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 59 Consolidated Balance Sheets at December 31, 2023 and 2022 62 Consolidated Statements of Income for the years ended December 31, 2023, 2022, and 2021 63 Consolidated Statements of Comprehensive Income for the years ended December 31, 2023, 2022, and 2021 64 Consolidated Statements of Shareholders’ Equity for the years ended December 31, 2023, 2022, and 2021 65 Consolidated Statements of Cash Flows for the years ended December 31, 2023, 2022, and 2021 66 Notes to Consolidated Financial Statements 68 58 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, 2023 and 2022, the related consolidated statements of income, comprehensive income, shareholders’ equity, and cash flows, for each of the three years in the period ended December 31, 2023, 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, 2023 and 2022, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2023, 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, 2023, 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 26, 2024, expressed an unqualified opinion on the Company's internal control over financial reporting. 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 U.S. 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 Matter The critical audit matter communicated below is a matter arising from the current-period audit of the financial statements that was communicated or required to be communicated to the audit committee and that (1) relates 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 matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates. Allowance for Credit Losses on Loans — 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. Additionally, the Company applies qualitative adjustments to address risks not directly captured in the quantitative 59 reserve; including to address macroeconomic uncertainty by weighting the forecasted baseline, upside, and downside economic factors. We identified the ACL on loans as a critical audit matter because of the complexity of the Company’s model and the significant assumptions used by management. Auditing the ACL on loans 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 on loans included the following, among others: • We tested the design and operating effectiveness of management’s controls covering the key data, assumptions and judgments impacting the ACL on loans. • We evaluated the appropriateness of the Company’s accounting policies, methodologies, and elections involved in determining the ACL on loans. • We involved credit specialists to assist us in evaluating the Company’s development of the ACL model, including the selection of and calibration to economic factors. • 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. /s/ Deloitte & Touche LLP St. Louis, Missouri February 26, 2024 We have served as the Company’s auditor since 2010. 60 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, 2023, 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, 2023, 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, 2023, of the Company and our report dated February 26, 2024, expressed an unqualified opinion on those financial statements. 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 26, 2024 61 ENTERPRISE FINANCIAL SERVICES CORP AND SUBSIDIARIES Consolidated Balance Sheets As of December 31, 2023 and 2022 December 31, ($ in thousands, except per share data) 2023 2022 Assets Cash and due from banks $ 193,275 $ 229,580 Federal funds sold 2,880 1,753 Interest-earning deposits 236,874 60,026 Total cash and cash equivalents 433,029 291,359 Interest-earning deposits greater than 90 days 3,856 8,029 Securities available-for-sale 1,618,273 1,535,807 Securities held-to-maturity, net 750,434 709,915 Loans held-for-sale 359 1,228 Loans 10,884,118 9,737,138 Allowance for credit losses on loans ( 134,771 ) ( 136,932 ) Total loans, net 10,749,347 9,600,206 Other investments 66,195 63,790 Fixed assets, net 42,681 42,985 Goodwill 365,164 365,164 Intangible assets, net 12,318 16,919 Other assets 476,934 418,770 Total assets $ 14,518,590 $ 13,054,172 Liabilities and Shareholders' equity Noninterest-bearing demand accounts $ 3,958,743 $ 4,642,732 Interest-bearing demand accounts 2,950,259 2,256,295 Money market accounts 3,399,280 2,655,159 Savings accounts 595,175 744,256 Certificates of deposit: Brokered 482,759 118,968 Customer 790,155 411,740 Total deposits 12,176,371 10,829,150 Subordinated debentures and notes 155,984 155,433 FHLB advances — 100,000 Other borrowings 297,829 324,119 Other liabilities 172,338 123,207 Total liabilities 12,802,522 11,531,909 Commitments and contingent liabilities (Note 17) Shareholders' equity: Preferred stock, $ 0.01 par value; 5,000,000 shares authorized; 75,000 shares issued and outstanding, respectively ($ 1,000 per share liquidation preference) 71,988 71,988 Common stock, $ 0.01 par value; 75,000,000 shares authorized; 37,416,028 and 37,253,292 shares issued and outstanding, respectively 374 373 Additional paid-in capital 995,208 982,660 Retained earnings 749,513 597,574 Accumulated other comprehensive loss, net ( 101,015 ) ( 130,332 ) Total shareholders' equity 1,716,068 1,522,263 Total liabilities and shareholders' equity $ 14,518,590 $ 13,054,172 The accompanying notes are an integral part of these Consolidated Financial Statements. 62 ENTERPRISE FINANCIAL SERVICES CORP AND SUBSIDIARIES Consolidated Statements of Income Years ended December 31, 2023, 2022, and 2021 Year ended December 31, ($ in thousands, except per share data) 2023 2022 2021 Interest income: Loans $ 687,852 $ 456,007 $ 348,615 Debt securities: Taxable 39,510 28,267 18,030 Nontaxable 22,717 18,838 13,814 Interest-earning deposits 13,430 10,599 1,496 Dividends on equity securities 1,410 1,371 1,275 Total interest income 764,919 515,082 383,230 Interest expense: Deposits 183,723 30,158 10,668 Subordinated debentures and notes 9,781 9,166 10,960 FHLB advances 2,752 599 803 Other borrowings 6,071 1,256 605 Total interest expense 202,327 41,179 23,036 Net interest income 562,592 473,903 360,194 Provision (benefit) for credit losses 36,605 ( 611 ) 13,385 Net interest income after provision (benefit) for credit losses 525,987 474,514 346,809 Noninterest income: Deposit service charges 16,559 18,326 15,428 Wealth management revenue 10,030 10,010 10,259 Card services revenue 10,028 11,551 11,880 Tax credit income 9,196 2,558 8,028 Other income 22,912 16,717 22,148 Total noninterest income 68,725 59,162 67,743 Noninterest expense: Employee compensation and benefits 164,566 147,029 124,904 Deposit costs 72,293 31,082 14,211 Occupancy 16,526 17,640 16,286 Data processing 15,196 13,513 12,242 Professional fees 5,719 7,079 4,289 Branch-closure expenses — — 3,441 Merger-related expenses — — 22,082 Other expense 73,886 57,873 48,464 Total noninterest expense 348,186 274,216 245,919 Income before income tax expense 246,526 259,460 168,633 Income tax expense 52,467 56,417 35,578 Net income $ 194,059 $ 203,043 $ 133,055 Preferred stock dividends 3,750 4,041 — Net income available to common shareholders $ 190,309 $ 199,002 $ 133,055 Earnings per common share Basic $ 5.09 $ 5.32 $ 3.86 Diluted 5.07 5.31 3.86 The accompanying notes are an integral part of these Consolidated Financial Statements. 63 ENTERPRISE FINANCIAL SERVICES CORP AND SUBSIDIARIES Consolidated Statements of Comprehensive Income Years ended December 31, 2023, 2022, and 2021 Year ended December 31, ($ in thousands) 2023 2022 2021 Net income $ 194,059 $ 203,043 $ 133,055 Other comprehensive income (loss), net of tax: Change in unrealized gain (loss) on available-for-sale securities 32,155 ( 149,623 ) ( 17,049 ) Reclassification of gain on the sale of available-for-sale securities ( 450 ) — — Reclassification of gain on held-to-maturity securities ( 2,605 ) ( 2,696 ) ( 3,624 ) Change in unrealized gain (loss) on cash flow hedges ( 491 ) 2,798 1,161 Reclassification of loss on cash flow hedges 708 412 1,169 Total other comprehensive income (loss), net 29,317 ( 149,109 ) ( 18,343 ) Total comprehensive income $ 223,376 $ 53,934 $ 114,712 The accompanying notes are an integral part of these Consolidated Financial Statements. 64 ENTERPRISE FINANCIAL SERVICES CORP AND SUBSIDIARIES Consolidated Statements of Shareholders’ Equity Years ended December 31, 2023, 2022, and 2021 Preferred Common (in thousands, except per share data) Shares Amount Shares Amount Treasury Stock Additional Paid-in Capital Retained Earnings Accumulated Other Comprehensive Income (Loss) Total Shareholders' Equity Balance December 31, 2020 — $ — 31,210 $ 332 $ ( 73,528 ) $ 697,839 $ 417,212 $ 37,120 $ 1,078,975 Net income — $ — — $ — $ — $ — $ 133,055 $ — $ 133,055 Other comprehensive loss — — — — — — — ( 18,343 ) ( 18,343 ) Common stock dividends ($ 0.75 per share) — — — — — — ( 26,153 ) — ( 26,153 ) Repurchase of common stock — — ( 1,300 ) ( 12 ) — ( 30,518 ) ( 30,059 ) — ( 60,589 ) Issuance under equity compensation plans, net — — 132 — — 2,549 ( 663 ) — 1,886 Shares issued in connection with acquisition of First Choice Bancorp, net (gross issuance 7,808 shares) — — 7,777 78 — 342,912 ( 710 ) — 342,280 Preferred stock issuance, net of $ 3,012 issuance cost 75 71,988 — — — — — — 71,988 Share-based compensation — — — — — 6,017 — — 6,017 Balance December 31, 2021 75 $ 71,988 37,819 $ 398 $ ( 73,528 ) $ 1,018,799 $ 492,682 $ 18,777 $ 1,529,116 Net income — $ — — $ — $ — $ — $ 203,043 $ — $ 203,043 Other comprehensive loss — — — — — — — ( 149,109 ) ( 149,109 ) Common stock dividends ($ 0.90 per share) — — — — — — ( 33,602 ) — ( 33,602 ) Preferred stock dividends ($ 53.89 per share) — — — — — — ( 4,041 ) — ( 4,041 ) Repurchase of common stock — — ( 700 ) ( 7 ) — ( 18,867 ) ( 14,049 ) — ( 32,923 ) Issuance under equity compensation plans, net — — 134 2 — 2,460 ( 689 ) — 1,773 Share-based compensation — — — — — 8,006 — — 8,006 Retirement of treasury stock ( 1,980 shares) — — — ( 20 ) 73,528 ( 27,738 ) ( 45,770 ) — — Balance December 31, 2022 75 $ 71,988 37,253 $ 373 $ — $ 982,660 $ 597,574 $ ( 130,332 ) $ 1,522,263 Net income — $ — — $ — $ — $ — $ 194,059 $ — $ 194,059 Other comprehensive income — — — — — — — 29,317 29,317 Common stock dividends ($ 1.00 per share) — — — — — — ( 37,368 ) — ( 37,368 ) Preferred stock dividends ($ 50.00 per share) — — — — — — ( 3,750 ) — ( 3,750 ) Issuance under equity compensation plans, net — — 163 1 — 2,402 ( 1,002 ) — 1,401 Share-based compensation — — — — — 10,146 — — 10,146 Balance December 31, 2023 75 $ 71,988 37,416 $ 374 $ — $ 995,208 $ 749,513 $ ( 101,015 ) $ 1,716,068 The accompanying notes are an integral part of these Consolidated Financial Statements. 65 ENTERPRISE FINANCIAL SERVICES CORP AND SUBSIDIARIES Consolidated Statements of Cash Flows Years ended December 31, 2023, 2022, and 2021 Year ended December 31, ($ in thousands) 2023 2022 2021 Cash flows from operating activities: Net income $ 194,059 $ 203,043 $ 133,055 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation 5,090 5,573 6,147 Provision (benefit) for credit losses 36,605 ( 611 ) 13,385 Deferred income taxes 2,380 2,194 545 Net amortization of debt securities 3,998 5,639 7,343 Net amortization (accretion) on loans 3,775 266 ( 1,140 ) Amortization of intangible assets 4,601 5,367 5,690 Amortization of servicing assets 1,648 3,066 2,311 Mortgage loans originated-for-sale ( 19,610 ) ( 67,470 ) ( 159,670 ) Proceeds from mortgage loans sold 20,585 73,014 163,864 Loss (gain) on: Investment securities ( 601 ) — — Loans sold ( 2,015 ) — — Other real estate ( 187 ) 93 ( 931 ) Fixed assets ( 46 ) ( 54 ) — State tax credits ( 904 ) ( 1,506 ) ( 2,220 ) Asset impairment — — 3,441 Share-based compensation 10,146 8,006 6,017 Changes in other assets and liabilities, net 8,714 ( 19,980 ) ( 17,262 ) Net cash provided by operating activities 268,238 216,640 160,575 Cash flows from investing activities: Proceeds from acquisitions, net — — 212,642 Net (increase) decrease in loans ( 1,238,276 ) ( 722,677 ) 138,455 Proceeds received from: Sale of debt securities, available-for-sale 40,393 — 27,135 Paydown or maturity of debt securities, available-for-sale 233,105 238,909 306,360 Paydown or maturity of debt securities, held-to-maturity 9,135 11,913 49,947 Redemption of other investments 92,879 12,989 18,159 Sale of loans 44,975 — — Sale of state tax credits held-for-sale 4,592 20,645 18,507 Sale of other real estate 457 2,517 5,915 Sale of fixed assets 357 1,699 — Settlement of bank-owned life insurance policies 1,155 534 — Payments for the purchase of: Available-for-sale debt securities ( 318,797 ) ( 728,247 ) ( 779,481 ) Held-to-maturity debt securities ( 56,365 ) ( 182,004 ) — Other investments ( 114,746 ) ( 19,286 ) ( 9,564 ) State tax credits held-for-sale ( 90 ) ( 18,846 ) ( 8,689 ) Fixed assets ( 6,556 ) ( 1,930 ) ( 2,500 ) Net cash used in investing activities ( 1,307,782 ) ( 1,383,784 ) ( 23,114 ) 66 Year ended December 31, ($ in thousands) 2023 2022 2021 Cash flows from financing activities: Net (decrease) increase in noninterest-bearing deposit accounts $ ( 683,989 ) $ 64,296 $ 869,203 Net (decrease) increase in interest-bearing deposit accounts 2,031,210 ( 578,945 ) 648,778 Payments for the redemption of subordinated notes — — ( 50,000 ) Net increase (decrease) in short term FHLB advances, net ( 100,000 ) 100,000 ( 160,000 ) Repayments of long-term FHLB advances — ( 50,000 ) — Repayments of notes payable ( 5,714 ) ( 5,714 ) ( 7,143 ) Net (decrease) increase in other borrowings ( 20,576 ) ( 24,030 ) 59,925 Dividends paid on common stock ( 37,368 ) ( 33,602 ) ( 26,153 ) Repurchase of common stock — ( 32,923 ) ( 60,589 ) Dividends paid on preferred stock ( 3,750 ) ( 4,041 ) — Proceeds from issuance of preferred stock, net — — 71,988 Other, net 1,401 1,773 516 Net cash provided by (used in) financing activities 1,181,214 ( 563,186 ) 1,346,525 Net (decrease) increase in cash and cash equivalents 141,670 ( 1,730,330 ) 1,483,986 Cash and cash equivalents, beginning of period 291,359 2,021,689 537,703 Cash and cash equivalents, end of period $ 433,029 $ 291,359 $ 2,021,689 Supplemental disclosures of cash flow information: Cash paid during the period for: Interest $ 195,392 $ 40,736 $ 23,957 Income taxes 50,117 46,009 56,845 Noncash investing and financing transactions: Transfer to other real estate and repossessed assets owned in settlement of loans $ 6,933 $ — $ 3,227 Sales of other real estate financed — — 228 Transfer of securities from available-for-sale to held-to-maturity — 116,927 — Transfer to loans from fixed assets for building sale and leaseback 1,460 — — Right-of-use assets obtained in exchange for lease obligations 15,640 9,512 5,658 Leasehold improvement allowance in other assets 2,483 — — Common shares issued in connection with acquisitions — — 343,650 The accompanying notes are an integral part of these Consolidated Financial Statements. 67 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 Arizona, California, Florida, Kansas, Missouri, Nevada, and New Mexico 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 various 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 to be cash and cash equivalents. Cash balances include deposits in transit and drafts in the process of collection. The Federal Reserve is authorized to establish reserve requirements on depository institutions. In 2020, the Federal Reserve reduced the reserve requirement to zero percent. As such, cash balances at the Federal Reserve at December 31, 2023 and 2022 were not subject to a reserve requirement. Recent Accounting Pronouncements FASB ASU 2021-01, Reference Rate Reform (Topic 848): Scope (ASU 2021-01) . ASU 2021-01 was issued in January 2021 and provides optional expedients and exceptions in ASC 848 to contracts, hedging relationships, and other transactions affected by reference rate reform if certain criteria are met. The amendment only applies to contracts, hedging relationships, and other transactions that reference LIBOR or another reference rate expected to be discontinued because of reference rate reform. The expedients and exceptions provided by the amendments will not apply to contract modifications made and hedging relationships entered into or evaluated after December 31, 2022, except for hedging relationships existing as of December 31, 2022, 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. In December 2022, ASU 2022-06 Reference Rate Reform (Topic 848): Deferral of the Sunset date of Topic 848 was issued, which extends the sunset date from December 31, 2022 to December 31, 2024. FASB ASU 2022-02, Financial Instruments–Credit Losses (Topic 326); Troubled Debt Restructurings and Vintage Disclosures. ASU 2022-02 was issued in March 2022 and eliminates the accounting guidance on troubled 68 debt restructurings for creditors in ASC 310-40 and amends the guidance on “vintage disclosures” to require disclosure of current-period gross write-offs by year of origination. The ASU also updates the requirements related to accounting for credit losses under ASC 326 and adds enhanced disclosures for creditors with respect to loan refinancings and restructurings for borrowers experiencing financial difficulty. The amendments in this update will be effective for fiscal years beginning after December 15, 2022 for entities that have adopted the amendments in ASU 2016-13, Financial Instruments–Credit Losses (Topic 326) Measurement of Credit Losses on Financial Instruments . The adoption of ASU 2022-02 did not have a material effect on the consolidated financial statements. FASB ASU 2022-03, Fair Value Measurement of Equity Securities Subject to Contractual Sale Restrictions. ASU 2022-03 was issued in June 2022 to (1) clarify the guidance in Topic 820, Fair Value Measurement, when measuring the fair value of an equity security subject to contractual restrictions that prohibit the sale of an equity security, (2) amend a related illustrative example, and (3) introduce new disclosure requirements for equity securities subject to contractual sale restrictions that are measured at fair value in accordance with Topic 820. The amendments in this update are effective for fiscal years beginning after December 15, 2023, and interim periods within those fiscal years. The Company has evaluated the accounting and disclosure requirements of ASU 2022-03 and does not expect them to have a material effect on the consolidated financial statements. FASB ASU 2023-02, Accounting for Investments in Tax Credit Structures Using the Proportional Amortization Method . ASU 2023-02 was issued in March 2023 to allow reporting entities to consistently account for equity investments made primarily for the purpose of receiving income tax credits and other income tax benefits. If certain conditions are met, a reporting entity may elect to account for its tax equity investments by using the proportional amortization method regardless of the program from which it receives income tax credits, instead of only low-income-housing tax credit (“LIHTC”) structures. This amendment also eliminates certain LIHTC-specific guidance aligning the accounting with other equity investments in tax credit structures. The amendments in this update are effective for fiscal years beginning after December 15, 2023, and interim periods within those fiscal years. The Company is evaluating the accounting and disclosure requirements of ASU 2023-02 and does not expect them to have a material effect on the consolidated financial statements. FASB ASU 2023-07, Improvements to Reportable Segment Disclosures . ASU 2023-07 was issued in November 2023 to improve reportable segment disclosure requirements, primarily through enhanced disclosures about significant segment disclosures. The amendments in this update require annual and interim disclosures on significant segment expenses that are regularly provided to the chief operating decision maker and require annual and interim disclosures on “other segment items” that comprise the difference between segment revenue less segment expense compared to the reported measure of segment profit or loss. In addition, the amendments will require all annual disclosures that are currently required to be reported on an interim basis and requires disclosure of the title and position of the chief operating decision maker and how that position uses the information to assess segment performance and the allocation of resources. ASU 2023-07 also requires entities that have a single reportable segment, such as the Company, to provide all disclosures required in this update and the existing segment disclosures in Topic 280. The amendments in this update are effective for fiscal years beginning after December 15, 2023, and interim periods within fiscal years beginning after December 15, 2024. The Company is evaluating the accounting and disclosure requirements of ASU 2023-07 and does not expect them to have a material effect on the consolidated financial statements. FASB ASU 2023-09, Income Tax Disclosures . ASU 2023-09 was issued in December 2023 to require annual disclosures on specific categories in the income tax rate reconciliation and provide additional information for reconciling items that meet a quantitative threshold. Annual disclosures are required on income taxes paid, including the amounts paid for federal, state and foreign taxes and the amount paid in individual jurisdictions if the amount is equal to or greater than 5% of total income taxes paid (net of refunds received). Additional annual disclosures are required on pre-tax income from continuing operations and income tax expense, disaggregated by domestic and foreign amounts. The amendments in this update are effective for fiscal years beginning after December 15, 2024. The Company is evaluating the accounting and disclosure requirements of ASU 2023-09 and does not expect them to have a material effect on the consolidated financial statements. 69 Investments The Company has classified all investments in debt securities as either 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 as a separate component of 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. 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 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 Income. 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 1-4 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 SBA 7(a) loans that generally provide for a guarantee of 75% of the loan, 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, 2023 and 2022, 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, 2023, the Company was servicing SBA loans that had been sold and has recorded a related servicing asset of $ 2.9 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. 70 Gains on the sale of held-for-sale loans are reported net of direct origination fees and costs in the Company’s Consolidated Statements of Income. 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 $ 66.7 million and $ 48.1 million at December 31, 2023 and 2022, respectively, and were reported in Other Assets on the consolidated balance sheets. Acquired Loans 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 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 described below under “Allowance for Credit Losses on Loans.” Non-accrual Loans 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. 71 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 deems the loan uncollectible. 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 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 and 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. As of December 31, 2023, the Company has ceased originating new agricultural credit relationships. 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. 72 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 all portfolios. The annual percentage change in gross domestic product is used in Construction, Agricultural, 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, Residential Real Estate and C&I portfolios, respectively. The contractual term excludes expected extensions, renewals, and modifications unless 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. 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. Other individually-evaluated loans may be remeasured using a discounted cash flow method if appropriate. 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 are evaluated individually. 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 and the amounts are deemed uncollectible. Other Real Estate and Repossessed Assets 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 initially recorded at fair value less cost to sell and subsequently 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. Gains, losses and writedowns resulting from the writedown or sale of other real estate are credited or charged to earnings. 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. Repossessed assets represent property, other than real estate, that is acquired through repossession and is initially recorded at estimated fair value on the date of acquisition, less costs to sell. Subsequent to repossession, the assets are carried at the lower of cost or fair value, less estimated costs to sell. 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. 73 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 Income. 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 2023. 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 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. The Company does not enter into derivative financial instruments for trading purposes. 74 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 applicable 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, collars, 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 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. Share-Based Compensation Share-based compensation is recognized as an expense for stock options, restricted stock awards, performance stock units, and restricted stock units granted to employees and directors 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 share-based employee compensation plan is included in “Note 15 - Shareholders’ Equity and Compensation Plans.” Specialty Deposits The Company offers specialty deposit accounts to customers in certain industries, primarily community associations, property management, third party escrow, and trust services. These customers will typically receive an earnings credit rate on average collected balances that is used to offset their cost of maintaining the deposit accounts. Earnings credits, otherwise referred to as Deposit costs, are reflected as a component of non-interest expense in the Consolidated Statement of Income. 75 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 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 potential dilutive common shares outstanding during the period using the treasury stock method. 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 Income. 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, including deposit costs and other noninterest expense, reported in prior periods in the “Consolidated Statements of Income,” and “Note 20 – Supplemental Financial Information,” have been reclassified to conform to the current presentation. The reclassifications had no effect on net income or shareholders’ equity. 76 NOTE 2 - EARNINGS PER SHARE Basic earnings per common share data is calculated by dividing net income available to common shareholders by the weighted average number of common shares outstanding during the period. Diluted earnings per common share gives effect to all dilutive potential common shares outstanding during the period using the treasury stock method. The following table presents a summary of per common share data and amounts for the periods indicated. Year ended December 31, ($ and shares in thousands, except per share data) 2023 2022 2021 Net income available to common shareholders $ 190,309 $ 199,002 $ 133,055 Weighted average common shares outstanding 37,370 37,381 34,436 Additional dilutive common stock equivalents 137 119 60 Weighted average diluted common shares outstanding 37,507 37,500 34,496 Basic earnings per common share $ 5.09 $ 5.32 $ 3.86 Diluted earnings per common share $ 5.07 $ 5.31 $ 3.86 For 2023, 2022 and 2021, common stock equivalents of approximately 419,000 , 224,000 and 158,000 , respectively, were excluded from the earnings per share calculation because their effect would have been anti-dilutive. 77 NOTE 3 - 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, 2023 ($ in thousands) Amortized Cost Gross Unrealized Gains Gross Unrealized Losses Fair Value Available-for-sale securities: Obligations of U.S. Government-sponsored enterprises $ 316,511 $ 303 $ ( 20,368 ) $ 296,446 Obligations of states and political subdivisions 500,881 57 ( 68,767 ) 432,171 Agency mortgage-backed securities 758,283 1,181 ( 59,083 ) 700,381 Corporate debt securities 8,750 — ( 1,176 ) 7,574 U.S. Treasury Bills 184,709 62 ( 3,070 ) 181,701 Total securities available-for-sale $ 1,769,134 $ 1,603 $ ( 152,464 ) $ 1,618,273 Held-to-maturity securities: Obligations of states and political subdivisions $ 575,699 $ 7,078 $ ( 47,461 ) $ 535,316 Agency mortgage-backed securities 52,100 — ( 5,424 ) 46,676 Corporate debt securities 123,420 216 ( 8,981 ) 114,655 Total securities held-to-maturity $ 751,219 $ 7,294 $ ( 61,866 ) $ 696,647 Allowance for credit losses ( 785 ) Total securities held-to-maturity, net $ 750,434 December 31, 2022 ($ in thousands) Amortized Cost Gross Unrealized Gains Gross Unrealized Losses Fair Value Available-for-sale securities: Obligations of U.S. Government-sponsored enterprises $ 266,090 $ — $ ( 28,305 ) $ 237,785 Obligations of states and political subdivisions 507,842 27 ( 90,425 ) 417,444 Agency mortgage-backed securities 727,931 453 ( 68,980 ) 659,404 Corporate debt securities 13,750 — ( 1,110 ) 12,640 U.S. Treasury Bills 213,441 1 ( 4,908 ) 208,534 Total securities available-for-sale $ 1,729,054 $ 481 $ ( 193,728 ) $ 1,535,807 Held-to-maturity securities: Obligations of states and political subdivisions $ 529,012 $ 2,321 $ ( 65,347 ) $ 465,986 Agency mortgage-backed securities 57,018 — ( 6,416 ) 50,602 Corporate debt securities 124,620 163 ( 12,854 ) 111,929 Total securities held-to-maturity $ 710,650 $ 2,484 $ ( 84,617 ) $ 628,517 Allowance for credit losses ( 735 ) Total securities held-to-maturity, net $ 709,915 During 2023, the Company did no t transfer any securities from available-for-sale to held-to-maturity. The Company believes the held-to-maturity category is consistent with the Company’s intent for these securities. In 2022, the Company transferred $ 116.7 million of securities from available-for-sale to held-to-maturity. 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- 78 maturity securities. The balance of held-to-maturity securities in the “Amortized Cost” column in the table above includes a cumulative net unamortized, unrealized gain of $ 14.1 million and $ 17.6 million at December 31, 2023 and 2022, respectively. Such amounts are amortized over the remaining life of the securities. At December 31, 2023 and 2022, 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 of $ 1.6 billion and $ 734.5 million at December 31, 2023 and December 31, 2022, respectively, were pledged as collateral to secure deposits of public institutions and for other purposes as required by law or contract provisions. The amortized cost and estimated fair value of debt securities at December 31, 2023, by contractual maturity, are shown below. Expected maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. The weighted average life of the mortgage-backed securities is approximately 5 years. Available-for-sale Held-to-maturity ($ in thousands) Amortized Cost Estimated Fair Value Amortized Cost Estimated Fair Value Due in one year or less $ 141,734 $ 140,353 $ 1,230 $ 1,230 Due after one year through five years 327,794 309,375 81,887 77,227 Due after five years through ten years 130,737 117,025 190,949 183,396 Due after ten years 410,586 351,139 425,053 388,118 Agency mortgage-backed securities 758,283 700,381 52,100 46,676 $ 1,769,134 $ 1,618,273 $ 751,219 $ 696,647 79 There were 753 and 740 available-for-sale securities in an unrealized loss position as of December 31, 2023 and 2022, respectively, included in the following tables: December 31, 2023 Less than 12 months 12 months or more Total ($ in thousands) Fair Value Unrealized Losses Fair Value Unrealized Losses Fair Value Unrealized Losses Obligations of U.S. Government-sponsored enterprises $ 25,886 $ 85 $ 247,027 $ 20,283 $ 272,913 $ 20,368 Obligations of states and political subdivisions 1,168 163 428,171 68,604 429,339 68,767 Agency mortgage-backed securities 58,249 417 540,032 58,666 598,281 59,083 Corporate debt securities — — 7,574 1,176 7,574 1,176 U.S. Treasury Bills 41,857 49 103,588 3,021 145,445 3,070 $ 127,160 $ 714 $ 1,326,392 $ 151,750 $ 1,453,552 $ 152,464 December 31, 2022 Less than 12 months 12 months or more Total ($ in thousands) Fair Value Unrealized Losses Fair Value Unrealized Losses Fair Value Unrealized Losses Obligations of U.S. Government-sponsored enterprises $ 73,738 $ 6,249 $ 163,047 $ 22,056 $ 236,785 $ 28,305 Obligations of states and political subdivisions 103,179 13,501 311,634 76,924 414,813 90,425 Agency mortgage-backed securities 334,431 20,038 281,321 48,942 615,752 68,980 Corporate debt securities 12,640 1,110 — — 12,640 1,110 U.S. Treasury Bills 198,688 4,908 — — 198,688 4,908 $ 722,676 $ 45,806 $ 756,002 $ 147,922 $ 1,478,678 $ 193,728 The unrealized losses at both December 31, 2023 and 2022, were primarily attributable to changes in market interest rates since the securities were purchased. In 2023, an allowance for credit losses on available-for-sale investment securities was established through a provision for credit losses of $ 4.2 million. A debt security of $ 4.2 million was subsequently charged-off against that allowance. At both December 31, 2023 and 2022, there was no ACL on available-for-sale securities outstanding. Accrued interest receivable on held-to-maturity debt securities totaled $ 6.5 million and $ 5.8 million at December 31, 2023 and 2022, respectively, and is excluded from the estimate of expected credit losses. The estimate of expected credit losses considers historical credit loss information adjusted for current conditions and reasonable and supportable forecasts. At December 31, 2023 and 2022, the ACL on held-to-maturity securities was $ 0.8 million and $ 0.7 million, respectively. The proceeds, gross gains and losses realized from sales of available-for-sale investment securities were as follows: December 31, ($ in thousands) 2023 2022 2021 Gross gains realized $ 601 $ — $ — Proceeds from sales 40,393 — 27,135 80 Other Investments At December 31, 2023 and 2022, other investments totaled $ 66.2 million and $ 63.8 million, respectively. As a member of the FHLB, 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 $ 7.8 million, and $ 14.0 million at December 31, 2023 and 2022, 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 10 – Subordinated Debentures and Notes.” 81 NOTE 4 - LOANS The following table presents a summary of loans by category: ($ in thousands) December 31, 2023 December 31, 2022 Commercial and industrial $ 4,674,056 $ 3,859,964 Real estate loans: Commercial - investor owned 2,452,402 2,357,820 Commercial - owner occupied 2,344,117 2,270,551 Construction and land development 760,122 611,565 Residential 371,995 395,537 Total real estate loans 5,928,636 5,635,473 Other 285,653 248,990 Loans, before unearned loan fees 10,888,345 9,744,427 Unearned loan fees, net ( 4,227 ) ( 7,289 ) Loans, including unearned loan fees $ 10,884,118 $ 9,737,138 The loan balance includes a net premium on acquired loans of $ 9.6 million and $ 11.9 million at December 31, 2023 and 2022, respectively. At December 31, 2023 and 2022 loans of $ 4.8 billion and $ 2.8 billion, respectively, were pledged to the FHLB and the Federal Reserve. Consumer mortgage loans secured by residential real estate in process of foreclosure totaled $ 1.0 million at December 31, 2023. There were no consumer mortgage loans secured by residential real estate in process of foreclosure at December 31, 2022. Loans to executive officers and directors, or to entities in which such individuals had beneficial interests as a shareholder, officer, or director totaled $ 0.1 million and $ 0.1 million for the year ended December 31, 2023 and 2022, respectively. 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. 82 A summary of the activity, by loan category, in the allowance for credit losses on loans for 2021, 2022, and 2023 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, 2021 Allowance for credit losses on loans: Balance, beginning of year $ 58,812 $ 32,062 $ 17,012 $ 21,413 $ 4,585 $ 2,787 $ 136,671 Provision (benefit) for credit 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 Balance at December 31, 2022 Allowance for credit losses on loans: Balance, beginning of year $ 63,825 $ 35,877 $ 17,560 $ 14,536 $ 7,927 $ 5,316 $ 145,041 Provision (benefit) for credit losses ( 6,121 ) 46 4,867 ( 3,145 ) 540 ( 397 ) ( 4,210 ) Charge-offs ( 6,082 ) ( 478 ) ( 395 ) — ( 2,068 ) ( 370 ) ( 9,393 ) Recoveries 2,213 746 720 53 1,529 233 5,494 Balance, end of year $ 53,835 $ 36,191 $ 22,752 $ 11,444 $ 7,928 $ 4,782 $ 136,932 Balance at December 31, 2023 Allowance for credit losses on loans: Balance, beginning of year $ 53,835 $ 36,191 $ 22,752 $ 11,444 $ 7,928 $ 4,782 $ 136,932 Provision (benefit) for credit losses 38,308 ( 335 ) 523 ( 1,300 ) ( 2,109 ) 796 35,883 Charge-offs ( 36,302 ) ( 4,869 ) — ( 9 ) ( 656 ) ( 1,379 ) ( 43,215 ) Recoveries 3,045 293 130 63 979 661 5,171 Balance, end of year $ 58,886 $ 31,280 $ 23,405 $ 10,198 $ 6,142 $ 4,860 $ 134,771 The Company recorded a provision for credit losses on loans of $ 35.9 million and a provision benefit for credit losses of $ 4.2 million for the years ended December 31, 2023 and 2022, respectively. An additional provision for credit losses of $ 0.7 million and $ 3.6 million was recorded in 2023 and 2022, respectively, for securities, unfunded commitments and accrued interest on nonaccrual loans. Acquisition-related provision expense of $ 25.4 million in 2021 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 $ 12.3 million to the ACL over the baseline model at December 31, 2023. The forecasts at the end of 2023 incorporate an expectation that the federal funds rate has peaked at the range of 5.25% to 5.50% and will begin falling in the latter half of 2024. It is also assumed that the bank failures in early 2023 were not an indication of a broader problem in the industry. The Company has also recognized various risks posed by loans in certain segments, including the commercial office sector, by allocating additional reserves to those segments. Some of the key risks to the forecasts that could result in future provision for credit losses are market reactions to the Federal Reserve policy actions that could push the economy into a recession, persistently higher inflation, tightening in the credit markets, and further weakness in the financial system. 83 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, 2023, the ACL on loans included a qualitative adjustment of $ 37.4 million. Of this amount, $ 15.2 million was allocated to Sponsor Finance loans due to their unsecured nature. G ross charge-offs by loan class and year of origination is presented in the following table: December 31, 2023 Term Loans by Origination Year ($ in thousands) 2023 2022 2021 2020 2019 Prior Revolving Loans Converted to Term Loans Revolving Loans Total Commercial and industrial $ 600 $ 2,999 $ 1,940 $ 2,539 $ — $ — $ 12,533 $ 15,178 $ 35,789 Real estate: Commercial - investor owned — — 170 — 4,692 7 — — 4,869 Construction and land development — — — — — 9 — — 9 Residential — — — — — 480 176 — 656 Other — 3 459 — — 319 12 — 793 Total charge-offs by origination year $ 600 $ 3,002 $ 2,569 $ 2,539 $ 4,692 $ 815 $ 12,721 $ 15,178 $ 42,116 Total gross charge-offs by performing status 1,099 Total gross charge-offs $ 43,215 The following tables present the recorded investment in nonperforming loans by category, excluding government guaranteed balances: December 31, 2023 ($ 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 $ 7,641 $ — $ 115 $ 7,756 $ 6,179 Real estate: Commercial - investor owned 20,404 — — 20,404 19,466 Commercial - owner occupied 12,972 — 363 13,335 9,010 Construction and land development 1,205 — 64 1,269 464 Residential 959 — — 959 959 Other — — 5 5 — Total $ 43,181 $ — $ 547 $ 43,728 $ 36,078 84 December 31, 2022 ($ 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 $ 4,373 $ — $ 70 $ 4,443 $ 1,047 Real estate: Commercial - investor owned 3,023 — — 3,023 — Commercial - owner occupied 1,177 — — 1,177 — Construction and land development 1,192 — — 1,192 1,192 Residential — 73 — 73 — Other 1 — 72 73 — Total $ 9,766 $ 73 $ 142 $ 9,981 $ 2,239 The nonperforming loan balances at December 31, 2023 and December 31, 2022 exclude government guaranteed balances of $ 10.7 million and $ 6.7 million, respectively. Interest income recognized on nonaccrual loans was immaterial in the years ending December 31, 2021, 2022 and 2023. Collateral-dependent nonperforming loans by class of loan is presented as of the dates indicated: December 31, 2023 Type of Collateral ($ in thousands) Commercial Real Estate Residential Real Estate Blanket Lien Other Commercial and industrial $ 527 $ 1,864 $ 344 $ 3,445 Real estate: Commercial - investor owned 19,467 — — — Commercial - owner occupied 5,904 1,638 1,831 — Construction and land development 528 741 — — Residential — 959 — — Total $ 26,426 $ 5,202 $ 2,175 $ 3,445 December 31, 2022 Type of Collateral ($ in thousands) Commercial Real Estate Residential Real Estate Blanket Lien Commercial and industrial $ — $ — $ 1,047 Real estate: Commercial - investor owned 2,238 785 — Commercial - owner occupied 1,177 — — Construction and land development — 1,192 — Residential — 73 — Total $ 3,415 $ 2,050 $ 1,047 85 The aging of the recorded investment in past due loans by class and category is presented as of the dates indicated. December 31, 2023 ($ in thousands) 30-89 Days Past Due 90 or More Days Past Due Total Past Due Current Total Commercial and industrial $ 3,445 $ 9,037 $ 12,482 $ 4,661,574 $ 4,674,056 Real estate: Commercial - investor owned 1,905 18,395 20,300 2,432,102 2,452,402 Commercial - owner occupied 8,409 14,142 22,551 2,321,566 2,344,117 Construction and land development 770 1,908 2,678 757,444 760,122 Residential 1,620 959 2,579 369,416 371,995 Other 82 4 86 285,567 285,653 Loans, before unearned loan fees 16,231 44,445 60,676 10,827,669 10,888,345 Unearned loan fees, net ( 4,227 ) Total $ 10,884,118 December 31, 2022 ($ in thousands) 30-89 Days Past Due 90 or More Days Past Due Total Past Due Current Total Commercial and industrial $ 555 $ 2,373 $ 2,928 $ 3,857,036 $ 3,859,964 Real estate: Commercial - investor owned — 1,135 1,135 2,356,685 2,357,820 Commercial - owner occupied 8,628 164 8,792 2,261,759 2,270,551 Construction and land development 9 1,192 1,201 610,364 611,565 Residential 1,227 — 1,227 394,310 395,537 Other 18 72 90 248,900 248,990 Loans, before unearned loan fees 10,437 4,936 15,373 9,729,054 9,744,427 Unearned loan fees, net ( 7,289 ) Total $ 9,737,138 The allowance for credit losses incorporates an estimate of lifetime expected credit losses and is recorded on each asset upon origination or acquisition. The starting point for the estimate of the allowance for credit losses is historical loss information, which includes losses from modifications of receivables to borrowers experiencing financial difficulty. The Company uses a probability of default and loss given default model to determine the allowance for credit losses. An assessment of whether a borrower is experiencing financial difficulty is made on the date of a modification. The effect of most modifications made to borrowers experiencing financial difficulty is already included in the allowance for credit losses because of the measurement methodologies used to estimate the allowance. The most common concession the Company provides to borrowers experiencing financial difficulty is a term extension. In limited circumstances, the Company may modify loans by providing principal forgiveness or an interest rate reduction. When principal forgiveness is provided, the amortized cost basis of the asset is written off against the allowance for credit losses. The amount of the principal forgiveness is deemed to be uncollectible; therefore, that portion of the loan is written off, resulting in a reduction of the amortized cost basis and a corresponding adjustment to the allowance for credit losses. In some cases, the Company will modify a loan by providing multiple types of concessions. Typically, one type of concession, such as a term extension, is granted initially. If the borrower continues to experience financial difficulty, another concession, such as an interest rate reduction or principal forgiveness, may be granted. 86 The following table shows the recorded investment at the end of the reporting period for loans modified to borrowers experiencing financial difficulty, disaggregated by loan class and type of concession granted: Term Extension Twelve months ended ($ in thousands) December 31, 2023 Percent of Total Loan Class Commercial and industrial $ 39,437 0.84 % Real estate: Commercial - investor owned 9,411 0.38 % Commercial - owner occupied 94 — % Construction and land development 1,137 0.15 % Residential 7,601 2.04 % Other 4 — % Total $ 57,684 The following table summarizes the financial impacts of loan modifications made to borrowers experiencing financial difficulty and outstanding at the end of the year: Weighted Average Term Extension (in months) Twelve months ended December 31, 2023 Commercial and industrial 5 Real estate: Commercial - investor owned 4 Commercial - owner occupied 3 Construction and land development 7 Residential 3 Other 48 The following table shows the aging of the recorded investment in modified loans by class: December 31, 2023 ($ in thousands) Current 30-89 Days Past Due 90 or More Days Past Due Total Commercial and industrial $ 39,187 $ 250 $ — $ 39,437 Real estate: Commercial - investor owned 9,411 — — 9,411 Commercial - owner occupied — 94 — 94 Construction and land development 1,137 — — 1,137 Residential 7,527 74 — 7,601 Other — 4 — 4 Total $ 57,262 $ 422 $ — $ 57,684 As of December 31, 2023, no loans experienced a default subsequent to being granted a term extension modification in the prior twelve months. Default is defined as movement to nonperforming status, foreclosure or charge-off. As of December 31, 2023, the Company allocated an immaterial amount in specific reserves to loans that have been restructured. 87 The Company categorizes loans into risk categories based on relevant information about the ability of borrowers to service their debt, such as current financial information, payment experience, credit documentation, and current economic factors among other factors. This analysis is performed on a quarterly basis. The Company uses the following definitions for risk ratings: • Grades 1, 2, and 3 – Includes loans to borrowers with a continuous record of strong earnings, sound balance sheet condition and capitalization, ample liquidity with solid cash flow, and whose management team has experience and depth within their industry. • Grade 4 – Includes loans to borrowers with positive trends in profitability, satisfactory capitalization and balance sheet condition, and sufficient liquidity and cash flow. • Grade 5 – Includes loans to borrowers that may display fluctuating trends in sales, profitability, capitalization, liquidity, and cash flow. • Grade 6 – Includes loans to borrowers where an adverse change or perceived weakness has occurred, but may be correctable in the near future. Alternatively, this rating category may also include circumstances where the borrower is starting to reverse a negative trend or condition, or has recently been upgraded from a 7, 8, or 9 rating. • Grade 7 – Special Mention 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 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. 88 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, 2023 Term Loans by Origination Year ($ in thousands) 2023 2022 2021 2020 2019 Prior Revolving Loans Converted to Term Loans Revolving Loans Total Commercial and industrial Pass (1-6) $ 1,567,738 $ 1,052,462 $ 345,292 $ 194,972 $ 123,425 $ 71,205 $ 12,163 $ 1,108,233 $ 4,475,490 Special Mention (7) 52,523 6,845 8,597 544 453 242 272 19,590 89,066 Classified (8-9) 12,824 19,306 1,833 812 339 363 508 45,830 81,815 Total Commercial and industrial $ 1,633,085 $ 1,078,613 $ 355,722 $ 196,328 $ 124,217 $ 71,810 $ 12,943 $ 1,173,653 $ 4,646,371 Commercial real estate-investor owned Pass (1-6) $ 495,131 $ 544,223 $ 492,974 $ 323,175 $ 165,343 $ 236,914 $ 5,222 $ 51,413 $ 2,314,395 Special Mention (7) 3,626 22,725 51,851 1,657 164 5,526 — — 85,549 Classified (8-9) 9,411 1,034 43 15,838 2,831 4,919 48 — 34,124 Total Commercial real estate-investor owned $ 508,168 $ 567,982 $ 544,868 $ 340,670 $ 168,338 $ 247,359 $ 5,270 $ 51,413 $ 2,434,068 Commercial real estate-owner occupied Pass (1-6) $ 407,901 $ 486,701 $ 489,589 $ 301,399 $ 183,872 $ 313,474 $ 5,083 $ 30,036 $ 2,218,055 Special Mention (7) 13,739 2,521 4,652 10,492 5,439 15,833 — 1,493 54,169 Classified (8-9) 3,389 3,413 2,247 3,181 8,878 24,857 5,056 — 51,021 Total Commercial real estate-owner occupied $ 425,029 $ 492,635 $ 496,488 $ 315,072 $ 198,189 $ 354,164 $ 10,139 $ 31,529 $ 2,323,245 Construction real estate Pass (1-6) $ 292,689 $ 325,010 $ 96,426 $ 30,956 $ 1,413 $ 3,408 $ 10 $ 3,700 $ 753,612 Special Mention (7) 42 2,958 1,046 210 123 114 — — 4,493 Classified (8-9) 1,137 704 — — 13 466 — — 2,320 Total Construction real estate $ 293,868 $ 328,672 $ 97,472 $ 31,166 $ 1,549 $ 3,988 $ 10 $ 3,700 $ 760,425 Residential real estate Pass (1-6) $ 59,259 $ 41,956 $ 51,436 $ 30,713 $ 17,793 $ 77,327 $ 1,464 $ 78,351 $ 358,299 Special Mention (7) 322 — — — 75 1,801 — 614 2,812 Classified (8-9) 127 1,073 69 — 30 1,492 74 7,500 10,365 Total residential real estate $ 59,708 $ 43,029 $ 51,505 $ 30,713 $ 17,898 $ 80,620 $ 1,538 $ 86,465 $ 371,476 Other Pass (1-6) $ 10,071 $ 55,923 $ 67,766 $ 53,569 $ 9,382 $ 19,657 $ 7 $ 28,464 $ 244,839 Special Mention (7) — — 14,472 — — — — 11,645 26,117 Classified (8-9) — — — — — 8 — — 8 Total Other $ 10,071 $ 55,923 $ 82,238 $ 53,569 $ 9,382 $ 19,665 $ 7 $ 40,109 $ 270,964 Total loans classified by risk category $ 2,929,929 $ 2,566,854 $ 1,628,293 $ 967,518 $ 519,573 $ 777,606 $ 29,907 $ 1,386,869 $ 10,806,549 Total loans classified by performing status 77,569 Total loans $ 10,884,118 89 December 31, 2022 Term Loans by Origination Year ($ in thousands) 2022 2021 2020 2019 2018 Prior Revolving Loans Converted to Term Loans Revolving Loans Total Commercial and industrial Pass (1-6) $ 1,403,381 $ 635,275 $ 332,740 $ 172,127 $ 62,729 $ 66,152 $ 8,388 $ 964,592 $ 3,645,384 Special Mention (7) 37,048 10,836 13,858 423 7,995 4,102 — 72,944 147,206 Classified (8-9) 16,176 4,457 1,627 24 166 183 — 21,349 43,982 Total Commercial and industrial $ 1,456,605 $ 650,568 $ 348,225 $ 172,574 $ 70,890 $ 70,437 $ 8,388 $ 1,058,885 $ 3,836,572 Commercial real estate-investor owned Pass (1-6) $ 667,107 $ 584,644 $ 392,402 $ 240,033 $ 115,530 $ 202,661 $ 1,457 $ 53,051 $ 2,256,885 Special Mention (7) 18,844 5,751 23,502 11,605 — 13,063 — — 72,765 Classified (8-9) 1,823 — 465 953 193 6,092 49 — 9,575 Total Commercial real estate-investor owned $ 687,774 $ 590,395 $ 416,369 $ 252,591 $ 115,723 $ 221,816 $ 1,506 $ 53,051 $ 2,339,225 Commercial real estate-owner occupied Pass (1-6) $ 539,610 $ 555,690 $ 362,150 $ 232,335 $ 123,095 $ 270,613 $ — $ 57,308 $ 2,140,801 Special Mention (7) 11,164 3,801 16,856 4,455 13,043 9,009 — 800 59,128 Classified (8-9) — 1,572 3,483 8,910 15,873 11,387 — — 41,225 Total Commercial real estate-owner occupied $ 550,774 $ 561,063 $ 382,489 $ 245,700 $ 152,011 $ 291,009 $ — $ 58,108 $ 2,241,154 Construction real estate Pass (1-6) $ 290,146 $ 232,998 $ 53,129 $ 2,909 $ 2,061 $ 8,480 $ — $ 1,769 $ 591,492 Special Mention (7) 17,331 — 681 146 111 106 — — 18,375 Classified (8-9) 1,192 — — 14 471 21 — — 1,698 Total Construction real estate $ 308,669 $ 232,998 $ 53,810 $ 3,069 $ 2,643 $ 8,607 $ — $ 1,769 $ 611,565 Residential real estate Pass (1-6) $ 63,317 $ 60,910 $ 48,796 $ 20,943 $ 11,259 $ 88,795 $ 579 $ 96,304 $ 390,903 Special Mention (7) 331 — — 79 352 781 — — 1,543 Classified (8-9) 121 73 — 53 1,102 994 — 5 2,348 Total residential real estate $ 63,769 $ 60,983 $ 48,796 $ 21,075 $ 12,713 $ 90,570 $ 579 $ 96,309 $ 394,794 Other Pass (1-6) $ 38,753 $ 88,613 $ 56,252 $ 10,556 $ 20,508 $ 10,796 $ — $ 9,536 $ 235,014 Special Mention (7) — — — — — — — — — Classified (8-9) — — — 4 3 11 3 4 25 Total Other $ 38,753 $ 88,613 $ 56,252 $ 10,560 $ 20,511 $ 10,807 $ 3 $ 9,540 $ 235,039 Total loans classified by risk category $ 3,106,344 $ 2,184,620 $ 1,305,941 $ 705,569 $ 374,491 $ 693,246 $ 10,476 $ 1,277,662 $ 9,658,349 Total loans classified by performing status 78,789 Total loans $ 9,737,138 90 In the tables above, loan originations in 2023 and 2022 with a classification of “special mention” or “classified” primarily represent renewals or modifications initially underwritten and originated in prior years. For certain loans the Company evaluates credit quality based on the aging status. The following tables present the recorded investment in loans based on payment activity as of the dates indicated: December 31, 2023 ($ in thousands) Performing Non Performing Total Commercial and industrial $ 26,076 $ 112 $ 26,188 Real estate: Commercial - investor owned 17,885 — 17,885 Commercial - owner occupied 28,373 — 28,373 Residential 712 — 712 Other 4,406 5 4,411 Total $ 77,452 $ 117 $ 77,569 December 31, 2022 ($ in thousands) Performing Non Performing Total Commercial and industrial $ 23,240 $ 70 $ 23,310 Real estate: Commercial - investor owned 18,595 — 18,595 Commercial - owner occupied 29,397 — 29,397 Residential 743 — 743 Other 6,672 72 6,744 Total $ 78,647 $ 142 $ 78,789 91 NOTE 5 - LEASES Lessee Arrangements The Company has banking and limited-service facilities, data centers, and certain equipment under lease agreements. Most of the leases expire between 2024 and 2028 and include one or more renewal options for up to 5 years. Five leases expire between 2030 and 2034. All leases are classified as operating leases. For the year ended December 31, ($ in thousands) 2023 2022 Operating lease cost $ 5,628 $ 5,868 Short-term lease cost 491 814 Total lease cost $ 6,119 $ 6,682 Payments on operating leases included in the measurement of lease liabilities during the twelve months ended December 31, 2023 and 2022 totaled $ 5.5 million and $ 5.8 million, respectively. Right-of-use assets obtained in exchange for lease obligations totaled $ 15.6 million and $ 9.5 million during the twelve months ended December 31, 2023 and 2022, respectively. The additions in 2023 and 2022 were primarily from lease renewals. Supplemental balance sheet information related to leases is as follows: ($ in thousands) December 31, 2023 December 31, 2022 Operating lease right-of-use assets, included in other assets $ 25,406 $ 17,355 Operating lease liabilities, included in other liabilities 28,635 18,038 Operating leases Weighted average remaining lease term 7 years 5 years Weighted average discount rate 3.9 % 2.5 % Maturities of operating lease liabilities are as follows: ($ in thousands) Year Amount 2024 $ 5,378 2025 5,586 2026 5,682 2027 4,442 2028 2,979 Thereafter 9,011 Total operating lease liabilities, payments 33,078 Less: present value adjustment 4,443 Operating lease liabilities $ 28,635 Lessor Arrangements The Company leases office space to a third party through an operating lease. This lease has remaining lease terms of two years . Lessor income was $ 1.8 million and $ 1.9 million for the twelve months en ded December 31, 2023, and 2022. 92 NOTE 6 - DERIVATIVE FINANCIAL INSTRUMENTS Risk Management Objective of Using Derivatives The Company is exposed to certain risks arising from both its business operations and economic conditions. The Company principally manages its exposures to a wide variety of business and operational risks through management of its core business activities. The Company manages economic risks, including interest rate, liquidity, and credit risk primarily by managing the amount, sources, and duration of its assets and liabilities and the use of derivative financial instruments. Specifically, the Company enters into derivative financial instruments to manage exposures that arise from business activities that result in the receipt or payment of future known and uncertain cash amounts, the value of which are determined by interest rates. The Company’s derivative financial instruments are used to manage differences in the amount, timing, and duration of the Company’s known or expected cash receipts and its known or expected cash payments principally related to the Company’s loans and borrowings. The Company does not enter into derivative financial instruments for trading purposes. Cash Flow Hedges of Interest Rate Risk The Company’s objectives in using interest rate derivatives are to add stability to interest income and expense and to manage its exposure to interest rate movements. To accomplish this objective, the Company primarily uses interest rate swaps as part of its interest rate risk management strategy. For hedges of the Company’s variable-rate loans, interest rate swaps designated as cash flow hedges involve the receipt of fixed amounts and the Company making variable rate payments. In the fourth quarter 2022, the Company executed a cash flow hedge to reduce a portion of variability in cash flows on the Company’s prime based loan portfolio. The interest rate swap has a notional value of $ 100.0 million, that effectively fixes the interest rate at 6.63 % for the notional amount and has a maturity date of January 1, 2028. In January 2023, the Company entered into another hedge on the prime based loan portfolio with a notional value of $ 50.0 million, that effectively fixes the interest rate at 6.56 % for the notional amount and has a maturity date of February 1, 2027. In addition, the Company executed a prime based interest rate collar in the fourth quarter of 2022 with a notional amount of $ 100.0 million. The collar includes a cap of 8.14 % and a floor of 5.25 %. This transaction, commonly referred to as a zero cost collar, involves the Company selling an interest rate cap where payments will be made when the index exceeds the cap rate, and the purchase of a floor where payments will be received if the index falls below the floor. The collar matures on October 1, 2029. For hedges of the variable-rate liabilities, interest rate swaps designated as cash flow hedges involve the receipt of variable amounts from a counterparty in exchange for the Company making fixed-rate payments over the life of the agreements without exchange of the underlying notional amount. The Company has executed a series of cash flow hedges to fix the effective interest rate for payments due on $ 62.0 million of junior subordinated debentures to a weighted-average-fixed rate o f 2.62 %. Select terms of the hedges are as follows: $ in thousands Notional Fixed Rate Maturity Date $ 15,465 2.60 % March 15, 2024 $ 14,433 2.60 % March 30, 2024 $ 18,558 2.64 % March 15, 2026 $ 13,506 2.64 % March 17, 2026 The gain or loss on derivatives designated and qualified as cash flow hedges of interest rate risk are recorded in accumulated other comprehensive income and subsequently reclassified into interest income or expense in the same period(s) during which the hedged transaction affects earnings. Amounts reported in accumulated other comprehensive income related to derivatives will be reclassified to interest income or expense as interest payments are paid on the Company’s variable-rate loans and debt. During the next twelve months, the Company estimates an 93 additional $ 0.9 million will be reclassified as a decrease to interest expense and $ 1.7 million will be reclassified as a decrease to interest income. Non-designated Hedges Derivatives not designated as hedges are not considered speculative and result from a service the Company provides to certain customers. The Company executes interest rate swaps with commercial banking customers to facilitate their respective risk management strategies. Those interest rate swaps are simultaneously hedged by offsetting derivatives the Company executes with a third party, such that the Company minimizes its net risk exposure resulting from such transactions. As the interest rate derivatives associated with this program do not meet the strict hedge accounting requirements, changes in the fair value of both the customer derivatives and the offsetting derivatives are recognized directly in earnings as a component of other noninterest income. The table below presents the fair value of the Company’s derivative financial instruments as well as their classification on the Balance Sheet. Notional Amount Derivative Assets Derivative Liabilities ($ in thousands) December 31, 2023 December 31, 2022 December 31, 2023 December 31, 2022 December 31, 2023 December 31, 2022 Derivatives designated as hedging instruments Interest rate swaps $ 211,962 $ 161,962 $ 1,389 $ 2,348 $ 233 $ 921 Interest rate collar 100,000 100,000 514 — — 48 Total $ 1,903 $ 2,348 $ 233 $ 969 Derivatives not designated as hedging instruments Interest rate swaps $ 779,152 $ 687,902 $ 15,886 $ 20,610 $ 15,951 $ 20,612 94 The tables below present a gross presentation, the effects of offsetting, and a net presentation of the Company’s financial instruments subject to offsetting. The gross amounts of assets or liabilities can be reconciled to the tabular disclosure of fair value. The tabular disclosure of fair value provides the location that financial assets and liabilities are presented on the Balance Sheet. As of December 31, 2023 Gross Amounts Not Offset in the Statement of Financial Position ($ in thousands) Gross Amounts Recognized Gross Amounts Offset in the Statement of Financial Position Net Amounts of Assets presented in the Statement of Financial Position Financial Instruments Fair Value Collateral Posted Net Amount Assets: Interest rate swaps $ 17,275 $ — $ 17,275 $ 1,105 $ 16,170 $ — Interest rate collar 514 — 514 — — 514 Liabilities: Interest rate swaps $ 16,184 $ — $ 16,184 $ 1,105 $ — $ 15,079 Securities sold under agreements to repurchase 250,197 — 250,197 — 250,197 — As of December 31, 2022 Gross Amounts Not Offset in the Statement of Financial Position ($ in thousands) Gross Amounts Recognized Gross Amounts Offset in the Statement of Financial Position Net Amounts of Assets presented in the Statement of Financial Position Financial Instruments Fair Value Collateral Posted Net Amount Assets: Interest rate swaps $ 22,958 $ — $ 22,958 $ — $ 9,010 $ 13,948 Liabilities: Interest rate swaps $ 21,533 $ — $ 21,533 $ — $ — $ 21,533 Interest rate collar 48 — 48 — — 48 Securities sold under agreements to repurchase 270,773 — 270,773 — 270,773 — As of December 31, 2023, the fair value of counterparty derivatives in a net liability position, which includes accrued interest, related to these agreements was $ 15.8 million. The company has minimum collateral posting thresholds with certain derivative counterparties and posts collateral related to derivatives in a net liability position. The Company has received cash collateral from counterparties on derivatives that were in a net asset position as noted in the tables above. 95 NOTE 7 - FIXED ASSETS A summary of fixed assets is as follows: December 31, ($ in thousands) 2023 2022 Land $ 11,716 $ 12,362 Buildings and leasehold improvements 50,720 50,243 Furniture, fixtures and equipment 21,526 19,569 83,962 82,174 Less accumulated depreciation and amortization 41,281 39,189 Total fixed assets $ 42,681 $ 42,985 Depreciation and amortization of fixed assets included in noninterest expense amounted to $ 5.1 million, $ 5.6 million, and $ 6.1 million in 2023, 2022, and 2021, respectively. In 2023, the Company completed an asset sale-leaseback on a branch location in the Kansas City market and recorded a gain of $ 0.1 million. 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 8 - GOODWILL AND INTANGIBLE ASSETS The Company’s goodwill was $ 365.2 million for the years ending December 31, 2023 and 2022, respectively. The table below presents a summary of intangible assets: ($ in thousands) Years ended December 31, 2023 2022 Core deposit intangible, net, beginning of year $ 16,919 $ 22,286 Amortization ( 4,601 ) ( 5,367 ) Core deposit intangible, net, end of year $ 12,318 $ 16,919 Amortization expense on the core deposit intangibles was $ 4.6 million, $ 5.4 million, and $ 5.7 million for the years ended December 31, 2023, 2022, and 2021, respectively. The core deposit intangibles are being amortized over a 10 -year period. The following table reflects the amortization schedule for the core deposit intangible at December 31, 2023. Year Core Deposit Intangible ($ in thousands) 2024 $ 3,834 2025 3,068 2026 2,301 2027 1,535 2028 953 After 2028 627 $ 12,318 96 NOTE 9 - DEPOSITS Following is a summary of certificates of deposit maturities at December 31, 2023: ($ in thousands) Brokered Customer Total Less than 1 year $ 387,609 $ 714,213 $ 1,101,822 Greater than 1 year and less than 2 years 95,150 61,365 156,515 Greater than 2 years and less than 3 years — 6,073 6,073 Greater than 3 years and less than 4 years — 2,946 2,946 Greater than 4 years and less than 5 years — 1,291 1,291 Greater than 5 years — 4,267 4,267 $ 482,759 $ 790,155 $ 1,272,914 Certificates of deposit balances over the FDIC insurance limit of $250,000 were $ 234.6 million as of December 31, 2023. At December 31, 2023, deposit accounts of executive officers and directors, or to entities in which such individuals had beneficial interests as a shareholder, officer, or director totaled $ 2.6 million. The Company is a participant in certain networks that offer deposit placement services on a reciprocal basis that qualify large deposits for FDIC insurance. The Company had $ 91.7 million and $ 10.6 million of certificates of deposits, and $ 1.1 billion and $ 195.1 million of demand deposits in these reciprocal accounts at December 31, 2023 and 2022, respectively. At December 31, 2023 and 2022, overdraft deposits of $ 1.6 million and $ 3.2 million, respectively, were reclassified to loans. 97 NOTE 10 - SUBORDINATED DEBENTURES AND NOTES The following table summarizes the Company’s subordinated debentures at December 31: Amount Maturity Date Initial Call Date (1) Interest Rate ($ in thousands) 2023 2022 EFSC Clayco Statutory Trust I $ 3,196 $ 3,196 December 17, 2033 December 17, 2008 Floats @ 3 month term SOFR + 2.85 % EFSC Capital Trust II 5,155 5,155 June 17, 2034 June 17, 2009 Floats @ 3 month term SOFR + 2.65 % EFSC Statutory Trust III 11,341 11,341 December 15, 2034 December 15, 2009 Floats @ 3 month term SOFR + 1.97 % EFSC Clayco Statutory Trust II 4,124 4,124 September 15, 2035 September 15, 2010 Floats @ 3 month term SOFR + 1.83 % EFSC Statutory Trust IV 10,310 10,310 December 15, 2035 December 15, 2010 Floats @ 3 month term SOFR + 1.44 % EFSC Statutory Trust V 4,124 4,124 September 15, 2036 September 15, 2011 Floats @ 3 month term SOFR + 1.60 % EFSC Capital Trust VI 14,433 14,433 March 30, 2037 March 30, 2012 Floats @ 3 month term SOFR + 1.60 % EFSC Capital Trust VII 4,124 4,124 December 15, 2037 December 15, 2012 Floats @ 3 month term SOFR + 2.25 % JEFFCO Stat Trust I 7,732 7,732 February 22, 2031 February 22, 2011 Fixed @ 10.20 % JEFFCO Stat Trust II (2) 4,604 4,550 March 17, 2034 March 17, 2009 Floats @ 3 month term SOFR + 2.75 % Trinity Capital Trust III (2) 5,473 5,406 September 8, 2034 September 8, 2009 Floats @ 3 month term SOFR + 2.70 % Trinity Capital Trust IV 10,310 10,310 November 23, 2035 August 23, 2010 Fixed @ 6.88 % Trinity Capital Trust V (2) 8,195 8,032 December 15, 2036 September 15, 2011 Floats @ 3 month term SOFR + 1.65 % Total junior subordinated debentures 93,121 92,837 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 % Debt issuance costs ( 387 ) ( 654 ) Total fixed-to-floating rate subordinated notes 62,863 62,596 Total subordinated debentures and notes $ 155,984 $ 155,433 (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 Income. The Company’s investment in these trusts of $ 2.9 million at December 31, 2023 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 98 interest rate swaps. For further discussion of the interest rate swaps and the corresponding terms, see “Note 6 – Derivative Financial Instruments.” 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 11 - 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, 2023 and 2022, the carrying value of the loans pledged to the FHLB of Des Moines was $ 1.9 billion and $ 1.4 billion, respectively. The loans are pledged to the secured line of credit to maintain the borrowing base, which had availability of approximately $ 1.0 billion at December 31, 2023. The following table summarizes the Company’s FHLB advances at December 31: 2023 2022 ($ in thousands) Outstanding Balance Weighted Rate Outstanding Balance Weighted Rate Non-amortizing fixed advance $ — — % $ 100,000 4.57 % NOTE 12 - 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 portfolio that it believes is sufficient to cover a decline in the market value of the securities sold under agreements to repurchase. 99 A summary of securities sold under agreements to repurchase is as follows: December 31, ($ in thousands) 2023 2022 Securities sold under agreement to repurchase $ 250,197 $ 270,773 Average balance during the year 168,745 211,039 Maximum balance outstanding at any month-end 250,197 284,269 Average interest rate during the year 2.16 % 0.24 % Average interest rate at December 31 3.56 % 1.44 % 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, 2023, $ 2.5 billion was available under this line. Included in this line is $ 215.0 million related to the Bank Term Funding program. On January 24, 2024, the Federal Reserve announced that the program would cease making new loans on March 11, 2024. This line is secured by a pledge of certain eligible loans and securities aggregating $ 2.9 billion. There were no amounts drawn on the Federal Reserve line of credit as of December 31, 2023. Other Borrowings The Bank has $ 36.2 million of borrowings from various entities related to New Market Tax Credit investments. These notes have remaining terms that range from 25 - 30 years. These notes have an interest rate of 1.0 % and are generally interest only for the first 7 years. 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, 2024, allows for borrowings up to $ 25 million, and had an interest rate of one-month Term SOFR plus 136 basis points until February 2024. A fee of 0.30 % annually is assessed against the unused commitment. 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. The revolving credit line was not accessed in 2023 or 2022. 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 was one-month LIBOR plus 125 basis points until February 2022. In February 2022, the interest rate on the Term Loan was amended to one-month Term SOFR plus 136 basis points. The term loan agreement matures in February 2024. A summary of the Term Loan is as follows: December 31, ($ in thousands) 2023 2022 Term Loan $ 11,429 $ 17,143 Average balance during the year 14,959 20,681 Maximum balance outstanding at any month-end 17,143 22,857 Weighted average interest rate during the year 6.44 % 2.94 % Average interest rate at December 31 6.70 % 5.48 100 NOTE 13 - 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 14 - 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, 2023 and 2022, that the Company met all capital adequacy requirements to which it is subject. As of December 31, 2023 and 2022, 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 following 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, 2023 December 31, 2022 EFSC Bank EFSC Bank To Be Well-Capitalized Minimum Ratio with CCB Common Equity Tier 1 Capital to Risk Weighted Assets 11.3 % 12.2 % 11.1 % 12.1 % 6.5 % 7.0 % Tier 1 Capital to Risk Weighted Assets 12.7 % 12.2 % 12.6 % 12.1 % 8.0 % 8.5 % Total Capital to Risk Weighted Assets 14.2 % 13.2 % 14.2 % 13.1 % 10.0 % 10.5 % Leverage Ratio (Tier 1 Capital to Average Assets) 11.0 % 10.6 % 10.9 % 10.5 % 5.0 % N/A 101 NOTE 15 - SHAREHOLDERS’ EQUITY AND COMPENSATION PLANS Shareholders’ Equity Common Stock At December 31, 2023 and 2022, 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, 2023 December 31, 2022 Outstanding performance units (maximum issuance) 273,202 209,702 Outstanding RSU’s 290,141 269,868 Outstanding options 333,608 222,032 2018 Stock Incentive Plan 732,427 342,157 Non-Management Director Plan 130,162 55,878 2018 Employee Stock Purchase Plan 447,655 515,941 Total 2,207,195 1,615,578 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. As of May 2022, this plan was depleted. In May 2022, 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, 2023, there were two million 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 2023 and 2022. 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 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. Preferred stock 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. Quarterly dividends have been declared and paid in all periods since the preferred stock was issued. Dividends on the Company’s capital stock are prohibited under the terms of the junior subordinated debenture agreements, see “Note 10 – Subordinated Debentures and Notes,” 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 102 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, 2023, the Company was not in default on any of the junior subordinated debenture issuances or preferred stock. 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 Gain (Loss) on Cash Flow Hedges Total 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 Net change ( 149,623 ) ( 2,696 ) 3,210 ( 149,109 ) Transfer from available-for-sale to held-to-maturity ( 197 ) 197 — — Balance, December 31, 2022 $ ( 144,549 ) $ 13,185 $ 1,032 $ ( 130,332 ) Net change 31,705 ( 2,605 ) 217 29,317 Balance, December 31, 2023 $ ( 112,844 ) $ 10,580 $ 1,249 $ ( 101,015 ) The following table presents the pre-tax and after-tax changes in the components of other comprehensive income: 2023 2022 2021 ($ 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 securities $ 42,988 $ 10,833 $ 32,155 $ ( 200,030 ) $ ( 50,407 ) $ ( 149,623 ) $ ( 22,701 ) $ ( 5,652 ) $ ( 17,049 ) Reclassification of gain on sale of available-for-sale securities(a) ( 601 ) ( 151 ) ( 450 ) — — — — — — Reclassification of gain on held-to-maturity securities(a) ( 3,483 ) ( 878 ) ( 2,605 ) ( 3,605 ) ( 909 ) ( 2,696 ) ( 4,672 ) ( 1,048 ) ( 3,624 ) Change in unrealized gain (loss) on cash flow hedges ( 656 ) ( 165 ) ( 491 ) 3,741 943 2,798 1,533 372 1,161 Reclassification of loss on cash flow hedges(b) 945 237 708 551 139 412 1,543 374 1,169 Total other comprehensive income (loss) $ 39,193 $ 9,876 $ 29,317 $ ( 199,343 ) $ ( 50,234 ) $ ( 149,109 ) $ ( 24,297 ) $ ( 5,954 ) $ ( 18,343 ) (a) The pre-tax amount is reported in noninterest income/expense in the Consolidated Statements of Income. (b) The pre-tax amount is reported in interest income/expense in the Consolidated Statements of Income. 103 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. The total excess income tax benefit (expense) for share-based compensation arrangements was $ 0.3 million, $ 0.1 million, and $( 0.1 ) million for the years ended December 31, 2023, 2022, and 2021, respectively. At December 31, 2023, there was $ 14.5 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 approximately 2 years. The following table summarizes share-based compensation expense: ($ in thousands) 2023 2022 2021 Performance stock units $ 2,879 $ 2,391 $ 1,777 Restricted stock units 5,014 4,156 3,109 Stock options 1,609 916 396 Employee stock purchase plan 644 543 735 Total share-based compensation expense $ 10,146 $ 8,006 $ 6,017 Performance Stock 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 least at 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 issued upon vesting in 2023, 2022, and 2021 were $ 1.6 million, $ 0.5 million, and $ 0.9 million, respectively. Information related to the outstanding grants at December 31, 2023 is shown below: ($ in thousands, except per share data) 2021 - 2023 Cycle 2022 - 2024 Cycle 2023 - 2025 Cycle Shares issuable at target 38,412 41,765 56,424 Maximum shares issuable 76,824 83,530 112,848 Unrecognized compensation cost $ 77 $ 1,001 $ 2,340 Weighted average grant date fair value (per share) $ 47.16 $ 51.91 $ 62.19 Maximum Shares Issuable Outstanding at December 31, 2022 209,702 Granted 112,848 Vested (issued 31,142 shares) ( 49,348 ) Outstanding at December 31, 2023 273,202 104 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) 2023 2022 2021 Total fair value of awards vesting during the year $ 3,894 $ 3,888 $ 2,855 Unrecognized compensation cost 8,438 8,507 4,622 Expected years to recognize unearned compensation 1.7 years 2.0 years 1.9 years Weighted average grant date fair value $ 50.46 $ 47.96 $ 44.01 A summary of the status of the Company’s RSU awards as of December 31, 2023 and changes during the year then ended is presented below. Shares Weighted Average Grant Date Fair Value Outstanding at December 31, 2022 269,868 $ 46.49 Granted 107,353 50.46 Vested ( 77,195 ) 43.60 Forfeited ( 9,885 ) 47.65 Outstanding at December 31, 2023 290,141 $ 48.69 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 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, 2023. Weighted Average Risk Free Interest Rate 4.09 % Expected Dividend Yield 1.84 % Expected Volatility 34.74 % Expected Term (years) 6.3 Non-qualified 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 2023. Shares Weighted Average Exercise Price Weighted Average Remaining Contractual Term Outstanding at December 31, 2022 222,032 $ 46.12 Granted 122,161 54.46 Exercised ( 909 ) 45.28 Forfeited ( 9,676 ) 48.30 Outstanding at December 31, 2023 333,608 $ 49.11 8.2 years Exercisable at December 31, 2023 53,208 $ 45.30 7.5 years The intrinsic value of options exercised totaled $ 0.1 million and $ 0.1 million in 2023 and 2022, respectively. 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 2023, 2022, and 2021, employees purchased 68,286 , 55,123 , and 64,826 shares, respectively, and there are 447,655 remaining shares available under the ESPP at December 31, 2023. Stock Plan for Non-Management Directors The Company has adopted a Stock Plan for Non-Management Directors, which provides for issuing up to 400,000 shares of common stock to non-management directors as compensation. At December 31, 2023, there were 108,893 shares of stock available for grant under the Stock Plan for Non-Management Directors, exclusive of 21,269 shares to be issued upon deferral release. Various information related to the Director Plan is shown below. 2023 2022 2021 Shares granted 27,016 23,343 12,998 Weighted average grant date fair value $ 41.31 $ 42.17 $ 46.05 401(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 $ 6.5 million, $ 5.8 million and $ 4.9 million for 2023, 2022, and 2021, respectively. Deferred Compensation Plan The Company has a nonqualified deferred compensation plan that 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, 2023, the Company had a liability of $ 3.7 million related to the deferred compensation plan. 106 NOTE 16 - INCOME TAXES The components of income tax expense (benefit) for the years ended December 31, are as follows: Year ended December 31, ($ in thousands) 2023 2022 2021 Current: Federal $ 40,471 $ 42,718 $ 29,835 State and local 9,616 11,505 5,198 Total current 50,087 54,223 35,033 Deferred: Federal 283 1,853 870 State and local 2,097 341 ( 325 ) Total deferred 2,380 2,194 545 Total income tax expense $ 52,467 $ 56,417 $ 35,578 A reconciliation of expected income tax expense, computed by applying the statutory federal income tax rate to income before income taxes reflected in the Consolidated Statements of Income is as follows: Year ended December 31, ($ in thousands) 2023 2022 2021 Income tax expense at statutory rate $ 51,770 $ 54,487 $ 35,413 Increase (reduction) in income tax resulting from: Tax-exempt interest income, net ( 4,942 ) ( 4,351 ) ( 3,198 ) State and local income taxes, net 9,445 9,767 4,936 Bank-owned life insurance ( 888 ) ( 545 ) ( 713 ) Non-deductible expenses 2,059 926 1,090 Tax benefit of low-income housing tax credit ("LIHTC") investments, net ( 56 ) ( 195 ) ( 132 ) Excess tax benefits ( 251 ) ( 68 ) 146 Federal tax credits ( 4,364 ) ( 3,661 ) ( 1,136 ) Non-taxable donation to charitable foundation — — ( 263 ) Other, net ( 306 ) 57 ( 565 ) Total income tax expense $ 52,467 $ 56,417 $ 35,578 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 immaterial for the year ended December 31, 2023, and $ 0.2 million and $ 0.1 million for the years ended December 31, 2022, and December 31, 2021, respectively. As of December 31, 2023 and 2022, the carrying value of the investments related to low-income housing tax credits was $ 17.2 million and $ 7.3 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 $ 76.7 million and $ 89.0 million is included in other assets in the consolidated balance sheets at December 31, 2023 and 2022, 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) 2023 2022 Deferred tax assets: Allowance for loan losses $ 33,423 $ 34,507 Loans held-for-sale 4,463 5,917 Other real estate — 179 Deferred compensation 4,746 3,527 Accrued compensation 6,047 6,294 Unrealized losses on securities, net 33,687 44,094 Net operating losses and tax credits 5,544 5,829 Lease liability accrual 7,101 4,545 Other investments 5,341 4,293 Research and experimental expenses 1,944 — Fixed assets 2,341 2,867 Other deferred tax assets 4,823 3,596 Total deferred tax assets 109,460 115,648 Deferred tax liabilities: Acquired loans 2,388 2,212 Intangible assets 8,576 8,676 Right of use asset 6,301 4,374 Other investments 11,834 7,530 Other deferred tax liabilities 841 1,065 Total deferred tax liabilities 29,940 23,857 Net deferred tax asset before valuation allowance 79,520 91,791 Less: valuation allowance 2,812 2,830 Net deferred tax asset $ 76,708 $ 88,961 As part of an 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. The company determined it was more likely than not that some of the acquired net operating loss and tax credit assets would not be realized and has recognized a valuation allowance of $ 2.8 million at December 31, 2023 and 2022, respectively. The Company and its subsidiaries file income tax returns in the federal jurisdiction and in thirty-two states. The Company is no longer subject to federal, state or local income tax audits by tax authorities for years before 2018, with the exception of 2016 and 2017 being open years by state taxing authorities. Net operating losses generated prior to 2016 that are utilized going forward would still be subject to examination. As of December 31, 2023, the gross amount of unrecognized tax benefits was $ 3.1 million and the total amount of net unrecognized tax benefits that would impact the effective tax rate, if recognized, was $ 2.4 million compared to $ 2.2 million and $ 2.5 million as of December 31, 2022 and 2021, respectively. The Company believes it is reasonably possible the gross amount of unrecognized benefits will be reduced by approximately $ 0.4 million as a 108 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. 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 $ 1.0 million for 2023, $ 0.6 million as of 2022, and $ 0.5 million for 2021. The activity in the gross liability for unrecognized tax benefits was as follows: ($ in thousands) 2023 2022 2021 Balance at beginning of year $ 2,724 $ 2,697 $ 3,157 Additions based on tax positions related to the current year 727 683 563 Additions for tax positions of prior years 24 47 436 Settlements for tax positions of prior years — ( 82 ) ( 1,289 ) Settlements or lapse of statute of limitations ( 398 ) ( 621 ) ( 170 ) Balance at end of year $ 3,077 $ 2,724 $ 2,697 NOTE 17 - COMMITMENTS AND CONTINGENT LIABILITIES Long-term Lease Commitments See “Note 5 – 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 are as follows: ($ in thousands) December 31, 2023 December 31, 2022 Commitments to extend credit $ 2,937,760 $ 3,113,966 Letters of credit 107,082 68,544 Tax credits 3,514 4,075 Limited partnership commitments 32,548 35,090 There was an insignificant amount of unadvanced commitments on impaired loans at December 31, 2023 and December 31, 2022. Other liabilities include an allowance for credit losses on unadvanced commitments of $ 6.6 million and $ 12.1 million at December 31, 2023 and 2022, respectively. 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, 2023, and December 31, 2022, $ 191.6 million and $ 246.5 million, respectively, represent fixed rate loan commitments. Since certain of the commitments may expire without being drawn upon or may be revoked, the total commitment amounts do not necessarily represent future cash obligations. The Company evaluates each customer’s credit worthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the 109 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 one month to 9 years at December 31, 2023. The Company also has off-balance sheet commitments for purchases of tax credits and commitments for various capital raises for limited partnership investments . NOTE 18 - 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, segregated by the level of the valuation inputs within the fair value hierarchy utilized to measure fair value. December 31, 2023 ($ in thousands) Quoted Prices in Active Markets for Identical Assets (Level 1) Significant Other Observable Inputs (Level 2) Significant Unobservable Inputs (Level 3) Total Fair Value Assets Securities available-for-sale Obligations of U.S. Government-sponsored enterprises $ — $ 296,446 $ — $ 296,446 Obligations of states and political subdivisions — 432,171 — 432,171 Residential mortgage-backed securities — 700,381 — 700,381 Corporate debt securities — 181,701 — 181,701 U.S. Treasury Bills — 7,574 — 7,574 Total securities available-for-sale — 1,618,273 — 1,618,273 Other investments — 2,941 — 2,941 Derivatives — 17,789 — 17,789 Total assets $ — $ 1,639,003 $ — $ 1,639,003 Liabilities Derivatives $ — $ 16,184 $ — $ 16,184 Total liabilities $ — $ 16,184 $ — $ 16,184 December 31, 2022 ($ in thousands) Quoted Prices in Active Markets for Identical Assets (Level 1) Significant Other Observable Inputs (Level 2) Significant Unobservable Inputs (Level 3) Total Fair Value Assets Securities available-for-sale Obligations of U.S. Government-sponsored enterprises $ — $ 237,785 $ — $ 237,785 Obligations of states and political subdivisions — 417,444 — 417,444 Residential mortgage-backed securities — 659,404 — 659,404 Corporate debt securities — 12,640 — 12,640 U.S. Treasury Bills — 208,534 — 208,534 Total securities available-for-sale — 1,535,807 — 1,535,807 Other investments — 2,667 — 2,667 Derivative financial instruments — 22,958 — 22,958 Total assets $ — $ 1,561,432 $ — $ 1,561,432 Liabilities Derivative financial instruments $ — $ 21,581 $ — $ 21,581 Total liabilities $ — $ 21,581 $ — $ 21,581 • Securities available-for-sale . Fair values for available-for-sale 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, 2023 and 2022, 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). • Individually-evaluated loans . On a quarterly basis, fair value adjustments are recorded as necessary on loans that no longer exhibit risk characteristics similar to other 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 loans are classified in Level 3 of the valuation hierarchy. Fair value estimates on individually-evaluated loans utilizing a discounted cash flow approach are also classified as Level 3. • Other real estate. These assets are initially reported at fair value, less cost to sell, and subsequently at the lower of cost or fair value, less cost to sell. 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 tables present financial instruments and non-financial assets still held as of the reporting date measured at fair value on a non-recurring basis. December 31, 2023 (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) Individually-evaluated loans $ 5,138 $ — $ — $ 5,138 Other real estate 5,736 — — 5,736 Total $ 10,874 $ — $ — $ 10,874 112 December 31, 2022 (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) Other real estate 269 — — 269 Loan servicing asset 1,027 — 1,027 — Total $ 1,296 $ — $ 1,027 $ 269 (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 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, 2023 and 2022. 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, 2023 December 31, 2022 ($ in thousands) Carrying Amount Estimated fair value Level Carrying Amount Estimated fair value Level Balance sheet assets Securities held-to-maturity $ 750,434 $ 696,647 Level 2 $ 709,915 $ 628,517 Level 2 Other investments 63,255 63,255 Level 2 61,123 61,123 Level 2 Loans held-for-sale 359 359 Level 2 1,228 1,228 Level 2 Loans, net 10,749,347 10,392,551 Level 3 9,600,206 9,328,844 Level 3 State tax credits, held-for-sale 22,115 23,897 Level 3 27,700 28,880 Level 3 Servicing asset 2,861 3,799 Level 2 3,648 3,905 Level 2 Balance sheet liabilities Certificates of deposit $ 1,272,914 $ 1,265,905 Level 3 $ 530,708 $ 512,229 Level 3 Subordinated debentures and notes 155,984 154,354 Level 2 155,433 152,679 Level 2 FHLB advances — — Level 2 100,000 100,004 Level 2 Other borrowings 297,829 274,658 Level 2 324,119 324,119 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. Such estimates and assumptions are adjusted when facts and circumstances dictate. Changing real estate values, illiquid credit markets, volatile equity markets, and changes 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 the Company’s entire holdings of a particular financial instrument at one time. Fair value estimates are based on existing on-balance and off-balance-sheet financial instruments without attempting to estimate the value of anticipated future business and the value of assets and liabilities that are not 113 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 19 - PARENT COMPANY ONLY CONDENSED FINANCIAL STATEMENTS Condensed Balance Sheets December 31, ($ in thousands) 2023 2022 Assets Cash $ 100,418 $ 99,018 Investment in Bank 1,748,260 1,553,657 Investment in nonbank subsidiaries 11,267 16,476 Other assets 27,701 30,312 Total assets $ 1,887,646 $ 1,699,463 Liabilities and Shareholders’ Equity Subordinated debentures and notes $ 155,984 $ 155,433 Notes payable 11,429 17,143 Accounts payable and other liabilities 4,165 4,624 Shareholders' equity 1,716,068 1,522,263 Total liabilities and shareholders' equity $ 1,887,646 $ 1,699,463 114 Condensed Statements of Income Year ended December 31, ($ in thousands) 2023 2022 2021 Income: Dividends from Bank $ 45,000 $ 75,000 $ 95,000 Dividends from nonbank subsidiaries 4,875 1,700 2,000 Other 7,736 1,086 3,600 Total income 57,611 77,786 100,600 Expenses: Interest expense 10,856 9,825 11,406 Other expenses 8,774 8,580 11,037 Total expenses 19,630 18,405 22,443 Income before taxes and equity in undistributed earnings of subsidiaries 37,981 59,381 78,157 Income tax benefit 2,520 3,585 3,710 Net income before equity in undistributed earnings of subsidiaries 40,501 62,966 81,867 Equity in undistributed earnings of subsidiaries 153,558 140,077 51,188 Net income $ 194,059 $ 203,043 $ 133,055 115 Condensed Statements of Cash Flows Year ended December 31, ($ in thousands) 2023 2022 2021 Cash flows from operating activities: Net income $ 194,059 $ 203,043 $ 133,055 Adjustments to reconcile net income to net cash provided by operating activities: Share-based compensation 4,439 8,006 6,017 Net income of subsidiaries ( 203,433 ) ( 216,777 ) ( 148,188 ) Dividends from subsidiaries 49,875 76,700 97,000 Other, net ( 421 ) 6,102 ( 16 ) Net cash provided by operating activities 44,519 77,074 87,868 Cash flows from investing activities: Proceeds from acquisitions, net of cash acquired — — 2,346 Purchases of other investments ( 1,002 ) ( 2,187 ) ( 2,204 ) Proceeds from distributions on other investments 3,314 3,878 2,656 Net cash provided by investing activities 2,312 1,691 2,798 Cash flows from financing activities: Payments for the redemption of subordinated notes — — ( 50,000 ) Repayment of long-term debt ( 5,714 ) ( 5,714 ) ( 7,143 ) Dividends paid on common stock ( 37,368 ) ( 33,602 ) ( 26,153 ) Payments for the repurchase of common stock — ( 32,923 ) ( 60,589 ) Proceeds from issuance of preferred stock — — 71,988 Dividends paid on preferred stock ( 3,750 ) ( 4,041 ) — Other 1,401 1,773 516 Net cash used in financing activities ( 45,431 ) ( 74,507 ) ( 71,381 ) Net increase in cash and cash equivalents 1,400 4,258 19,285 Cash and cash equivalents, beginning of year 99,018 94,760 75,475 Cash and cash equivalents, end of year $ 100,418 $ 99,018 $ 94,760 Supplemental disclosures of cash flow information: Noncash transactions: Common shares issued in connection with acquisitions $ — $ — $ 343,650 116 NOTE 20 - SUPPLEMENTAL FINANCIAL INFORMATION The following table presents other income and other expense components that primarily exceed one percent of the aggregate of total interest income and noninterest income in one or more of the periods indicated: Year ended December 31, ($ in thousands) 2023 2022 2021 Other income: Community development fees $ 4,037 $ 5,304 $ 5,491 Bank-owned life insurance 3,688 3,324 2,938 Other income 15,187 8,089 13,719 Total other noninterest income $ 22,912 $ 16,717 $ 22,148 Other expense: Amortization of intangibles $ 4,601 $ 5,367 $ 5,691 Banking expenses 8,110 7,212 6,123 FDIC and other insurance 13,164 7,098 5,789 Loan, legal expenses 8,639 6,943 7,130 Outside services 7,040 5,399 4,992 Other expenses 32,332 25,854 18,739 Total other noninterest expenses $ 73,886 $ 57,873 $ 48,464 117 ITEM 9: CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None.