Home Enterprise bank ENTERPRISE FINANCIAL SERVICES CORP: MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL POSITION AND RESULTS OF OPERATIONS (Form 10-Q)

ENTERPRISE FINANCIAL SERVICES CORP: MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL POSITION AND RESULTS OF OPERATIONS (Form 10-Q)

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Forward-looking statements

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

While there is no assurance that any list of risks and uncertainties or risk
factors is complete, important factors that could cause actual results to differ
materially from those in the forward-looking statements include the following,
without limitation: our ability to efficiently integrate acquisitions, including
the FCBP acquisition, into our operations, retain the customers of these
businesses and grow the acquired operations; credit risk; changes in the
appraised valuation of real estate securing impaired loans; our ability to
recover our investment in loans; fluctuations in the fair value of collateral
underlying loans; outcomes of litigation and other contingencies; exposure to
general and local economic and market conditions, including risk of recession,
high unemployment rates, higher inflation and its impacts (including U.S.
federal government measures to address higher inflation), U.S. fiscal debt,
budget and tax matters, and any slowdown in global economic growth; 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; the ability to attract and retain relationship
officers and other key personnel; burdens imposed by federal and state
regulation; changes in legislative or regulatory requirements, as well as
current, pending or future legislation or regulation that could have a negative
effect on our revenue and businesses, including rules and regulations relating
to bank products and financial services; changes in accounting policies and
practices or accounting standards; changes in the method of determining LIBOR
and the phase-out of LIBOR; natural disasters; terrorist activities, war and
geopolitical matters (including the war in Ukraine and the imposition of
additional sanctions and export controls in connection therewith), or pandemics,
including the COVID-19 pandemic, and their effects on economic and business
environments in which we operate, including the ongoing disruption to the
financial market and other economic activity caused by the continuing COVID-19
pandemic; and other risks discussed under the caption "Risk Factors" under Part
I, Item 1A of our 2021 Annual Report on Form 10-K, and other reports filed with
the SEC, all of which could cause the Company's actual results to differ from
those set forth in the forward-looking statements. The Company cautions that the
preceding list is not exhaustive of all possible risk factors and other factors
could also adversely affect the Company's results.

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."

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Introduction

The following discussion describes the significant changes to the financial
condition of the Company that have occurred during the first nine months of 2022
compared to the financial condition as of December 31, 2021. In addition, this
discussion summarizes the significant factors affecting the results of
operations of the Company for the three months ended September 30, 2022,
compared to the linked second quarter ("linked quarter") in 2022 and the results
of operations, liquidity and cash flows for the nine months ended September 30,
2022 compared to the same period in 2021. In light of the nature of the
Company's business, which is not seasonal, the Company's management believes
that the comparison to the linked quarter is the most relevant to understand the
financial results from management's perspective. For purposes of the Quarterly
Report on Form 10-Q, the Company is presenting a comparison to the corresponding
year-to-date period in 2021. 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, 2021.

Significant Accounting Policies and Estimates

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

A full description of our critical accounting policies and the impact and any
associated risks related to those policies on our business operations are
discussed throughout "Management's Discussion and Analysis of Financial
Condition and Results of Operations," where such policies affect our reported
and expected financial results. For a detailed discussion on the application of
these and other accounting policies, see the Company's Annual Report on Form
10-K for the year ended December 31, 2021.

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. 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.


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Provision for credit losses

Utilizing the CECL methodology, the Company maintains separate allowances for
funded loans, unfunded loans, and held-to-maturity securities, collectively the
ACL. The ACL is a valuation account to adjust the cost basis to the amount
expected to be collected, based on management's estimate of experience, current
conditions, and reasonable and supportable forecasts. For purposes of
determining the allowance for funded and unfunded loans, the portfolios are
segregated into pools that share similar risk characteristics that are then
further segregated by credit grades. Loans that do not share similar risk
characteristics are evaluated on an individual basis and are not included in the
collective evaluation. The Company estimates the amount of the allowance based
on loan loss experience, adjusted for current and forecasted economic
conditions, including unemployment, changes in GDP, and commercial and
residential real estate prices. The Company's forecast of economic conditions
uses internal and external information and considers a weighted average of a
baseline, upside, and downside scenarios. Because economic conditions can change
and are difficult to predict, the anticipated amount of estimated loan defaults
and losses, and therefore the adequacy of the allowance, could change
significantly and have a direct impact on the Company's credit costs. The
Company's allowance for credit losses on loans was $140.6 million at September
30, 2022 based on the weighting of the different economic scenarios. As a
hypothetical example, if the Company had only used the upside scenario, the
allowance would have decreased $7.7 million. Conversely, the allowance would
have increased $39.0 million using only the downside scenario.


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Summary

The Company finalized its acquisition of FCBP on July 21, 2021. The results of operations of FCBP are included in our results from that date.

Below are highlights of the Company’s financial performance for the periods indicated.

                                                     Three months ended                                At or for the nine months ended
(in thousands, except per share   September 30,           June 30,          September 30,            September 30,           September 30,
data)                                  2022                 2022                 2021                    2022                     2021
EARNINGS
Total interest income            $     135,695          $ 116,069          $     103,228          $       358,345           $     275,589
Total interest expense                  11,405              6,456                  5,955                   23,277                  17,455
Net interest income                    124,290            109,613                 97,273                  335,068                 258,134
Provision (benefit) for credit
losses                                     676                658                 19,668                   (2,734)                 17,045
Net interest income after
provision (benefit) for credit
losses                                 123,614            108,955                 77,605                  337,802                 241,089
Total noninterest income                 9,454             14,194                 17,619                   42,289                  45,113
Total noninterest expense               68,843             65,424                 76,885                  197,067                 182,225
Income before income tax expense        64,225             57,725                 18,339                  183,024                 103,977
Income tax expense                      14,025             12,576                  4,426                   39,982                  21,733
Net income                       $      50,200          $  45,149          $      13,913          $       143,042           $      82,244
Preferred stock dividends                  937                938                      -                    3,104                       -
Net income available to common
shareholders                     $      49,263          $  44,211          $      13,913          $       139,938           $      82,244

Basic earnings per share         $        1.32          $    1.19          $        0.38          $          3.74           $        2.48
Diluted earnings per share       $        1.32          $    1.19          $        0.38          $          3.73           $        2.48

Return on average assets                  1.51  %            1.34  %                0.45  %                  1.42   %                1.01  %
Return on average common equity          13.74  %           12.65  %                3.96  %                 13.09   %                9.14  %
Return on average tangible
common equity1                           18.82  %           17.44  %                5.37  %                 17.92   %               12.31  %
Net interest margin (tax
equivalent)                               4.10  %            3.55  %                3.40  %                  3.64   %                3.45  %

Efficiency ratio                         51.47  %           52.84  %               66.92  %                 52.22   %               60.09  %
Core efficiency ratio1                   51.47  %           52.81  %               51.30  %                 52.21   %               52.59  %
Book value per common share      $       36.92          $   36.97          $       37.52
Tangible book value per common
share1                           $       26.62          $   26.63          

$27.38

ASSET QUALITY
Net charge-offs (recoveries)     $         478          $    (175)         $       1,850          $         1,824           $       8,366
Nonperforming loans                     18,184             19,560                 41,554
Classified assets                       98,078             96,801                104,220
Nonperforming loans to total
loans                                     0.19  %            0.21  %                0.46  %
Nonperforming assets to total
assets                                    0.14  %            0.16  %                0.35  %
ACL on loans to total loans               1.50  %            1.52  %                1.67  %
Net charge-offs (recoveries) to
average loans (annualized)                0.02  %           (0.01) %                0.08  %                  0.03   %                0.14  %

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

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Financial results and other notable items include:

• Details of PPP loans are shown in the following table:

                                                          Quarter ended                              At or for the nine months ended
                                    September 30,                               September 30,       September 30,        September 30,
(in thousands)                           2022             June 30, 2022             2021                 2022                2021
PPP loans outstanding, net of
deferred fees                       $   13,165           $      49,175          $  438,959          $   13,165           $  438,959

Average PPP loans outstanding, net      26,113                  89,152             489,104             102,599              614,470
PPP interest and fee income
recognized                                 471                   1,557               6,048               4,886               22,463
PPP deferred fees remaining                119                     524               7,428                 119                7,428
PPP average yield                         7.16   %                7.01  %             4.91  %             6.37   %             4.89  %



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

•Pre-provision net revenue1 ("PPNR") of $64.9 million in the third quarter 2022
increased $6.5 million from the linked quarter PPNR of $58.4 million. PPNR of
$180.3 million for the nine months ended September 30, 2022 increased
$36.1 million from $144.2 million in the prior year period. The increase from
the linked quarter was primarily due to an increase in operating revenue,
partially offset by an increase in noninterest expense. The year-to-date
increase over the prior year period was primarily due to the acquisition of FCBP
in the third quarter 2021, partially offset by a decline in PPP income.

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

•Net interest income of $124.3 million for the third quarter 2022 increased
$14.7 million from $109.6 million in the linked quarter. Net interest margin
("NIM") was 4.10% for the third quarter 2022, compared to 3.55% for the linked
quarter. Net interest income and NIM benefited from higher average loan and
investment balances and expanding yields on earning assets, partially offset by
higher deposit costs and a decline in average interest-earning cash. Net
interest income of $335.1 million for the nine months ended September 30, 2022
increased $76.9 million from $258.1 million in the prior year period. The
year-to-date increase over the prior year was due primarily to the acquisition
of FCBP, an increase in market interest rates, and growth in the loan and
investment portfolios, partially offset by a decline in PPP income.

•Noninterest income of $9.5 million for the third quarter 2022 decreased $4.7
million from $14.2 million in the linked quarter. The decline from the linked
quarter was primarily due to a decrease in tax credit income and card service
revenue. The increase in market interest rates in the quarter reduced tax credit
income due to the impact on tax credit projects carried at fair value. Card
services revenue declined due to the Durbin Amendment cap on debit card income
that became effective in the current quarter. Noninterest income of
$42.3 million for the nine months ended September 30, 2022 decreased
$2.8 million from $45.1 million in the prior year period. The year-to-date
decrease from the prior period was due primarily to the reduction in tax credit
income partially offset by increased noninterest income from the FCBP
acquisition.

Balance sheet highlights:

•Loans - Total loans increased $337.3 million to $9.4 billion at September 30,
2022, compared to $9.0 billion at December 31, 2021. PPP loans declined
$258.8 million from December 31, 2021. Excluding PPP, loans grew $596.1 million,
or 7%, on a year-to-date basis from December 31, 2021. Average loans totaled
$9.1 billion for the nine months ended September 30, 2022 compared to $7.7
billion for the nine months ended September 30, 2021.
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•Deposits - Total deposits decreased $286.2 million, to $11.1 billion at
September 30, 2022 from $11.3 billion at December 31, 2021. The decline in
deposits was primarily concentrated in interest-bearing demand and money market
accounts that were not relationship-based and reflects a shift in our deposit
mix aligned with our disciplined focus on relationship-based, lower-cost
deposits. Average deposits totaled $11.4 billion for the nine months ended
September 30, 2022, compared to $9.0 billion for the nine months ended September
30, 2021. Noninterest deposit accounts represented 42.0% of total deposits and
the loan to deposit ratio was 84.6% at September 30, 2022.

•Asset quality - The allowance for credit losses on loans to total loans was
1.50% at September 30, 2022, compared to 1.61% at December 31, 2021.
Nonperforming assets to total assets was 0.14% at September 30, 2022 compared to
0.23% at December 31, 2021. Due to the improvement in credit quality and a shift
in the risk composition of the loan portfolio, offset by a decline in
macroeconomic forecasts, a provision benefit of $2.7 million was recorded in the
first nine months of 2022, compared to a provision expense of $17.0 million in
the comparable prior year period. The provision for credit losses of $17.0
million included $23.9 million to establish the initial allowance for credit
losses on certain First Choice acquired loans and commitments. Loan growth and
the provision benefit in the first nine months of 2022 contributed to the
decline in the ratio of allowance for credit losses to total loans.

•Shareholders' equity - Total shareholders' equity was $1.45 billion at
September 30, 2022, compared to $1.53 billion at December 31, 2021, and the
tangible common equity to tangible assets ratio2 was 7.86% at September 30, 2022
compared to 8.13% at December 31, 2021. The decline in the tangible common
equity ratio was primarily due to a $172.0 million decrease in accumulated other
comprehensive income, mainly from a decrease in the fair value of the
available-for-sale investment portfolio. The Company and the Bank's regulatory
capital ratios exceeded the "well-capitalized" level at September 30, 2022. In
June 2022, the Company retired 1,980,093 shares of treasury stock and returned
them to authorized and unissued shares.

The Company repurchased 700,473 shares totaling $32.9 million in the first nine
months of 2022 for an average price of $47.00 per share. The shares acquired in
2022 complete the share repurchase plan authorized by the Board of Directors on
April 29, 2021. On May 4, 2022, the Board of Directors approved a new plan that
authorized the repurchase of up to 2,000,000 shares of common stock. No shares
have been repurchased under the recently-approved plan.

The Company's Board of Directors approved a quarterly dividend of $0.24 per
common share, payable on December 30, 2022 to shareholders of record as of
December 15, 2022, an increase of $0.01, or 4.3%, compared to the third quarter
2022. The Board of Directors also declared a cash dividend of $12.50 per share
of Series A Preferred Stock (or $0.3125 per depositary share) representing a 5%
per annum rate for the period commencing (and including) September 15, 2022 to
(but excluding) December 15, 2022. The dividend will be payable on December 15,
2022 to shareholders of record on November 30, 2022.

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

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RESULTS OF OPERATIONS
Net Interest Income
Average Balance Sheet
The following tables present, for the periods indicated, certain information
related to our average interest-earning assets and interest-bearing liabilities,
as well as the corresponding interest rates earned and paid, all on a tax
equivalent basis.

                                                              Three months ended September 30,                                               Three months ended June 30,                                            Three months ended September 30,
                                                                            2022                                                                        2022                                                                      2021
                                                                                                     Average                                                                      Average                                                               Average
                                                                            Interest                 Yield/                                                Interest                Yield/                                       Interest                 Yield/
(in thousands)                                Average Balance            Income/Expense               Rate                  Average Balance             Income/Expense              Rate            Average Balance          Income/Expense               Rate
Assets
Interest-earning assets:

Total loans1, 2                            $        9,230,738          $       118,642                    5.10  %       $      9,109,131              $       102,328                 4.51  %       $   8,666,353          $        94,465                   4.32  %
Taxable securities                                  1,294,470                    8,064                    2.27                 1,209,498                        6,894                 2.29                904,338                    4,810                   2.11
Non-taxable securities2                               907,785                    6,653                    2.84                   858,621                        6,050                 2.83                690,600                    4,773                   2.74
Total securities                                    2,202,255                   14,717                    2.65                 2,068,119                       12,944                 2.51              1,594,938                    9,583                   2.38
Interest-earning deposits                             765,258                    4,190                    2.17                 1,401,961                        2,496                 0.71              1,251,988                      480                   0.15
Total interest-earning assets                      12,198,251                  137,549                    4.47                12,579,211                      117,768                 3.76             11,513,279                  104,528                   3.60
Noninterest-earning assets                            959,870                                                                    949,263                                                                  821,279

 Total assets                              $       13,158,121                                                           $     13,528,474                                                            $  12,334,558

Liabilities and Shareholders' Equity
Interest-bearing liabilities:
Interest-bearing demand accounts           $        2,200,619          $         1,707                    0.31  %       $      2,329,431              $           659                 0.11  %       $   2,228,466          $           459                   0.08  %
Money market accounts                               2,791,822                    6,067                    0.86                 2,767,595                        2,270                 0.33              2,675,405                    1,294                   0.19
Savings                                               828,747                       69                    0.03                   854,860                           70                 0.03                747,927                       61                   0.03
Certificates of deposit                               554,987                      844                    0.60                   591,091                          851                 0.58                604,594                      927                   0.61
Total interest-bearing deposits                     6,376,175                    8,687                    0.54                 6,542,977                        3,850                 0.24              6,256,392                    2,741                   0.17
Subordinated debentures                               155,225                    2,313                    5.91                   155,092                        2,257                 5.84                204,011                    2,855                   5.55
FHLB advances                                          25,543                      103                    1.60                    50,000                          197                 1.58                 89,457                      211                   0.94
Securities sold under agreements to
repurchase                                            198,027                      123                    0.25                   202,537                           41                 0.08                216,403                       58                   0.11
Other borrowed funds                                   19,984                      179                    3.53                    21,413                          111                 2.08                 25,699                       90                   1.39
Total interest-bearing liabilities                  6,774,954                   11,405                    0.67                 6,972,019                        6,456                 0.37              6,791,962                    5,955                   0.35
Noninterest bearing liabilities:
Demand deposits                                     4,778,720                                                                  4,987,455                                                                4,040,761
Other liabilities                                     109,943                                                                     94,733                                                                  107,739
Total liabilities                                  11,663,617                                                                 12,054,207                                                               10,940,462
Shareholders' equity                                1,494,504                                                                  1,474,267                                                                1,394,096
Total liabilities & shareholders' equity   $       13,158,121                                                           $     13,528,474                                                            $  12,334,558
Net interest income                                                    $       126,144                                                                $       111,312                                                      $        98,573
Net interest spread                                                                                       3.80  %                                                                     3.39  %                                                                3.25  %
Net interest margin                                                                                       4.10  %                                                                     3.55  %                                                                3.40  %


1 Average balances include nonaccrual loans. Interest income includes loan fees
of $3.6 million, $4.2 million, and $6.5 million for the three months ended
September 30, 2022, June 30, 2022, and September 30, 2021, respectively.
2 Non-taxable income is presented on a fully tax-equivalent basis using a 25.2%
tax rate. The tax-equivalent adjustments were $1.9 million, $1.7 million, and
$1.3 million for the three months ended September 30, 2022, June 30, 2022, and
September 30, 2021, respectively.
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                                                                                                        Nine months ended September 30,
                                                                                 2022                                                                    2021
                                                                                                         Average                                                                 Average
                                                                                  Interest                Yield/                                          Interest                Yield/
(in thousands)                                       Average Balance           Income/Expense              Rate              Average Balance           Income/Expense              Rate
Assets
Interest-earning assets:

Total loans1, 2                                    $      9,116,072          $       317,271                 4.65  %       $      7,727,264          $       250,699                 4.34  %
Taxable securities                                        1,219,093                   20,658                 2.27                   870,169                   14,235                 2.19
Non-taxable securities2                                     846,707                   17,973                 2.84                   635,423                   13,392                 2.82
Total securities                                          2,065,800                   38,631                 2.50                 1,505,592                   27,627                 2.45
Interest-earning deposits                                 1,312,442                    7,502                 0.76                   914,954                      906                 0.13
Total interest-earning assets                            12,494,314                  363,404                 3.89                10,147,810                  279,232                 3.68
Noninterest-earning assets                                  937,549                                                                 712,946

 Total assets                                      $     13,431,863                                                        $     10,860,756

Liabilities and Shareholders' Equity
Interest-bearing liabilities:
Interest-bearing demand accounts                   $      2,344,007          $         2,902                 0.17  %       $      2,035,029          $         1,123                 0.07  %
Money market accounts                                     2,810,278                    9,797                 0.47                 2,458,146                    3,257                 0.18
Savings                                                     833,721                      205                 0.03                   707,269                      161                 0.03
Certificates of deposit                                     584,213                    2,492                 0.57                   555,045                    3,329                 0.80
Total interest-bearing deposits                           6,572,219                   15,396                 0.31                 5,755,489                    7,870                 0.18
Subordinated debentures                                     155,093                    6,790                 5.85                   203,853                    8,521                 5.59
FHLB advances                                                41,758                      495                 1.58                    63,297                      603                 1.27
Securities sold under agreements to repurchase              220,703                      224                 0.14                   218,942                      176                 0.11
Other borrowed funds                                         21,402                      372                 2.32                    27,154                      285                 1.40
Total interest-bearing liabilities                        7,011,175                   23,277                 0.44                 6,268,735                   17,455                 0.37
Noninterest bearing liabilities:
Demand deposits                                           4,819,718                                                               3,280,414
Other liabilities                                            99,458                                                                 108,001
Total liabilities                                        11,930,351                                                               9,657,150
Shareholders' equity                                      1,501,512                                                               1,203,606
Total liabilities & shareholders' equity           $     13,431,863                                                        $     10,860,756
Net interest income                                                          $       340,127                                                         $       261,777
Net interest spread                                                                                          3.45  %                                                                 3.31  %
Net interest margin                                                                                          3.64  %                                                                 3.45  %


1 Average balances include nonaccrual loans. Interest income includes loan fees
of $13.0 million and $22.1 million for the nine months ended September 30, 2022
and September 30, 2021, respectively.
2 Non-taxable income is presented on a fully tax-equivalent basis using a 25.2%
tax rate. The tax-equivalent adjustments were $5.1 million and $3.6 million for
the nine months ended September 30, 2022 and September 30, 2021, respectively.

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Rate/Volume

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

                                                                                                            Nine months ended
                                               Three months ended September 30, 2022                        September 30, 2022
                                                            compared to                                        compared to
                                                                                                            Nine months ended
                                                 Three months ended June 30, 2022                           September 30, 2021
                                                    Increase (decrease) due to                          Increase (decrease) due to
(in thousands)                             Volume(1)            Rate(2)             Net                                Volume(1)           Rate(2)             Net
Interest earned on:

Loans(3)                                $      1,395          $ 14,919          $ 16,314                              $  47,366          $ 19,206          $ 66,572
Taxable securities                               552               618             1,170                                  5,896               527             6,423
Non-taxable securities(3)                        404               199               603                                  4,484                97             4,581
Interest-earning deposits                     (1,540)            3,234             1,694                                    551             6,045             6,596
Total interest-earning assets           $        811          $ 18,970          $ 19,781                              $  58,297          $ 25,875          $ 84,172

Interest paid on:
Interest-bearing demand accounts        $        (37)         $  1,085          $  1,048                              $     194          $  1,585          $  1,779
Money market accounts                             21             3,776             3,797                                    528             6,012             6,540
Savings                                           (1)                -                (1)                                    30                15                45
Certificates of deposit                          (42)               35                (7)                                   167            (1,005)             (838)
Subordinated debentures                            4                52                56                                 (2,119)              388            (1,731)
FHLB advances                                    (96)                2               (94)                                  (234)              126              (108)
Securities sold under agreements to
repurchase                                        (1)               83                82                                      1                47                48
Other borrowings                                  (7)               75                68                                    (70)              157                87
Total interest-bearing liabilities              (159)            5,108             4,949                                 (1,503)            7,325             5,822
Net interest income                     $        970          $ 13,862          $ 14,832                              $  59,800          $ 18,550          $ 78,350


(1) Change in volume multiplied by yield/rate of prior period.
(2) Change in yield/rate multiplied by volume of prior period.
(3) Nontaxable income is presented on a tax equivalent basis.
NOTE: The change in interest due to both rate and volume has been allocated to
rate and volume changes in proportion to the relationship of the absolute dollar
amounts of the change in each.

Net interest income (on a tax equivalent basis) of $126.1 million for the three
months ended September 30, 2022 increased $14.8 million, from $111.3 million in
the linked quarter. Interest income increased during the quarter due to higher
loan and investment balances combined with an increase in market interest rates.
The effective federal funds rate for the third quarter 2022 was 2.20%, an
increase of 144 basis points, compared to the linked quarter. Excess liquidity
was redeployed into the investment portfolio which, combined with higher average
loan balances, benefited the earning-asset mix. The increase in interest income
was partially offset by higher interest expense on the deposit portfolio due to
higher costs.

Net interest income (on a tax equivalent basis) for the nine months ended
September 30, 2022 of $340.1 million increased $78.3 million, over
$261.8 million in the prior year period. The year-to-date increase over the
prior year was primarily due to the FCBP acquisition and an increase in market
interest rates. Organic growth in the loan portfolio and the continued increase
in the investment portfolio has also benefited net interest income.

The current quarter and year-to-date increases in net interest income were
partially offset by a decline in PPP income. PPP income in the third quarter
2022 was $0.5 million, compared to $1.6 million in the linked quarter. PPP
income was $4.9 million for the nine months ended September 30, 2022, compared
to $22.5 million in the comparable prior year period.

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NIM was 4.10% for the third quarter 2022, an increase of 55 basis points from
3.55% in the linked quarter. The increase in NIM from the linked quarter was
primarily due to higher yields on loans, investments and interest-earning
deposits due to an increase in market interest rates. The average loan yield was
5.10% in the third quarter 2022, an increase of 59 basis points from 4.51% in
the linked quarter. The average loan yield increased due to the repricing of
variable-rate loans and the origination of new loans at an average rate of 5.68%
in the third quarter. Approximately 20% of the variable-rate loan portfolio
reprices on the first day of each quarter and thus, interest income in the
period did not benefit from the Federal Reserve's increase in the target federal
funds rate in the current quarter. These loans will reset early in the fourth
quarter. The average investment yield was 2.65%, an increase of 14 basis points
from the linked quarter. The investment yield increased due to the purchase of
new investments at higher yields due to the expansion of the investment
portfolio and the reinvestment of cash flows. Investments purchased in the third
quarter 2022 had a tax equivalent average yield of 3.68%.

NIM was 3.64% for the nine months ended September 30, 2022, an increase of 19
basis points, from 3.45% in the prior year period. The increase in NIM over the
prior year period was primarily due to the increase in interest rates that have
had a greater impact on assets with variable interest rates than on deposit
costs. In 2022, the target federal funds rate has increased 300 basis points to
a range of 3.0 to 3.25%, the highest level since early 2008.

Non-interest income

The following table presents a comparative summary of the main components of non-interest revenue for the periods indicated.

                                                             Linked quarter comparison                                                         Prior year comparison
                                                                   Quarter ended                                                                 Nine months ended
                                    September 30,                                                                      September 30,       September 30,
(in thousands)                           2022               June 30, 2022              Increase (decrease)                 2022                2021                 Increase (decrease)
Deposit service charges            $       4,951          $        4,749          $      202                4  %       $   13,863          $   11,466          $    2,397              21  %
Wealth management revenue                  2,432                   2,533                (101)              (4) %            7,587               7,572                  15               -  %
Card services revenue                      2,652                   3,514                (862)             (25) %            9,206               8,657                 549               6  %
Tax credit income (loss)                  (3,625)                  1,186              (4,811)            (406) %              169               3,654              (3,485)            (95) %

Other income                               3,044                   2,212                 832               38  %           11,464              13,764              (2,300)            (17) %

Total noninterest income           $       9,454          $       14,194          $   (4,740)             (33) %       $   42,289          $   45,113          $   (2,824)             (6) %



Total noninterest income for the third quarter 2022 was $9.5 million, a decrease
of $4.7 million from $14.2 million in the linked quarter. The decrease from the
linked quarter was primarily due to decreases in tax credit income and card
services revenue. Rising interest rates reduced tax credit income due to the
impact on tax credit projects carried at fair value. The rise in interest rates
in the third quarter 2022 increased the discount rate used in the fair value of
these projects, resulting in a lower fair value. Future rate increases may
result in additional fair value changes that will lower tax credit income. The
Durbin Amendment limits the amount of interchange income the Company can earn on
debit card transactions. This limitation went into effect for the Company in the
third quarter 2022 and reduced card services revenue by approximately $1.0
million in the third quarter.

Other income in the current and linked quarters included a combined $0.3 million
of income from community development investments and swap income. Income from
community development investments and customer swap fees are not consistent
sources and will vary among periods.

Total noninterest income for the nine months ended September 30, 2022 was
$42.3 million, a decrease of $2.8 million from $45.1 million in the prior year
period. The decrease was primarily due to tax credit and other income. Tax
credit income was lower due to the previously discussed changes in the fair
value of tax credits carried at fair value. Other income in the first nine
months of 2022 decreased primarily due to lower private equity fund
distributions and lower mortgage banking revenue due to a decline in activity,
partially offset by higher income on community development investments. The FCBP
acquisition contributed $4.9 million to noninterest income in 2022 compared to
$1.5 million in the prior year period, primarily in deposit service charges.
                                       38
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Non-interest expenses

The following table presents a comparative summary of the main components of non-interest expenses for the periods indicated.

                                                Linked quarter comparison                                                      Prior year comparison
                                                      Quarter ended                                                              Nine months ended
                         September 30,                                                                  September 30,       September 30,
(in thousands)               2022             June 30, 2022              Increase (decrease)                2022                2021                Increase (decrease)
Employee compensation
and benefits             $  36,999           $      36,028          $     971                3  %       $  108,854          $   91,416          $  17,438              19  %
Occupancy                    4,497                   4,309                188                4  %           13,392              11,776              1,616              14  %
Data processing              3,543                   3,111                432               14  %            9,914               9,068                846               9  %
Professional fees            1,597                   1,542                 55                4  %            4,316               3,189              1,127              35  %

Branch closure expenses          -                       -                  -                -  %                -               3,441             (3,441)                NM
Merger-related expenses          -                       -                  -                -  %                -              19,762            (19,762)                NM
Other expense               22,207                  20,434              1,773                9  %           60,591              43,573             17,018              39  %
Total noninterest
expense                  $  68,843           $      65,424          $   3,419                5  %       $  197,067          $  182,225          $  14,842               8  %

Efficiency ratio             51.47   %               52.84  %           (1.37)   %                           52.22  %            60.09  %           (7.87)  %
Core efficiency ratio1       51.47   %               52.81  %           (1.34)   %                           52.21  %            52.59  %           

(1.12)%

1 Core efficiency ratio is a non-GAAP measure. See discussion and reconciliation of this measure in the accompanying financial tables. NM – Not significant



Noninterest expense was $68.8 million for the third quarter 2022, an increase of
$3.4 million from $65.4 million in the linked quarter. Employee compensation and
benefits increased $1.0 million from the linked quarter due to an increase in
full-time equivalent associates and higher performance-based incentive accruals.
Other expense increased $2.3 million from the linked quarter primarily due to a
$1.8 million increase in variable deposit costs in certain of the Company's
specialized deposit businesses that are impacted by higher interest rates.

Noninterest expense of $197.1 million for the nine months ended September 30,
2022, increased $14.8 million, from $182.2 million in the prior year period. The
increase was primarily due to the FCBP acquisition that added $20.0 million in
noninterest expense for the nine months ended September 30, 2022 compared to
$7.4 million in the prior year period, an increase in employee compensation and
benefits from merit increases in 2021, and higher deposit servicing costs.
Certain deposit specialty accounts receive an earnings credit that pays costs
used to service the customer. These costs are recorded as noninterest expense
and will fluctuate with the amount of the underlying deposit balances and the
related earnings credit rate. The increase was primarily due to continued
success in generating new customer activity in the deposit specialties and
higher earnings credit rates. Offsetting these increases was a decline of $19.8
million in merger expenses that were recognized in the prior year on the
acquisitions of Seacoast Commerce Banc Holdings and FCBP and $3.4 million in
branch closure expenses recognized in the prior year period.


Income taxes

The Company's effective tax rate was 21.8% for both the third quarter 2022 and
the linked quarter. The effective tax rate was 21.9% and 20.9% for the nine
months ended September 30, 2022 and 2021, respectively. The Company's effective
tax rate for the first nine months of 2022 has increased over the prior year
period due to growth of pre-tax income and the further expansion and
diversification of the Company's geographic footprint which has affected tax
apportionment between states with different income tax rates.

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