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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-Q

☒ |  | Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the quarterly period ended June 30, 2020.

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

For the transition period from ______ to ______
Commission file number 001-15373
ENTERPRISE FINANCIAL SERVICES CORP
Incorporated in the State of Delaware
I.R.S. Employer Identification # 43-1706259
Address: 150 North Meramec
Clayton, MO 63105
Telephone: (314) 725-5500
___________________
Securities registered pursuant to Section 12(b) of the Act:

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

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See definitions of “large accelerated filer”, “accelerated filer”, “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer | ☒ |  | Accelerated filer | ☐
Non-accelerated filer | ☐ |  | Smaller reporting company | ☐
|  |  | Emerging growth company | ☐

If an emerging growth company, indicate by check mark if the registrant has elected to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act)
Yes ☐ No ☒
As of July 22, 2020, the Registrant had 26,206,044 shares of outstanding common stock, $0.01 par value per share.
This document is also available through our website at http://www.enterprisebank.com.

ENTERPRISE FINANCIAL SERVICES CORP AND SUBSIDIARIES
TABLE OF CONTENTS

|  | Page
PART I - FINANCIAL INFORMATION |
Item 1. Financial Statements |
Condensed Consolidated Balance Sheets (Unaudited) | 1
Condensed Consolidated Statements of Operations (Unaudited) | 2
Condensed Consolidated Statements of Comprehensive Income (Unaudited) | 3
Condensed Consolidated Statements of Shareholders’ Equity (Unaudited) | 4
Condensed Consolidated Statements of Cash Flows (Unaudited) | 5
Notes to Condensed Consolidated Financial Statements (Unaudited) | 6
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations | 26
Item 3. Quantitative and Qualitative Disclosures About Market Risk | 49
Item 4. Controls and Procedures | 50
PART II - OTHER INFORMATION |
Item 1. Legal Proceedings | 50
Item 1A. Risk Factors | 50
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds | 53
Item 3. Defaults Upon Senior Securities | 53
Item 4. Mine Safety Disclosures | 53
Item 5. Other Information | 53
Item 6. Exhibits | 54
Signatures | 56

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

ACL | Allowance for Credit Losses |  | FDIC | Federal Deposit Insurance Corporation
ACLL | Allowance for Credit Losses on Loans (excludes allowance for securities and allowance for unfunded commitments) |  | FHLB | Federal Home Loan Bank
ASC | Accounting Standards Codification |  | GAAP | Generally Accepted Accounting Principles (United States)
ASU | Accounting Standards Update |  | LIBOR | London Interbank Offered Rate
Bank | Enterprise Bank & Trust |  | MD&A | Management’s Discussion and Analysis of Financial Condition and Results of Operations
C&I | Commercial and Industrial |  | PCD | Purchased Credit Deteriorated
CECL | Current Expected Credit Loss |  | PCI | Purchased Credit Impaired
Company | Enterprise Financial Services Corp and Subsidiaries |  | PPP | Paycheck Protection Program
CRE | Commercial Real Estate |  | SBA | Small Business Administration
DCF | Discounted Cash Flow |  | SEC | Securities and Exchange Commission
EFSC | Enterprise Financial Services Corp |  | SOFR | Secured Overnight Financing Rate
Enterprise | Enterprise Financial Services Corp and Subsidiaries |  | Trinity | Trinity Capital Corporation
FASB | Financial Accounting Standards Board |  |  |

PART 1 - ITEM 1 - FINANCIAL STATEMENTS
ENTERPRISE FINANCIAL SERVICES CORP AND SUBSIDIARIES
Condensed Consolidated Balance Sheets (Unaudited)

(in thousands, except share and per share data) | June 30, 2020 |  | December 31, 2019
Assets |  |  |
Cash and due from banks | $ | 100,804 |  |  | $ | 74,769 |
Federal funds sold | 2,381 |  |  | 3,060 |
Interest-earning deposits (including $47,085 and $15,285 pledged as collateral, respectively) | 245,542 |  |  | 89,427 |
Total cash and cash equivalents | 348,727 |  |  | 167,256 |
Interest-earning deposits greater than 90 days | 6,907 |  |  | 3,730 |
Securities available-for-sale | 998,104 |  |  | 1,135,317 |
Securities held-to-maturity, net | 345,791 |  |  | 181,166 |
Loans held-for-sale | 16,029 |  |  | 5,570 |
Loans | 6,140,051 |  |  | 5,314,337 |
Less: Allowance for credit losses on loans | 110,270 |  |  | 43,288 |
Total loans, net | 6,029,781 |  |  | 5,271,049 |
Other investments | 43,106 |  |  | 38,044 |
Fixed assets, net | 58,231 |  |  | 60,013 |
Goodwill | 210,344 |  |  | 210,344 |
Intangible assets, net | 23,196 |  |  | 26,076 |
Other assets | 277,285 |  |  | 235,226 |
Total assets | $ | 8,357,501 |  |  | $ | 7,333,791 |
Liabilities and Shareholders' Equity |  |  |
Noninterest-bearing deposit accounts | $ | 1,965,868 |  |  | $ | 1,327,348 |
Interest-bearing transaction accounts | 1,508,535 |  |  | 1,367,444 |
Money market accounts | 1,962,916 |  |  | 1,713,615 |
Savings accounts | 603,095 |  |  | 536,169 |
Certificates of deposit: |  |  |
Brokered | 85,414 |  |  | 215,758 |
Other | 573,752 |  |  | 610,689 |
Total deposits | 6,699,580 |  |  | 5,771,023 |
Subordinated debentures and notes | 203,384 |  |  | 141,258 |
FHLB advances | 250,000 |  |  | 222,406 |
Other borrowings | 196,532 |  |  | 230,886 |
Notes payable | 31,429 |  |  | 34,286 |
Other liabilities | 108,613 |  |  | 66,747 |
Total liabilities | $ | 7,489,538 |  |  | $ | 6,466,606 |
Commitments and contingent liabilities (Note 5) |  |  |
Shareholders' equity: |  |  |
Preferred stock, $0.01 par value; 5,000,000 shares authorized; 0 shares issued and outstanding | — |  |  | — |
Common stock, $0.01 par value; 45,000,000 shares authorized; 28,176,087 and 28,067,087 shares issued, respectively | 281 |  |  | 281 |
Treasury stock, at cost; 1,980,093 and 1,523,842 shares, respectively | (73,528 | ) |  | (58,181 | )
Additional paid in capital | 527,734 |  |  | 526,599 |
Retained earnings | 380,667 |  |  | 380,737 |
Accumulated other comprehensive income | 32,809 |  |  | 17,749 |
Total shareholders' equity | 867,963 |  |  | 867,185 |
Total liabilities and shareholders' equity | $ | 8,357,501 |  |  | $ | 7,333,791 |

The accompanying notes are an integral part of these consolidated financial statements.
1

ENTERPRISE FINANCIAL SERVICES CORP AND SUBSIDIARIES
Condensed Consolidated Statements of Operations (Unaudited)

| Three months ended June 30, |  | Six months ended June 30,
(in thousands, except per share data) | 2020 |  | 2019 |  | 2020 |  | 2019
Interest income: |  |  |  |  |  |  |
Interest and fees on loans | $ | 64,478 |  |  | $ | 69,628 |  |  | $ | 131,647 |  |  | $ | 130,653 |
Interest on debt securities: |  |  |  |  |  |  |
Taxable | 6,587 |  |  | 7,757 |  |  | 14,144 |  |  | 13,232 |
Nontaxable | 1,812 |  |  | 861 |  |  | 3,301 |  |  | 1,308 |
Interest on interest-earning deposits | 87 |  |  | 703 |  |  | 387 |  |  | 1,150 |
Dividends on equity securities | 227 |  |  | 252 |  |  | 400 |  |  | 475 |
Total interest income | 73,191 |  |  | 79,201 |  |  | 149,879 |  |  | 146,818 |
Interest expense: |  |  |  |  |  |  |
Deposits | 4,383 |  |  | 13,119 |  |  | 14,271 |  |  | 24,939 |
Subordinated debentures and notes | 2,316 |  |  | 1,958 |  |  | 4,235 |  |  | 3,606 |
FHLB advances | 455 |  |  | 1,696 |  |  | 1,350 |  |  | 3,094 |
Notes payable and other borrowings | 204 |  |  | 713 |  |  | 822 |  |  | 1,121 |
Total interest expense | 7,358 |  |  | 17,486 |  |  | 20,678 |  |  | 32,760 |
Net interest income | 65,833 |  |  | 61,715 |  |  | 129,201 |  |  | 114,058 |
Provision for credit losses | 19,591 |  |  | 1,722 |  |  | 41,855 |  |  | 3,198 |
Net interest income after provision for credit losses | 46,242 |  |  | 59,993 |  |  | 87,346 |  |  | 110,860 |
Noninterest income: |  |  |  |  |  |  |
Service charges on deposit accounts | 2,616 |  |  | 3,366 |  |  | 5,759 |  |  | 6,301 |
Wealth management revenue | 2,326 |  |  | 2,661 |  |  | 4,827 |  |  | 4,653 |
Card services revenue | 2,225 |  |  | 2,461 |  |  | 4,472 |  |  | 4,251 |
Tax credit income | (221 | ) |  | 572 |  |  | 1,815 |  |  | 730 |
Miscellaneous income | 3,014 |  |  | 2,904 |  |  | 6,495 |  |  | 5,259 |
Total noninterest income | 9,960 |  |  | 11,964 |  |  | 23,368 |  |  | 21,194 |
Noninterest expense: |  |  |  |  |  |  |
Employee compensation and benefits | 22,389 |  |  | 20,687 |  |  | 44,074 |  |  | 40,039 |
Occupancy | 3,185 |  |  | 3,188 |  |  | 6,532 |  |  | 5,825 |
Data processing | 2,144 |  |  | 2,458 |  |  | 4,226 |  |  | 4,364 |
Professional fees | 1,287 |  |  | 1,037 |  |  | 2,149 |  |  | 1,783 |
Merger-related expenses | — |  |  | 10,306 |  |  | — |  |  | 17,576 |
Other | 8,907 |  |  | 11,378 |  |  | 19,604 |  |  | 19,305 |
Total noninterest expense | 37,912 |  |  | 49,054 |  |  | 76,585 |  |  | 88,892 |
Income before income tax expense | 18,290 |  |  | 22,903 |  |  | 34,129 |  |  | 43,162 |
Income tax expense | 3,656 |  |  | 4,479 |  |  | 6,627 |  |  | 8,582 |
Net income | $ | 14,634 |  |  | $ | 18,424 |  |  | $ | 27,502 |  |  | $ | 34,580 |
Earnings per common share |  |  |  |  |  |  |
Basic | $ | 0.56 |  |  | $ | 0.69 |  |  | $ | 1.04 |  |  | $ | 1.36 |
Diluted | 0.56 |  |  | 0.68 |  |  | 1.04 |  |  | 1.36 |

The accompanying notes are an integral part of these consolidated financial statements.
2

ENTERPRISE FINANCIAL SERVICES CORP AND SUBSIDIARIES
Condensed Consolidated Statements of Comprehensive Income (Unaudited)

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

The accompanying notes are an integral part of these consolidated financial statements.
3

ENTERPRISE FINANCIAL SERVICES CORP AND SUBSIDIARIES
Condensed Consolidated Statements of Shareholders’ Equity (Unaudited)

Three and six months ended June 30, 2020 |  |  |  |  |  |  |  |  |  |  |
(in thousands, except per share data) | Common Stock |  | Treasury Stock |  | Additional paid in capital |  | Retained earnings |  | Accumulated other comprehensive income (loss) |  | Total shareholders’ equity
Balance at March 31, 2020 | $ | 281 |  |  | $ | (73,528 | ) |  | $ | 525,838 |  |  | $ | 370,748 |  |  | $ | 23,097 |  |  | $ | 846,436 |
Net income | — |  |  | — |  |  | — |  |  | 14,634 |  |  | — |  |  | 14,634 |
Other comprehensive income | — |  |  | — |  |  | — |  |  | — |  |  | 9,712 |  |  | 9,712 |
Comprehensive income | — |  |  | — |  |  | — |  |  | 14,634 |  |  | 9,712 |  |  | 24,346 |
Cash dividends paid on common shares, $0.18 per share | — |  |  | — |  |  | — |  |  | (4,715 | ) |  | — |  |  | (4,715 | )
Issuance under equity compensation plans, 35,485 shares, net | — |  |  | — |  |  | 827 |  |  | — |  |  | — |  |  | 827 |
Share-based compensation | — |  |  | — |  |  | 1,069 |  |  | — |  |  | — |  |  | 1,069 |
Balance at June 30, 2020 | $ | 281 |  |  | $ | (73,528 | ) |  | $ | 527,734 |  |  | $ | 380,667 |  |  | $ | 32,809 |  |  | $ | 867,963 |
Balance at December 31, 2019 | $ | 281 |  |  | $ | (58,181 | ) |  | $ | 526,599 |  |  | $ | 380,737 |  |  | $ | 17,749 |  |  | $ | 867,185 |
Net income | — |  |  | — |  |  | — |  |  | 27,502 |  |  | — |  |  | 27,502 |
Other comprehensive income | — |  |  | — |  |  | — |  |  | — |  |  | 15,060 |  |  | 15,060 |
Total comprehensive income | — |  |  | — |  |  | — |  |  | 27,502 |  |  | 15,060 |  |  | 42,562 |
Cash dividends paid on common shares, $0.36 per share | — |  |  | — |  |  | — |  |  | (9,458 | ) |  | — |  |  | (9,458 | )
Repurchase of common shares | — |  |  | (15,347 | ) |  | — |  |  | — |  |  | — |  |  | (15,347 | )
Issuance under equity compensation plans, 109,000 shares, net | — |  |  | — |  |  | (894 | ) |  | — |  |  | — |  |  | (894 | )
Share-based compensation | — |  |  | — |  |  | 2,029 |  |  | — |  |  | — |  |  | 2,029 |
Reclassification for the adoption of ASU 2016-13 (CECL) | — |  |  | — |  |  | — |  |  | (18,114 | ) |  | — |  |  | (18,114 | )
Balance at June 30, 2020 | $ | 281 |  |  | $ | (73,528 | ) |  | $ | 527,734 |  |  | $ | 380,667 |  |  | $ | 32,809 |  |  | $ | 867,963 |
Three and six months ended June 30, 2019 |  |  |  |  |  |  |  |  |  |  |
(in thousands, except per share data) | Common Stock |  | Treasury Stock |  | Additional paid in capital |  | Retained earnings |  | Accumulated other comprehensive income (loss) |  | Total shareholders’ equity
Balance at March 31, 2019 | $ | 280 |  |  | $ | (42,655 | ) |  | $ | 521,761 |  |  | $ | 316,959 |  |  | $ | 1,490 |  |  | $ | 797,835 |
Net income | — |  |  | — |  |  | — |  |  | 18,424 |  |  | — |  |  | 18,424 |
Other comprehensive income | — |  |  | — |  |  | — |  |  | — |  |  | 11,584 |  |  | 11,584 |
Comprehensive income | — |  |  | — |  |  | — |  |  | 18,424 |  |  | 11,584 |  |  | 30,008 |
Cash dividends paid on common shares, $0.15 per share | — |  |  | — |  |  | — |  |  | (4,035 | ) |  | — |  |  | (4,035 | )
Issuance under equity compensation plans, 28,341 shares, net | — |  |  | — |  |  | 707 |  |  | — |  |  | — |  |  | 707 |
Share-based compensation | — |  |  | — |  |  | 986 |  |  | — |  |  | — |  |  | 986 |
Balance at June 30, 2019 | $ | 280 |  |  | $ | (42,655 | ) |  | $ | 523,454 |  |  | $ | 331,348 |  |  | $ | 13,074 |  |  | $ | 825,501 |
Balance at December 31, 2018 | $ | 239 |  |  | $ | (42,655 | ) |  | $ | 350,936 |  |  | $ | 304,566 |  |  | $ | (9,282 | ) |  | $ | 603,804 |
Net income | — |  |  | — |  |  | — |  |  | 34,580 |  |  | — |  |  | 34,580 |
Other comprehensive income | — |  |  | — |  |  | — |  |  | — |  |  | 22,356 |  |  | 22,356 |
Total comprehensive income | — |  |  | — |  |  | — |  |  | 34,580 |  |  | 22,356 |  |  | 56,936 |
Cash dividends paid on common shares, $0.29 per share | — |  |  | — |  |  | — |  |  | (7,798 | ) |  | — |  |  | (7,798 | )
Issuance under equity compensation plans, 103,430 shares, net | 1 |  |  | — |  |  | (1,234 | ) |  | — |  |  | — |  |  | (1,233 | )
Share-based compensation | — |  |  | — |  |  | 1,907 |  |  | — |  |  | — |  |  | 1,907 |
Shares issued in connection with acquisition of Trinity Capital Corporation, 3,990,822 shares | 40 |  |  | — |  |  | 171,845 |  |  | — |  |  | — |  |  | 171,885 |
Balance at June 30, 2019 | $ | 280 |  |  | $ | (42,655 | ) |  | $ | 523,454 |  |  | $ | 331,348 |  |  | $ | 13,074 |  |  | $ | 825,501 |

The accompanying notes are an integral part of these consolidated financial statements.
4

ENTERPRISE FINANCIAL SERVICES CORP AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows (Unaudited)

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

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

ENTERPRISE FINANCIAL SERVICES CORP AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited)
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The significant accounting policies used by Enterprise Financial Services Corp (the “Company,” “EFSC,” or “Enterprise”) in the preparation of the condensed consolidated financial statements are summarized below:
Business and Consolidation
Enterprise is a financial holding company that provides a full range of banking and wealth management services to individuals and corporate customers located in the Arizona, Kansas, Missouri, and New Mexico markets through its banking subsidiary, Enterprise Bank & Trust.
Operating results for the three and six months ended June 30, 2020 are not necessarily indicative of the results that may be expected for any other interim period or for the year ending December 31, 2020. For further information, refer to the consolidated financial statements and footnotes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019, as filed with the SEC.
Basis of Financial Statement Presentation
The accompanying unaudited condensed consolidated financial statements of the Company and its subsidiaries have been prepared in accordance with GAAP for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Except as disclosed herein, there has been no material change in the information disclosed in the Notes to Consolidated Financial Statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019.
The condensed consolidated financial statements include the accounts of the Company and its subsidiaries, all of which are wholly owned. All intercompany accounts and transactions have been eliminated.
In the opinion of management, the consolidated financial statements contain all adjustments (consisting of normal recurring accruals) considered necessary for the fair presentation of the statements of financial position, results of operations, and cash flow for the interim periods.
Recently Adopted Accounting Pronouncements
On January 1, 2020, the Company adopted ASU 2016-13 “Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments,” which replaces the incurred loss methodology with an expected loss methodology commonly referred to as the CECL methodology. The measurement of expected credit losses under the CECL methodology is applicable to financial assets measured at amortized cost, including loan receivables and held-to-maturity debt securities. It also applies to off-balance sheet credit exposures such as loan commitments, standby letters of credit, financial guarantees, and other similar instruments. In addition, this standard made changes to the accounting for available-for-sale debt securities, including the requirement for credit losses to be presented as an allowance rather than as a write-down on available-for-sale debt securities.
The Company adopted this standard using the modified retrospective method for all financial assets measured at amortized cost, and off-balance-sheet credit exposures. Results for reporting periods beginning after January 1, 2020 are presented under the new standard while prior period amounts continue to be reported in accordance with previously applicable GAAP. The Company recorded an after-tax decrease to retained earnings of $18.1 million as of January 1, 2020 for the cumulative effect of adopting this standard.
The Company adopted this standard using the prospective transition approach for PCD assets that were previously classified as PCI assets. Management did not reassess whether PCI assets met the criteria of PCD assets as of the date of the adoption.
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The Company elected not to maintain PCI pools for certain loans which are now accounted for individually. Thus they are now included in nonperforming and classified loans. Management did not reassess whether modifications to individual acquired financial assets accounted for in pools were troubled debt restructurings as of the date of adoption.
The following table illustrates the impact of adoption:

($ in thousands) | December 31, 2019 |  | Impact of Adoption |  | January 1, 2020 |
Assets: |  |  |  |  |
Loans | $ | 5,314,337 |  |  | $ | 7,091 |  |  | $ | 5,321,428 |
Allowance for credit losses on loans | 43,288 |  |  | 28,387 |  |  | 71,675 |
Allowance for credit losses on held-to-maturity debt securities | — |  |  | 303 |  |  | 303 |
Deferred tax asset | 14,851 |  |  | 5,898 |  |  | 20,749 |
Liabilities: |  |  |  |  |
Reserve for unfunded commitments | 430 |  |  | 2,413 |  |  | 2,843 |
Shareholders’ Equity |  |  |  |  |
Retained Earnings | 380,737 |  |  | (18,114 | ) |  | 362,623 |

The Company also adopted ASU 2018-13, “Fair Value Measurement (Topic 820): Disclosure Framework—Changes to the Disclosure Requirements for Fair Value Measurement” on January 1, 2020. The Company previously selected the option to adopt the removal or modification of disclosures during the second quarter of 2019. The amendments on changes in unrealized gains and losses, the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements, and the narrative description of measurement uncertainty are applied prospectively for only the most recent interim or annual period presented. All other amendments are applied retrospectively to all periods presented upon their effective date. The adoption of this update did not have a material effect on the Company's consolidated financial statements.
Accounting Standards Issued but not yet Adopted
FASB ASU 2020-04, “Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting.” In March 2020, the FASB issued “Reference Rate Reform (Topic 848)” which provides optional expedients and exceptions for contracts, hedging relationships, and other transactions that reference LIBOR or another reference rate expected to be discontinued because of reference rate reform. The guidance is effective for contract modifications as of March 12, 2020 through December 31, 2022. The Company is currently evaluating the optional expedients and exceptions and has not yet determined the impact this standard may have on its consolidated financial statements.
Loans
The Company has elected to present the accrued interest receivable balance separate from amortized cost basis, to exclude accrued interest receivable balances from the tabular disclosures, and not to estimate an ACL on accrued interest receivable as these amounts are timely written off as a credit loss expense.
Accrued interest receivable totaled $19.7 million at June 30, 2020 and was reported in Other Assets on the consolidated balance sheets.
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PCD Loans
The Company has purchased loans, some of which have experienced more than insignificant credit deterioration since origination. PCD loans are recorded at the amount paid. An ACL is determined using the same methodology as other loans held for investment. The initial ACL determined on a collective basis is allocated to individual loans. The sum of the loan’s purchase price and ACL becomes its initial amortized cost basis. The difference between the initial amortized cost basis and the par value of the loan is a noncredit discount or premium, which is amortized into interest income over the life of the loan. Subsequent changes to the ACL are recorded through provision expense.
Allowance for Credit Losses on Loans
The ACLL is a valuation account that is deducted from the amortized cost basis to present the net amount expected to be collected. Loans are charged-off against the allowance when management believes the uncollectibility of a loan balance is confirmed.
Management estimates the allowance using relevant available information, from internal and external sources, relating to past events, current conditions, and reasonable and supportable forecasts. Credit loss experience provides the basis for the estimation of expected credit losses. Adjustments to historical loss information are made for differences in current loan-specific risk characteristics such as differences in underwriting standards, portfolio mix, delinquency level, or term as well as for changes in environmental conditions, such as changes in unemployment rates, property values, or other relevant factors.
The ACLL is measured on a collective basis when similar risk characteristics exist. The Company has identified the following portfolio segments:
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 enterprise value lending, which are loans with senior debt exposure to private equity backed companies.
CRE – CRE loans include various types of loans for which the Company holds real property as collateral. Commercial real estate lending activity is typically restricted to owner-occupied properties or to investor properties that are owned by customers with a current banking relationship. The primary risks of CRE loans include the borrower’s inability to pay, material decreases in the value of the real estate being held as collateral and significant increases in interest rates, which may make the real estate mortgage loan unprofitable. Real estate loans may be more adversely affected by conditions in the real estate markets or in the general economy.
Construction and Land Development – The Company originates loans to finance construction projects including one- to four-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.
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Agricultural – Agricultural loans are generally secured with equipment, cattle, crops or other non-real property and at times the underlying real property. Agricultural loans are primarily included as a component of CRE and C&I loans.
Consumer – The Company provides a broad range of consumer loans to customers, including personal lines of credit, credit cards and automobile loans. Repayment of these loans is dependent on the borrowers’ ability to pay and the fair value of the underlying collateral. Consumer loans are included as a component of Other loans.
The Company utilizes a DCF method to measure the ACL on loans collectively evaluated that are sub-segmented by credit risk levels. The DCF method incorporates assumptions for probability of default, loss given default, prepayments and curtailments over the contractual term of the loans. In determining the probability of default, the Company utilized a regression analysis to determine certain economic factors that are relevant loss drivers in the portfolio segments based on historical or peer evaluations. National unemployment is a loss driver used in nearly all portfolios, except Consumer. The annual percentage change in gross domestic product is also used in C&I, Construction, Agricultural and Consumer portfolios. The annual percentage change in a commercial real estate index, national house price index and the consumer price index are used in the CRE, Residential Real Estate and Consumer portfolios, respectively. The contractual term excludes expected extensions, renewals, and modifications unless either of the following applies: management has a reasonable expectation at the reporting date that a troubled debt restructuring will be executed with an individual borrower or the extension or renewal options are included in the original or modified contract at the reporting date and are not unconditionally cancellable by the Company.
The Company uses a one-year reasonable and supportable forecast that considers baseline, upside and downside economic scenarios. For periods beyond the forecast period, the Company reverts to historical loss rates on a straight-line basis over a six-month period.
Loans that do not share risk characteristics are evaluated on an individual basis. Loans evaluated individually are not also included in the collective evaluation. When management determines that foreclosure is probable, expected credit losses are based on the fair value of the collateral at the reporting date, adjusted for selling costs as appropriate.
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NOTE 2 - EARNINGS PER SHARE
Basic earnings per common share data is calculated by dividing net income by the weighted average number of common shares outstanding during the period. Common shares outstanding include common stock and restricted stock awards where recipients have satisfied the vesting terms. Diluted earnings per common share gives effect to all dilutive potential common shares outstanding during the period using the treasury stock method.
The following table presents a summary of per common share data and amounts for the periods indicated.

| Three months ended June 30, |  | Six months ended June 30,
(in thousands, except per share data) | 2020 |  | 2019 |  | 2020 |  | 2019
Net income as reported | $ | 14,634 |  |  | $ | 18,424 |  |  | $ | 27,502 |  |  | $ | 34,580 |
Weighted average common shares outstanding | 26,180 |  |  | 26,887 |  |  | 26,325 |  |  | 25,415 |
Additional dilutive common stock equivalents | 15 |  |  | 53 |  |  | 29 |  |  | 73 |
Weighted average diluted common shares outstanding | 26,195 |  |  | 26,940 |  |  | 26,354 |  |  | 25,488 |
Basic earnings per common share: | $ | 0.56 |  |  | $ | 0.69 |  |  | $ | 1.04 |  |  | $ | 1.36 |
Diluted earnings per common share: | 0.56 |  |  | 0.68 |  |  | $ | 1.04 |  |  | $ | 1.36 |

For the three and six months ended June 30, 2020 common stock equivalents of approximately 157,000 and 147,000, respectively, were excluded from the earnings per share calculations because their effect would have been anti-dilutive. Comparatively, there were 130,000 and 99,000 common stock equivalents excluded in the prior year periods, respectively.
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NOTE 3 - INVESTMENTS
The following table presents the amortized cost, gross unrealized gains and losses, allowance of credit losses and fair value of securities available for sale and held to maturity:

| June 30, 2020
(in thousands) | Amortized Cost |  | Gross Unrealized Gains |  | Gross Unrealized Losses |  | Allowance for Credit Losses |  | Fair Value
Available-for-sale securities: |  |  |  |  |  |  |  |  |
Obligations of U.S. Government-sponsored enterprises | $ | 9,966 |  |  | $ | 275 |  |  | $ | — |  |  | $ | — |  |  | $ | 10,241 |
Obligations of states and political subdivisions | 245,961 |  |  | 8,450 |  |  | (133 | ) |  | — |  |  | 254,278 |
Agency mortgage-backed securities | 693,082 |  |  | 27,915 |  |  | (6 | ) |  | — |  |  | 720,991 |
U.S. Treasury bills | 9,975 |  |  | 591 |  |  | — |  |  | — |  |  | 10,566 |
Corporate debt securities | 2,000 |  |  | 28 |  |  | — |  |  | — |  |  | 2,028 |
Total securities available for sale | $ | 960,984 |  |  | $ | 37,259 |  |  | $ | (139 | ) |  | $ | — |  |  | $ | 998,104 |
Held-to-maturity securities: |  |  |  |  |  |  |  |  |
Obligations of states and political subdivisions | $ | 96,547 |  |  | $ | 336 |  |  | $ | (122 | ) |  | $ | (16 | ) |  | $ | 96,745 |
Agency mortgage-backed securities | 127,353 |  |  | 2,469 |  |  | (28 | ) |  | — |  |  | 129,794 |
Corporate debt securities | 122,536 |  |  | 7,693 |  |  | — |  |  | (629 | ) |  | 129,600 |
Total securities held-to-maturity | $ | 346,436 |  |  | $ | 10,498 |  |  | $ | (150 | ) |  | $ | (645 | ) |  | $ | 356,139 |
Less: Allowance for credit losses | 645 |  |  |  |  |  |  |  |  |
Total securities held-to-maturity, net | $ | 345,791 |  |  |  |  |  |  |  |  |

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

During the second quarter of 2020, the Company transferred municipal securities and agency mortgage-backed securities with a book value of $163.6 million and fair value of $175.1 million from available-for-sale to held-to-maturity. The Company believes the held- to-maturity category is more consistent with the Company’s intent for these securities. The transfer of securities was made at fair value at the time of transfer. The unamortized portion of the $11.5 million unrealized holding gain at the time of transfer is retained in accumulated other comprehensive income and in the carrying value of held-to-maturity securities. Such amounts are amortized over the remaining life of the securities.
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At June 30, 2020 and December 31, 2019, there were no holdings of securities of any one issuer in an amount greater than 10% of shareholders’ equity, other than U.S. Government agencies and sponsored enterprises. The agency mortgage-backed securities are all issued by U.S. Government agencies and sponsored enterprises. Securities having a fair value of $449.9 million and $484.8 million at June 30, 2020 and December 31, 2019, respectively, were pledged as collateral to secure deposits of public institutions and for other purposes as required by law or contract provisions.
The amortized cost and estimated fair value of debt securities at June 30, 2020, by contractual maturity, are shown below. Expected maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. The weighted average life of the mortgage-backed securities is approximately 3 years.

| Available for sale |  | Held to maturity
(in thousands) | Amortized Cost |  | Estimated Fair Value |  | Amortized Cost |  | Estimated Fair Value
Due in one year or less | $ | 2,313 |  |  | $ | 2,345 |  |  | $ | — |  |  | $ | — |
Due after one year through five years | 25,981 |  |  | 27,058 |  |  | 10,207 |  |  | 10,597 |
Due after five years through ten years | 9,455 |  |  | 9,915 |  |  | 126,285 |  |  | 133,206 |
Due after ten years | 230,153 |  |  | 237,795 |  |  | 82,591 |  |  | 82,542 |
Agency mortgage-backed securities | 693,082 |  |  | 720,991 |  |  | 127,353 |  |  | 129,794 |
| $ | 960,984 |  |  | $ | 998,104 |  |  | $ | 346,436 |  |  | $ | 356,139 |

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

| June 30, 2020
Less than 12 months |  | 12 months or more |  | Total
(in thousands) | Fair Value |  | Unrealized Losses |  | Fair Value |  | Unrealized Losses |  | Fair Value |  | Unrealized Losses
Obligations of states and political subdivisions | $ | 33,821 |  |  | $ | 133 |  |  | $ | — |  |  | $ | — |  |  | $ | 33,821 |  |  | $ | 133 |
Agency mortgage-backed securities | 8,366 |  |  | 5 |  |  | 66 |  |  | 1 |  |  | 8,432 |  |  | 6 |
| $ | 42,187 |  |  | $ | 138 |  |  | $ | 66 |  |  | $ | 1 |  |  | $ | 42,253 |  |  | $ | 139 |
The following table represents a summary of investment securities that had an unrealized loss:
| December 31, 2019
Less than 12 months |  | 12 months or more |  | Total
(in thousands) | Fair Value |  | Unrealized Losses |  | Fair Value |  | Unrealized Losses |  | Fair Value |  | Unrealized Losses
Obligations of states and political subdivisions | 56,327 |  |  | 363 |  |  | — |  |  | — |  |  | 56,327 |  |  | 363 |
Agency mortgage-backed securities | 131,693 |  |  | 756 |  |  | 41,491 |  |  | 435 |  |  | 173,184 |  |  | 1,191 |
Corporate debt securities | 67,964 |  |  | 200 |  |  | — |  |  | — |  |  | 67,964 |  |  | 200 |
| $ | 255,984 |  |  | $ | 1,319 |  |  | $ | 41,491 |  |  | $ | 435 |  |  | $ | 297,475 |  |  | $ | 1,754 |

The unrealized losses at both June 30, 2020 and December 31, 2019, were primarily attributable to changes in market interest rates since the securities were purchased. Management systematically evaluates investment securities for other-than-temporary declines in fair value on a quarterly basis. This analysis requires management to consider various factors, which include among other considerations (1) the present value of the cash flows expected to be collected compared to the amortized cost of the security, (2) duration and magnitude of the decline in value, (3) the financial condition of the issuer or issuers, (4) structure of the security, and (5) the intent to sell the security or whether it is more likely than not the Company would be required to sell the security before its anticipated recovery in market value. At June 30, 2020, management performed its quarterly analysis of all securities with an unrealized loss and concluded
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no individual securities were other-than-temporarily impaired. Accrued interest receivable on available-for-sale debt securities totaled $3.6 million at June 30, 2020 and is excluded from the estimate of credit losses.
Accrued interest receivable on held-to-maturity debt securities totaled $2.3 million at June 30, 2020 and is excluded from the estimate of expected credit losses. The estimate of expected credit losses considers historical credit loss information adjusted for current conditions and reasonable and supportable forecasts. At June 30, 2020, the ACL on held-to-maturity securities was $0.6 million.
NOTE 4 - LOANS
Below is a summary of loans by category at June 30, 2020 and December 31, 2019:

(in thousands) | June 30, 2020 |  | December 31, 2019
Commercial and industrial | $ | 3,165,611 |  |  | $ | 2,361,157 |
Real estate: |  |  |
Commercial - investor owned | 1,309,895 |  |  | 1,299,884 |
Commercial - owner occupied | 738,549 |  |  | 697,437 |
Construction and land development | 481,221 |  |  | 457,273 |
Residential | 326,992 |  |  | 366,261 |
Total real estate loans | 2,856,657 |  |  | 2,820,855 |
Other | 142,224 |  |  | 134,941 |
Loans, before unearned loan fees | 6,164,492 |  |  | 5,316,953 |
Unearned loan fees, net | (24,441 | ) |  | (2,616 | )
Loans, including unearned loan fees | $ | 6,140,051 |  |  | $ | 5,314,337 |

PPP loans totaled $830.2 million at June 30, 2020, or $807.8 million net of unearned fees of $22.4 million. The loan balance at June 30, 2020 also includes a discount on acquired loans of $22.2 million. At June 30, 2020 loans of $2.4 billion were pledged to FHLB and the Federal Reserve Bank.
A summary of the activity in the ACLL by category for the three and six months ended June 30, 2020 is as follows:

(in thousands) | Commercial and industrial |  | CRE - investor owned |  | CRE - owner occupied |  | Construction and land development |  | Residential real estate |  | Other |  | Total
Allowance for credit losses on loans: |  |  |  |  |  |  |  |  |  |  |  |  |
Balance at March 31, 2020 | $ | 45,981 |  |  | $ | 19,892 |  |  | $ | 9,477 |  |  | $ | 9,895 |  |  | $ | 5,395 |  |  | $ | 1,547 |  |  | $ | 92,187 |
Provision for credit losses | 7,168 |  |  | 2,599 |  |  | 1,600 |  |  | 6,038 |  |  | 744 |  |  | 242 |  |  | 18,391 |
Charge-offs | (3,303 | ) |  | (224 | ) |  | — |  |  | — |  |  | (32 | ) |  | (105 | ) |  | (3,664 | )
Recoveries | 293 |  |  | 2,752 |  |  | 11 |  |  | 29 |  |  | 226 |  |  | 45 |  |  | 3,356 |
Balance at June 30, 2020 | $ | 50,139 |  |  | $ | 25,019 |  |  | $ | 11,088 |  |  | $ | 15,962 |  |  | $ | 6,333 |  |  | $ | 1,729 |  |  | $ | 110,270 |

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(in thousands) | Commercial and industrial |  | CRE - investor owned |  | CRE - owner occupied |  | Construction and land development |  | Residential real estate |  | Other |  | Total
Allowance for credit losses on loans: |  |  |  |  |  |  |  |  |  |  |  |  |
Balance at December 31, 2019 | $ | 27,455 |  |  | $ | 5,935 |  |  | $ | 4,873 |  |  | $ | 2,611 |  |  | $ | 1,280 |  |  | $ | 1,134 |  |  | $ | 43,288 |
CECL adoption | 6,494 |  |  | 10,726 |  |  | 2,598 |  |  | 5,183 |  |  | 3,470 |  |  | (84 | ) |  | 28,387 |
PCD loans immediately charged off | — |  |  | (5 | ) |  | (57 | ) |  | (217 | ) |  | (1,401 | ) |  | — |  |  | (1,680 | )
Balance at January 1, 2020 | $ | 33,949 |  |  | $ | 16,656 |  |  | $ | 7,414 |  |  | $ | 7,577 |  |  | $ | 3,349 |  |  | $ | 1,050 |  |  | $ | 69,995 |
Provision for credit losses | 18,759 |  |  | 5,823 |  |  | 3,594 |  |  | 8,347 |  |  | 2,755 |  |  | 808 |  |  | 40,086 |
Charge-offs | (3,366 | ) |  | (226 | ) |  | — |  |  | (31 | ) |  | (154 | ) |  | (191 | ) |  | (3,968 | )
Recoveries | 797 |  |  | 2,766 |  |  | 80 |  |  | 69 |  |  | 383 |  |  | 62 |  |  | 4,157 |
Balance at June 30, 2020 | $ | 50,139 |  |  | $ | 25,019 |  |  | $ | 11,088 |  |  | $ | 15,962 |  |  | $ | 6,333 |  |  | $ | 1,729 |  |  | $ | 110,270 |

Reserves on enterprise value lending and agricultural lending, which are included in the categories above, represented $15.8 million and $2.4 million, respectively.
On January 1, 2020, the Company adopted the CECL methodology which added $28.4 million to the ACLL. Upon adoption, $1.7 million of nonaccrual PCD loans that were less than $100,000 were immediately charged-off. Under the CECL method, the Company recorded a $18.4 million and $40.1 million provision for credit losses on loans in the three and six months ended June 30, 2020, respectively, compared to a $1.7 million and $3.2 million provision for loan losses in the prior year periods, respectively, under the incurred loss method. The increase in the provision for credit losses on loans is primarily due to the Company’s forecast of macroeconomic factors over the next 12 months, which significantly deteriorated in the first quarter 2020 due to the COVID-19 pandemic. The forecast continued to worsen in the second quarter of 2020.
The CECL methodology incorporates various economic scenarios. The Company utilizes three forecasts in the model, a Moody’s baseline, a stronger near-term growth and a moderate recession forecast. The Company weights these scenarios at 80%, 10%, and 10%, respectively. These forecasts incorporate an accommodative monetary policy and the current and anticipated impact of government stimulus. Accordingly, the CECL model has not been adjusted for negative qualitative factors, such as the potential loss mitigation of loan deferrals and the PPP. Some of the key risks to the forecasts that could result in future provision for credit losses are additional shutdowns and self-quarantines if a second wave of COVID hits, small-business bankruptcies occur at higher levels or unemployment increases. The 80/10/10 weighting adds approximately $1.0 million to the ACL.
The recorded investment in nonperforming loans by category at June 30, 2020 and December 31, 2019, is as follows:

| June 30, 2020
(in thousands) | Nonaccrual |  | Restructured, accruing |  | Loans over 90 days past due and still accruing interest |  | Total nonperforming loans |  | Nonaccrual loans with no allowance
Commercial and industrial | $ | 27,431 |  |  | $ | 3,642 |  |  | $ | 865 |  |  | $ | 31,938 |  |  | $ | 20,553 |
Real estate: |  |  |  |  |  |  |  |  |
Commercial - investor owned | 2,389 |  |  | — |  |  | — |  |  | 2,389 |  |  | 1,677 |
Commercial - owner occupied | 2,400 |  |  | — |  |  | — |  |  | 2,400 |  |  | 1,403 |
Construction and land development | 207 |  |  | — |  |  | — |  |  | 207 |  |  | 207 |
Residential | 4,421 |  |  | 78 |  |  | — |  |  | 4,499 |  |  | 3,444 |
Other | 19 |  |  | — |  |  | 21 |  |  | 40 |  |  | — |
Total | $ | 36,867 |  |  | $ | 3,720 |  |  | $ | 886 |  |  | $ | 41,473 |  |  | $ | 27,284 |

There was no interest income recognized on nonaccrual loans during the six months ended June 30, 2020.
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| December 31, 2019
(in thousands) | Nonaccrual |  | Restructured, accruing |  | Loans over 90 days past due and still accruing interest |  | Total nonperforming loans
Commercial and industrial | $ | 22,328 |  |  | $ | — |  |  | $ | 250 |  |  | $ | 22,578 |
Real estate: |  |  |  |  |  |  |
Commercial - investor owned | 2,303 |  |  | — |  |  | — |  |  | 2,303 |
Commercial - owner occupied | 213 |  |  | — |  |  | — |  |  | 213 |
Residential | 1,251 |  |  | 79 |  |  | — |  |  | 1,330 |
Other | 1 |  |  | — |  |  | — |  |  | 1 |
Total | $ | 26,096 |  |  | $ | 79 |  |  | $ | 250 |  |  | $ | 26,425 |

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

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

There were no troubled debt restructurings that occurred during the three months ended June 30, 2020. The recorded investment by category for troubled debt restructurings that occurred during the six months ended June 30, 2020 and the three and six months ended June 30, 2019 are as follows:

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

There were no troubled debt restructured loans that subsequently defaulted during the three or six months ended June 30, 2020 or 2019.
In response to the COVID-19 pandemic, the Company has implemented short-term deferral programs allowing customers to primarily defer payments for up to 90 days. Deferrals under the CARES Act or interagency guidance are not included above as troubled debt restructurings. As of June 30, 2020, $685.7 million in loans have participated in the programs, including $361.4 million in loans deferring full principal and interest payments and $324.3 million in
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loans deferring principal only. Interest of $4.0 million has been deferred and will be collected upon final maturity. The Company has moved all loans that have requested deferrals to a level six risk rating for additional monitoring.

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

| June 30, 2020
(in thousands) | 30-89 Days Past Due |  | 90 or More Days Past Due |  | Total Past Due |  | Current |  | Total
Commercial and industrial | $ | 6,684 |  |  | $ | 22,623 |  |  | $ | 29,307 |  |  | $ | 3,113,890 |  |  | $ | 3,143,197 |
Real estate: |  |  |  |  |  |  |  |  |
Commercial - investor owned | 116 |  |  | 2,095 |  |  | 2,211 |  |  | 1,307,684 |  |  | 1,309,895 |
Commercial - owner occupied | 2,723 |  |  | 1,208 |  |  | 3,931 |  |  | 734,618 |  |  | 738,549 |
Construction and land development | 58 |  |  | — |  |  | 58 |  |  | 481,163 |  |  | 481,221 |
Residential | 951 |  |  | 1,738 |  |  | 2,689 |  |  | 324,303 |  |  | 326,992 |
Other | 100 |  |  | 21 |  |  | 121 |  |  | 140,076 |  |  | 140,197 |
Total | $ | 10,632 |  |  | $ | 27,685 |  |  | $ | 38,317 |  |  | $ | 6,101,734 |  |  | $ | 6,140,051 |

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

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

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

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

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

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

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

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

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

|  | Term Loans by Origination Year |  |  |  |  |  |
(in thousands) |  | 2020 |  | 2019 |  | 2018 |  | 2017 |  | 2016 |  | Prior |  | Revolving Loans Converted to Term Loans |  | Revolving Loans |  | Total
Commercial and industrial |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Pass (1-6) |  | $ | 1,239,062 |  |  | $ | 535,477 |  |  | $ | 318,046 |  |  | $ | 180,269 |  |  | $ | 47,210 |  |  | $ | 85,529 |  |  | $ | 14,954 |  |  | $ | 510,168 |  |  | $ | 2,930,715 |
Watch (7) |  | 26,347 |  |  | 13,354 |  |  | 4,850 |  |  | 6,468 |  |  | 24,044 |  |  | 175 |  |  | — |  |  | 62,293 |  |  | 137,531 |
Classified (8-9) |  | 3,775 |  |  | 15,068 |  |  | 8,155 |  |  | 3,950 |  |  | 5,093 |  |  | 3,673 |  |  | 295 |  |  | 23,222 |  |  | 63,231 |
Total Commercial and industrial |  | $ | 1,269,184 |  |  | $ | 563,899 |  |  | $ | 331,051 |  |  | $ | 190,687 |  |  | $ | 76,347 |  |  | $ | 89,377 |  |  | $ | 15,249 |  |  | $ | 595,683 |  |  | $ | 3,131,477 |
Commercial real estate-investor owned |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Pass (1-6) |  | $ | 246,319 |  |  | $ | 321,849 |  |  | $ | 204,242 |  |  | $ | 126,567 |  |  | $ | 153,904 |  |  | $ | 181,761 |  |  | $ | 3,284 |  |  | $ | 35,460 |  |  | $ | 1,273,386 |
Watch (7) |  | 5,136 |  |  | 4,220 |  |  | 1,192 |  |  | 369 |  |  | 12,681 |  |  | 1,275 |  |  | — |  |  | — |  |  | 24,873 |
Classified (8-9) |  | — |  |  | 966 |  |  | 8,286 |  |  | 455 |  |  | 249 |  |  | 1,680 |  |  | — |  |  | — |  |  | 11,636 |
Total Commercial real estate-investor owned |  | $ | 251,455 |  |  | $ | 327,035 |  |  | $ | 213,720 |  |  | $ | 127,391 |  |  | $ | 166,834 |  |  | $ | 184,716 |  |  | $ | 3,284 |  |  | $ | 35,460 |  |  | $ | 1,309,895 |
Commercial real estate-owner occupied |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Pass (1-6) |  | $ | 147,313 |  |  | $ | 200,519 |  |  | $ | 92,624 |  |  | $ | 79,058 |  |  | $ | 44,990 |  |  | $ | 80,172 |  |  | $ | 2,756 |  |  | $ | 42,883 |  |  | $ | 690,315 |
Watch (7) |  | 9,473 |  |  | 1,963 |  |  | 261 |  |  | 9,729 |  |  | 8,533 |  |  | 5,074 |  |  | — |  |  | 2,500 |  |  | 37,533 |
Classified (8-9) |  | 601 |  |  | 1,156 |  |  | 4,267 |  |  | 458 |  |  | — |  |  | 4,219 |  |  | — |  |  | — |  |  | 10,701 |
Total Commercial real estate-owner occupied |  | $ | 157,387 |  |  | $ | 203,638 |  |  | $ | 97,152 |  |  | $ | 89,245 |  |  | $ | 53,523 |  |  | $ | 89,465 |  |  | $ | 2,756 |  |  | $ | 45,383 |  |  | $ | 738,549 |
Construction real estate |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Pass (1-6) |  | $ | 75,983 |  |  | $ | 167,936 |  |  | $ | 121,909 |  |  | $ | 37,555 |  |  | $ | 28,060 |  |  | $ | 12,906 |  |  | $ | — |  |  | $ | 20,631 |  |  | $ | 464,980 |
Watch (7) |  | 2,408 |  |  | 722 |  |  | 1,254 |  |  | 11,047 |  |  | — |  |  | 546 |  |  | — |  |  | — |  |  | 15,977 |
Classified (8-9) |  | — |  |  | 227 |  |  | — |  |  | — |  |  | — |  |  | 37 |  |  | — |  |  | — |  |  | 264 |
Total Construction real estate |  | $ | 78,391 |  |  | $ | 168,885 |  |  | $ | 123,163 |  |  | $ | 48,602 |  |  | $ | 28,060 |  |  | $ | 13,489 |  |  | $ | — |  |  | $ | 20,631 |  |  | $ | 481,221 |
Residential real estate |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Pass (1-6) |  | $ | 26,448 |  |  | $ | 33,085 |  |  | $ | 22,074 |  |  | $ | 19,931 |  |  | $ | 34,427 |  |  | $ | 115,036 |  |  | $ | 591 |  |  | $ | 63,505 |  |  | $ | 315,097 |
Watch (7) |  | 181 |  |  | 895 |  |  | 842 |  |  | — |  |  | — |  |  | 2,027 |  |  | 279 |  |  | 802 |  |  | 5,026 |
Classified (8-9) |  | 184 |  |  | 1,265 |  |  | 758 |  |  | 13 |  |  | 213 |  |  | 3,445 |  |  | — |  |  | 50 |  |  | 5,928 |
Total residential real estate |  | $ | 26,813 |  |  | $ | 35,245 |  |  | $ | 23,674 |  |  | $ | 19,944 |  |  | $ | 34,640 |  |  | $ | 120,508 |  |  | $ | 870 |  |  | $ | 64,357 |  |  | $ | 326,051 |
Other |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Pass (1-6) |  | $ | 8,758 |  |  | $ | 25,567 |  |  | $ | 20,615 |  |  | $ | 682 |  |  | $ | 3,705 |  |  | $ | 34,455 |  |  | $ | — |  |  | $ | 43,971 |  |  | $ | 137,753 |
Watch (7) |  | — |  |  | 2 |  |  | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | 1 |  |  | 3 |
Classified (8-9) |  | — |  |  | 1 |  |  | 3 |  |  | 4 |  |  | — |  |  | 19 |  |  | 10 |  |  | 7 |  |  | 44 |
Total Other |  | $ | 8,758 |  |  | $ | 25,570 |  |  | $ | 20,618 |  |  | $ | 686 |  |  | $ | 3,705 |  |  | $ | 34,474 |  |  | $ | 10 |  |  | $ | 43,979 |  |  | $ | 137,800 |

In the table above, loan originations in 2020 and 2019 with a classification of watch or classified primarily represent renewals or modifications initially underwritten and originated in prior years.
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For certain loans, primarily credit cards, the Company evaluates credit quality based on the aging status.
The following table presents the recorded investment on loans based on payment activity:

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

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

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

*Excludes $90.3 million of loans accounted for as PCI
NOTE 5 - COMMITMENTS AND CONTINGENCIES
The Company issues financial instruments with off balance sheet risk in the normal course of the business of meeting the financing needs of its customers. These financial instruments include commitments to extend credit and standby letters of credit. These instruments may involve, to varying degrees, elements of credit and interest rate risk in excess of the amounts recognized in the consolidated balance sheets.
The Company’s extent of involvement and maximum potential exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit and standby letters of credit is represented by the contractual amount of these instruments.
The Company uses the same credit policies in making commitments and conditional obligations as it does for financial instruments included on its consolidated balance sheets.
The contractual amounts of off-balance-sheet financial instruments as of June 30, 2020, and December 31, 2019, are as follows:

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

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Off-Balance Sheet Credit Risk
Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments usually have fixed expiration dates or other termination clauses, may have significant usage restrictions, and may require payment of a fee. Of the total commitments to extend credit at June 30, 2020, and December 31, 2019, approximately $161.3 million and $144.8 million, respectively, represent fixed rate loan commitments. Since certain of the commitments may expire without being drawn upon or may be revoked, the total commitment amounts do not necessarily represent future cash requirements. The Company evaluates each customer’s credit worthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Company upon extension of credit, is based on management’s credit evaluation of the borrower. Collateral held varies, but may include accounts receivable, inventory, premises and equipment, and real estate. Other liabilities includes $4.9 million and $0.4 million for estimated losses attributable to the unadvanced commitments at June 30, 2020, and December 31, 2019, respectively.
Standby letters of credit are conditional commitments issued by the Company to guarantee the performance or payment of a customer to a third party. These standby letters of credit are issued to support contractual obligations of the Company’s customers. The credit risk involved in issuing letters of credit is essentially the same as the risk involved in extending loans to customers. As of June 30, 2020, the approximate remaining terms of standby letters of credit range from 1 month to 4 years.
Contingencies
The Company and its subsidiaries are, from time to time, parties to various legal proceedings arising out of their businesses. Management believes there are no such proceedings pending or threatened against the Company or its subsidiaries which, if determined adversely, would have a material adverse effect on the business, consolidated financial condition, results of operations or cash flows of the Company or any of its subsidiaries.
NOTE 6 - DERIVATIVE FINANCIAL INSTRUMENTS
Risk Management Objective of Using Derivatives
The Company is exposed to certain risk arising from both its business operations and economic conditions. The Company principally manages its exposures to a wide variety of business and operational risks through management of its core business activities. The Company manages economic risks, including interest rate, liquidity, and credit risk primarily by managing the amount, sources, and duration of its assets and liabilities and the use of derivative financial instruments. Specifically, the Company enters into derivative financial instruments to manage exposures that arise from business activities that result in the receipt or payment of future known and uncertain cash amounts, the value of which are determined by interest rates. The Company’s derivative financial instruments are used to manage differences in the amount, timing, and duration of the Company’s known or expected cash receipts and its known or expected cash payments principally related to the Company’s borrowings. The Company does not enter into derivative financial instruments for trading purposes.
Cash Flow Hedges of Interest Rate Risk
The Company’s objectives in using interest rate derivatives are to add stability to interest expense and to manage its exposure to interest rate movements. To accomplish this objective, the Company primarily uses interest rate swaps as part of its interest rate risk management strategy. Interest rate swaps designated as cash flow hedges involve the receipt of variable amounts from a counterparty in exchange for the Company making fixed-rate payments over the life of the agreements without exchange of the underlying notional amount. These derivatives were used to hedge the variable cash flows associated with existing variable-rate debt. These cash flow hedges include: (1) swaps of variable three-month LIBOR on $62.0 million of junior subordinated debentures to a weighted-average-fixed rate of 2.62% over approximately six years, (2) a swap of the federal funds effective rate on $100.0 million of rolling FHLB overnight
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advances to a fixed rate of 1.12% for three years, and (3) a swap of three-month LIBOR on $100.0 million of rolling three-month FHLB advances for five years.
For derivatives designated and that qualify as cash flow hedges of interest rate risk, the gain or loss on the derivative is recorded in accumulated other comprehensive income and subsequently reclassified into interest expense in the same period(s) during which the hedged transaction affects earnings. Amounts reported in accumulated other comprehensive income related to derivatives will be reclassified to interest expense as interest payments are paid on the Company’s variable-rate debt. During the next twelve months, the Company estimates that an additional $2.8 million will be reclassified as an increase to interest expense.
Non-designated Hedges
Derivatives not designated as hedges are not considered speculative and result from a service the Company provides to certain customers. The Company executes interest rate swaps with commercial banking customers to facilitate their respective risk management strategies. Those interest rate swaps are simultaneously hedged by offsetting derivatives the Company executes with a third party, such that the Company minimizes its net risk exposure resulting from such transactions. As the interest rate derivatives associated with this program do not meet the strict hedge accounting requirements, changes in the fair value of both the customer derivatives and the offsetting derivatives are recognized directly in earnings as a component of other noninterest income.
The table below presents the fair value of the Company’s derivative financial instruments as well as their classification on the Balance Sheet as of June 30, 2020 and December 31, 2019.

| Derivative Assets |  | Derivative Liabilities
| June 30, 2020 | December 31, 2019 |  | June 30, 2020 | December 31, 2019
(in thousands) | Notional Amount | Balance Sheet Location | Fair Value | Notional Amount | Balance Sheet Location | Fair Value |  | Balance Sheet Location | Fair Value | Balance Sheet Location | Fair Value
Derivatives Designated as Hedging Instruments
Interest rate swap | $ | 261,962 |  | Other Assets | $ | — |  | $ | 61,962 |  | Other Assets | $ | — |  |  | Other Liabilities | $ | 10,840 |  | Other Liabilities | $ | 2,872 |
Total |  |  | $ | — |  |  |  | $ | — |  |  |  | $ | 10,840 |  |  | $ | 2,872 |
Derivatives not Designated as Hedging Instruments
Interest rate swap | $ | 1,021,528 |  | Other Assets | $ | 35,728 |  | $ | 749,819 |  | Other Assets | $ | 11,055 |  |  | Other Liabilities | $ | 35,988 |  | Other Liabilities | $ | 11,875 |
Total |  |  | $ | 35,728 |  |  |  | $ | 11,055 |  |  |  | $ | 35,988 |  |  | $ | 11,875 |

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The table below presents a gross presentation, the effects of offsetting, and a net presentation of the Company’s financial instruments that are subject to offsetting as of June 30, 2020 and December 31, 2019. 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 June 30, 2020
|  |  | Gross Amounts Not Offset in the Statement of Financial Position |  |
(in thousands) | Gross Amounts Recognized |  | Gross Amounts Offset in the Statement of Financial Position |  | Net Amounts of Assets presented in the Statement of Financial Position |  | Financial Instruments |  | Fair Value Collateral Posted |  | Net Amount
Assets: |  |  |  |  |  |  |  |  |  |  |
Interest rate swap | $ | 35,728 |  |  | $ | — |  |  | $ | 35,728 |  |  | $ | 14 |  |  | $ | — |  |  | $ | 35,714 |
Liabilities: |  |  |  |  |  |  |  |  |  |  |
Interest rate swap | $ | 46,828 |  |  | $ | — |  |  | $ | 46,828 |  |  | $ | 14 |  |  | $ | 46,222 |  |  | $ | 592 |
Securities sold under agreements to repurchase | 196,532 |  |  | — |  |  | 196,532 |  |  | — |  |  | 196,532 |  |  | — |
As of December 31, 2019
|  |  | 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 swap | $ | 11,055 |  |  | $ | — |  |  | $ | 11,055 |  |  | $ | 56 |  |  | $ | — |  |  | $ | 10,999 |
Liabilities: |  |  |  |  |  |  |  |  |  |  |
Interest rate swap | $ | 14,747 |  |  | $ | — |  |  | $ | 14,747 |  |  | $ | 56 |  |  | $ | 14,573 |  |  | $ | 118 |
Securities sold under agreements to repurchase | 230,886 |  |  | — |  |  | 230,886 |  |  | — |  |  | 230,886 |  |  | — |

As of June 30, 2020, the fair value of derivatives in a net liability position, which includes accrued interest but excludes any adjustment for nonperformance risk, related to these agreements was $46.8 million. Further, the Company has minimum collateral posting thresholds with certain of its derivative counterparties and has posted collateral of $47.1 million.
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NOTE 7 - FAIR VALUE MEASUREMENTS
The following table summarizes financial instruments measured at fair value on a recurring basis as of June 30, 2020 and December 31, 2019, segregated by the level of the valuation inputs within the fair value hierarchy utilized to measure fair value:

| June 30, 2020
(in thousands) | Quoted Prices in Active Markets for Identical Assets (Level 1) |  | Significant Other Observable Inputs (Level 2) |  | Significant Unobservable Inputs (Level 3) |  | Total Fair Value
Assets |  |  |  |  |  |  |
Securities available for sale |  |  |  |  |  |  |
Obligations of U.S. Government-sponsored enterprises | $ | — |  |  | $ | 10,241 |  |  | $ | — |  |  | $ | 10,241 |
Obligations of states and political subdivisions | — |  |  | 254,278 |  |  | — |  |  | 254,278 |
Agency mortgage-backed securities | — |  |  | 720,991 |  |  | — |  |  | 720,991 |
U.S. Treasury bills | — |  |  | 10,566 |  |  | — |  |  | 10,566 |
Corporate debt securities | — |  |  | 2,028 |  |  | — |  |  | 2,028 |
Total securities available for sale | — |  |  | 998,104 |  |  | — |  |  | 998,104 |
Derivatives | — |  |  | 35,728 |  |  | — |  |  | 35,728 |
Total assets | $ | — |  |  | $ | 1,033,832 |  |  | $ | — |  |  | $ | 1,033,832 |
Liabilities |  |  |  |  |  |  |  |  |  |  |
Derivatives | $ | — |  |  | $ | 46,828 |  |  | $ | — |  |  | $ | 46,828 |
Total liabilities | $ | — |  |  | $ | 46,828 |  |  | $ | — |  |  | $ | 46,828 |

| December 31, 2019
(in thousands) | Quoted Prices in Active Markets for Identical Assets (Level 1) |  | Significant Other Observable Inputs (Level 2) |  | Significant Unobservable Inputs (Level 3) |  | Total Fair Value
Assets |  |  |  |  |  |  |
Securities available for sale |  |  |  |  |  |  |
Obligations of U.S. Government-sponsored enterprises | $ | — |  |  | $ | 10,046 |  |  | $ | — |  |  | $ | 10,046 |
Obligations of states and political subdivisions | — |  |  | 213,024 |  |  | — |  |  | 213,024 |
Residential mortgage-backed securities | — |  |  | 902,021 |  |  | — |  |  | 902,021 |
U.S. Treasury bills | — |  |  | 10,226 |  |  | — |  |  | 10,226 |
Total securities available-for-sale | — |  |  | 1,135,317 |  |  | — |  |  | 1,135,317 |
Derivative financial instruments | — |  |  | 11,055 |  |  | — |  |  | 11,055 |
Total assets | $ | — |  |  | $ | 1,146,372 |  |  | $ | — |  |  | $ | 1,146,372 |
Liabilities |  |  |  |  |  |  |  |  |
Derivatives | $ | — |  |  | $ | 14,747 |  |  | $ | — |  |  | $ | 14,747 |
Total liabilities | $ | — |  |  | $ | 14,747 |  |  | $ | — |  |  | $ | 14,747 |

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

| (1) |  | (1) |  | (1) |  | (1) |  |  |  |
(in thousands) | Total Fair Value |  | Quoted Prices in Active Markets for Identical Assets (Level 1) |  | Significant Other Observable Inputs (Level 2) |  | Significant Unobservable Inputs (Level 3) |  | Total losses for the three months ended June 30, 2020 |  | Total losses for the six months ended June 30, 2020
Impaired loans | $ | 3,627 |  |  | $ | — |  |  | $ | — |  |  | $ | 3,627 |  |  | $ | 3,219 |  |  | $ | 3,230 |
Other real estate | 3,899 |  |  | — |  |  | — |  |  | 3,899 |  |  | 79 |  |  | 777 |
Total | $ | 7,526 |  |  | $ | — |  |  | $ | — |  |  | $ | 7,526 |  |  | $ | 3,298 |  |  | $ | 4,007 |
(1) The amounts represent only balances measured at fair value during the period and still held as of the reporting date.

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

| June 30, 2020 |  | December 31, 2019
(in thousands) | Carrying Amount |  | Estimated fair value |  | Level |  | Carrying Amount |  | Estimated fair value |  | Level
Balance sheet assets |  |  |  |  |  |  |  |  |  |  |
Securities held-to-maturity, net | 345,791 |  |  | 356,139 |  |  | Level 2 |  | 181,166 |  |  | 181,939 |  |  | Level 2
Other investments | 43,106 |  |  | 43,106 |  |  | Level 2 |  | 38,044 |  |  | 38,044 |  |  | Level 2
Loans held for sale | 16,029 |  |  | 16,029 |  |  | Level 2 |  | 5,570 |  |  | 5,570 |  |  | Level 2
Loans, net | 6,029,781 |  |  | 5,876,000 |  |  | Level 3 |  | 5,271,049 |  |  | 5,205,651 |  |  | Level 3
State tax credits, held for sale | 38,820 |  |  | 44,164 |  |  | Level 3 |  | 36,802 |  |  | 39,046 |  |  | Level 3
Balance sheet liabilities |  |  |  |  |  |  |  |  |  |  |
Certificates of deposit | 659,166 |  |  | 665,374 |  |  | Level 3 |  | 826,447 |  |  | 825,203 |  |  | Level 3
Subordinated debentures and notes | 203,384 |  |  | 192,852 |  |  | Level 2 |  | 141,258 |  |  | 130,985 |  |  | Level 2
FHLB advances | 250,000 |  |  | 251,978 |  |  | Level 2 |  | 222,406 |  |  | 221,402 |  |  | Level 2
Other borrowings and notes payable | 227,961 |  |  | 227,961 |  |  | Level 2 |  | 265,172 |  |  | 265,172 |  |  | Level 2

For information regarding the methods and assumptions used to estimate the fair value of each class of financial instruments refer to Note 19 – Fair Value Measurements in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019, as filed with the SEC.

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NOTE 8 - SUBORDINATED DEBENTURES
The amounts and terms of each issuance of the Company’s subordinated debentures at June 30, 2020 and December 31, 2019 were as follows:

| Amount |  | Maturity Date |  | Initial Call Date(1) |  | Interest Rate
(in thousands) | June 30, 2020 |  | December 31, 2019
EFSC Clayco Statutory Trust I | $ | 3,196 |  |  | $ | 3,196 |  |  | December 17, 2033 |  | December 17, 2008 |  | Floats @ 3MO LIBOR + 2.85%
EFSC Capital Trust II | 5,155 |  |  | 5,155 |  |  | June 17, 2034 |  | June 17, 2009 |  | Floats @ 3MO LIBOR + 2.65%
EFSC Statutory Trust III | 11,341 |  |  | 11,341 |  |  | December 15, 2034 |  | December 15, 2009 |  | Floats @ 3MO LIBOR + 1.97%
EFSC Clayco Statutory Trust II | 4,124 |  |  | 4,124 |  |  | September 15, 2035 |  | September 15, 2010 |  | Floats @ 3MO LIBOR + 1.83%
EFSC Statutory Trust IV | 10,310 |  |  | 10,310 |  |  | December 15, 2035 |  | December 15, 2010 |  | Floats @ 3MO LIBOR + 1.44%
EFSC Statutory Trust V | 4,124 |  |  | 4,124 |  |  | September 15, 2036 |  | September 15, 2011 |  | Floats @ 3MO LIBOR + 1.60%
EFSC Capital Trust VI | 14,433 |  |  | 14,433 |  |  | March 30, 2037 |  | March 30, 2012 |  | Floats @ 3MO LIBOR + 1.60%
EFSC Capital Trust VII | 4,124 |  |  | 4,124 |  |  | December 15, 2037 |  | December 15, 2012 |  | Floats @ 3MO LIBOR + 2.25%
JEFFCO Stat Trust I(2) | 7,819 |  |  | 7,886 |  |  | February 22, 2031 |  | February 22, 2011 |  | Fixed @ 10.20%
JEFFCO Stat Trust II(2) | 4,415 |  |  | 4,388 |  |  | March 17, 2034 |  | March 17, 2009 |  | Floats @ 3MO LIBOR + 2.75%
Trinity Capital Trust III(2) | 5,239 |  |  | 5,206 |  |  | September 8, 2034 |  | September 8, 2009 |  | Floats @ 3MO LIBOR + 2.70%
Trinity Capital Trust IV(2) | 10,310 |  |  | 10,302 |  |  | November 23, 2035 |  | August 23, 2010 |  | Fixed @ 6.88%
Trinity Capital Trust V(2) | 7,625 |  |  | 7,543 |  |  | December 15, 2036 |  | September 15, 2011 |  | Floats @ 3MO LIBOR + 1.65%
Total junior subordinated debentures | 92,215 |  |  | 92,132 |  |  |  |  |  |  |
5.75% Fixed-to-floating rate subordinated notes | 63,250 |  |  | — |  |  | June 1, 2030 |  | June 1, 2025 |  | Fixed @ 5.75% until June 1, 2025, then floats @ Benchmark rate (3 month term SOFR) + 5.66%
4.75% Fixed-to-floating rate subordinated notes | 50,000 |  |  | 50,000 |  |  | November 1, 2026 |  | November 1, 2021 |  | Fixed @ 4.75% until November 1, 2021, then floats @ 3MO LIBOR + 3.387%
Debt issuance costs | (2,081 | ) |  | (874 | ) |  |  |  |  |  |
Total fixed-to-floating rate subordinated notes | 111,169 |  |  | 49,126 |  |  |  |  |  |  |
Total subordinated debentures and notes | $ | 203,384 |  |  | $ | 141,258 |  |  |  |  |  |  |
(1) Callable each quarter after initial call date.
(2) Purchase accounting adjustments are reflected in the balance and also impact the effective interest rate.

On May 21, 2020, the Company issued $63.3 million of 5.75% fixed-to-floating rate subordinated notes due in 2030 in a public offering (the “2030 Notes”). From and including the date of issuance to, but excluding June 1, 2025, the 2030 Notes will bear interest at a rate equal to 5.75% per annum, payable semiannually in arrears on each June 1 and December 1. From and including June 1, 2025 to, but excluding the maturity date or the date of earlier redemption, the 2030 Notes will bear interest at a floating rate per annum equal to a benchmark rate (which is expected to be three-month term SOFR (as defined in the Indenture, dated May 21, 2020, between the Company 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.
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Notwithstanding the foregoing, in the event that the benchmark rate is less than zero, then the benchmark rate shall be deemed to be zero.
NOTE 9 - ACCUMULATED OTHER COMPREHENSIVE INCOME
The following table presents the changes in accumulated other comprehensive income after-tax by component:

(in thousands) | Net Unrealized Gain (Loss) on Available-for-Sale Debt Securities |  | Unamortized Gain (Loss) on Held-to-Maturity Securities |  | Net Unrealized Loss on Cash Flow Hedges |  | Total
Balance, March 31, 2020 | $ | 25,538 |  |  | $ | 4,778 |  |  | $ | (7,219 | ) |  | $ | 23,097 |
Net change | 10,984 |  |  | (329 | ) |  | (943 | ) |  | 9,712 |
Transfer from available-for-sale to held-to-maturity | $ | (8,650 | ) |  | $ | 8,650 |  |  | $ | — |  |  | $ | — |
Balance, June 30, 2020 | $ | 27,872 |  |  | $ | 13,099 |  |  | $ | (8,162 | ) |  | $ | 32,809 |
Balance, December 31, 2019 | $ | 14,977 |  |  | $ | 4,934 |  |  | $ | (2,162 | ) |  | $ | 17,749 |
Net change | 21,545 |  |  | (485 | ) |  | (6,000 | ) |  | 15,060 |
Transfer from available-for-sale to held-to-maturity | $ | (8,650 | ) |  | $ | 8,650 |  |  | $ | — |  |  | $ | — |
Balance, June 30, 2020 | $ | 27,872 |  |  | $ | 13,099 |  |  | $ | (8,162 | ) |  | $ | 32,809 |
(in thousands) | Net Unrealized Gain (Loss) on Available-for-Sale Debt Securities |  | Unamortized Gain (Loss) on Held-to-Maturity Securities |  | Net Unrealized Loss on Cash Flow Hedges |  | Total
Balance, March 31, 2019 | $ | 2,675 |  |  | $ | (233 | ) |  | $ | (952 | ) |  | $ | 1,490 |
Net change | 12,842 |  |  | 3 |  |  | (1,261 | ) |  | 11,584 |
Balance, June 30, 2019 | $ | 15,517 |  |  | $ | (230 | ) |  | $ | (2,213 | ) |  | $ | 13,074 |
Balance, December 31, 2018 | $ | (9,047 | ) |  | $ | (235 | ) |  | $ | — |  |  | $ | (9,282 | )
Net change | 24,564 |  |  | 5 |  |  | (2,213 | ) |  | 22,356 |
Balance, June 30, 2019 | $ | 15,517 |  |  | $ | (230 | ) |  | $ | (2,213 | ) |  | $ | 13,074 |

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

| Three months ended June 30,
(in thousands) | 2020 |  | 2019
| Pre-tax |  | Tax effect |  | After-tax |  | Pre-tax |  | Tax effect |  | After-tax
Change in unrealized gain on available-for-sale debt securities | $ | 14,587 |  |  | $ | 3,603 |  |  | $ | 10,984 |  |  | $ | 17,054 |  |  | $ | 4,212 |  |  | $ | 12,842 |
Reclassification of (gain) loss on held-to-maturity securities(b) | (437 | ) |  | (108 | ) |  | (329 | ) |  | 4 |  |  | 1 |  |  | 3 |
Change in unrealized loss on cash flow hedges arising during the period | (1,563 | ) |  | (386 | ) |  | (1,177 | ) |  | (1,679 | ) |  | (414 | ) |  | (1,265 | )
Reclassification of loss on cash flow hedges(b) | 311 |  |  | 77 |  |  | 234 |  |  | 5 |  |  | 1 |  |  | 4 |
Total other comprehensive income | $ | 12,898 |  |  | $ | 3,186 |  |  | $ | 9,712 |  |  | $ | 15,384 |  |  | $ | 3,800 |  |  | $ | 11,584 |
| Six months ended June 30,
| 2020 |  | 2019
| Pre-tax |  | Tax effect |  | After-tax |  | Pre-tax |  | Tax effect |  | After-tax
Change in unrealized gain on available-for-sale debt securities | $ | 28,616 |  |  | $ | 7,068 |  |  | $ | 21,548 |  |  | $ | 32,329 |  |  | $ | 7,985 |  |  | $ | 24,344 |
Reclassification adjustment for realized (gain) loss on sale of available-for-sale debt securities(a) | (4 | ) |  | (1 | ) |  | (3 | ) |  | 292 |  |  | 72 |  |  | 220 |
Reclassification of (gain) loss on held-to-maturity securities(b) | (644 | ) |  | (159 | ) |  | (485 | ) |  | 7 |  |  | 2 |  |  | 5 |
Change in unrealized loss on cash flow hedges arising during the period | (8,442 | ) |  | (2,085 | ) |  | (6,357 | ) |  | (2,944 | ) |  | (727 | ) |  | (2,217 | )
Reclassification of loss on cash flow hedges(b) | 474 |  |  | 117 |  |  | 357 |  |  | 5 |  |  | 1 |  |  | 4 |
Total other comprehensive income | $ | 20,000 |  |  | $ | 4,940 |  |  | $ | 15,060 |  |  | $ | 29,689 |  |  | $ | 7,333 |  |  | $ | 22,356 |

(a)The pre-tax amount is reported in noninterest income/expense in the Consolidated Statements of Operations
(b)The pre-tax amount is reported in interest income/expense in the Consolidated Statements of Operations
ITEM 2: MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Forward Looking Statements
This Quarterly Report on Form 10-Q contains information and statements that are considered “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Forward-looking statements include, but are not limited to, statements about the Company’s plans, objectives, expectations, or consequences of statements about the future performance, operations, products and services of the Company and its subsidiaries. Forward-looking statements are typically
identified with the use of terms such as “may,” “might,” “will,” “would,” “should,” “expect,” “plan,” “anticipate,” “believe,” “estimate,” “predict,” “potential,” “could,” “continue,” “intend,” and the negative and other variations of these terms and similar words and expressions, although some forward-looking statements may be expressed differently. Forward-looking statements are inherently subject to risks and uncertainties and our ability to predict results or the actual effect of future plans or strategies is inherently uncertain. You should be aware that our actual results could differ materially from those contained in the forward-looking statements. The COVID-19 pandemic is adversely affecting us, our customers, counterparties, employees, and third-party service providers, and the ultimate extent of the impacts on our business, financial position, results of operations, liquidity, and prospects is uncertain. Continued deterioration in general business and economic conditions, including further increases in unemployment rates, or turbulence in domestic or global financial markets could adversely affect our revenues and the values of our assets and liabilities, reduce the availability of funding, lead to a tightening of credit, and further increase stock price
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volatility. In addition, changes to statutes, regulations, or regulatory policies or practices as a result of, or in response to COVID-19, could affect us in substantial and unpredictable ways. Other factors that could cause or contribute to such differences include, but are not limited to: our ability to efficiently integrate acquisitions into our operations, retain the customers of these businesses and grow the acquired operations; credit risk; changes in the appraised valuation of real estate securing impaired loans; our ability to recover our investment in loans; fluctuations in the fair value of collateral underlying loans; outcomes of litigation and other contingencies; exposure to general and local economic conditions; risks associated with rapid increases or decreases in prevailing interest rates; changes in business prospects that could impact goodwill estimates and assumptions; consolidation within the banking industry; competition from banks and other financial institutions; our ability to attract and retain relationship officers and other key personnel; burdens imposed by federal and state regulation; changes in regulatory requirements; changes in accounting policies and practices or accounting standards, including ASU 2016-13 (Topic 326), “Measurement of Credit Losses on Financial Instruments,” commonly referenced as CECL model, which has changed how we estimate credit losses; uncertainty regarding the future of LIBOR; natural disasters, war or terrorist activities, or pandemics, or the outbreak of COVID-19 or similar outbreaks, and their effects on economic and business environments in which we operate; increased unemployment rates and defaults as a result of the economic disruptions caused by COVID-19; the impact of governmental orders issued in response to COVID-19; and other risks discussed under the caption “Risk Factors” under Part 1, Item 1A of our 2019 Annual Report on Form 10-K and Item 1A of Part II of our Quarterly Report on Form 10-Q for the quarter ended March 31, 2020, and other reports filed with the SEC, all of which could cause the Company’s actual results to differ from those set forth in the forward-looking statements.
Readers are cautioned not to place undue reliance on our forward-looking statements, which reflect management’s analysis and expectations only as of the date of such statements. Forward-looking statements speak only as of the date they are made, and the Company does not intend, and undertakes no obligation, to publicly revise or update forward-looking statements after the date of this report, whether as a result of new information, future events or otherwise, except as required by federal securities law. You should understand that it is not possible to predict or identify all risk factors. Readers should carefully review all disclosures we file from time to time with the SEC which are available on our website at www.enterprisebank.com under “Investor Relations.”
Introduction
The following discussion describes the significant changes to the financial condition of the Company that have occurred during the first six months of 2020 compared to the financial condition as of December 31, 2019. In addition, this discussion summarizes the significant factors affecting the results of operations, liquidity and cash flows of the Company for the three and six months ended June 30, 2020, compared to the same periods in 2019. This discussion should be read in conjunction with the accompanying condensed consolidated financial statements included in this report and our Annual Report on Form 10-K for the year ended December 31, 2019.
COVID-19 Pandemic
On January 31, 2020, the Secretary of Health and Human Services declared a public health emergency due to the global outbreak of a new strain of coronavirus (COVID-19). On March 13, 2020, the President of the United States proclaimed the COVID-19 as a national emergency, following the World Health Organization’s categorization of the outbreak as a pandemic. COVID-19 continues to aggressively spread globally, including throughout the United States. The pandemic and resulting travel bans, closure of non-essential businesses, social distancing measures and government responses across the country have had a profound impact on the global economy, financial markets and how business has been conducted across all industries and have affected many of the Company’s customers and clients. To the extent the economic impacts of the pandemic continue for a prolonged period and conditions stagnate or worsen, our provision for credit losses, noninterest income, and profitability may be adversely affected.
The Company has taken proactive and disciplined steps to promote the safety and overall wellbeing of its employees, customers and stakeholders, as well as to manage its financial performance. Steps taken include activation of the Company’s business continuity plan, formation of a communication and action task force, cost containment measures,
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restrictions on business travel, conversion of in-person meetings to virtual and a work-from-home mandate. The Company has also worked with its customers to implement appropriate loan deferral strategies in certain circumstances.
On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security (“CARES”) Act was signed into law. The CARES Act contains provisions to assist individuals and businesses, including the SBA’s Paycheck Protection Program (“PPP”). The PPP provided $349 billion in guaranteed loans that are forgivable if certain requirements are met. On April 24, 2020, an additional $310 billion was added to the PPP program. The CARES Act included a provision that allowed depository institutions the option to defer adoption of the CECL standard to the earlier of (1) the end of the COVID-19 national emergency or (2) December 31, 2020. The Company did not elect the deferral option.
On April 7, 2020, the U.S. banking agencies issued an Interagency Statement on Loan Modifications and Reporting for Financial Institutions Working with Customers Affected by the Coronavirus (Revised). The statement describes accounting for COVID-19-related loan modifications, including clarifying the interaction between current accounting rules and the temporary relief provided by the CARES Act. The statement also encourages institutions to work constructively with borrowers affected by COVID-19 and states the agencies will not criticize supervised institutions for prudent loan modifications. Both the CARES Act and the interagency statement provide relief from the accounting and reporting implications of troubled debt restructurings. The Company has implemented short-term deferral programs allowing customers to primarily defer payments for up to 90 days. As of June 30, 2020, $685.7 million in loans have participated in the programs.
Critical Accounting Policies
The following accounting policies are considered most critical to the understanding of the Company’s financial condition and results of operations. These critical accounting policies require management’s most difficult, subjective and complex judgments about matters that are inherently uncertain. Because these estimates and judgments are based on current circumstances, they may change over time or prove to be inaccurate based on actual experience. If different assumptions or conditions were to prevail, and depending upon the severity of such changes, the possibility of a materially different financial condition and/or results of operations could reasonably be expected. The impact and any associated risks related to our critical accounting policies on our business operations are discussed throughout “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” where such policies affect our reported and expected financial results. For a detailed discussion on the application of these and other accounting policies, see the Company’s Annual Report on Form 10-K for the year ended December 31, 2019.
The Company has prepared the consolidated financial information in this report in accordance with GAAP. The Company makes estimates and assumptions that affect the reported amount of assets and liabilities, disclosure of contingent assets and liabilities at the date of the consolidated financial statements, and the reported amounts of revenue and expenses during the reporting period. Such estimates include the valuation of loans, goodwill, intangible assets, and other long-lived assets, along with assumptions used in the calculation of income taxes, among others. These estimates and assumptions are based on management’s best estimates and judgment. Management evaluates its estimates and assumptions on an ongoing basis using loss experience and other factors, including the current economic environment, which management believes to be reasonable under the circumstances. We adjust such estimates and assumptions when facts and circumstances dictate. The three and six months ended June 30, 2020 were characterized by heightened uncertainty due to the COVID-19 pandemic which could impact estimates and assumptions made by management. As future events and their effects cannot be determined with precision, actual results could differ significantly from these estimates. Changes in estimates resulting from continuing changes in the economic environment will be reflected in the financial statement in future periods. There can be no assurances that actual results will not differ from those estimates.
Allowance for Credit Losses
On January 1, 2020, the Company adopted Accounting Standard Update 2016-13 “Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments.” This standard, referred to as CECL, requires an estimate of lifetime expected credit losses on certain financial assets measured at amortized cost.
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The Company maintains separate allowances for funded loans, unfunded loans, and held-to-maturity securities, collectively the ACL. The ACL is a valuation account to adjust the cost basis to the amount expected to be collected, based on management’s estimate of experience, current conditions, and reasonable and supportable forecasts. For purposes of determining the allowance for funded and unfunded loans, the portfolios are segregated into pools that share similar risk characteristics that are then further segregated by credit grades. Loans that do not share similar risk characteristics are evaluated on an individual basis and are not included in the collective evaluation. The Company estimates the amount of the allowance based on loan loss experience, adjusted for current and forecasted economic conditions, including unemployment, changes in GDP, and commercial and residential real estate prices. The Company’s forecast of economic conditions uses internal and external information and considers a weighted average of a baseline, upside, and downside scenarios. Because economic conditions can change and are difficult to predict, the anticipated amount of estimated loan defaults and losses, and therefore the adequacy of the allowance, could change significantly and have a direct impact on the Company’s credit costs.
Goodwill and Other Intangible Assets
The Company completes a goodwill impairment test in the fourth quarter each year or whenever events or changes in circumstances indicate the Company may not be able to recover the goodwill, or intangible assets, respective carrying amount. The impairment test involves the use of various estimates and assumptions. Management believes the estimates and assumptions utilized are reasonable.
Goodwill is evaluated for impairment at the reporting unit level. Reporting units are defined as the same level as, or one level below, an operating segment. An operating segment is a component of a business for which separate financial information is available that management regularly evaluates in deciding how to allocate resources and assess performance. The Company has one reporting unit and one operating segment.
Potential impairments to goodwill must first be identified by performing a qualitative assessment that evaluates relevant events or circumstances to determine whether it is more likely than not the fair value of a reporting unit is less than its carrying amount. If this test indicates it is more likely than not that goodwill has been impaired, then a quantitative impairment test is completed. The quantitative impairment test calculates the fair value of the reporting unit and compares it with its carrying amount, including goodwill. If the carrying amount of goodwill exceeds its implied fair market value, an impairment loss is recognized. That loss is equal to the carrying amount of goodwill that is in excess of its implied fair market value.
Intangible assets other than goodwill, such as core deposit intangibles, determined to have finite lives are amortized over their estimated remaining useful lives. These assets are reviewed for impairment whenever events or changes in circumstances indicate the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to estimated undiscounted future cash flows expected to be generated by the asset. If the carrying amount of an asset exceeds its estimated future cash flows, an impairment charge is recognized by the amount by which the carrying amount of the asset exceeds the fair value of the asset.
As of June 30, 2020, an assessment of goodwill and intangibles was performed due to a decrease in the Company’s market capitalization below book value. The impairment evaluation of goodwill and intangible balances did not identify any impairment in the second quarter 2020, though there can be no assurance that prolonged market volatility resulting from the COVID-19 pandemic will not result in impairments to goodwill or other intangibles in future periods.
Executive Summary
The Company closed its acquisition of Trinity on March 8, 2019. The results of operations of Trinity are included in our results from this date forward, which may affect certain comparisons to the six months ended June 30, 2019.
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Below are highlights of our financial performance for the three and six months ended June 30, 2020 and 2019.

(in thousands, except per share data) | At or for the three months ended |  | At or for the six months ended
June 30, 2020 |  | June 30, 2019 |  | June 30, 2020 |  | June 30, 2019
EARNINGS |  |  |  |  |  |  |
Total interest income | $ | 73,191 |  |  | $ | 79,201 |  |  | $ | 149,879 |  |  | $ | 146,818 |
Total interest expense | 7,358 |  |  | 17,486 |  |  | 20,678 |  |  | 32,760 |
Net interest income | 65,833 |  |  | 61,715 |  |  | 129,201 |  |  | 114,058 |
Provision for credit losses | 19,591 |  |  | 1,722 |  |  | 41,855 |  |  | 3,198 |
Net interest income after provision for credit losses | 46,242 |  |  | 59,993 |  |  | 87,346 |  |  | 110,860 |
Total noninterest income | 9,960 |  |  | 11,964 |  |  | 23,368 |  |  | 21,194 |
Total noninterest expense | 37,912 |  |  | 49,054 |  |  | 76,585 |  |  | 88,892 |
Income before income tax expense | 18,290 |  |  | 22,903 |  |  | 34,129 |  |  | 43,162 |
Income tax expense | 3,656 |  |  | 4,479 |  |  | 6,627 |  |  | 8,582 |
Net income | $ | 14,634 |  |  | $ | 18,424 |  |  | $ | 27,502 |  |  | $ | 34,580 |
Basic earnings per share | $ | 0.56 |  |  | $ | 0.69 |  |  | $ | 1.04 |  |  | $ | 1.36 |
Diluted earnings per share | $ | 0.56 |  |  | $ | 0.68 |  |  | $ | 1.04 |  |  | $ | 1.36 |
Return on average assets | 0.72 | % |  | 1.05 | % |  | 0.71 | % |  | 1.07 | %
Return on average common equity | 6.78 | % |  | 9.09 | % |  | 6.38 | % |  | 9.45 | %
Return on average tangible common equity 1 | 9.28 | % |  | 12.92 | % |  | 8.76 | % |  | 12.93 | %
Net interest margin (tax equivalent) | 3.53 | % |  | 3.86 | % |  | 3.65 | % |  | 3.87 | %
Core net interest margin 1 | 3.50 | % |  | 3.80 | % |  | 3.60 | % |  | 3.80 | %
Efficiency ratio | 50.02 | % |  | 66.58 | % |  | 50.20 | % |  | 65.72 | %
Core efficiency ratio 1 | 50.66 | % |  | 53.30 | % |  | 50.94 | % |  | 53.65 | %
Book value per common share | $ | 33.13 |  |  | $ | 30.68 |  |  |  |  |
Tangible book value per common share 1 | $ | 24.22 |  |  | $ | 21.74 |  |  |  |  |
ASSET QUALITY |  |  |  |  |  |  |
Net charge-offs | $ | 309 |  |  | $ | 970 |  |  | $ | 1,491 |  |  | $ | 2,796 |
Nonperforming loans | 41,473 |  |  | 19,842 |  |  |  |  |
Classified assets | 96,678 |  |  | 91,715 |  |  |  |  |
Nonperforming loans to total loans | 0.68 | % |  | 0.39 | % |  |  |  |
Nonperforming assets to total assets | 0.55 | % |  | 0.42 | % |  |  |  |
ACLL to total loans | 1.80 | % |  | 0.85 | % |  |  |  |
Net charge-offs to average loans (annualized) | 0.02 | % |  | 0.08 | % |  | 0.05 | % |  | 0.12 | %
(1) A non-GAAP measure. A reconciliation has been included in this section under the caption “Use of Non-GAAP Financial Measures.”

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

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

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

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

• | For the three and six months ended June 30, 2020, the Company had net income of $14.6 million and $27.5 million, respectively, compared to $18.4 million and $34.6 million, respectively, for the prior year periods. Earnings per diluted share for the three and six months ended June 30, 2020, was $0.56 and $1.04 per diluted share, respectively, and $0.68 and $1.36 per diluted share, for the same periods in 2019. Net income and earnings per share for the three and six months ended June 30, 2020 were impacted from $19.6 million and $41.9 million, respectively, on a pretax basis ($14.8 million and $31.5 million, respectively, after tax), of provision for credit losses. The increase in the provision for credit losses for the three and six months ending June 30, 2020 was primarily due to deterioration in the economic forecast. Net income and earnings per share for the three and six months ended June 30, 2019 were impacted from $10.3 million and $17.6 million, respectively, on a pretax basis ($8.0 million and $13.7 million, respectively, after tax), of merger-related expenses.

• | Net interest income for the three and six months ended June 30, 2020 increased 7% and 13%, respectively, over the prior year periods primarily from higher loan and investment volumes, both of which benefited from the Trinity acquisition and growth in the loan portfolio. The three-month period also benefited from higher loan volume due to PPP loans. The benefit to net interest income from higher earning-asset volumes and a decrease in funding costs was partially offset by the decrease in LIBOR in both the three and six months ended June 30, 2020.

The tax-equivalent net interest margin was 3.53% and 3.65% for the three and six months ended June 30, 2020, respectively, compared to 3.86% and 3.87% in the prior year periods, respectively. The net interest margin was impacted by the decline in short-term rates as approximately 60% of the Company’s loan portfolio (excluding PPP) has variable rates, with most indexed to one-month LIBOR that has declined significantly over the past year. An increase in the investment portfolio and in PPP loans in the second quarter 2020 contributed to growth in net interest income; however, the lower yields on these products compared to the loan portfolio yield excluding PPP reduced the net interest margin. The Company responded to interest rate trends by reducing the cost of certain managed money market and interest-bearing transaction accounts. Net interest income and margin both benefited from an 84-basis point decrease in the rate paid on interest-bearing deposits in the second quarter 2020 compared to the second quarter 2019. The rate on interest-bearing deposits for the six months ended June 30, 2020 declined 64 basis points compared to the prior-year period.
31

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

• | Noninterest expense for the three and six months ended June 30, 2020 decreased $11.1 million and $12.3 million, respectively, compared to the prior year periods. The decrease is primarily due to a reduction in merger-related expenses.

Balance sheet highlights:
Loans – Total loans grew $825.7 million from December 31, 2019, or 15.1%, to $6.1 billion as of June 30, 2020. Growth in the loan portfolio was primarily driven by PPP loans.

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

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

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

• | Shareholders’ equity – Total shareholders’ equity was $868.0 million and the tangible common equity to tangible assets ratio 1 was 7.81% at June 30, 2020 compared to 8.89% at December 31, 2019. Balance sheet growth from the PPP was the primary cause of the decline in the tangible common equity to tangible assets ratio. Bank regulatory capital ratios remain “well-capitalized,” with a common equity tier 1 ratio of 11.75% and a total risk-based capital ratio of 13.00%.

1 A non-GAAP measure. A reconciliation has been included in this section under the caption “Use of Non-GAAP Financial Measures.”
32

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

| Three months ended June 30,
| 2020 |  | 2019
(in thousands) | Average Balance |  | Interest Income/Expense |  | Average Yield/ Rate |  | Average Balance |  | Interest Income/Expense |  | Average Yield/ Rate
Assets |  |  |  |  |  |  |  |  |  |  |
Interest-earning assets: |  |  |  |  |  |  |  |  |  |  |
Taxable portfolio loans (1) | $ | 5,982,117 |  |  | $ | 63,250 |  |  | 4.25 | % |  | $ | 5,056,172 |  |  | $ | 68,093 |  |  | 5.40 | %
Tax-exempt portfolio loans (2) | 36,864 |  |  | 447 |  |  | 4.88 |  |  | 26,821 |  |  | 453 |  |  | 6.77 |
Non-core acquired loans - contractual | 13,095 |  |  | 172 |  |  | 5.28 |  |  | 12,188 |  |  | 284 |  |  | 9.35 |
Non-core acquired loans - incremental accretion |  |  | 719 |  |  | 22.08 |  |  |  |  | 910 |  |  | 29.95 |
Total loans | 6,032,076 |  |  | 64,588 |  |  | 4.31 |  |  | 5,095,181 |  |  | 69,740 |  |  | 5.49 |
Taxable debt and equity investments | 1,076,158 |  |  | 6,814 |  |  | 2.55 |  |  | 1,120,526 |  |  | 8,009 |  |  | 2.87 |
Non-taxable debt and equity investments (2) | 285,695 |  |  | 2,406 |  |  | 3.39 |  |  | 126,003 |  |  | 1,143 |  |  | 3.64 |
Short-term investments | 177,267 |  |  | 87 |  |  | 0.20 |  |  | 111,291 |  |  | 703 |  |  | 2.53 |
Total securities and short-term investments | 1,539,120 |  |  | 9,307 |  |  | 2.43 |  |  | 1,357,820 |  |  | 9,855 |  |  | 2.91 |
Total interest-earning assets | 7,571,196 |  |  | 73,895 |  |  | 3.93 |  |  | 6,453,001 |  |  | 79,595 |  |  | 4.95 |
Noninterest-earning assets | 587,008 |  |  |  |  |  |  | 604,604 |  |  |  |  |
Total assets | $ | 8,158,204 |  |  |  |  |  |  | $ | 7,057,605 |  |  |  |  |
Liabilities and Shareholders' Equity |  |  |  |  |  |  |  |  |  |  |
Interest-bearing liabilities: |  |  |  |  |  |  |  |  |  |  |
Interest-bearing transaction accounts | $ | 1,487,467 |  |  | $ | 244 |  |  | 0.07 | % |  | $ | 1,384,090 |  |  | $ | 2,134 |  |  | 0.62 | %
Money market accounts | 1,941,874 |  |  | 995 |  |  | 0.21 |  |  | 1,576,333 |  |  | 6,996 |  |  | 1.78 |
Savings | 590,104 |  |  | 45 |  |  | 0.03 |  |  | 562,503 |  |  | 231 |  |  | 0.16 |
Certificates of deposit | 718,529 |  |  | 3,099 |  |  | 1.73 |  |  | 815,138 |  |  | 3,758 |  |  | 1.85 |
Total interest-bearing deposits | 4,737,974 |  |  | 4,383 |  |  | 0.37 |  |  | 4,338,064 |  |  | 13,119 |  |  | 1.21 |
Subordinated debentures | 169,311 |  |  | 2,316 |  |  | 5.50 |  |  | 141,059 |  |  | 1,958 |  |  | 5.57 |
FHLB advances | 251,231 |  |  | 455 |  |  | 0.73 |  |  | 263,384 |  |  | 1,696 |  |  | 2.58 |
Securities sold under agreements to repurchase | 192,117 |  |  | 57 |  |  | 0.12 |  |  | 164,037 |  |  | 338 |  |  | 0.83 |
Other borrowed funds | 32,842 |  |  | 147 |  |  | 1.80 |  |  | 40,338 |  |  | 375 |  |  | 3.73 |
Total interest-bearing liabilities | 5,383,475 |  |  | 7,358 |  |  | 0.55 |  |  | 4,946,882 |  |  | 17,486 |  |  | 1.42 |
Noninterest bearing liabilities: |  |  |  |  |  |  |  |  |  |  |
Demand deposits | 1,813,760 |  |  |  |  |  |  | 1,244,008 |  |  |  |  |
Other liabilities | 92,806 |  |  |  |  |  |  | 53,609 |  |  |  |  |
Total liabilities | 7,290,041 |  |  |  |  |  |  | 6,244,499 |  |  |  |  |
Shareholders' equity | 868,163 |  |  |  |  |  |  | 813,106 |  |  |  |  |
Total liabilities & shareholders' equity | $ | 8,158,204 |  |  |  |  |  |  | $ | 7,057,605 |  |  |  |  |
Net interest income |  |  | $ | 66,537 |  |  |  |  |  |  | $ | 62,109 |  |  |
Net interest spread |  |  |  |  | 3.38 | % |  |  |  |  |  | 3.53 | %
Net interest margin |  |  |  |  | 3.53 | % |  |  |  |  |  | 3.86 | %
Core net interest margin (3) |  |  |  |  | 3.50 | % |  |  |  |  |  | 3.80 | %

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

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

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

33

| Six months ended June 30,
| 2020 |  | 2019
(in thousands) | Average Balance |  | Interest Income/Expense |  | Average Yield/ Rate |  | Average Balance |  | Interest Income/Expense |  | Average Yield/ Rate
Assets |  |  |  |  |  |  |  |  |  |  |
Interest-earning assets: |  |  |  |  |  |  |  |  |  |  |
Taxable portfolio loans (1) | $ | 5,640,977 |  |  | $ | 128,569 |  |  | 4.58 | % |  | $ | 4,763,916 |  |  | $ | 127,320 |  |  | 5.39 | %
Tax-exempt portfolio loans (2) | 37,019 |  |  | 938 |  |  | 5.10 |  |  | 27,418 |  |  | 878 |  |  | 6.46 |
Non-core acquired loans - contractual | 14,163 |  |  | 379 |  |  | 5.38 |  |  | 13,564 |  |  | 605 |  |  | 8.99 |
Non-core acquired loans - incremental accretion |  |  | 1,992 |  |  | 28.29 |  |  |  |  | 2,067 |  |  | 30.74 |
Total loans | 5,692,159 |  |  | 131,878 |  |  | 4.66 |  |  | 4,804,898 |  |  | 130,870 |  |  | 5.49 |
Taxable debt and equity investments | 1,096,703 |  |  | 14,544 |  |  | 2.67 |  |  | 976,875 |  |  | 13,707 |  |  | 2.83 |
Non-taxable debt and equity investments (2) | 257,707 |  |  | 4,384 |  |  | 3.42 |  |  | 95,823 |  |  | 1,737 |  |  | 3.66 |
Short-term investments | 134,758 |  |  | 387 |  |  | 0.58 |  |  | 106,752 |  |  | 1,150 |  |  | 2.17 |
Total securities and short-term investments | 1,489,168 |  |  | 19,315 |  |  | 2.61 |  |  | 1,179,450 |  |  | 16,594 |  |  | 2.84 |
Total interest-earning assets | 7,181,327 |  |  | 151,193 |  |  | 4.23 |  |  | 5,984,348 |  |  | 147,464 |  |  | 4.97 |
Noninterest-earning assets | 579,577 |  |  |  |  |  |  | 525,540 |  |  |  |  |
Total assets | $ | 7,760,904 |  |  |  |  |  |  | $ | 6,509,888 |  |  |  |  |
Liabilities and Shareholders' Equity |  |  |  |  |  |  |  |  |  |  |
Interest-bearing liabilities: |  |  |  |  |  |  |  |  |  |  |
Interest-bearing transaction accounts | $ | 1,431,311 |  |  | $ | 1,581 |  |  | 0.22 | % |  | $ | 1,231,537 |  |  | $ | 3,924 |  |  | 0.64 | %
Money market accounts | 1,876,482 |  |  | 5,735 |  |  | 0.61 |  |  | 1,549,255 |  |  | 13,511 |  |  | 1.76 |
Savings | 566,549 |  |  | 188 |  |  | 0.07 |  |  | 431,843 |  |  | 414 |  |  | 0.19 |
Certificates of deposit | 755,871 |  |  | 6,767 |  |  | 1.80 |  |  | 763,988 |  |  | 7,090 |  |  | 1.87 |
Total interest-bearing deposits | 4,630,213 |  |  | 14,271 |  |  | 0.62 |  |  | 3,976,623 |  |  | 24,939 |  |  | 1.26 |
Subordinated debentures | 155,303 |  |  | 4,235 |  |  | 5.48 |  |  | 132,653 |  |  | 3,606 |  |  | 5.48 |
FHLB advances | 235,842 |  |  | 1,350 |  |  | 1.15 |  |  | 239,535 |  |  | 3,094 |  |  | 2.60 |
Securities sold under agreements to repurchase | 197,002 |  |  | 419 |  |  | 0.43 |  |  | 175,603 |  |  | 611 |  |  | 0.70 |
Other borrowed funds | 33,556 |  |  | 403 |  |  | 2.42 |  |  | 27,689 |  |  | 510 |  |  | 3.71 |
Total interest-bearing liabilities | 5,251,916 |  |  | 20,678 |  |  | 0.79 |  |  | 4,552,103 |  |  | 32,760 |  |  | 1.45 |
Noninterest bearing liabilities: |  |  |  |  |  |  |  |  |  |  |
Demand deposits | 1,564,513 |  |  |  |  |  |  | 1,166,595 |  |  |  |  |
Other liabilities | 77,876 |  |  |  |  |  |  | 52,994 |  |  |  |  |
Total liabilities | 6,894,305 |  |  |  |  |  |  | 5,771,692 |  |  |  |  |
Shareholders' equity | 866,599 |  |  |  |  |  |  | 738,196 |  |  |  |  |
Total liabilities & shareholders' equity | $ | 7,760,904 |  |  |  |  |  |  | $ | 6,509,888 |  |  |  |  |
Net interest income |  |  | $ | 130,515 |  |  |  |  |  |  | $ | 114,704 |  |  |
Net interest spread |  |  |  |  | 3.44 | % |  |  |  |  |  | 3.52 | %
Net interest margin |  |  |  |  | 3.65 | % |  |  |  |  |  | 3.87 | %
Core net interest margin (3) |  |  |  |  | 3.60 | % |  |  |  |  |  | 3.80 | %

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

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

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

34

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

| 2020 compared to 2019
| Three months ended June 30, |  | Six months ended June 30,
| Increase (decrease) due to |  | Increase (decrease) due to
(in thousands) | Volume(1) |  | Rate(2) |  | Net |  | Volume(1) |  | Rate(2) |  | Net
Interest earned on: |  |  |  |  |  |  |  |  |  |  |
Taxable loans | $ | 11,129 |  |  | $ | (15,972 | ) |  | $ | (4,843 | ) |  | $ | 21,761 |  |  | $ | (20,512 | ) |  | $ | 1,249 |
Tax-exempt loans (3) | 141 |  |  | (147 | ) |  | (6 | ) |  | 269 |  |  | (209 | ) |  | 60 |
Non-core acquired loans | 83 |  |  | (386 | ) |  | (303 | ) |  | 116 |  |  | (417 | ) |  | (301 | )
Taxable debt and equity investments | (313 | ) |  | (882 | ) |  | (1,195 | ) |  | 1,646 |  |  | (809 | ) |  | 837 |
Non-taxable debt and equity investments (3) | 1,346 |  |  | (83 | ) |  | 1,263 |  |  | 2,766 |  |  | (119 | ) |  | 2,647 |
Short-term investments | 264 |  |  | (880 | ) |  | (616 | ) |  | 245 |  |  | (1,008 | ) |  | (763 | )
Total interest-earning assets | $ | 12,650 |  |  | $ | (18,350 | ) |  | $ | (5,700 | ) |  | $ | 26,803 |  |  | $ | (23,074 | ) |  | $ | 3,729 |
Interest paid on: |  |  |  |  |  |  |  |  |  |  |
Interest-bearing transaction accounts | $ | 147 |  |  | $ | (2,037 | ) |  | $ | (1,890 | ) |  | $ | 557 |  |  | $ | (2,900 | ) |  | $ | (2,343 | )
Money market accounts | 1,313 |  |  | (7,314 | ) |  | (6,001 | ) |  | 2,415 |  |  | (10,191 | ) |  | (7,776 | )
Savings | 10 |  |  | (196 | ) |  | (186 | ) |  | 102 |  |  | (328 | ) |  | (226 | )
Certificates of deposit | (426 | ) |  | (233 | ) |  | (659 | ) |  | (71 | ) |  | (252 | ) |  | (323 | )
Subordinated debentures | 383 |  |  | (25 | ) |  | 358 |  |  | 628 |  |  | 1 |  |  | 629 |
FHLB advances | (75 | ) |  | (1,166 | ) |  | (1,241 | ) |  | (47 | ) |  | (1,697 | ) |  | (1,744 | )
Securities sold under agreements to repurchase | 50 |  |  | (331 | ) |  | (281 | ) |  | 68 |  |  | (260 | ) |  | (192 | )
Other borrowings | (60 | ) |  | (168 | ) |  | (228 | ) |  | 94 |  |  | (201 | ) |  | (107 | )
Total interest-bearing liabilities | 1,342 |  |  | (11,470 | ) |  | (10,128 | ) |  | 3,746 |  |  | (15,828 | ) |  | (12,082 | )
Net interest income | $ | 11,308 |  |  | $ | (6,880 | ) |  | $ | 4,428 |  |  | $ | 23,057 |  |  | $ | (7,246 | ) |  | $ | 15,811 |

(1) Change in volume multiplied by yield/rate of prior period.
(2) Change in yield/rate multiplied by volume of prior period.
(3) Nontaxable income is presented on a tax equivalent basis using the combined statutory federal and state income tax rate in effect for each tax year.
NOTE: The change in interest due to both rate and volume has been allocated to rate and volume changes in proportion to the relationship of the absolute dollar amounts of the change in each.
Net interest income (on a tax equivalent basis) for the three and six months ended June 30, 2020 increased 7% and 13%, respectively, over the prior year periods primarily from higher loan and investment volumes, both of which benefited from the Trinity acquisition and growth in the loan portfolio. The three-month period also benefited from a higher loan volume due to PPP loans. The benefit to net interest income from higher earning-asset volumes and a decrease in funding costs was partially offset by a decrease in earning-asset yields.
The tax-equivalent net interest margin was 3.53% and 3.65% for the three and six months ended June 30, 2020, respectively, compared to 3.86% and 3.87% in the prior year periods, respectively. The net interest margin was impacted by the decline in short-term rates as approximately 60% of the Company’s loan portfolio (excluding PPP) has variable rates, with most indexed to one-month LIBOR that has declined significantly over the past year. Average one-month LIBOR was 0.35% and 0.89% in the three and six months ended June 30, 2020, respectively, compared to 2.44% and 2.47% in the comparable prior year periods, respectively. An increase in the investment portfolio and in PPP loans in
35

the second quarter 2020 contributed to growth in net interest income; however, the lower yields on these products compared to the loan portfolio yield excluding PPP reduced the net interest margin.
The Company responded to interest rate trends by reducing the cost of certain managed money market and interest-bearing transaction accounts. Net interest income and margin both benefited from an 84-basis point decrease in the rate paid on interest-bearing deposits in the second quarter 2020 compared to the second quarter 2019. The rate on interest-bearing deposits for the six months ended June 30, 2020 declined 64 basis points compared to the prior-year period. In addition, the new subordinated debt issuance in the quarter reduced net interest margin by two basis points.
The Company manages its balance sheet to defend against pressures on core net interest margin, which could be negatively impacted from continued competition for deposits, current interest rate conditions, and movements in short-term rates.
Noninterest Income
The following table presents a comparative summary of the major components of noninterest income for the periods indicated.

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

Noninterest income decreased $2.0 million, or 17%, for the three months ended June 30, 2020, compared to the same period in 2019. The increase in deposit account balances provided more earnings credits to business customers, resulting in lower service charge income compared to the prior year quarter. Lower transaction volumes on credit and debit cards impacted card services revenue for the three months ended June 30, 2020. The Company’s tax credit income decreased in the current quarter over the prior year period primarily due to timing delays on projects.
Noninterest income increased $2.2 million, or 10%, for the six months ended June 30, 2020, compared to the same period in 2019. Wealth management and card services benefited from a full period of income in 2020 from the Trinity acquisition compared to the prior year. Tax credit income increased partially due to fair value adjustments on tax credits. The fair value of these projects increased due to a decline in the LIBOR component of the discount rate. Miscellaneous income increased $1.2 million in 2020 over 2019 due primarily to a $0.9 million increase in swap fees and a $0.7 million claim on a life insurance policy, partially offset by a $0.4 million decrease in non-core acquired fee income.
36

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

| 2020 compared to 2019
| Three months ended June 30, |  | Six months ended June 30,
(in thousands) | 2020 |  | 2019 |  | Increase (decrease) |  | 2020 |  | 2019 |  | Increase (decrease)
Employee compensation and benefits | $ | 22,389 |  |  | $ | 20,687 |  |  | $ | 1,702 |  |  | 8 | % |  | $ | 44,074 |  |  | $ | 40,039 |  |  | $ | 4,035 |  |  | 10 | %
Occupancy | 3,185 |  |  | 3,188 |  |  | (3 | ) |  | — | % |  | 6,532 |  |  | 5,825 |  |  | 707 |  |  | 12 | %
Data processing | 2,144 |  |  | 2,458 |  |  | (314 | ) |  | (13 | )% |  | 4,226 |  |  | 4,364 |  |  | (138 | ) |  | (3 | )%
Professional fees | 1,287 |  |  | 1,037 |  |  | 250 |  |  | 24 | % |  | 2,149 |  |  | 1,783 |  |  | 366 |  |  | 21 | %
Merger-related expenses | — |  |  | 10,306 |  |  | (10,306 | ) |  | (100 | )% |  | — |  |  | 17,576 |  |  | (17,576 | ) |  | (100 | )%
Other | 8,907 |  |  | 11,378 |  |  | (2,471 | ) |  | (22 | )% |  | 19,604 |  |  | 19,305 |  |  | 299 |  |  | 2 | %
Total noninterest expense | $ | 37,912 |  |  | $ | 49,054 |  |  | $ | (11,142 | ) |  | (23 | )% |  | $ | 76,585 |  |  | $ | 88,892 |  |  | $ | (12,307 | ) |  | (14 | )%
Efficiency ratio | 50.02 | % |  | 66.58 | % |  | (16.56 | )% |  |  |  |  | 50.20 | % |  | 65.72 | % |  | (15.52 | )% |  |  |
Core efficiency ratio 1 | 50.66 | % |  | 53.30 | % |  | (2.64 | )% |  |  |  |  | 50.94 | % |  | 53.65 | % |  | (2.71 | )% |  |  |
1 A non-GAAP measure. A reconciliation has been included in this section under the caption “Use of Non-GAAP Financial Measures.”

Noninterest expense decreased $11.1 million, or 23%, for the second quarter 2020, compared to the same period in 2019. The decrease from the prior year period was primarily impacted by merger-related expenses of $10.3 million from the Trinity transaction incurred in the second quarter 2019. For the six months ended June 30, 2020, noninterest expense decreased $12.3 million, or 14%, from the prior year period primarily due to merger-related expenses of $17.6 million, partially offset by an increase in employee compensation from merit increases.
Efficiency gains primarily from growth in net interest income combined with reductions in noninterest expense have resulted in continued improvements to the Company’s core efficiency ratio.1 The core efficiency ratio was 50.66% in the second quarter 2020 compared to 53.30% in the second quarter 2019.
Income Taxes
The Company’s effective tax rate was 20.0% for the second quarter 2020, compared to 19.6% for the same period in 2019. For the six months ended June 30, 2020, the effective tax rate was 19.4% compared to 19.9% for the same period in 2019.
Summary Balance Sheet

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

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

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

Loans grew $825.7 million to $6.1 billion at June 30, 2020, from December 31, 2019. Loan growth was primarily due to the $807.8 million PPP loans outstanding at June 30, 2020. Revolving line utilization for C&I customers decreased in the second quarter 2020, partially due to the influx of PPP funds to our customers. Low interest rates and higher refinance activity has reduced the residential real estate portfolio, while construction and commercial real estate loans have increased.
The following table illustrates loan growth with selected specialized lending detail:

(in thousands) | June 30, 2020 |  | December 31, 2019 |  | Increase (decrease)
C&I - general | $ | 1,057,899 |  |  | $ | 1,186,667 |  |  | $ | (128,768 | ) |  | (11 | )%
CRE investor owned - general | 1,302,235 |  |  | 1,290,258 |  |  | 11,977 |  |  | 1 | %
CRE owner occupied - general | 599,800 |  |  | 582,579 |  |  | 17,221 |  |  | 3 | %
PPP | 807,814 |  |  | — |  |  | 807,814 |  |  | NM |
Enterprise value lending 1 | 382,828 |  |  | 428,896 |  |  | (46,068 | ) |  | (11 | )%
Life insurance premium financing 1 | 520,705 |  |  | 472,822 |  |  | 47,883 |  |  | 10 | %
Residential real estate - general | 326,697 |  |  | 366,261 |  |  | (39,564 | ) |  | (11 | )%
Construction and land development - general | 455,686 |  |  | 428,681 |  |  | 27,005 |  |  | 6 | %
Tax credits 1 | 363,222 |  |  | 294,210 |  |  | 69,012 |  |  | 23 | %
Agriculture 1 | 191,093 |  |  | 139,873 |  |  | 51,220 |  |  | 37 | %
Other | 132,072 |  |  | 124,090 |  |  | 7,982 |  |  | 6 | %
Total loans | $ | 6,140,051 |  |  | $ | 5,314,337 |  |  | $ | 825,714 |  |  | 16 | %
Note: Certain prior period amounts have been reclassified among the categories to conform to the current period presentation.
1 Specialized categories may include a mix of C&I, CRE, construction and land development, or other loans.

Specialized lending products, especially enterprise value lending, life insurance premium financing, and tax credits, consist of primarily C&I loans. These loans are sourced through relationships developed with estate planning firms and private equity funds and are not bound geographically by our four markets. These specialized loan products offer opportunities to expand and diversify geographically by entering into new markets. The Company continues to focus on originating high-quality C&I relationships, as they typically have variable interest rates and allow for cross selling
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opportunities involving other banking products. C&I loan growth, coupled with typically fixed-rate CRE lending, supports management’s efforts to maintain a flexible asset sensitive interest rate risk position. The specialized lending products declined in 2020, primarily due to a decrease in enterprise value loans, offset by an increase in life insurance premium financing and tax credits. Life insurance premium financing and tax credits are typically lower risk products due to the high collateral value securing the loans. Agriculture loans increased primarily due to one relationship for hog and pig farming, and other loans increased primarily due to loans to financial institutions as part of the Company’s correspondent business unit.
In response to the COVID-19 pandemic, the Company has processed short-term deferrals allowing customers to defer payments. Approximately 99% of the deferrals are for 90 days or less. As of June 30, 2020, $685.7 million in loans have received deferrals, of which 53% are deferring all principal and interest and 47% are paying interest only.
The following table summarizes the loans modified by category:

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

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

| Three months ended June 30, |  | Six months ended June 30,
(in thousands) | 2020 |  | 2019 |  | 2020 |  | 2019
Allowance, at beginning of period | $ | 92,187 |  |  | $ | 43,095 |  |  | $ | 43,288 |  |  | $ | 43,476 |
CECL adoption | — |  |  | — |  |  | 28,387 |  |  | — |
PCD loans immediately charged-off | — |  |  | — |  |  | (1,680 | ) |  | — |
Allowance at beginning of period, adjusted for adoption of CECL | 92,187 |  |  | 43,095 |  |  | 69,995 |  |  | 43,476 |
Charge-offs: |  |  |  |  |  |  |
Commercial and industrial | (3,303 | ) |  | (1,380 | ) |  | (3,366 | ) |  | (3,233 | )
Real estate: |  |  |  |  |  |  |
Commercial | (224 | ) |  | (431 | ) |  | (226 | ) |  | (587 | )
Construction and land development | — |  |  | — |  |  | (31 | ) |  | (45 | )
Residential | (32 | ) |  | (26 | ) |  | (154 | ) |  | (93 | )
Other | (105 | ) |  | (53 | ) |  | (191 | ) |  | (182 | )
Total charge-offs | (3,664 | ) |  | (1,890 | ) |  | (3,968 | ) |  | (4,140 | )
Recoveries: |  |  |  |  |  |  |
Commercial and industrial | 293 |  |  | 32 |  |  | 797 |  |  | 61 |
Real estate: |  |  |  |  |  |  |
Commercial | 2,763 |  |  | 58 |  |  | 2,846 |  |  | 67 |
Construction and land development | 29 |  |  | 489 |  |  | 69 |  |  | 498 |
Residential | 226 |  |  | 124 |  |  | 383 |  |  | 488 |
Other | 45 |  |  | 217 |  |  | 62 |  |  | 230 |
Total recoveries | 3,356 |  |  | 920 |  |  | 4,157 |  |  | 1,344 |
Net (charge-offs) recoveries | (308 | ) |  | (970 | ) |  | 189 |  |  | (2,796 | )
Provision for credit losses | 18,391 |  |  | 1,722 |  |  | 40,086 |  |  | 3,198 |
Other | — |  |  | (25 | ) |  | — |  |  | (56 | )
Allowance, at end of period | $ | 110,270 |  |  | $ | 43,822 |  |  | $ | 110,270 |  |  | $ | 43,822 |

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

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

The provision for credit losses, which includes a provision for losses on unfunded commitments, is a charge to earnings to maintain the ACL at a level consistent with management’s assessment of expected losses in the loan portfolio at the balance sheet date. The Company also records reversals of interest on nonaccrual loans and interest recoveries directly
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through the provision of credit losses. Due to current economic conditions, the provision for credit losses was $19.6 million and $41.9 million for the three and six months ended June 30, 2020, respectively. CECL requires economic forecasts to be factored into determining estimated losses. As a result, CECL will typically require a higher level of provision at the start of an economic downturn. The increase in the provision for credit losses in 2020 was primarily due to a change in economic forecasts from the end of 2019, which worsened significantly starting in March 2020 due to the COVID-19 pandemic and the resulting slow-down of business activity. Two of the primary economic loss drivers used in estimating the ACL include the percentage change in GDP and unemployment. The Company’s forecast of the percentage change in GDP included a range of (10.0)% to 8.0%. The Company’s forecast of unemployment included a range of 7.9% to 11.8%. The Company utilizes a one-year reasonable and supportable forecast.
To the extent the Company does not recognize charge-offs and economic forecasts improve in future periods, the Company could recognize a reversal of provision for credit losses. Conversely, if economic conditions and the Company’s forecast worsens, the Company could recognize elevated levels of provision for credit losses. The provision is also reflective of charge-offs in the period.
The Company had net charge-offs of $1.5 million in the first six months of 2020, primarily due to the administrative charge-off of nonaccrual loans less than $100,000 under the Company’s credit policy. Most of these charge-offs were loans added to nonaccual as part of the CECL adoption. The ACLL was 1.80% of loans at June 30, 2020, compared to 0.81% at December 31, 2019.
Nonperforming assets
Prior to the adoption of CECL, PCI loans were accounted for in performing pools of loans and were not individually identified as nonaccrual or classified. Under the CECL accounting model, the Company elected not to maintain PCI pools for certain loans which are now accounted for individually and are now included in nonperforming and classified loans. PCI loans are referred to as PCD under CECL.
The following table presents the categories of nonperforming assets and other ratios as of the dates indicated.

(in thousands) | June 30, 2020 |  | December 31, 2019 |  | June 30, 2019
Nonaccrual loans | $ | 36,867 |  |  | $ | 26,096 |  |  | $ | 15,659 |
Loans past due 90 days or more and still accruing interest | 886 |  |  | 250 |  |  | 3,999 |
Troubled debt restructurings | 3,720 |  |  | 79 |  |  | 184 |
Total nonperforming loans | 41,473 |  |  | 26,425 |  |  | 19,842 |
Other real estate | 4,874 |  |  | 6,344 |  |  | 10,531 |
Total nonperforming assets | $ | 46,347 |  |  | $ | 32,769 |  |  | $ | 30,373 |
Total assets | $ | 8,357,501 |  |  | $ | 7,333,791 |  |  | $ | 7,181,855 |
Total loans | 6,140,051 |  |  | 5,314,337 |  |  | 5,149,497 |
Nonperforming loans to total loans | 0.68 | % |  | 0.50 | % |  | 0.39 | %
Nonperforming assets to total assets | 0.55 | % |  | 0.45 | % |  | 0.42 | %
ACLL to nonperforming loans | 266 | % |  | 164 | % |  | 221 | %

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

(in thousands) | June 30, 2020 |  | December 31, 2019 |  | June 30, 2019
Commercial and industrial | $ | 31,938 |  |  | $ | 22,578 |  |  | $ | 15,112 |
Commercial real estate | 4,789 |  |  | 2,516 |  |  | 1,670 |
Construction and land development | 207 |  |  | — |  |  | — |
Residential real estate | 4,499 |  |  | 1,330 |  |  | 3,060 |
Other | 40 |  |  | 1 |  |  | — |
Total | $ | 41,473 |  |  | $ | 26,425 |  |  | $ | 19,842 |

The following table summarizes the changes in nonperforming loans:

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

Other real estate
Other real estate was $4.9 million at June 30, 2020 compared to $10.5 million at June 30, 2019.
The following table summarizes the changes in other real estate:

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

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

(in thousands) | June 30, 2020 |  | December 31, 2019 |  | Increase (decrease)
Noninterest-bearing deposit accounts | $ | 1,965,868 |  |  | $ | 1,327,348 |  |  | $ | 638,520 |  |  | 48 | %
Interest-bearing transaction accounts | 1,508,535 |  |  | 1,367,444 |  |  | 141,091 |  |  | 10 | %
Money market accounts | 1,962,916 |  |  | 1,713,615 |  |  | 249,301 |  |  | 15 | %
Savings accounts | 603,095 |  |  | 536,169 |  |  | 66,926 |  |  | 12 | %
Certificates of deposit: |  |  |  |  |  |  |
Brokered | 85,414 |  |  | 215,758 |  |  | (130,344 | ) |  | (60 | )%
Other | 573,752 |  |  | 610,689 |  |  | (36,937 | ) |  | (6 | )%
Total deposits | $ | 6,699,580 |  |  | $ | 5,771,023 |  |  | $ | 928,557 |  |  | 16 | %
Non-time deposits / total deposits | 90 | % |  | 86 | % |  |  |  |
Demand deposits / total deposits | 29 | % |  | 23 | % |  |  |  |

Total deposits at June 30, 2020 were $6.7 billion, an increase of 16%, from December 31, 2019. The increase in deposits has been influenced by the PPP, as many of the recipients have maintained increased deposit levels since receiving PPP funding. Government stimulus checks and organic growth have also impacted deposit balances. Due to increased liquidity, the brokered certificates of deposit have been reduced in 2020. Noninterest bearing deposits as a percentage of total deposits was 29% at June 30, 2020, compared to 23% at December 31, 2019, respectively.
Shareholders’ Equity
Shareholders’ equity totaled $868.0 million at June 30, 2020, an increase of $0.8 million from December 31, 2019. Significant activity during the first six months of 2020 was as follows:

• | increase from net income of $27.5 million,

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

• | decrease from CECL adoption of $18.1 million,

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

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

• | decrease from share repurchases of $15.3 million.

Liquidity and Capital Resources
Liquidity
Our objective of liquidity management is to ensure we have the ability to generate sufficient cash or cash equivalents in a timely and cost-effective manner to meet our commitments as they become due. Typical demands on liquidity are run-off from demand deposits, maturing time deposits which are not renewed, and fundings under credit commitments to customers. Funds are available from a number of sources, such as from the core deposit base and from loans and securities repayments and maturities.
Liquidity is provided from sales of the securities portfolio, fed fund lines with correspondent banks, borrowings from the Federal Reserve and the FHLB, the ability to acquire large and brokered deposits, and the ability to sell loan participations to other banks. These alternatives are an important part of our liquidity plan and provide flexibility and efficient execution of the asset-liability management strategy.
The Bank’s Asset-Liability Management Committee oversees our liquidity position, the parameters of which are approved by the Bank’s Board of Directors. Our liquidity position is monitored monthly by measuring the amount of liquid versus non-liquid assets and liabilities. Our liquidity management framework includes measurement of several
43

key elements, such as the loan to deposit ratio, a liquidity ratio, and a dependency ratio. The Company’s liquidity framework also incorporates contingency planning to assess the nature and volatility of funding sources and to determine alternatives to these sources. While core deposits and loan and investment repayments are principal sources of liquidity, funding diversification is another key element of liquidity management and is achieved by strategically varying depositor types, terms, funding markets, and instruments.
The Bank has a variety of funding sources available to increase financial flexibility. In addition to amounts currently borrowed, at June 30, 2020, the Bank had borrowing capacity of $562 million from the FHLB of Des Moines under blanket loan pledges, and has an additional $879 million available from the Federal Reserve Bank under a pledged loan agreement. The Bank has unsecured federal funds lines with six correspondent banks totaling $90 million, and $367 million of unsecured credit through the American Financial Exchange.
Investment securities are another important tool in managing the Bank’s liquidity objectives. Securities totaled $1.4 billion at June 30, 2020, and included $450 million pledged as collateral for deposits of public institutions, treasury, loan notes, and other requirements. The remaining $904 million could be pledged or sold to enhance liquidity, if necessary.
In the normal course of business, the Bank enters into certain forms of off-balance sheet transactions, including unfunded loan commitments and letters of credit. These transactions are managed through the Bank’s various risk management processes. Management considers both on-balance sheet and off-balance sheet transactions in its evaluation of the Company’s liquidity. The Bank has $1.7 billion in unused commitments as of June 30, 2020. The nature of these commitments is such that the likelihood of funding them in the aggregate at any one time is low.
Parent Company liquidity
The parent company’s liquidity is managed to provide the funds necessary to pay dividends to shareholders, service debt, invest in subsidiaries as necessary, and satisfy other operating requirements. The parent company’s primary funding sources to meet its liquidity requirements are dividends and payments from the Bank and proceeds from the issuance of equity (i.e. stock option exercises, stock offerings). Another source of funding for the parent company includes the issuance of subordinated debentures and other debt instruments.
The Company has an effective automatic shelf registration statement on Form S-3 allowing for the issuance of various forms of equity and debt securities. The Company’s ability to offer securities pursuant to the registration statement depends on market conditions and the Company’s continuing eligibility to use the Form S-3 under rules of the SEC.
On November 1, 2016, the Company issued $50 million aggregate principal amount of 4.75% fixed-to-floating rate subordinated notes with a maturity date of November 1, 2026, which initially bear an annual interest rate of 4.75%, with interest payable semiannually. Beginning November 1, 2021, the interest rate resets quarterly to the three-month LIBOR rate plus a spread of 338.7 basis points, payable quarterly.
On May 21, 2020, the Company issued $63.3 million aggregate principal amount of 5.75% fixed-to-floating rate subordinated notes with a maturity date of June 1, 2030, which initially bear an annual interest rate of 5.75%, with interest payable semiannually. Beginning June 1, 2025, the interest rate resets quarterly to the three-month SOFR rate plus a spread of 566.0 basis points, payable quarterly.
The Company has a senior unsecured revolving credit agreement (the “Revolving Agreement”) with another bank allowing for borrowings up to $25 million that matures in February 2021. The proceeds can be used for general corporate purposes. The Revolving Agreement is subject to ongoing compliance with a number of customary affirmative and negative covenants as well as specified financial covenants. As of June 30, 2020, no amount was outstanding under the Revolving Agreement.
In March 2019, the Company entered into a five-year term note for $40 million that matures in March 2024. The Company principally used the proceeds from the issuance of the note to fund the cash consideration at the closing of the acquisition of Trinity. The remaining balance at June 30, 2020 was $31 million.
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As of June 30, 2020, the Company had $92 million of outstanding junior subordinated debentures as part of 13 statutory trusts. These debentures are classified as debt but are included in regulatory capital and the related interest expense is tax-deductible, which makes them an attractive source of funding.
Management believes our current level of cash at the holding company of $68 million, along with the Company’s other available funding sources, will be sufficient to meet all projected cash needs for the remainder of 2020.
Capital Resources
The Company and the Bank are subject to various regulatory capital requirements administered by the Federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possible additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company and its bank affiliate must meet specific capital guidelines that involve quantitative measures of assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices. The banking affiliate’s capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings and other factors.
Quantitative measures established by regulation to ensure capital adequacy require the Company and the Bank to maintain minimum amounts and ratios (set forth in the following table) of total, Tier 1, and common equity tier 1 capital to risk-weighted assets, and of Tier 1 capital to average assets. To be categorized as “well capitalized”, banks must maintain minimum total risk-based (10%), Tier 1 risk-based (8%), common equity tier 1 risk-based (6.5%), and Tier 1 leverage ratios (5%). As of June 30, 2020, and December 31, 2019, the Company and the Bank met all capital adequacy requirements to which they are subject.
The Bank continues to exceed regulatory standards and met the definition of “well-capitalized” (the highest category) at June 30, 2020.
The following table summarizes the Company’s various capital ratios at the dates indicated:

(in thousands) | June 30, 2020 |  | December 31, 2019 |  | Well Capitalized Minimum % |  | Minimum Capital Requirement Including Capital Conservation Buffer
Total capital to risk-weighted assets | 14.40 | % |  | 12.90 | % |  | N/A |  | 10.50 | %
Tier 1 capital to risk-weighted assets | 11.37 |  |  | 11.40 |  |  | N/A |  | 8.50 |
Common equity tier 1 capital to risk-weighted assets | 9.91 |  |  | 9.90 |  |  | N/A |  | 7.00 |
Leverage ratio (Tier 1 capital to average assets) | 9.16 |  |  | 10.05 |  |  | N/A |  | 4.00 |
Tangible common equity to tangible assets 1 | 7.81 |  |  | 8.89 |  |  | N/A |  |
Total risk-based capital | $ | 919,693 |  |  | $ | 804,273 |  |  |  |  |
Tier 1 capital | 726,574 |  |  | 710,480 |  |  |  |  |
Common equity tier 1 capital | 632,919 |  |  | 616,825 |  |  |  |  |
1 Not a required regulatory capital ratio |  |  |  |

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

(in thousands) | June 30, 2020 |  | December 31, 2019 |  | Well Capitalized Minimum % |  | Minimum Capital Requirement Including Capital Conservation Buffer
Total capital to risk-weighted assets | 13.00 | % |  | 12.40 | % |  | 10.00 | % |  | 10.50 | %
Tier 1 capital to risk-weighted assets | 11.75 |  |  | 11.70 |  |  | 8.00 |  |  | 8.50 |
Common equity tier 1 capital to risk-weighted assets | 11.75 |  |  | 11.69 |  |  | 6.50 |  |  | 7.00 |
Leverage ratio (Tier 1 capital to average assets) | 9.48 |  |  | 10.31 |  |  | 5.00 |  |  | 4.00 |
Total risk-based capital | $ | 829,134 |  |  | $ | 769,254 |  |  |  |  |
Tier 1 capital | 749,402 |  |  | 725,461 |  |  |  |  |
Common equity tier 1 capital | 749,347 |  |  | 725,406 |  |  |  |  |

In March 2020, the U.S. banking agencies issued an interim final rule that provides banking organizations that implement CECL before the end of 2020 the option to delay for two years an estimate of CECL’s effect on regulatory capital followed by a three-year transition period. The Company adopted CECL on January 1, 2020. For additional information regarding the adoption of CECL, see “Item 1. Note 1 – Summary of Significant Accounting Policies.” The Company has elected the transition provisions provided by the U.S. banking agencies’ rule. Accordingly, the regulatory capital effects resulting from adoption of the CECL methodology will not be fully reflected in the Company’s regulatory capital until January 1, 2025. Based on the Company’s regulatory capital position as of June 30, 2020, the estimated impact of adopting CECL methodology would reduce the Common Equity Tier 1 Capital ratio by approximately 44 basis points. The actual impact of adopting CECL on the regulatory capital ratios may change as the final impact is not determined until the end of the second year of the transition period.
The Company believes the tangible common equity ratio is an important measure of capital strength, even though it is considered a non-GAAP measure. A reconciliation has been included in this section under the caption “Use of Non-GAAP Financial Measures.”
Use of Non-GAAP Financial Measures:
The Company’s accounting and reporting policies conform to GAAP and the prevailing practices in the banking industry. However, the Company provides other financial measures, such as core net interest income, core net interest margin, core efficiency ratios, tangible common equity, return on average tangible common equity, and the tangible common equity ratio, in this report that are considered “non-GAAP financial measures.” Generally, a non-GAAP financial measure is a numerical measure of a company’s financial performance, financial position, or cash flows that exclude (or include) amounts that are included in (or excluded from) the most directly comparable measure calculated and presented in accordance with GAAP.
The Company considers its core net interest income, core net interest margin, core efficiency ratio, tangible common equity, return on average tangible common equity, and the tangible common equity ratio, collectively “core performance measures,” presented in this report and the included tables as important measures of financial performance, even though they are non-GAAP measures, as they provide supplemental information by which to evaluate the impact of non-core acquired loans, which were acquired from the FDIC and previously covered by loss share agreements, and the related income and expenses, the impact of certain non-comparable items, and the Company’s operating performance on an ongoing basis. Core performance measures include contractual interest on non-core acquired loans, but exclude incremental accretion on these loans. Core performance measures also exclude expenses directly related to non-core acquired loans. Core performance measures also exclude certain other income and expense items, such as merger-related expenses, and the gain or loss on sale of investment securities, the Company believes to be not indicative of or useful to measure the Company’s operating performance on an ongoing basis. The attached tables contain a reconciliation of these core performance measures to the GAAP measures. The Company believes the tangible common equity ratio provides useful information to investors about the Company’s capital strength even though it is considered
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to be a non-GAAP financial measure and is not part of the regulatory capital requirements to which the Company is subject.
The Company believes these non-GAAP measures and ratios, when taken together with the corresponding GAAP measures and ratios, provide meaningful supplemental information regarding the Company’s performance and capital strength. The Company’s management uses, and believes that investors benefit from referring to, these non-GAAP measures and ratios in assessing the Company’s operating results and related trends and when forecasting future periods. However, these non-GAAP measures and ratios should be considered in addition to, and not as a substitute for or preferable to, ratios prepared in accordance with GAAP. In the following tables, the Company has provided a reconciliation of, where applicable, the most comparable GAAP financial measures and ratios to the non-GAAP financial measures and ratios, or a reconciliation of the non-GAAP calculation of the financial measure for the periods indicated.
Core Performance Measures

| For the three months ended |  | At or for the six months ended
(in thousands) | June 30, 2020 |  | June 30, 2019 |  | June 30, 2020 |  | June 30, 2019
Net interest income | $ | 65,833 |  |  | $ | 61,715 |  |  | $ | 129,201 |  |  | $ | 114,058 |
Less: Incremental accretion income | 719 |  |  | 910 |  |  | 1,992 |  |  | 2,067 |
Core net interest income | 65,114 |  |  | 60,805 |  |  | 127,209 |  |  | 111,991 |
Total noninterest income | 9,960 |  |  | 11,964 |  |  | 23,368 |  |  | 21,194 |
Less: Gain on sale of investment securities | — |  |  | — |  |  | 4 |  |  | — |
Less: Other income from non-core acquired assets | — |  |  | 2 |  |  | — |  |  | 367 |
Less: Other non-core income | 265 |  |  | 266 |  |  | 265 |  |  | 266 |
Core noninterest income | 9,695 |  |  | 11,696 |  |  | 23,099 |  |  | 20,561 |
Total core revenue | 74,809 |  |  | 72,501 |  |  | 150,308 |  |  | 132,552 |
Total noninterest expense | 37,912 |  |  | 49,054 |  |  | 76,585 |  |  | 88,892 |
Less: Other expenses related to non-core acquired loans | 12 |  |  | 103 |  |  | 24 |  |  | 206 |
Less: Merger related expenses | — |  |  | 10,306 |  |  | — |  |  | 17,576 |
Core noninterest expense | 37,900 |  |  | 38,645 |  |  | 76,561 |  |  | 71,110 |
Core efficiency ratio | 50.66 | % |  | 53.30 | % |  | 50.94 | % |  | 53.65 | %

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

| Three months ended June 30, |  | Six months ended June 30,
(in thousands) | 2020 |  | 2019 |  | 2020 |  | 2019
Net interest income | $ | 66,537 |  |  | $ | 62,109 |  |  | $ | 130,515 |  |  | $ | 114,704 |
Less: Incremental accretion income | 719 |  |  | 910 |  |  | 1,992 |  |  | 2,067 |
Core net interest income, tax equivalent | $ | 65,818 |  |  | $ | 61,199 |  |  | $ | 128,523 |  |  | $ | 112,637 |
Average earning assets | $ | 7,571,196 |  |  | $ | 6,453,005 |  |  | $ | 7,181,327 |  |  | $ | 5,984,348 |
Reported net interest margin | 3.53 | % |  | 3.86 | % |  | 3.65 | % |  | 3.87 | %
Core net interest margin | 3.50 | % |  | 3.80 | % |  | 3.60 | % |  | 3.80 | %

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Tangible Common Equity Ratio

(in thousands) | June 30, 2020 |  | December 31, 2019
Total shareholders' equity | $ | 867,963 |  |  | $ | 867,185 |
Less: Goodwill | 210,344 |  |  | 210,344 |
Less: Intangible assets | 23,196 |  |  | 26,076 |
Tangible common equity | $ | 634,423 |  |  | $ | 630,765 |
Total assets | $ | 8,357,501 |  |  | $ | 7,333,791 |
Less: Goodwill | 210,344 |  |  | 210,344 |
Less: Intangible assets, net | 23,196 |  |  | 26,076 |
Tangible assets | $ | 8,123,961 |  |  | $ | 7,097,371 |
Tangible common equity to tangible assets | 7.81 | % |  | 8.89 | %

Average Shareholders’ Equity and Average Tangible Common Equity

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

Critical Accounting Policies
The impact and any associated risks related to the Company’s critical accounting policies on business operations are described throughout “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” where such policies affect our reported and expected financial results. For a detailed description on the application of these and other accounting policies, see the Company’s Annual Report on Form 10-K for the year ended December 31, 2019.
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ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The disclosures set forth in this item are qualified by the section captioned “Safe Harbor Statement Under the Private Securities Litigation Reform Act of 1995” included in Item 2 – Management’s Discussion and Analysis of Financial Condition and Results of Operations of this report and other cautionary statements set forth elsewhere in this report.
Interest Rate Risk
Our interest rate risk management practices are aimed at optimizing net interest income, while guarding against deterioration that could be caused by certain interest rate scenarios. Interest rate sensitivity varies with different types of interest-earning assets and interest-bearing liabilities. We attempt to maintain interest-earning assets, comprised primarily of both loans and investments, and interest-bearing liabilities, comprised primarily of deposits, maturing or repricing in similar time horizons in order to minimize or eliminate any impact from market interest rate changes. In order to measure earnings sensitivity to changing rates, the Company uses an earnings simulation model.
The Company determines the sensitivity of its short-term future earnings to a hypothetical plus or minus 100 to 300 basis point parallel rate shock through the use of simulation modeling (due to the current level of interest rates, the downward shock scenarios are not shown in the table below.) The simulation of earnings includes the modeling of the balance sheet as an ongoing entity. Future business assumptions involving administered rate products, prepayments for future rate-sensitive balances, and the reinvestment of maturing assets and liabilities are included. These items are then modeled to project net interest income based on a hypothetical change in interest rates. The resulting net interest income for the next 12-month period is compared to the net interest income amount calculated using flat rates. The Company uses an earning sensitivity model to track earnings sensitivity to a plus or minus 100 basis points parallel rate shock.
The following table summarizes the expected impact of interest rate shocks on net interest income:

Rate Shock 1 | Annual % change in net interest income
+ 300 bp | 7.8%
+ 200 bp | 4.9%
+ 100 bp | 2.1%
1 Due to the current levels of interest rates, the downward shock scenarios are not shown.

In addition to the rate shocks shown in the table above, the Company models net interest income under various dynamic
interest rate scenarios. Generally, positive changes in rates result in higher levels of net interest income, while scenarios based on declining rates, particularly those involving decreases in long-term rates, result in reduced net interest income.
At June 30, 2020, model scenarios based on a flatter yield curve through a reduction in longer term rates result in a marginal decrease in net interest income over a 12 month horizon.
At June 30, 2020, the Company had $3.1 billion in variable rate loans including $2.5 billion based on LIBOR and $332 million based on Prime. Approximately 86% of the LIBOR based loans are indexed to one-month LIBOR. Of the total variable rate loans, $1.2 billion, or 39%, had a rate floor of which approximately $1.0 billion, or 86%, were currently priced at the floor.
The Company occasionally uses interest rate derivative financial instruments as an asset/liability management tool to hedge mismatches in interest rate exposure indicated by the net interest income simulation described above. They are used to modify the Company’s exposures to interest rate fluctuations and provide more stable spreads between loan yields and the rate on their funding sources.
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ITEM 4: CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
Under the supervision and with the participation of the Company’s Chief Executive Officer (CEO) and the Chief Financial Officer (CFO), management has evaluated the effectiveness of the design and operation of the Company’s disclosure controls and procedures pursuant to Exchange Act Rule 13a-15, as of June 30, 2020. Disclosure controls and procedures include without limitation, controls and procedures designed to ensure that information required to be disclosed by an issuer in the reports that it files or submits under the Securities Exchange Act of 1934, as amended, is accumulated and communicated to the issuer’s management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.
Based on that evaluation, the CEO and CFO concluded the Company’s disclosure controls and procedures were effective as of June 30, 2020 to provide reasonable assurance of the achievement of the objectives described above.
Changes to Internal Controls
There were no changes during the period covered by this Quarterly Report on Form 10-Q in the Company’s internal controls over financial reporting that have materially affected, or are reasonably likely to materially affect, those controls.
PART II - OTHER INFORMATION
ITEM 1: LEGAL PROCEEDINGS
The Company and its subsidiaries are, from time to time, parties to various legal proceedings arising out of their businesses. Management believes there are no such proceedings pending or threatened against the Company or its subsidiaries which, if determined adversely, would have a material adverse effect on the business, consolidated financial condition, results of operations or cash flows of the Company or any of its subsidiaries.
ITEM 1A: RISK FACTORS
For information regarding risk factors affecting the Company, please see the cautionary language regarding forward-looking statements in the introduction to Item 2 of Part I of this Report on Form 10-Q, and Part I, Item 1A of our Report on Form 10-K for the fiscal year ended December 31, 2019, which is supplemented by the additional risk factors set forth below.
The recent global coronavirus (COVID-19) pandemic has led to periods of significant volatility in financial, commodities and other markets and could harm our business and results of operations.
In December 2019, a novel strain of coronavirus (COVID-19) was first reported in Wuhan, Hubei Province, China. Since then, COVID-19 infections have spread to additional countries including the United States. In March 2020, the World Health Organization declared COVID-19 to be a pandemic. Given the ongoing and dynamic nature of the circumstances, it is difficult to predict the impact of the COVID-19 pandemic on our business, and there is no guarantee that our efforts to address or mitigate the adverse impacts of the COVID-19 pandemic will be effective. The impact to date has included periods of significant volatility in financial, commodities and other markets. This volatility, if it continues, could have an adverse impact on our customers and on our business, financial condition and results of operations as well as our growth strategy.
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Our business is dependent upon the willingness and ability of our customers to conduct banking and other financial transactions. The spread of COVID-19 has caused and could continue to cause severe disruptions in the U.S. economy at large, and has resulted and may continue to result in disruptions to our customers’ businesses, and a decrease in consumer confidence and business generally. In addition, recent actions by US federal, state and local governments to address the pandemic, including travel bans, stay-at-home orders and school, business and entertainment venue closures, may have a significant adverse effect on our customers and the markets in which we conduct our business. The extent of impacts resulting from the COVID-19 pandemic and other events beyond our control will depend on future developments, which are highly uncertain and cannot be predicted, including new information which may emerge concerning the severity of the COVID-19 pandemic and actions taken to contain the COVID-19 or its impact, among others.
Disruptions to our customers could result in increased risk of delinquencies, defaults, foreclosures and losses on our loans as well as declines in wealth management revenues. The escalation of the pandemic may also negatively impact regional economic conditions for a period of time, resulting in declines in local loan demand, liquidity of loan guarantors, loan collateral (particularly in real estate), loan originations and deposit availability. If the global response to contain COVID-19 escalates or is unsuccessful, we could experience a material adverse effect on our business, financial condition, results of operations and cash flows.
The Company has implemented restrictions on employee business travel, conversion of in-person meetings to virtual, and a work-from home mandate. The Company has also worked with its customers to implement appropriate loan deferral strategies in certain circumstances. These actions in response to the COVID-19 pandemic, and similar actions by our vendors and business partners, have not materially impaired our ability to support our employees, conduct our business and serve our customers, but there is no assurance these actions will be sufficient to successfully mitigate the risks presented by COVID-19 or that our ability to operate will not be materially affected going forward. For instance, our business operations may be disrupted if key personnel or significant portions of our employees are unable to work effectively, including because of illness, quarantines, government actions, or other restrictions in connection with the COVID-19 pandemic. Similarly, if any of our vendors or business partners become unable to continue to provide their products and services, which we rely upon to maintain our day-to-day operations, our ability to serve our customers could be impacted.
The spread of the COVID-19 outbreak and the governmental responses may disrupt banking and other financial activity in the areas in which we operate and could potentially create widespread business continuity issues for us.
The outbreak of COVID-19 and the US federal, state and local governmental responses may result in a disruption in the services we provide. We rely on our third-party vendors to conduct business and to process, record, and monitor transactions. If any of these vendors are unable to continue to provide us with these services or experience interruptions in their ability to provide us with these services, it could negatively impact our ability to serve our customers. Furthermore, the COVID-19 pandemic could negatively impact the ability of our employees and customers to engage in banking and other financial transactions in the geographic areas in which we operate and could create widespread business continuity issues for us. We also could be adversely affected if key personnel or a significant number of employees were to become unavailable due to infection, quarantine or other effects and restrictions of a COVID-19 outbreak in our market areas. Although we have business continuity plans and other safeguards in place, there is no assurance that such plans and safeguards will be effective. If we are unable to promptly recover from such business disruptions, our business and financial conditions and results of operations would be adversely affected. We also may incur additional costs to remedy damages caused by such disruptions, which could adversely affect our financial condition and results of operations.
Our participation in the SBA PPP loan program exposes us to risks related to noncompliance with the PPP, as well as litigation risk related to our administration of the PPP loan program, which could have a material adverse impact on our business, financial condition and results of operations.
The Company is a participating lender in the PPP, a loan program administered through the SBA, that was created to help eligible businesses, organizations and self-employed persons fund their operational costs during the COVID-19
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pandemic. Under this program, the SBA guarantees 100% of the amounts loaned under the PPP. The PPP opened on April 3, 2020; however, because of the short window between the passing of the CARES Act and the opening of the PPP, there is some ambiguity in the laws, rules and guidance regarding the operation of the PPP, which exposes the Company to risks relating to noncompliance with the PPP. For instance, other financial institutions have experienced litigation related to their process and procedures used in processing applications for the PPP. Any financial liability, litigation costs or reputational damage caused by PPP related litigation could have a material adverse impact on our business, financial condition and results of operations. In addition, the Company may be exposed to credit risk on PPP loans if a determination is made by the SBA that there is a deficiency in the manner in which the loan was originated, funded, or serviced. If a deficiency is identified, the SBA may deny its liability under the guaranty, reduce the amount of the guaranty, or, if it has already paid under the guaranty, seek recovery of any loss related to the deficiency from the Company.
Unpredictable future developments related to or resulting from the COVID-19 pandemic could materially and adversely affect our business and results of operations.
Because there have been no comparable recent global pandemics that resulted in similar global impact, we do not yet know the full extent of the COVID-19 pandemic’s effects on our business, operations, or the global economy as a whole. Any future development will be highly uncertain and cannot be predicted, including the scope and duration of the pandemic, the effectiveness of our work from home arrangements, third party providers’ ability to support our operation, and any actions taken by governmental authorities and other third parties in response to the pandemic. We are continuing to monitor the COVID-19 pandemic and related risks, although the rapid development and fluidity of the situation precludes any specific prediction as to its ultimate impact on us. However, if the COVID-19 outbreak continues to spread or otherwise results in a continuation or worsening of the current economic and commercial environments, our business, financial condition, results of operations and cash flows as well as our regulatory capital and liquidity ratios could be materially adversely affected and many of the risks described in our Annual Report on Form 10-K for the year ended December 31, 2019 will be heightened.
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ITEM 2: UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
None.

ITEM 3: DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4: MINE SAFETY DISCLOSURES
Not applicable.
ITEM 5: OTHER INFORMATION
None.
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ITEM 6: EXHIBITS

Exhibit No. | Description

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

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

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

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

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

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

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

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

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

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

4.1 | Long-term borrowing instruments are omitted pursuant to Item 601(b)(4)(iii) of Regulation S-K. The Company undertakes to furnish copies of such instruments to the Securities and Exchange Commission upon request.

*31.1 | Chief Executive Officer’s Certification required by Rule 13(a)-14(a).

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

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

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

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

101.SCH | XBRL Taxonomy Extension Schema Document.

101.CAL | XBRL Taxonomy Extension Calculation Linkbase Document.

101.LAB | XBRL Taxonomy Extension Label Linkbase Document.

101.PRE | XBRL Taxonomy Extension Presentation Linkbase Document.

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101.DEF | XBRL Taxonomy Extension Definitions Linkbase Document.

104 | The cover page of Enterprise Financial Services Corp’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2020, formatted in Inline XBRL (contained in Exhibit 101).

* Filed herewith
** Furnished herewith. Notwithstanding any incorporation of this Quarterly Statement on Form 10-Q in any other filing by the Registrant, Exhibits furnished herewith and designated with two (**) shall not be deemed incorporated by reference to any other filing unless specifically otherwise set forth herein or therein.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Clayton, State of Missouri on the day of July 24, 2020.

| ENTERPRISE FINANCIAL SERVICES CORP
| By: | /s/ James B. Lally |
|  | James B. Lally |
|  | Chief Executive Officer |
| By: | /s/ Keene S. Turner |
|  | Keene S. Turner |
|  | Chief Financial Officer |

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