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Item 2. Management’s Discussion and Analysis

2021-10-27 compared with 2021-08-04 · 238 added, 204 removed, 458 unchanged (49% of the section changed)

ITEM 2 - MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Net income in the first six months of 2021 was $47.3 million, up $10.4 million from $37.0 million for the comparable period of 2020 .

Diluted income per common share was $1.85 in the first six months of 2021, up 28.5% from $1.44 in the comparable period of 2020.

The increase was primarily due to the Company recording a provision for credit losses of $12.1 million for the six months of 2020 compared to a recovery to provision for credit losses of $223,000 for the first six months of 2021, a decrease in expense of $12.3 million.

Net income in the first nine months of 2021 was $71.5 million, which increased $11.7 million, or 19.6%, from $59.7 million for the comparable period of 2020 .

Diluted income per common share was $2.79 in the first nine months of 2021, up 19.7% from $2.33 in the comparable period of 2020.

The increase in net income for 2021 was primarily due to growth in net interest income of $14.8 million and a decrease in provision expense of $12.8 million, offset by an increase in noninterest expense of $13.1 million.

The elevated provision in 2020 was driven primarily by the economic impact of COVID-19 on the Company's loan customers using the incurred loan loss methodology.

Pretax pre-provision earnings in the first six months of 2021 were $57.8 million, an increase of $683,000, or 1.2%, compared to $57.2 million for the comparable period.

Pretax pre-provision earnings in the first nine months of 2021 were $88.7 million, an increase of $1.7 million, or 1.9%, compared to $87.1 million for the comparable period.

Pretax pre-provision earnings is a non-GAAP measure calculated by adding net interest income to noninterest income and subtracting noninterest expense.

Annualized return on average total equity was 14.49% in the first six months of 2021 versus 12.22% in the comparable period of 2020.

Annualized return on average total assets was 1.58% in the first six months of 2021 versus 1.43% in the comparable period of 2020.

The Company's average equity to average assets ratio was 10.92% in the first six months of 2021 versus 11.67% in the comparable period of 2020.

Net income in second quarter of 2021 was $24.3 million, up 23.8% from $19.7 million for the comparable period of 2020.

Diluted earnings per common share was $0.95 in the second quarter of 2021, up 23.4% from $0.77 in the comparable period of 2020.

The increase was primarily due to the Company recording a recovery to provision for credit losses of $1.7 million for the second quarter of 2021, a decrease of $7.2 million, compared to provision expense of $5.5 million for the second quarter of 2020.

In addition, net income for the second quarter of 2021 was positively impacted by a $4.1 million increase in net interest income and a $171,000 increase in noninterest income.

These increases were offset by a $5.6 million, or 26.4%, increase in noninterest expense.

Pretax pre-provision earnings in the second quarter of 2021 were $28.4 million, a decrease of $1.3 million, or 4.3%, compared to $29.6 million for the comparable period of 2020.

Annualized return on average total equity was 14.71% in the second quarter of 2021 versus 12.92% in the comparable period of 2020.

Annualized return on average total assets was 1.58% in the second quarter of 2021 versus 1.45% in the comparable period of 2020.

The average equity to average assets ratio was 10.76% in the second quarter of 2021 versus 11.23% in the comparable period of 2020.

Total assets were $6.233 billion as of June 30, 2021 versus $5.830 billion as of December 31, 2020, an increase of $402.5 million, or 6.9%.

This increase was primarily due to a $322.9 million increase in cash and cash equivalents and a $389.4 million increase in securities available-for-sale, offset by a decrease in net loans of $305.8 million.

The outstanding balance of Paycheck Protection Program (PPP) loans at June 30, 2021, was $194.2 million versus $412.0 million at December 31, 2020.

Annualized return on average total equity was 14.29% in the first nine months of 2021 versus 12.96% in the comparable period of 2020.

Annualized return on average total assets was 1.57% in the first nine months of 2021 versus 1.50% for the comparable period of 2020.

The Company's average equity to average assets ratio was 11.01% in the first nine months of 2021 versus 11.59% in the comparable period of 2020.

Net income in the third quarter of 2021 was $24.1 million, up $1.3 million, or 5.9%, from $22.8 million for the comparable period of 2020.

Diluted earnings per common share was $0.94 in the third quarter of 2021, up 5.6% from $0.89 in the comparable period of 2020.

The increase was primarily due to a $5.8 million increase in net interest income for the quarter.

Additionally, the Company recording a provision for credit losses of $1.3 million for the third quarter of 2021, a decrease of $450,000, compared to provision expense of $1.8 million for the third quarter of 2020.

These increases were offset by a $2.0 million, or 15.3%, decrease in noninterest income and a $2.8 million, or 12.3%, increase in noninterest expense.

Pretax pre-provision earnings in the third quarter of 2021 were $30.9 million, an increase of $ 985,000, or 3.3%, compared to $29.9 million for the comparable period of 2020 .

Annualized return on average total equity was 13.90% in the third quarter of 2021 versus 14.36% in the comparable period of 2020.

Annualized return on average total assets was 1.56% in the third quarter of 2021 versus 1.64% in the comparable period of 2020.

The average equity to average assets ratio was 11.19% in the third quarter of 2021 versus 11.43% in the comparable period of 2020.

Total assets were $6.223 billion as of September 30, 2021 versus $5.830 billion as of December 31, 2020, an increase of $392.5 million, or 6.7%.

This increase was primarily due to a $504.9 million increase in securities available-for-sale and a $307.3 million increase in cash and cash equivalents, offset by a decrease in net loans of $421.3 million.

The outstanding balance of Paycheck Protection Program (PPP) loans at September 30, 2021, was $ 91.9 million versus $412.0 million at December 31, 2020.

The Paycheck Protection Program has strengthened the Company’s borrowers’ balance sheets and improved their operating performance.

It has further provided a valuable cash injection for all clients who participated in the program.

Yet, it has contributed to a reduction in usage of available credit facilities by clients, which decreased to 40% at June 30, 2021 from 43% at December 31, 2020.

Since the start of the pandemic, loan line utilization has declined from 48% as of March 31, 2020 to 41% as of September 30, 2021, thereby decreasing loans outstanding.

Line utilization was 42% as of December 31, 2020.

Balance sheet growth was primarily funded through growth in deposits during 2021, which was driven by the deposit of PPP loan proceeds into borrower accounts and additional government stimulus payments into customer accounts, inclusive of stimulus payments received for municipal customers.

Deposits increased $377.8 million while total borrowings decreased by $10.5 million since December 31, 2020.

Total equity increased by $20.3 million due primarily to net income of $47.3 million, dividends declared and paid of $0.68 per share totaling $17.3 million, the day one CECL adjustment to retained earnings of $7.0 million, and a reduction to accumulated other comprehensive income of $5.5 million, driven primarily by a decrease in the fair value of available-for-sale securities.

Total equity increased by $26.0 million due primarily to net income of $71.5 million, dividends declared and paid of $1.02 per share totaling $26.0 million, the day one CECL adjustment to retained earnings of $7.0 million net of tax, and a reduction to accumulated other comprehensive income of $16.8 million, driven primarily by a decrease in the fair value of available-for-sale securities.

Impact of COVID-19 .

The progression of the COVID-19 pandemic in the United States has had an impact on our financial condition and results of operations as of and for the three and six months ended June 30, 2021 and 2020, and may have a complex and significant adverse impact on the economy, the banking industry and our Company in future fiscal periods, all subject to a high degree of uncertainty.

As a result of the pandemic, our financial condition, capital levels and results of operations have been and could continue to be significantly affected, as described in further detail below.

The progression of the COVID-19 pandemic in the United States has had an impact on our financial condition and results of operations as of and for the three and nine months ended September 30, 2021 and 2020, and may have a complex and significant adverse impact on the economy, the banking industry and our Company in future fiscal periods, all subject to a high degree of uncertainty.

As a result of the pandemic, our financial condition, capital levels and results of operations have been and could continue to be significantly affected, as described in further detail in this section.

Active Management of Credit Risk

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The original ten industries represented a peak of $765 million, or 18.7%, as of March 31, 2020, excluding PPP loans.

The Company’s commercial loan portfolio is highly diversified, and no industry sector represents more than 8% of the bank’s loan portfolio, net of PPP, as of June 30, 2021.

Agri-business and agricultural loans, along with healthcare loans, represented the highest specific industry concentrations, at 8% of total loans in both cases.

The Company’s commercial loan portfolio is highly diversified, and no industry sector represents more than 8% of the bank’s loan portfolio, net of PPP, as of September 30, 2021.

Agri-business and agricultural loans represented the highest specific industry concentrations, at 8% of total loans.

The Company’s Commercial Banking and Credit Administration teams continue to actively work with customers to understand their business challenges and credit needs during this time.

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Loan deferrals peaked on June 17, 2020, at $737 million, which represented 16% of the total loan portfolio.

As of June 30, 2021, total deferrals attributable to COVID-19 were $37 million, representing eight borrowers, or 1% of the total loan portfolio.

Total deferrals as of July 20, 2021 represented a decline in deferral balances of 96% from peak levels in June 2020.

Of the $28 million, four were commercial loan borrowers representing $28 million in loans, or 1% of total commercial loans, and there were no retail loan deferrals.

As of September 30, 2021, total deferrals attributable to COVID-19 were $22.3 million, representing three borrowers, or 0.5% of the total loan portfolio.

Total deferrals as of September 30, 2021 represented a decline in deferral balances of 97.0% from peak levels in June 2020.

Of the $22.3 million, two were commercial loan borrowers representing $22.3 million in loans, or 0.6% of total commercial loans, and there was one retail loan deferral with a balance less than $50,000.

All COVID-19 related loan deferrals remain on accrual status, as each deferral is evaluated individually, and management has determined that all contractual cash flows are collectable at this time.

As of July 20, 2021, of the total commercial deferrals attributed to COVID-19, $8 million represented a first deferral action, $250,000 represented a second deferral action and $20 million represented a third deferral action.

As of September 30, 2021, of the total commercial deferrals attributed to COVID-19, $8.0 million represented a second deferral action and $14.3 million represented a third deferral action.

In accordance with Section 4013 of the CARES Act, these deferrals were not considered to be troubled debt restructurings.

This provision was extended to January 1, 2022 under the Consolidated Appropriations Act, 2021.

The third deferral actions, which are comprised of two borrowers, have been classified as watch list credits and are adequately reserved for in the allowance for credit losses as of June 30, 2021.

The third deferral action has been classified as a watch list credit and is adequately reserved for in the allowance for credit losses as of September 30, 2021.

In addition, this credit was removed from COVID-19 deferral status in October 2021.

The Company’s retail loan portfolio is comprised of 1-4 family mortgage loans, home equity lines of credit and other direct and indirect installment loans.

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The Paycheck Protection Program

During the first and second quarter of 2021, the Company funded PPP loans totaling $165.1 million for its customers through the second round of the PPP program.

During the first half of 2021, the Company funded PPP loans totaling $165.1 million for its customers through the second round of the PPP program.

In addition, the Bank has continued processing forgiveness applications for PPP loans made during the first and second rounds of the PPP program.

As of June 30, 2021, Lake City Bank had $194.2 million in PPP loans outstanding, net of deferred fees, consisting of $40.7 million from PPP round one and $153.5 million from PPP round two.

As of September 30, 2021, the Bank had $91.9 million in PPP loans outstanding, net of deferred fees, consisting of $15.5 million from PPP round one and $76.4 million from PPP round two.

Most of the PPP loans are for existing customers and 55% of the number of PPP loans originated are for amounts less than $50,000.

As of June 30, 2021, the SBA has approved forgiveness for $513.6 million in PPP loans originated during round one and $5.7 million in PPP loans originated during round two.

As of June 30, 2021, the Company has submitted forgiveness applications on behalf of customers in the amount of $15.2 million for PPP round one and $1.7 million for PPP round two that are awaiting SBA approval.

June 30, 2021

As of September 30, 2021, the SBA has approved forgiveness for $538.9 million in PPP loans originated during round one and $86.0 million in PPP loans originated during round two.

During 2021, the Bank has processed $320.1 million of PPP loan forgiveness.

As of September 30, 2021, the Company has submitted forgiveness applications on behalf of customers in the amount of $14.6 million for PPP round one and $5.9 million for PPP round two that are awaiting SBA approval.

September 30, 2021

Originated Forgiven Outstanding (1)

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RESULTS OF OPERATIONS

Selected income statement information for the three and six months ended June 30, 2021 and 2020 is presented in the following table:

Three Months Ended June 30, Six Months Ended June 30,

Selected income statement information for the three and nine months ended September 30, 2021 and 2020 is presented in the following table:

Three Months Ended September 30, Nine Months Ended September 30,

(dollars in thousands) 2021 2020 2021 2020

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A reconciliation of non-GAAP measures is provided below (in thousands, except for per share data).

Three Months Ended June 30, Six Months Ended June 30,

Three Months Ended September 30, Nine Months Ended September 30,

(dollars in thousands) 2021 2020 2021 2020

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Deferred tax assets related to goodwill 1,176 1,176 1,176 1,176

Tangible Common Equity 673,677 617,103 673,677 617,103

Tangible Common Equity (A) 679,408 633,045 679,408 633,045

Total Assets $ 6,222,916 $ 5,551,108 $ 6,222,916 $ 5,551,108

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Deferred tax assets related to goodwill 1,176 1,176 1,176 1,176

Tangible Assets 6,229,120 5,437,303 6,229,120 5,437,303

Tangible Common Equity/Tangible Assets 10.81 % 11.35 % 10.81 % 11.35 %

Tangible Assets (B) 6,219,122 5,547,314 6,219,122 5,547,314

Tangible Capital Ratio (A/B) 10.92 % 11.41 % 10.92 % 11.41 %

Net Interest Income $ 45,741 $ 39,913 $ 133,081 $ 118,295

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Impact of Paycheck Protection Program on Net Interest Margin FTE

Three Months Ended June 30, Six Months Ended June 30,

Three Months Ended September 30, Nine Months Ended September 30,

2021 2020 2021 2020

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Net Interest Margin FTE, net of PPP Impact 2.95 % 3.17 % 2.98 % 3.22 %

Net income was $47.3 million in the first six months of 2021, an increase of $10.4 million, or 28.0%, versus net income of $37.0 million in the first six months of 2020.

The increase in net income was primarily due to the Company recording a provision for credit losses of $12.1 million for the first six months of 2020 compared to a recovery to provision for credit losses of $223,000 for the first six months of 2021, a decrease of $12.3 million.

The higher provision in the first half of 2020 was driven by potential negative impacts on the Company's borrowers from the economic conditions resulting from the COVID-19 pandemic, which was calculated using the incurred loss model.

In addition, net interest income increased by $9.0 million and noninterest income increased by $2.0 million.

These were offset by an increase in noninterest expense of $10.2 million and an increase in income tax expense of $2.6 million.

Net income was $24.3 million for the three months ended June 30, 2021, an increase of $4.7 million, or 23.8%, versus net income of $19.7 million for the three months ended June 30, 2020.

The increase was primarily due to the Company recording a recovery to provision for credit losses of $1.7 million for the second quarter of 2021, a decrease of $7.2 million compared to provision expense of $5.5 million for the second quarter of 2020.

The higher provision in the second quarter of 2020 was driven by potential negative impacts on the Company’s borrowers from the economic conditions resulting from the COVID-19 pandemic, which was calculated using the incurred loss model.

In addition, net income for the three months ended June 30, 2021 was positively impacted by a $4.1 million, or 10.5%, increase in net interest income and a $171,000, or 1.5%, increase in noninterest income.

These increases were offset by a $5.6 million, or 26.4%, increase in noninterest expense.

Net income was $71.5 million in the first nine months of 2021 , an increase of $11.7 million, or 19.6%, versus net income of $59.7 million in the first nine months of 2020 .

The increase in net income for 2021 was primarily due to growth in net interest income of $14.8 million, or 12.5%, and a decrease in provision expense of $12.8 million, offset by an increase in noninterest expense of $13.1 million.

The elevated provision in the first nine months of 2020 was driven by potential negative impacts on the Company's borrowers from the economic conditions resulting from the COVID-19 pandemic, which was calculated using the incurred loss model.

Net income was $24.1 million for the three months ended September 30, 2021, an increase of $1.3 million, or 5.9%, versus net income of $22.8 million for the three months ended September 30, 2020.

The increase was primarily due to the Company recording a provision for credit losses of $1.3 million for the third quarter of 2021, a decrease of $450,000 compared to provision expense of $1.8 million for the third quarter of 2020.

The higher provision in the third quarter of 2020 was driven by potential negative impacts on the Company’s borrowers from the economic conditions resulting from the COVID-19 pandemic, which was calculated using the incurred loss model.

In addition, net income for the three months ended September 30, 2021 was positively impacted by a $5.8 million , or 14.6%, increase in net interest income.

This increase was offset by a $2.0 million, or 15.3%, decrease in noninterest income and a $2.8 million, or 12.3%, increase in noninterest expense.

We anticipate that our net income for future fiscal periods will continue to be impacted as a result of the economic developments resulting from the COVID-19 pandemic.

During the first half of 2021, provision expense declined relative to the first half provision expense of 2020.

This decline was a result of improving economic and asset quality trends, the declining balances of COVID-19 loan deferrals and a one-time recovery of $1.7 million.

During the first nine months of 2021 , provision expense declined relative to the first half provision expense of 2020 .

This decline was a result of improving economy, the declining balances of COVID-19 loan deferrals and a one-time recovery of $1.7 million in the second quarter of 2021.

However, the economic impact of the pandemic continues to evolve and, as a result, we continue to monitor the impact to customers very closely.

Net interest income in 2021 has been negatively impacted by net interest margin compression that has resulted from excess liquidity and a shift in the mix of earning assets to investment securities.

In particular, disruption to the labor market and supply chains have had, and may continue to have, a negative impact on our customers growth plans, with a corresponding effect on loan demand.

Net interest income, excluding the impacts of PPP loans, in 2021 has been negatively impacted by net interest margin compression that has resulted from excess liquidity and a shift in the mix of earning assets from loans to investment securities and short-term investments.

During 2021 , PPP loan forgiveness and continued deposit growth has contributed to the increased liquidity on the balance sheet.

The combined impact of the low interest rate environment that resulted from the Federal Reserve Bank’s reductions to the target Federal Funds Rate in the first quarter of 2020, together with the Corporation’s asset sensitive balance sheet, has caused a reduction in net interest margin in the second quarter of 2021 when compared to the second quarter of 2020 as well as year-to-date.

The combined impact of the low interest rate environment that resulted from the Federal Reserve Bank’s reductions to the target Federal Funds Rate in the first quarter of 2020, together with the Corporation’s asset sensitive balance sheet, has caused a reduction in net interest margin, excluding PPP loans, in the third quarter of 2021 when compared to the third quarter of 2020 .

Loan and investment security yields have been negatively impacted by the decline in interest rates.

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Correspondingly, deposit rates have also declined but have not fully offset the earning asset compression.

Net interest margin compression will continue to be impacted from the PPP loan program and the low fixed rate of 1.0% on these loans.

Borrowers that meet the loan forgiveness requirements outlined in the SBA program will result in loan balance paydowns for the Bank and an acceleration in unamortized PPP net loan fee income accretion through the income statement.

Net interest margin will continue to be impacted from the PPP loan program and the low fixed rate of 1.0% on these loans.

The timing and impact to net interest margin will be contingent on how quickly the PPP loans are submitted for forgiveness by borrowers and approved for forgiveness by the SBA.

In addition, loans could be repaid by borrowers in lieu of forgiveness over the course of the next few years.

PPP loan income, including both interest and fees, was $8.8 million and $3.7 million for the six months and three months ended June 30, 2021, respectively.

PPP loan income, including both interest and fees, was $3.0 million for both the six months and three months ended June 30, 2020.

PPP loan income, including both interest and fees, was $12.8 million and $ 3.9 million for the nine months and three months ended September 30, 2021, respectively.

PPP loan income, including both interest and fees, was $6.3 m illion and $3.3 million for the nine months and three months ended September 30, 2020, respectively.

Net Interest Income

The following table sets forth consolidated information regarding average balances and rates:

Six Months Ended June 30,

Nine Months Ended September 30,

(fully tax equivalent basis, dollars in thousands) Average Balance Interest Yield (1)/

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The tax equivalent rate for tax exempt loans and tax exempt securities acquired after January 1, 1983 included the Tax Equity and Fiscal Responsibility Act of 1982 (“TEFRA”) adjustment applicable to nondeductible interest expenses.

Taxable equivalent basis adjustments were $1.5 million and $1.2 million in the six-month periods ended June 30, 2021 and 2020, respectively.

Taxable equivalent basis adjustments were $2.5 million and $1.8 million in the nine-month periods ended September 30, 2021 and 2020 , respectively.

(2) Loan fees are included as taxable loan interest income.

Net loan fees attributable to PPP loans were $6.9 million and $1.9 million for the six months ended June 30, 2021 and 2020, respectively.

Net loan fees attributable to PPP loans were $10.5 million and $3.7 million for the nine months ended September 30, 2021 and 2020 , respectively.

All other loan fees were immaterial in relation to total taxable loan interest income for the periods presented.

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Prior to January 1, 2021 calculation was based on the incurred loss methodology.

Three Months Ended

June 30, 2021 Three Months Ended

June 30, 2020

Three Months Ended September 30, 2021 Three Months Ended September 30, 2020

(fully tax equivalent basis, dollars in thousands) Average Balance Interest Income Yield (1)/

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Taxable equivalent basis adjustments were $791,000 and $596,000 in the three-month periods ended June 30, 2021 and June 30, 2020, respectively.

Taxable equivalent basis adjustments were $ 976,000 and $610,000 in the three-month periods ended September 30, 2021 and September 30, 2020, respectively.

(2) Loan fees are included as taxable loan interest income.

Net loan fees attributable to PPP loans were $2.8 million and $1.9 million for the three months ended June 30, 2021 and June 30, 2020, respectively.

Net loan fees attributable to PPP loans were $ 3.6 million and $1.9 million for the three months ended September 30, 2021 and September 30, 2020, respectively.

All other loan fees were immaterial in relation to total taxable loan interest income for the periods presented.

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Prior to January 1, 2021 calculation was based on the incurred loss methodology.

Net interest income increased $9.0 million, or 11.4%, for the six months ended June 30, 2021 compared with the first six months of 2020.

The increase in net interest income was largely driven by an increase in average earning assets of $806.9 million, due primarily to loan growth of $267.4 million and growth in investment securities of $244.2 million.

Average loans outstanding increased to $4.527 billion during the six months ended June 30, 2021 compared to $4.260 billion during the the same period of 2020, with most of the growth being in commercial loans.

The average balance of PPP loans was $375.2 million for the first six months of 2021 compared to $228.9 million for the first six months of 2020.

Net interest income increased $14.8 million, or 12.5%, for the nine months ended September 30, 2021 to $133.1 million compared with $118.3 million for the first nine months of 2020 .

The increase in net interest income was largely driven by an increase in average earning assets of $746.8 million, due primarily to growth in investment securities of $352.1 million, growth in interest bearing deposits of $315.7 million and loan growth of $109.4 million.

Average loans outstanding increased to $4.469 billion during the nine months ended September 30, 2021 compared to $4.360 billion during the the same period of 2020, with most of the growth being in fixed rate commercial loans.

The average balance of PPP loans was $296.9 million for the first nine months of 2021 compared to $339.1 million for the first nine months of 2020 .

The earning asset growth was funded through an increase of deposits.

Average deposits increased $797.4 million to $5.248 billion during the six months ended June 30, 2021, compared to $4.450 billion for the same period of 2020.

PPP loan proceeds to borrowers, additional economic impact payments to consumers, and stimulus payments to municipalities impacted the increase in deposits and core deposits during the first six months of 2021, as these funds were deposited into customer checking and savings accounts at the Bank.

The tax equivalent net interest margin was 3.10% for the six months ended June 30, 2021 compared to 3.22% during the first six months of 2020.

The yield on earning assets totaled 3.39% during the six months ended June 30, 2021 compared to 3.98% in the same period of 2020.

Cost of funds (expressed as a percentage of average earning assets) totaled 0.29% during the first half of 2021 compared to 0.76% in the same period of 2020.

Average deposits increased $733.5 million to $5.280 billion during the nine months ended September 30, 2021, compared to $4.547 billion for the same period of 2020 .

PPP loan proceeds to borrowers, additional economic impact payments to consumers, and stimulus payments to municipalities impacted the increase in deposits and core deposits during the first nine months of 2021, as these funds were deposited into customer checking and savings accounts at the Bank.

The tax equivalent net interest margin was 3.11% for the nine months ended September 30, 2021 compared to 3.16% during the first nine months of 2020 .

The yield on earning assets totaled 3.38% during the nine months ended September 30, 2021 compared to 3.82% in the same period of 2020 .

Cost of funds (expressed as a percentage of average earning assets) totaled 0.27% during the first nine months of 2021 compared to 0.66% in the same period of 2020 .

The lower margin was due to lower yields on loans and securities, partially offset by a lower cost of funds.

The decline in net interest margin resulted from the Federal Reserve Bank decreases in the target Federal Funds Rate by 150 basis points during the first quarter of 2020, which brought the Federal Funds Rate back to the zero-bound range of 0.00% to 0.25% and excess liquidity on the Company's balance sheet.

The earning asset mix has changed during 2021 to reflect increased investment securities and short-term investments, which are lower yielding assets.

Additionally, the Company's net interest margin was positively impacted by 10 basis points during the first half of 2021 due to interest income and fees earned on PPP loans.

Net interest margin excluding PPP loans was 3.00% for the six months ended June 30, 2021.

Net interest income increased by $4.1 million, or 10.5%, for the three months ended June 30, 2021 as compared to the three months ended June 30, 2020.

The increased level of net interest income during the second quarter of 2021 was largely driven by an increase in average earning assets of $711.8 million, due primarily to loan growth of $27.3 million, growth in available-for-sale securities of $334.1 million and increases in interest bearing deposits of $418.3 million.

The earning asset mix has changed during 2021 to reflect increased investment securities and interest bearing deposits, which are lower yielding assets.

The Bank deployed excess liquidity of $600 million to the investment security portfolio and to interest bearing deposits as a result of lower loan growth.

Additionally, the Company's net interest margin was positively impacted by 13 basis points during the first nine months of 2021 due to interest income and fees earned on PPP loans.

Net interest margin excluding PPP loans was 2.98% for the nine months ended September 30, 2021.

Net interest income increased by $5.8 million, or 14.6%, for the three months ended September 30, 2021 as compared to the three months ended September 30, 2020.

The increased level of net interest income during the third quarter of 2021 was largely driven by an increase in average earning assets of $627.3 million, due primarily to growth in available-for-sale securities of $564.1 million and increases in interest bearing deposits of $272.4 million.

The Company deployed $600 million in excess liquidity to its investment security portfolio since late 2020 in response to the surge in deposits that begin in 2020 and has continued into 2021.

This earning asset growth was funded through an increase in deposits.

Average deposits increased $690.4 million to $5.387 billion for the second quarter of 2021, compared to $4.697 billion for the comparable period of 2020.

Average deposits increased $606.6 million to $5.344 billion for the third quarter of 2021, compared to $4.738 billion for the comparable period of 2020.

During this same period, average core deposits increased $803.4 million.

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Short-term borrowings have decreased by $22.1 million during these comparable periods.

Additionally, net interest income for 2021 was positively impacted by $308,000 in nonaccrual interest income that was recognized during the three months ended June 30, 2021 as a result of previously charged-off credit being paid in full, see "Provision for Credit Losses" for additional details.

The Company’s net interest margin decreased 9 basis points to 3.01% for the second quarter of 2021 compared to 3.10% for the second quarter of 2020.

The lower margin in the second quarter of 2021 as compared to the prior year period was due to lower yields on loans and securities, partially offset by a lower cost of funds.

The Company’s net interest margin increased 8 basis points to 3.13% for the third quarter of 2021 compared to 3.05% for the third quarter of 2020.

The higher margin in the third quarter of 2021 as compared to the prior year period was due to higher yields on loans due to PPP interest income and fee accretion as well as lower costs of funds.

As a result of the excess liquidity on the company's balance sheet, the mix of earning assets included lower earning assets consisting of balances at the Federal Reserve Bank and the investment securities portfolio.

The decline in earning asset yields, and thereby net interest margin, resulted from the Federal Reserve Bank decreases in the target Federal Funds Rate by 150 basis points during the first quarter of 2020, which brought the Federal Funds Rate back to the zero-bound range of 0.00% to 0.25%.

Second quarter loan yields were impacted by the lower yield on the PPP loan portfolio, offset by fees earned as a result of PPP loan forgiveness.

The Company’s net interest margin excluding PPP related net interest income was 6 basis points lower at 2.95% for the second quarter of 2021 compared to actual net interest margin of 3.01%, and reflects a 22 basis point decline from net interest margin excluding PPP loans of 3.17% in the second quarter of 2020.

Cost of funds decreased to a historical low of 0.27% for the three-month period ended June 30, 2021 from 0.56% at June 30, 2020.

In addition, third quarter loan yields were impacted by the lower yield on the PPP loan portfolio, offset by fees earned as a result of PPP loan forgiveness.

The Company’s net interest margin excluding PPP related net interest income was 18 basis points lower at 2.95% for the third quarter of 2021 compared to actual net interest margin of 3.13%, and reflects a 22 basis point decline from net interest margin excluding PPP loans of 3.17% in the third quarter of 2020.

Cost of funds decreased to a historical low of 0.24% for the three-month period ended September 30, 2021.

Provision for Credit Losses

The Company recorded a provision for credit losses expense of $1.3 million for the three months ended September 30, 2021 compared to a provision expense of $1.8 million during the comparable period of 2020 , a decrease of $450,000.

Net recoveries were $35,000 during the three month period ended September 30, 2021 compared to net charge offs of $22,000 during the comparable period of 2020 .

The Company recorded a provision for credit losses expense of $1.1 million for the nine months ended September 30, 2021 compared to a provision expense of $13.9 million during the comparable period of 2020 .

The primary factor impacting the provision expense in 2020 was the potential negative impact to the Company's borrowers as a result of the economic conditions resulting from the COVID-19 pandemic.

Net recoveries were $1.5 million during the nine month period ended September 30, 2021 compared to net charge offs of $3.8 million during the comparable period of 2020 .

The Company adopted the CECL standard (ASU 2016-13) during the first quarter of 2021, effective January 1, 2021.

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The day one impact of the adoption was an increase in the allowance for credit losses of $9.1 million, with an offset, net of taxes, to beginning stockholders’ equity.

The Company recorded a recovery of provision for credit losses expense of $1.7 million for the three months ended June 30, 2021 compared to a provision expense of $5.5 million during the comparable period of 2020, a decrease of $7.2 million.

provision reversal was driven primarily by a one-time recovery during the second quarter of 2021 of $1.7 million from a commercial loan relationship that had been partially charged off in 2009.

Net recoveries were $1.6 million during the three month period ended June 30, 2021 compared to net charge offs of $90,000 during the comparable period of 2020.

The Company recorded a recovery of provision for credit losses expense of $223,000 for the six months ended June 30, 2021 compared to a provision expense of $12.1 million during the comparable period of 2020.

The primary factor impacting the provision expense in 2020 was the potential negative impact to the Company's borrowers as a result of the economic conditions resulting from the COVID-19 pandemic.

Net recoveries were $1.5 million during the six month period ended June 30, 2021 compared to net charge offs of $3.7 million during the comparable period of 2020.

The Company has granted COVID-19 loan deferrals to customers, which peaked on June 17, 2020 at $737 million, or 16%, of the total loan portfolio.

As of June 30, 2021, COVID-19 loan deferrals have declined to $36.9 million, representing eight borrowers, or 0.8% of the total loan portfolio.

All eight were commercial loan borrowers and there were no retail borrowers with COVID-19 deferrals.

In accordance with Section 4013 of the CARES Act, loan deferrals granted to customers that resulted from the impact of COVID-19 and who were not past due at December 31, 2019 were not considered troubled debt restructurings as of June 30, 2021 and December 31, 2020.

As of September 30, 2021, COVID-19 loan deferrals have declined to $22.3 million, representing three borrowers, or 0.5% of the total loan portfolio.

Two were commercial loan borrowers and there was one retail borrower with COVID-19 deferrals.

This provision was extended to January 1, 2022 under the Consolidated Appropriations Act, 2021.

Management continues to monitor these deferrals and has adequately considered these credits in the June 30, 2021 and December 31, 2020 allowance for credit losses balance.

Management continues to monitor these deferrals and has considered these credits in the September 30, 2021 and December 31, 2020 allowance for credit losses balance.

The recent credit cycle has not been as negative as originally expected in the prior year, and management is comfortable with the current levels of the Company's reserve.

The provision expense in the third quarter of 2021 was driven primarily by the downgrading of two commercial loan borrowers to nonaccrual status.

The balance of these loans totaled $21.2 million as of September 30, 2021.

The first credit relationship of $12.0 million was downgraded due to the severe impact on the business caused by the economic conditions resulting from the COVID-19 pandemic.

The borrower is a retailer of party and special event supplies.

During the third quarter of 2021, the borrower’s challenges significantly worsened.

As a result, loans to the borrower were downgraded and placed on nonaccrual status.

Loans to this borrower are secured by a blanket lien on all assets, including buildings, inventory, accounts receivable and equipment.

In addition, the exposure is supported by a partial personal guarantee.

The second downgrade relates to a shared national credit participation of $9.2 million to a commercial borrower that operates grain elevators and handles feed processing and merchandising of agriculture products.

Loans to this borrower are secured by a blanket lien on all assets, including buildings, inventory, accounts receivable and equipment.

These downgrades resulted in an increase to the specific credit loss allocations for each credit as they are now individually analyzed credits.

The loans to both borrowers are current on interest and principal payments through September 2021.

The Bank believes that the allocations are adequate to cover any potential losses.

Each of these downgrades resulted from a unique business challenge and management does not believe these downgrades are systemic as it relates to the Bank's broader loan portfolio.

Additional factors considered by management included key loan quality metrics, including reserve coverage of nonperforming loans and economic conditions in the Company’s markets, and changes in the facts and circumstances of watch list credits, which includes the security position of the borrower.

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Noninterest Income

Noninterest income categories for the six-month and three-month periods ended June 30, 2021 and 2020 are shown in the following table:

Six Months Ended

Noninterest income categories for the nine-month and three-month periods ended September 30, 2021 and 2020 are shown in the following table:

Nine Months Ended

September 30,

(dollars in thousands) 2021 2020 Dollar Change Percent Change

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Three Months Ended

September 30,

(dollars in thousands) 2021 2020 Dollar Change Percent Change

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Interest rate swap fee income 180 2,143 (1,963) (91.6) %

Mortgage banking income 415 1,354 (939) (69.4) %

Mortgage banking income (loss) (32) 1,005 (1,037) (103.2) %

Net securities gains 0 314 (314) (100.0) %

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Noninterest income to total revenue 19.55 % 24.73 %

The Company's noninterest income increased $2.0 million, or 8.9%, to $23.9 million for the six months ended June 30, 2021 compared to $21.9 million in the prior year period.

Noninterest income was positively impacted by a $985,000 increase, or 20.4%, in loan and service fees, a $917,000 increase, or 168.6%, in bank owned life insurance income and a $904,000 increase, or 20.6%, in wealth management and investment brokerage fees over the corresponding prior period.

Noninterest income was also positively impacted by a $748,000 increase in net securities gains due to repositioning of the available-for-sale securities portfolio in response to the steepening yield curve during the first quarter of 2021.

Noninterest income was negatively impacted by a $1.2 million decrease, or 61.6%, in interest rate swap fee income, a $152,000 decrease, or 7.8%, in mortgage banking income and a $419,000 decrease, or 20.9%, decrease in other income.

The decrease in other income was primarily driven by a credit valuation adjustment on interest rate swaps during the first quarter of 2020.

The Company’s noninterest income increased $171,000, or 1.5%, to $11.3 million for the second quarter of 2021, compared to $11.2 million for the second quarter of 2020.

Noninterest income was positively impacted by elevated wealth and investment brokerage fees which increased by $538,000, or 25.4%, for these comparable periods.

In addition, service charges on deposit accounts were up $332,000, or 15.2%, and loan and service fees were up $617,000, or 25.4%, for these comparable periods due to an increase in economic activity within the Company's operating footprint which resulted in increased utilization of the bank's products and services.

Offsetting these increases were decreases of $804,000, or 61.4%, in interest rate swap fee income and $939,000, or 69.4%, in mortgage banking income.

Both interest rate swap arrangements and mortgage banking have seen a decrease in demand during the second quarter of 2021 compared to the second quarter of 2020, and the carrying value of mortgage service rights has been impacted by increased prepayment speeds due to the current rate environment and appreciating single-home values.

The increased prepayment speeds has resulted in increased mortgage servicing asset amortization expense of $250,000 during the second quarter of 2021 which offset mortgage banking income earned during the period.

The Company's noninterest income decreased $50,000, or 0.1%, to $35.0 million for the nine months ended September 30, 2021 compared to $35.1 million in the prior year period.

Noninterest income was positively impacted by a $1.4 million increase, or 18.1%, in loan and service fees, a $1.3 million increase, or 18.6%, in wealth management and investment brokerage fees over the corresponding prior period.

Noninterest income was also positively impacted by a $625,000 increase in bank owned life insurance income and an increase in net securities gains of $434,000 due to repositioning of the available-for-sale securities portfolio in response to the steepening yield curve during the first quarter of 2021.

Noninterest income was negatively impacted by a $3.2 million decrease, or 77.2%, in interest rate swap fee income, and a $1.2 million decrease, or 40.4%, in mortgage banking income.

Interest rate swaps have seen a decrease in customer demand during the first three quarters of 2021 compared to the record year in 2020.

Additionally, mortgage banking income has been negatively impacted by the valuation of mortgage servicing rights due to increased amortization expense in the current rate environment.

The increased prepayment speeds have resulted in increased mortgage servicing asset amortization expense of $900,000 for the nine months ended September 30, 2021.

The Company’s noninterest income decreased $2.0 million, or 15.3%, to $11.1 million for the third quarter of 2021 , compared to $13.1 million for the third quarter of 2020 .

Noninterest income was positively impacted by elevated loan and service fees which increased by $368,000, or 14.0%, for these comparable periods due to increased debit card interchange fees.

In addition, wealth and investment brokerage fees which increased by $347,000, or 14.8%, and service charges on deposit accounts were up $265,000, or 10.6%.

Offsetting these increases were decreases of $2.0 million, or 91.6%, in interest rate swap fee income and $1.0 million, or 103.2%, in mortgage banking income.

Both interest rate swap arrangements and mortgage banking have seen a decrease in demand during the third quarter of 2021 compared to the third quarter of 2020, and the carrying value of mortgage service rights has been impacted by increased prepayment speeds due to the current rate environment and appreciating single-home values.

The increased prepayment speeds have resulted in increased mortgage servicing asset amortization expense of $650,000 during the third quarter of 2021 which offset mortgage banking income earned during the period.

Future noninterest income may continue to be impacted due to the effects of the COVID-19 pandemic, and the scope of any future governmental policy responses.

For example, increased economic activity may result in higher merchant card fee income and higher interchange revenue that is reported in services charges on deposits accounts and loan and service fees.

Conversely, increased infection rates due to the Delta variant of COVID-19, and any governmental responses thereto, could reduce economic activity and thereby reduce these activity-driven fees.

Conversely, increased infection rates due to COVID-19, and any governmental responses thereto, could reduce economic activity and thereby reduce these activity-driven fees.

Noninterest Expense

Noninterest expense categories for the six-month and three-month periods ended June 30, 2021 and 2020 are shown in the following tables:

Six Months Ended

Noninterest expense categories for the nine-month and three-month periods ended September 30, 2021 and 2020 are shown in the following tables:

Nine Months Ended

September 30,

(dollars in thousands) 2021 2020 Dollar Change Percent Change

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Three Months Ended

September 30,

(dollars in thousands) 2021 2020 Dollar Change Percent Change

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Efficiency ratio 45.67 % 43.61 %

The Company’s noninterest expense increased by $10.2 million, or 23.7%, to $53.4 million in the first six months of 2021 compared to $43.2 million in the corresponding prior year period.

The increase was driven by salaries and employee benefits which increased $7.2 million, or 31.1%, primarily due to higher performance-based incentive compensation expense.

The Company’s noninterest expense increased by $13.1 million, or 19.7%, to $79.4 million in the first nine months of 2021 compared to $66.3 million in the corresponding prior year period.

The increase was driven by salaries and employee benefits which increased $8.7 million, or 24.3%, primarily due to higher performance-based incentive compensation expense and health insurance costs.

Professional fees increased $1.6 million, or 44.3%, driven by expenses related to the Company's implementation of Lake City Bank Digital, an innovative digital banking platform, in the first quarter of 2021, as well as an increase in legal and regulatory expense.

Data processing expenses associated with the PPP digital solution totaled $490,000 during the first six months of 2021.

Data processing expenses associated with the PPP digital solution totaled $578,000 during the first nine months of 2021.

In addition, the Company made a $500,000 contribution to its foundation in the first quarter of 2021 which is included in corporate and business development expense.

The Company’s noninterest expense increased $5.6 million, or 26.4%, to $26.6 million in the second quarter of 2021, compared to $21.1 million in the second quarter of 2020.

The Company’s noninterest expense increased $2.8 million, or 12.3%, to $26.0 million in the third quarter of 2021, compared to $23.1 million in the third quarter of 2020.

Salaries and employee benefits increased $1.5 million, or 12.0%, driven by higher performance-based incentive compensation expense and higher employee health insurance expense.

Professional fees increased $786,000, or 74.6%, driven by expenses related to the Company's implementation of Lake City Bank Digital in the first quarter of 2021, as well as an increase in legal and regulatory expense.

Data processing fees increased $375,000, or 13.3%, driven by the Company’s continued investment in customer focused, technology-based solutions, such as the online PPP origination and forgiveness platform, and ongoing cybersecurity and data management enhancements.

The Company's efficiency ratio was 48.0% for the six months ended June 30, 2021 compared to 43.0% in the prior period.

The Company’s efficiency ratio was 48.5% for the second quarter of 2021, compared to 41.6% for the second quarter of 2020.

Corporate and business development expenses increased $414,000, or 70.6%, due to the timing of planned advertising campaigns and increased business development costs, as in-person meetings with clients and prospects have resumed.

FDIC insurance and other regulatory fees increased $194,000, or 35.0%, driven by the company's rapid balance sheet growth year-over-year.

The Company's efficiency ratio was 47.21% for the nine months ended September 30, 2021 compared to 43.23% in the prior period.

The Company’s efficiency ratio was 45.67% for the third quarter of 2021, compared to 43.61% for the third quarter of 2020.

As previously disclosed, in the third quarter of 2019, the Bank discovered potentially fraudulent activity by a former treasury management client involving multiple banks.

The former client subsequently filed several related bankruptcy cases, captioned In re Interlogic Outsourcing, Inc., et al ., which are pending in the United States Bankruptcy Court for the Western District of Michigan.

On April 27, 2021, the bankruptcy court entered an order approving an amended plan of liquidation, which was filed by the former client, other debtors and bankruptcy plan proponents.

In related filings, the debtors have disclosed that they have various potential state and federal claims against the Bank, and that they had settled similar claims against another bank.

Based on current information, we have determined that a loss is neither probable nor estimable at this time, and the Bank intends to vigorously defend itself if any claim is filed.

On April 27, 2021, the bankruptcy court entered an order approving an amended plan of liquidation, which was filed by the former client, other debtors and bankruptcy plan proponents, and approving the consolidation of the assets in the aforementioned cases under the Khan IOI Consolidated Estate Trust.

On August 9, 2021, the liquidating trustee for the bankruptcy estates filed a complaint against the Bank, and has agreed to stay prosecution of the action through December 31, 2021.

The action is focused on a series of business transactions among the client, related entities, and the Bank, which the liquidating trustee alleges are voidable under applicable federal bankruptcy and state law.

The complaint also addresses treatment of the Bank’s claims filed in the bankruptcy cases.

Based on current information, we have determined that a loss is neither probable nor estimable at this time, and the Bank intends to vigorously defend itself against all allegations asserted in the compliant.

Future noninterest expense may continue to be impacted due to the COVID-19 pandemic.

For example, continued economic reopening and growth may impact balance sheet growth and resulting revenue growth which could increase the amount the Company pays in incentive-based compensation.

In addition, prolonged supply chain disruptions and increased infection rates due to the Delta variant of COVID-19 could halt the economic recovery and result in elevated provision expense which may reduce net income and diluted earnings per share, another key performance metric that impacts the incentive-based compensation targets.

The Company’s income tax expense increased $2.6 million and $1.3 million, respectively, in the six-month and three-month periods ended June 30, 2021 compared to the same periods in 2020.

The effective tax rate was 18.5% and 19.0%, respectively, in the six-month and three-month periods ended June 30, 2021, compared to 18.0% and 18.4% for the comparable periods of 2020.

The year-to-date effective tax rate for 2021 increased as compared to the prior year period primarily due a lower percentage of income being derived from tax-advantaged sources.

In addition, prolonged supply chain disruptions and increased infection rates due to COVID-19 could halt the economic recovery and result in elevated provision expense which may reduce net income and diluted earnings per share, another key performance metric that impacts the incentive-based compensation targets.

The Company’s income tax expense increased $ 2.7 million and $ 92,000 , respectively, in the nine-month and three-month periods ended September 30, 2021 compared to the same periods in 2020 .

The effective tax rate was 18.5 % in the nine-month and three-month periods ended September 30, 2021, compared to 18.4% and 19.1%, respectively, for the comparable periods of 2020 .

The quarter-to-date effective tax rate for 2021 decreased as compared to the prior year period primarily due a higher percentage of income being derived from tax-advantaged sources.

FINANCIAL CONDITION

Total assets of the Company were $6.233 billion as of June 30, 2021, an increase of $402.5 million, or 6.9%, when compared to $5.830 billion as of December 31, 2020.

Total assets of the Company were $6.223 billion as of September 30, 2021, an increase of $392.5 million, or 6.7%, when compared to $5.830 billion as of December 31, 2020.

This increase was primarily due to a $307.3 million increase in cash and cash equivalents and a $504.9 million increase in securities available-for-sale, offset by a decrease in gross loans of $409.7 million, or 8.8%.

The outstanding balance of Paycheck Protection Program (PPP) loans at September 30, 2021, was $91.9 million versus $412.0 million at December 31, 2020.

Loans excluding PPP loans decreased by $89.6 million, or 2.1%, from $4.237 billion at December 31, 2020 to $4.148 billion at September 30, 2021.

Total deposits increased $377.8 million, or 7.5%, while total borrowings decreased by $10.5 million, or 12.3%.

The increase in deposits was primarily driven by growth in core deposits of $381.8 million, or 7.6%, offset by a decrease in wholesale funding of $4.0 million.

Core deposits were $5.385 billion as of June 30, 2021 compared to $5.022 billion as of December 31, 2020.

The net decline in PPP loans was due to loan forgiveness of $370.9 million from round one loans, $5.7 million from round two loans and $165.1 million of loans originated in round two of the program.

The outstanding balance of Paycheck Protection Program (PPP) loans at June 30, 2021, was $194.2 million versus $412.0 million at December 31, 2020.

Loans excluding PPP loans decreased by $77.7 million, or 1.8%, from $4.237 billion at December 31, 2020 to $4.159 billion at June 30, 2021.

Additionally, commercial deposits increased by $181.7 million, or 9.4%, to $2.122 billion at June 30, 2021 compared to $1.940 billion at December 31, 2020.

Core deposits were $5.404 billion as of September 30, 2021 compared to $5.022 billion as of December 31, 2020.

Additionally, commercial

deposits increased by $203.3 million, or 10.5%, to $2.144 billion at September 30, 2021 compared to $1.940 billion at December 31, 2020.

The increase in commercial and retail core deposits has resulted from proceeds from the PPP loan program, federal stimulus payments made to individuals, customer liquidity events and an increase in the savings rate during the pandemic.

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Total Cash and Cash Equivalents

Total cash and cash equivalents increased by $322.9 million, or 129.2% to $572.8 million at June 30, 2021, from $249.9 million at December 31, 2020.

Cash and cash equivalents at June 30, 2021 reflect repayments on loans as well as cash inflows from federal stimulus programs and an overall increase in the savings rate during the pandemic.

Total cash and cash equivalents increased by $307.3 million, or 123.0% to $557.2 million at September 30, 2021, from $249.9 million at December 31, 2020.

Cash and cash equivalents at September 30, 2021 reflect repayments on loans as well as cash inflows from federal stimulus programs and an overall increase in the savings rate during the pandemic and include short-term investments.

Short-term investments include cash on deposit that earns interest such as excess liquidity maintained at the Federal Reserve Bank.

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Investment Portfolio

The amortized cost and the fair value of securities as of June 30, 2021 and December 31, 2020 were as follows:

June 30, 2021 December 31, 2020

The amortized cost and the fair value of securities as of September 30, 2021 and December 31, 2020 were as follows:

September 30, 2021 December 31, 2020

(dollars in thousands) Amortized

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Total $ 1,224,229 $ 1,239,715 $ 697,906 $ 734,845

At June 30, 2021 and December 31, 2020, there were no holdings of securities of any one issuer, other than the U.S.

At September 30, 2021 and December 31, 2020, there were no holdings of securities of any one issuer, other than the U.S.

government agencies and government sponsored entities, in an amount greater than 10% of stockholders’ equity.

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This is taken into consideration when evaluating the gain or loss of investment securities in the portfolio and the potential for an allowance for credit losses.

Purchases of securities available-for-sale totaled $437.7 million in the first six months of 2021.

Purchases of securities available-for-sale totaled $640.4 million in the first nine months of 2021.

The purchases consisted of mortgage-backed securities issued by government sponsored entities and state and municipal securities.

The investment security purchases reflect the deployment of excess liquidity to the investment portfolio.

The Company deployed $100 million in December 2020, an additional $100 million during the first quarter of 2021 and an additional $400 million during the second quarter of 2021.

The Company deployed $100 million in December 2020, $100 million during the first quarter of 2021 and an additional $400 million during the second quarter of 2021.

The deployment was due to the surge in deposits balances that began in 2020 and has continued into 2021.

Paydowns from prepayments and scheduled payments of $50.5 million were received in the first six months of 2021, and the amortization of premiums, net of the accretion of discounts, was $2.1 million.

Maturities and calls of securities totaled $16.1 million in the first six months of 2021.

Sales of securities totaled $14.0 million in the first six months of 2021.

No allowance for credit losses was recognized in the first six months of 2021.

Purchases of securities available-for-sale totaled $47.4 million in the first six months of 2020.

Paydowns from prepayments and scheduled payments of $97.5 million were received in the first nine months of 2021, and the amortization of premiums, net of the accretion of discounts, was $3.5 million.

Maturities and calls of securities totaled $4.9 million in the first nine months of 2021.

Proceeds from sales of securities totaled $14.0 million in the first nine months of 2021.

No allowance for credit losses was recognized in the first nine months of 2021.

Purchases of securities available-for-sale totaled $89.9 million in the first nine months of 2020.

The purchases consisted primarily of state and municipal securities and purchases of mortgage-backed securities issued by government sponsored entities.

Paydowns from prepayments and scheduled payments of $36.5 million were received in the first six months of 2020, and the amortization of premiums, net of the accretion of discounts, was $2.0 million.

Maturities and calls of securities totaled $3.9 million in the first six months of 2020.

Sales of securities totaled $1.1 million in the first six months of 2020.

No other-than-temporary impairment was recognized in the first six months of 2020.

Paydowns from prepayments and scheduled payments of $63.0 million were received in the first nine months of 2020, and the amortization of premiums, net of the accretion of discounts, was $3.0 million.

Maturities and calls of securities totaled $6.3 million in the first nine months of 2020.

Proceeds from sales of securities totaled $6.4 million in the first nine months of 2020.

No other-than-temporary impairment was recognized in the first nine months of 2020.

The investment portfolio is managed by a third-party firm to provide for an appropriate balance between liquidity, credit risk, interest rate risk management and investment return and to limit the Company’s exposure to credit risk in the investment securities portfolio to an acceptable level.

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Real Estate Mortgage Loans Held-for-Sale

Real estate mortgage loans held-for-sale decreased by $4.2 million, or 37.6%, to $7.0 million at June 30, 2021, from $11.2 million at December 31, 2020.

Real estate mortgage loans held-for-sale decreased by $3.2 million, or 29.0%, to $8.0 million at September 30, 2021, from $11.2 million at December 31, 2020.

The balance of this asset category is subject to a high degree of variability depending on, among other things, recent mortgage loan rates and the timing of loan sales into the secondary market.

The Company generally sells conforming qualifying mortgage loans it originates on the secondary market.

Proceeds from sales of residential mortgages totaled $71.0 million in the first six months of 2021 compared to $48.1 million in the first six months of 2020.

Proceeds from sales of residential mortgages totaled $98.7 million in the first nine months of 2021 compared to $90.6 million in the first nine months of 2020.

Mortgage loans serviced for others are not included in the accompanying consolidated balance sheets.

The unpaid principal balances of these loans were $366.5 million and $351.0 million as of June 30, 2021 and December 31, 2020, respectively.

The unpaid principal balances of these loans were $374.0 million and $351.0 million as of September 30, 2021 and December 31, 2020, respectively.

Loan Portfolio

The loan portfolio by portfolio segment as of June 30, 2021 and December 31, 2020 is summarized as follows:

(dollars in thousands) June 30,

The loan portfolio by portfolio segment as of September 30, 2021 and December 31, 2020 is summarized as follows:

(dollars in thousands) September 30,

2021 December 31,

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Prior to January 1, 2021 calculation was based on the incurred loss methodology.

Total loans, excluding real estate mortgage loans held-for-sale and deferred fees, decreased by $295.2 million to $4.362 billion at June 30, 2021 from $4.657 billion at December 31, 2020.

The decrease was concentrated in the commercial and industrial and agribusiness categories and was driven by seasonal paydowns in agribusiness loans and forgiveness of PPP round one loans.

Total loans, excluding real estate mortgage loans held-for-sale and deferred fees, decreased by $412.8 million to $4.244 billion at September 30, 2021 from $4.657 billion at December 31, 2020.

The decrease was primarily driven by the forgiveness of PPP loans and was also concentrated in the commercial and industrial and agribusiness categories and was driven by seasonal paydowns in these loan segments.

We anticipate that the portion of our loan portfolio attributable to PPP loans will continue to decline in future quarters, as borrowers avail themselves of loan forgiveness opportunities under the PPP.

Total loans excluding PPP loans decreased by $77.7 million, as of June 30, 2021 as compared to December 31, 2020.

The balance of net deferred loans fees attributable to PPP loans was $6.3 million as of June 30, 2021.

PPP round one and round two unamortized loan fees, net of deferred costs, were $360,000 and $5.9 million, respectively, as of June 30, 2021.

The following table summarizes the Company’s non-performing assets as of June 30, 2021 and December 31, 2020:

(dollars in thousands) June 30,

Total loans excluding PPP loans decreased by $89.6 million, as of September 30, 2021 as compared to December 31, 2020.

The balance of net deferred loans fees attributable to PPP loans was $2.7 million as of September 30, 2021.

PPP round one and round two unamortized loan fees, net of deferred costs, were $0.1 and $2.6 million, respectively, as of September 30, 2021.

Since the start of the pandemic, loan line utilization declined from 48% as of March 31, 2020 to 41% as of September 30, 2021, thereby decreasing loans outsanding.

The following table summarizes the Company’s non-performing assets as of September 30, 2021 and December 31, 2020:

(dollars in thousands) September 30,

2021 December 31,

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Total troubled debt restructured loans $ 11,066 $ 11,713

Total nonperforming assets decreased by $618,000, or 5.0%, to $11.8 million during the six month period ended June 30, 2021.

The ratio of nonperforming assets to total assets at June 30, 2021 decreased from 0.21% at December 31, 2020 to 0.19% at June 30, 2021.

Total nonperforming assets increased by $18.9 million, or 152.2%, to $31.3 million during the nine month period ended September 30, 2021.

The ratio of nonperforming assets to total assets at September 30, 2021 increased from 0.21% at December 31, 2020 to 0.50% at September 30, 2021.

The increase in nonperforming assets was driven primarily by the downgrading of two commercial loan relationships to nonaccrual status during the third quarter of 2021, which totaled $21.2 million.