information related to the RSUs is shown below. ($ in thousands) 2021 2020 2019 Total fair value at vesting date $ 2,855 $ 1,702 $ 1,067 Unrecognized compensation cost 4,622 3,899 3,417 Expected years to recognize unearned compensation 1.9 years 1.9 years 1.9 years Weighted average grant date fair value $ 44.01 $ 39.63 $ 45.00 A summary of the status of the Company’s RSU awards as of December 31, 2021 and changes during the year then ended is presented below. Shares Weighted Average Grant Date Fair Value Outstanding at December 31, 2020 157,428 $ 42.44 Granted 100,220 44.01 Vested ( 65,755 ) 43.91 Forfeited ( 10,236 ) 43.51 Outstanding at December 31, 2021 181,657 $ 42.71 Stock Options In determining compensation cost for stock options, the Black-Scholes option-pricing model is used to estimate the fair value on date of grant. The model utilizes several assumptions in its calculations. The risk-free rate for periods within the contractual life of the option is based on the U.S. Treasury yield in effect at the time of the grant. The expected term of options granted is based on the option's vesting schedule and expected exercise patterns and represent the period of time that options granted are expected to be outstanding. The expected volatility is based on the historical volatility of the Company's stock and expected term of the option. The dividend yield is determined by annualizing the dividend rate as a percentage of the Company's stock price. The following weighted average assumptions were used for grants issued during the year ended December 31, 2021. Weighted Average Risk Free Interest Rate 1.06 % Expected Dividend Yield 1.65 % Expected Volatility 33.92 % Expected Term (years) 6.2 Stock options have been granted to key employees with exercise prices equal to the market price of the Company’s common stock at the date of grant and 10 -year contractual terms. Stock options have a vesting schedule of three to five years . 105 Following is a summary of stock option activity for 2021. ($ in thousands, except per share data) Shares Weighted Average Exercise Price Weighted Average Remaining Contractual Term Outstanding at December 31, 2020 — $ — Granted 118,604 43.80 9.2 years Forfeited ( 5,677 ) 43.81 Outstanding at December 31, 2021 112,927 $ 43.80 9.2 years Exercisable at December 31, 2021 460 $ 43.81 9.2 years Employee Stock Purchase Plan The Company’s Employee Stock Purchase Plan (“ESPP”) provides its eligible employees with an opportunity to purchase common stock through accumulated payroll contributions. The ESPP provides for shares to be purchased at 85 % of the lesser of the stock price at the enrollment date or the exercise date. The maximum number of shares of common stock available for sale under the ESPP is 750,000 . In 2021, 2020, and 2019, employees purchased 64,826 , 58,195 , and 41,116 shares, respectively. Stock Plan for Non-Management Directors The Company has adopted a Stock Plan for Non-Management Directors, which provides for issuing up to 200,000 shares of common stock to non-management directors as compensation in lieu of cash. At December 31, 2021, there were 59,760 shares of stock available for grant under the Stock Plan for Non-Management Directors, exclusive of 13,858 shares to be issued upon deferral release. Various information related to the Director Plan is shown below. 2021 2020 2019 Shares granted 12,998 15,901 11,382 Weighted average grant date fair value $ 46.05 $ 30.28 $ 41.63 401(k) Plan The Company has a 401(k) savings plan which covers substantially all full-time employees over the age of 21 and matches 100% of the first 6% of employee contributions. The amount charged to expense for the Company’s contributions to the plan was $ 4.9 million, $ 3.8 million and $ 3.2 million for 2021, 2020, and 2019, respectively. Deferred Compensation Plan The Company’s Nonqualified Deferred Compensation Plan permits certain executives to participate and defer up to 25 % of their base salary and/or up to 100 % of their eligible bonus for a plan year. Participants make an irrevocable election when they elect to participate for a plan year to receive the vested account balance following their retirement date, or at a future date not less than five years after the beginning of the plan year. At December 31, 2021, the Company had a liability of $ 5.0 million related to the Deferred Compensation Plan. 106 NOTE 17 - INCOME TAXES The components of income tax expense (benefit) for the years ended December 31, are as follows: Year ended December 31, ($ in thousands) 2021 2020 2019 Current: Federal $ 29,835 $ 25,132 $ 15,470 State and local 5,198 5,009 2,027 Total current 35,033 30,141 17,497 Deferred: Federal 870 ( 10,651 ) 4,262 State and local ( 325 ) ( 1,927 ) 1,538 Total deferred 545 ( 12,578 ) 5,800 Total income tax expense $ 35,578 $ 17,563 $ 23,297 A reconciliation of expected income tax expense, computed by applying the statutory federal income tax rate in 2021, 2020, and 2019 to income before income taxes and the amounts reflected in the consolidated statements of operations is as follows: Year ended December 31, ($ in thousands) 2021 2020 2019 Income tax expense at statutory rate $ 35,413 $ 19,309 $ 24,368 Increase (reduction) in income tax resulting from: Tax-exempt interest income, net ( 3,198 ) ( 2,010 ) ( 962 ) State and local income taxes, net 4,936 3,254 2,816 Bank-owned life insurance, net ( 713 ) ( 778 ) ( 628 ) Non-deductible expenses 1,090 637 749 Tax benefit of low-income housing tax credit ("LIHTC") investments, net ( 132 ) ( 444 ) ( 278 ) Excess tax benefits 146 ( 175 ) ( 526 ) Federal tax credits ( 1,136 ) ( 1,327 ) ( 913 ) Non-taxable donation to charitable foundation ( 263 ) — ( 420 ) Other, net ( 565 ) ( 903 ) ( 909 ) Total income tax expense $ 35,578 $ 17,563 $ 23,297 The net amount recognized as a component of tax expense for tax credits, other tax benefits, and amortization from LIHTC investments recognized per the table above was $ 0.1 million for the year ended December 31, 2021. The net amount recognized as a benefit component of income tax expense per the table above was $ 0.4 million for the year ended December 31, 2020, and $ 0.3 million for the year ended December 31, 2019. As of December 31, 2021 and 2020, the carrying value of the investments related to low-income housing tax credits was $ 7.6 million and $ 4.2 million, respectively. No impairment losses have been recognized from forfeiture or ineligibility of tax credits or other circumstances during the life of any of the investments. 107 A net deferred income tax asset of $ 40.9 million and $ 29.8 million is included in other assets in the consolidated balance sheets at December 31, 2021 and 2020, respectively. The tax effect of temporary differences that gave rise to significant portions of the deferred tax assets and deferred tax liabilities is as follows: Year ended December 31, ($ in thousands) 2021 2020 Deferred tax assets: Allowance for loan losses $ 36,550 $ 34,031 Loans held-for-sale 6,971 8,058 Other real estate 305 896 Deferred compensation 2,704 2,585 Accrued compensation 5,881 5,391 Net operating losses and tax credits 6,061 6,460 Other deferred tax assets 5,671 3,086 Total deferred tax assets 64,143 60,507 Deferred tax liabilities: Acquired loans 1,709 3,413 Unrealized gains on securities 6,171 12,189 Intangible assets 8,789 7,800 Other deferred tax liabilities 3,754 4,369 Total deferred tax liabilities 20,423 27,771 Net deferred tax asset before valuation allowance 43,720 32,736 Less: valuation allowance 2,830 2,932 Net deferred tax asset $ 40,890 $ 29,804 As part of the Trinity Capital Corporation acquisition in 2019, the company acquired net operating loss, tax credit, and capital loss deferred tax assets. Net operating losses originated in the years 2012, 2014-2017, and 2019 and will expire in the years between 2032-2037. Tax credit carryforwards originated in years 2010-2015 and will expire in the years between 2030-2035. A valuation allowance is provided on deferred tax assets when it is more likely than not that some portion of the assets will not be realized. In 2019, as part of the Trinity Capital Corporation acquisition, the company acquired net operating loss, tax credit, and capital loss deferred tax assets. The company determined it was more likely than not that some of the assets would not be realized. As such, the company has a valuation allowance recorded of $ 2.8 million and $ 2.9 million as of December 31, 2021 and 2020, respectively. The Company and its subsidiaries file income tax returns in the federal jurisdiction and in thirty states. The Company is no longer subject to federal, state or local income tax audits by tax authorities for years before 2017, with the exception of 2016 being an open year by one state taxing authority. Net operating losses generated prior to 2016 that are utilized going forward would still be subject to examination. As of December 31, 2021, the gross amount of unrecognized tax benefits was $ 2.7 million and the total amount of net unrecognized tax benefits that would impact the effective tax rate, if recognized, was $ 2.5 million. As of December 31, 2020 and 2019, the total amount of the net unrecognized tax benefits that would impact the effective tax rate, if recognized, was $ 3.1 million and $ 1.1 million, respectively. The Company believes it is reasonably possible the gross amount of unrecognized benefits will be reduced by approximately $ 0.4 million as a result of a lapse of statute of limitations in the next 12 months. The Company is under audit by the state of Missouri, and while the Company has concluded it has adequately provided for uncertain tax positions, the outcome of such audits are always uncertain and could result in additional tax expense, though immaterial. 108 The Company recognizes interest and penalties related to uncertain tax positions in income tax expense and classifies such interest and penalties in the liability for unrecognized tax benefits. The amount accrued for interest and penalties was $ 0.5 million as of December 31, 2021, $ 0.9 million for 2020 and was not significant for 2019. The activity in the gross liability for unrecognized tax benefits was as follows: ($ in thousands) 2021 2020 2019 Balance at beginning of year $ 3,157 $ 1,497 $ 1,301 Additions based on tax positions related to the current year 563 395 401 Additions for tax positions of prior years 436 1,556 62 Settlements for tax positions of prior years ( 1,289 ) — — Settlements or lapse of statute of limitations ( 170 ) ( 291 ) ( 267 ) Balance at end of year $ 2,697 $ 3,157 $ 1,497 NOTE 18 - COMMITMENTS Long-term Lease Commitments See “Note 6 – Leases” in this report for information regarding the Company’s long-term lease commitments. Off-balance-Sheet Commitments The Company issues financial instruments 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 not more than 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 December 31, 2021, and December 31, 2020, are as follows: (in thousands) December 31, 2021 December 31, 2020 Commitments to extend credit $ 2,481,173 $ 1,946,068 Letters of credit 77,314 50,971 State tax credits 18,118 24,473 Limited partnership commitments 21,553 23,400 There was an insignificant amount of unadvanced commitments on impaired loans at December 31, 2021 and December 31, 2020. Other liabilities include approximately $ 7.6 million for an allowance for credit losses attributable to unadvanced commitments at December 31, 2021. 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 December 31, 2021, and December 31, 2020, $ 238.7 million and $ 160.6 million, respectively, represent fixed rate loan commitments. Since certain of the commitments may expire without being drawn upon or may be revoked, the total commitment amounts do not necessarily represent future cash obligations. The Company evaluates each 109 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. Letters of credit are conditional commitments issued by the Company to guarantee the performance of a customer to a third party. These 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. The approximate remaining term of letters of credit range from 1 month to 11 years at December 31, 2021. The Company also has off-balance sheet commitments for purchases of state tax credits and commitments for various capital raises for SBICs . NOTE 19 - FAIR VALUE MEASUREMENTS The fair value of an asset or liability is the exchange price that would be received to sell that asset or paid to transfer that liability in an orderly transaction occurring in the principal market (or most advantageous market in the absence of a principal market) for such asset or liability. Inputs to valuation techniques include the assumptions that market participants would use in pricing an asset or liability. ASC Topic 820, Fair Value Measurements and Disclosures, establishes a fair value hierarchy for valuation inputs that gives the highest priority to quoted prices in active markets for identical assets or liabilities and the lowest priority to unobservable inputs. The fair value hierarchy is as follows: • Level 1 Inputs - Unadjusted quoted prices in active markets for identical assets or liabilities that the reporting entity has the ability to access at the measurement date. • Level 2 Inputs - Inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly. These might include quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, inputs other than quoted prices that are observable for the asset or liability (such as interest rates, volatilities, prepayment speeds, credit risks, etc.) or inputs that are derived principally from or corroborated by market data by correlation or other means. • Level 3 Inputs - Unobservable inputs for determining the fair values of assets or liabilities that reflect an entity’s own assumptions about the assumptions that market participants would use in pricing the assets or liabilities. 110 Fair value on a recurring basis The following table summarizes financial instruments measured at fair value on a recurring basis as of December 31, 2021 and 2020, segregated by the level of the valuation inputs within the fair value hierarchy utilized to measure fair value. December 31, 2021 ($ in thousands) Quoted Prices in Active Markets for Identical Assets (Level 1) Significant Other Observable Inputs (Level 2) Significant Unobservable Inputs (Level 3) Total Fair Value Assets Securities available-for-sale Obligations of U.S. Government-sponsored enterprises $ — $ 173,511 $ — $ 173,511 Obligations of states and political subdivisions — 575,084 — 575,084 Residential mortgage-backed securities — 513,859 — 513,859 Corporate debt securities — 12,382 — 12,382 U.S. Treasury Bills — 91,170 — 91,170 Total securities available-for-sale — 1,366,006 — 1,366,006 Other investments — 3,012 — 3,012 Derivative financial instruments — 12,869 — 12,869 Total assets $ — $ 1,381,887 $ — $ 1,381,887 Liabilities Derivative financial instruments $ — $ 15,794 $ — $ 15,794 Total liabilities $ — $ 15,794 $ — $ 15,794 December 31, 2020 ($ in thousands) Quoted Prices in Active Markets for Identical Assets (Level 1) Significant Other Observable Inputs (Level 2) Significant Unobservable Inputs (Level 3) Total Fair Value Assets Securities available-for-sale Obligations of U.S. Government-sponsored enterprises $ — $ 15,161 $ — $ 15,161 Obligations of states and political subdivisions — 344,232 — 344,232 Residential mortgage-backed securities — 526,572 — 526,572 Corporate debt securities — 14,998 — 14,998 U.S. Treasury Bills — 11,466 — 11,466 Total securities available-for-sale — 912,429 — 912,429 Derivative financial instruments — 28,703 — 28,703 Total assets $ — $ 941,132 $ — $ 941,132 Liabilities Derivative financial instruments $ — $ 34,967 $ — $ 34,967 Total liabilities $ — $ 34,967 $ — $ 34,967 • Securities available-for-sale . Securities classified as available-for-sale are reported at fair value utilizing Level 2 inputs. Fair values for Level 2 securities are based upon dealer quotes, market spreads, the U.S. Treasury yield curve, trade execution data, market consensus prepayment speeds, credit information and the bond’s terms and conditions at the security level. Changes in fair value are recognized through accumulated other comprehensive income. 111 • Derivatives . Derivatives are reported at fair value utilizing Level 2 inputs. The Company obtains counterparty quotations to value its interest rate swaps and caps. In addition, the Company validates the counterparty quotations with third-party valuation sources. Derivatives with negative fair values are included in Other liabilities in the consolidated balance sheets. Derivatives with positive fair value are included in Other assets in the consolidated balance sheets. Changes in the fair value of client-related derivative instruments are recognized through net income. For the years ended December 31, 2021 and 2020, the gains and losses substantially offset each other due to the Company’s hedging of the client swaps with other bank counterparties. Fair value on a non-recurring basis Certain financial assets and financial liabilities are measured at fair value on a non-recurring basis; that is, the instruments are not measured at fair value on an ongoing basis but are subject to fair value adjustments in certain circumstances (for example, when there is evidence of impairment). • Impaired loans . On a quarterly basis, fair value adjustments are recorded as necessary on impaired loans to account for (1) partial write-downs based on the current appraised or market-quoted value of the underlying collateral or (2) the full charge-off of the loan carrying value. In some cases, the properties for which market quotes or appraised values have been obtained are located in areas where comparable sales data is limited, outdated, or unavailable. In addition, the Company may adjust the valuations based on other relevant market conditions or information. Accordingly, fair value estimates, including those obtained from real estate brokers or other third-party consultants, for collateral-dependent impaired loans are classified in Level 3 of the valuation hierarchy. • Other real estate. These assets are reported at the lower of the loan carrying amount at foreclosure or fair value. Fair value is based on third party appraisals of each property and the Company’s judgment of other relevant market conditions. These are considered Level 3 inputs. • Loan servicing asset . The loan servicing asset is included in Other assets on the Company’s consolidated balance sheets and assessed for impairment on a quarterly basis. Market-based cash flow modeling and discounting models specific to the SBA industry are provided by a third-party valuation service and are considered Level 2 inputs. The following table presents financial instruments and non-financial assets measured at fair value on a non-recurring basis as of December 31, 2021 and 2020. December 31, 2021 (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 year ended December 31, 2021 Impaired loans $ 6,406 $ — $ — $ 6,406 $ 3,500 Other real estate 632 — — 632 29 Loan servicing asset 3,146 $ 3,146 $ — $ 156 Total $ 10,184 $ — $ 3,146 $ 7,038 $ 3,685 112 December 31, 2020 (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 year ended December 31, 2020 Impaired loans $ 1,247 $ — $ — $ 1,247 $ 4,486 Other real estate 3,600 — — 3,600 1,000 Total $ 4,847 $ — $ — $ 4,847 $ 5,486 (1) The amounts represent balances measured at fair value during the period and still held as of the reporting date. Carrying amount and fair value at December 31, 2021 and 2020 Following is a summary of the carrying amounts and fair values of the Company’s financial instruments on the consolidated balance sheets at December 31, 2021 and 2020. This summary excludes certain financial assets and liabilities for which carrying value approximates fair value and financial instruments that are recorded at fair value on a recurring basis disclosed above. Financial instruments for which carrying values approximate fair value include cash and due from banks, federal funds sold, interest bearing deposits, accrued interest receivable/payable, demand, savings and money market deposits. December 31, 2021 December 31, 2020 ($ in thousands) Carrying Amount Estimated fair value Level Carrying Amount Estimated fair value Level Balance sheet assets Securities held-to-maturity $ 429,681 $ 434,672 Level 2 $ 487,610 $ 501,523 Level 2 Other investments 56,884 56,884 Level 2 48,764 48,764 Level 2 Loans held-for-sale 6,389 6,389 Level 2 13,564 13,564 Level 2 Loans, net 8,872,601 8,869,891 Level 3 7,088,264 7,067,562 Level 3 State tax credits, held-for-sale 27,994 30,686 Level 3 36,853 39,925 Level 3 Servicing asset 6,714 6,714 Level 2 5,721 5,721 Level 2 Balance sheet liabilities Certificates of deposit $ 608,293 $ 606,177 Level 3 $ 550,095 $ 553,946 Level 3 Subordinated debentures and notes 154,899 155,972 Level 2 203,637 192,889 Level 2 FHLB advances 50,000 51,527 Level 2 50,000 51,871 Level 2 Other borrowings 353,863 353,863 Level 2 301,081 301,081 Level 2 Limitations Fair value estimates are made at a specific point in time, based on relevant market information and information about the financial instrument. These estimates are subjective in nature and involve uncertainties and matters of significant judgment, and therefore, cannot be determined with precision. 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 experience and other factors, including the current economic environment, which management believes to be reasonable under the circumstances. Such estimates and assumptions are adjusted when facts and circumstances dictate. Changing real estate values, illiquid credit markets, volatile equity markets, and declines in consumer spending have combined to increase the uncertainty inherent in such estimates and assumptions. 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 statements in future periods. In addition, these estimates do not reflect any premium or discount that could result from offering for sale at one time the Company’s entire holdings of a particular financial instrument. Fair value estimates are based on existing on-balance and off-balance-sheet financial instruments without attempting to estimate the value of 113 anticipated future business and the value of assets and liabilities that are not considered financial instruments. In addition, the tax ramifications related to the realization of the unrealized gains and losses can have a significant effect on fair value estimates and have not been considered in many of the estimates. NOTE 20 - PARENT COMPANY ONLY CONDENSED FINANCIAL STATEMENTS Condensed Balance Sheets December 31, ($ in thousands) 2021 2020 Assets Cash $ 94,760 $ 75,475 Investment in Bank 1,568,796 1,200,689 Investment in nonbank subsidiaries 14,302 9,778 Other assets 33,847 35,108 Total assets $ 1,711,705 $ 1,321,050 Liabilities and Shareholders’ Equity Subordinated debentures and notes $ 154,899 $ 203,637 Notes payable 22,857 30,000 Accounts payable and other liabilities 4,833 8,439 Shareholders' equity 1,529,116 1,078,974 Total liabilities and shareholders' equity $ 1,711,705 $ 1,321,050 114 Condensed Statements of Operations Year ended December 31, ($ in thousands) 2021 2020 2019 Income: Dividends from Bank $ 95,000 $ 37,000 $ 60,000 Dividends from nonbank subsidiaries 2,000 1,400 1,500 Other 3,600 483 663 Total income 100,600 38,883 62,163 Expenses: Interest expense 11,406 10,590 8,689 Other expenses 11,037 6,946 6,936 Total expenses 22,443 17,536 15,625 Income before taxes and equity in undistributed earnings of subsidiaries 78,157 21,347 46,538 Income tax benefit 3,710 3,448 3,478 Net income before equity in undistributed earnings of subsidiaries 81,867 24,795 50,016 Equity in undistributed earnings of subsidiaries 51,188 49,589 42,723 Net income $ 133,055 $ 74,384 $ 92,739 115 Condensed Statements of Cash Flows Year ended December 31, ($ in thousands) 2021 2020 2019 Cash flows from operating activities: Net income $ 133,055 $ 74,384 $ 92,739 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Share-based compensation 6,017 4,178 4,032 Net income of subsidiaries ( 148,188 ) ( 87,989 ) ( 104,223 ) Dividends from subsidiaries 97,000 38,400 61,500 Other, net ( 16 ) 3,588 ( 1,063 ) Net cash provided by operating activities 87,868 32,561 52,985 Cash flows from investing activities: Proceeds (cash paid) for acquisitions, net of cash acquired 2,346 ( 1,243 ) ( 36,015 ) Purchases of other investments ( 2,204 ) ( 1,166 ) ( 2,634 ) Proceeds from distributions on other investments 2,656 765 1,271 Net cash provided by (used in) investing activities 2,798 ( 1,644 ) ( 37,378 ) Cash flows from financing activities: Proceeds from issuance of subordinated notes — 61,953 — Payments for the redemption of subordinated notes ( 50,000 ) — — Proceeds from notes payable — — 1,000 Repayments of notes payable — — ( 3,000 ) Proceeds from issuance of long-term debt — — 40,000 Repayment of long-term debt ( 7,143 ) ( 4,286 ) ( 5,714 ) Cash dividends paid ( 26,153 ) ( 19,795 ) ( 16,569 ) Payments for the repurchase of common stock ( 60,589 ) ( 15,347 ) ( 15,526 ) Proceeds from issuance of preferred stock 71,988 — — Other 516 78 ( 212 ) Net cash provided by (used in) financing activities ( 71,381 ) 22,603 ( 21 ) Net increase in cash and cash equivalents 19,285 53,520 15,586 Cash and cash equivalents, beginning of year 75,475 21,955 6,369 Cash and cash equivalents, end of year $ 94,760 $ 75,475 $ 21,955 Supplemental disclosures of cash flow information: Noncash transactions: Common shares issued in connection with acquisitions $ 343,650 $ 167,035 $ 171,885 116 NOTE 21 - SUPPLEMENTAL FINANCIAL INFORMATION The following table presents miscellaneous income and other expense components that exceed one percent of the aggregate of total interest income and other income in one or more of the periods indicated: Year ended December 31, ($ in thousands) 2021 2020 2019 Miscellaneous income: Community development fees $ 5,491 $ 3,353 $ 889 Other miscellaneous income 16,657 13,609 11,007 Total miscellaneous income $ 22,148 $ 16,962 $ 11,896 Other expense: Amortization expense $ 5,691 $ 5,673 $ 5,543 Banking expenses 6,123 4,921 5,258 Customer analysis expense 12,104 1,246 — FDIC and other insurance 5,789 3,897 2,380 Loan, legal expenses 7,130 4,003 3,526 Meals and entertainment 1,253 742 3,670 Outside services 4,992 4,961 4,335 Other expenses 19,593 18,807 17,119 Total other noninterest expenses $ 62,675 $ 44,250 $ 41,831 117 ITEM 9: CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None.