Seacoast Banking Corp. Of Florida (SBCF) 10-Q 2021 Q2 Quarterly report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

FORM 10-Q

(Mark One)

☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2021

OR

☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from _______________ to __________________.

Commission File No. 0-13660

Seacoast Banking Corporation of Florida

(Exact Name of Registrant as Specified in its Charter)

Florida	59-2260678
(State or Other Jurisdiction of Incorporation or Organization)	(I.R.S. Employer Identification No.)

815 COLORADO AVENUE,	STUART	FL	34994
(Address of Principal Executive Offices)			(Zip Code)

	(772)	287-4000
(Registrant’s Telephone Number, Including Area Code)

Securities registered pursuant to Section 12(b) of the Act:

Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Common Stock	SBCF	Nasdaq Global Select Market

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.                Yes ☒ No☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).                                Yes ☒ No☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

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

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).     Yes ☐ No☒

Common Stock, $0.10 Par Value – 55,436,036 shares as of June 30, 2021

INDEX

 SEACOAST BANKING CORPORATION OF FLORIDA

		PAGE #
Part I	FINANCIAL INFORMATION
Item 1.	Financial Statements (Unaudited)
	Condensed consolidated statements of income – Three and six months ended June 30, 2021 and 2020	3
	Condensed consolidated statements of comprehensive income – Three and six months ended June 30, 2021 and 2020	4
	Condensed consolidated balance sheets - June 30, 2021 and December 31, 2020	5
	Consolidated statements of cash flows – Six months ended June 30, 2021 and 2020	6
	Consolidated statements of shareholders' equity - Three and six months ended June 30, 2021 and 2020	8
	Notes to condensed consolidated financial statements	9
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	35
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	64
Item 4.	Controls and Procedures	65
Part II	OTHER INFORMATION
Item 1.	Legal Proceedings	65
Item 1A.	Risk Factors	65
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	66
Item 3.	Defaults upon Senior Securities	66
Item 4.	Mine Safety Disclosures	66
Item 5.	Other Information	66
Item 6.	Exhibits	67
SIGNATURES		69

2

Part I. FINANCIAL INFORMATION

Item 1. Financial Statements

SEACOAST BANKING CORPORATION OF FLORIDA AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF INCOME (Unaudited)

	Three Months Ended June 30,				Six Months Ended June 30,
(In thousands, except per share data)	2021		2020		2021		2020
Interest and fees on loans	$	60,348	$	64,844	$	122,646	$	128,284
Interest and dividends on securities	6,706		7,694		13,152		16,512
Interest on interest bearing deposits and other investments	709		684		1,295		1,418
Total Interest Income	67,763		73,222		137,093		146,214
Interest on deposits	980		1,203		2,045		4,393
Interest on time certificates	524		3,820		1,711		8,588
Interest on borrowed money	457		927		925		2,784
Total Interest Expense	1,961		5,950		4,681		15,765
Net Interest Income	65,802		67,272		132,412		130,449
Provision for credit losses	(4,855)		7,611		(10,570)		37,124
Net Interest Income after Provision for Credit Losses	70,657		59,661		142,982		93,325
Noninterest income
Other income	15,377		13,776		33,162		28,445
Securities (losses) gains, net	(55)		1,230		(169)		1,249
Total Noninterest Income (Note I – Noninterest Income and Expense)	15,322		15,006		32,993		29,694
Total Noninterest Expenses (Note I – Noninterest Income and Expense)	45,784		42,399		91,904		90,197
Income Before Income Taxes	40,195		32,268		84,071		32,822
Provision for income taxes	8,785		7,188		18,942		7,033
Net Income	$	31,410	$	25,080	$	65,129	$	25,789
Share Data
Net income per share of common stock
Diluted	$	0.56	$	0.47	$	1.17	$	0.49
Basic	0.57		0.47		1.18		0.49
Average common shares outstanding
Diluted	55,901		53,308		55,827		52,807
Basic	55,421		52,985		55,347		52,394

See notes to unaudited condensed consolidated financial statements.

3

SEACOAST BANKING CORPORATION OF FLORIDA AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited)

	Three Months Ended June 30,				Six Months Ended June 30,
(In thousands)	2021		2020		2021		2020
Net Income	$	31,410	$	25,080	$	65,129	$	25,789
Other comprehensive income (loss):
Available-for-sale securities:
Unrealized gains (losses) on available-for-sale securities, net of tax expense of $0.2 million and tax benefit of $3.0 million for the three and six months ended June 30, 2021, respectively, and tax expense of $3.6 million for each of the three and six months ended June 30, 2020	$	296	$	14,004	$	(10,555)	$	14,134
Amortization of unrealized gains and losses on securities transferred to held-to-maturity, net of tax expense of $5 thousand and $11 thousand for the three and six months ended June 30, 2021, respectively, and tax expense of $12 thousand and $25 thousand for the three and six months ended June 30, 2020, respectively	20		47		44		94
Reclassification adjustment for losses (gains) included in net income, net of tax benefit of $19 thousand for each of the three and six months ended June 30, 2021, and tax expense of $0.3 million for each of the three and six months ended June 30, 2020	91		(1,516)		91		(1,399)
Available-for-sale securities, net of tax	$	407	$	12,535	$	(10,420)	$	12,829
Unrealized losses on derivatives designated as cash flow hedges, net of reclassifications to income, net of tax benefit of $4 thousand and $51 thousand for the three and six months ended June 30, 2021, respectively	$	(11)	$	0	(149)		0
Total other comprehensive income (loss)	$	396	$	12,535	$	(10,569)	$	12,829
Comprehensive Income	$	31,806	$	37,615	$	54,560	$	38,618

See notes to unaudited condensed consolidated financial statements.

4

SEACOAST BANKING CORPORATION OF FLORIDA AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited)

	June 30,		December 31,
(In thousands, except share data)	2021		2020
Assets
Cash and due from banks	$	97,468	$	86,630
Interest bearing deposits with other banks	1,351,377		317,458
Total cash and cash equivalents	1,448,845		404,088
Time deposits with other banks	750		750
Debt securities:
Securities available-for-sale (at fair value)	1,322,776		1,398,157
Securities held-to-maturity (fair value $489.3 million at June 30, 2021 and $192.2 million at December 31, 2020)	493,467		184,484
Total debt securities	1,816,243		1,582,641
Loans held for sale (at fair value)	42,793		68,890
Loans	5,437,049		5,735,349
Less: Allowance for credit losses	(81,127)		(92,733)
Loans, net of allowance for credit losses	5,355,922		5,642,616
Bank premises and equipment, net	69,392		75,117
Other real estate owned	12,804		12,750
Goodwill	221,176		221,176
Other intangible assets, net	14,106		16,745
Bank owned life insurance	158,506		131,776
Net deferred tax assets	21,839		23,629
Other assets	154,457		162,214
Total Assets	$	9,316,833	$	8,342,392
Liabilities
Deposits	$	7,836,436	$	6,932,561
Securities sold under agreements to repurchase, maturing within 30 days	119,973		119,609
Subordinated debt	71,506		71,365
Other liabilities	106,571		88,455
Total Liabilities	8,134,486		7,211,990
Shareholders' Equity
Common stock, par value $0.10 per share, authorized 120,000,000 shares, issued 55,830,068 and outstanding 55,436,036 at June 30, 2021, and authorized 120,000,000, issued 55,584,979 and outstanding 55,243,226 shares at December 31, 2020	5,544		5,524
Other shareholders' equity	1,176,803		1,124,878
Total Shareholders' Equity	1,182,347		1,130,402
Total Liabilities and Shareholders' Equity	$	9,316,833	$	8,342,392

 See notes to unaudited condensed consolidated financial statements.

5

SEACOAST BANKING CORPORATION OF FLORIDA AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)

	Six Months Ended June 30,
(In thousands)	2021		2020
Cash Flows from Operating Activities
Net income	$	65,129	$	25,789
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation	2,792		3,031
Amortization of premiums and discounts on securities, net	4,012		1,746
Amortization of operating lease right-of-use assets	2,127		2,363
Other amortization and accretion, net	(7,307)		(366)
Stock based compensation	4,262		3,524
Origination of loans designated for sale	(283,001)		(203,935)
Sale of loans designated for sale	318,479		174,450
Provision for credit losses	(10,570)		37,124
Deferred income taxes	4,833		(3,328)
Losses (gains) on sale of securities	73		(1,092)
Gains on sale of loans	(9,411)		(5,303)
Gains on sale and write-downs of other real estate owned	(380)		(485)
Losses on disposition of fixed assets and write-downs upon transfer of bank premises to other real estate owned	316		220
Changes in operating assets and liabilities, net of effects from acquired companies:
Net decrease (increase) in other assets	1,086		(22,451)
Net (decrease) increase in other liabilities	(10,726)		19,139
Net cash provided by operating activities	81,714		30,426
Cash Flows from Investing Activities
Maturities and repayments of debt securities available-for-sale	288,171		134,488
Maturities and repayments of debt securities held-to-maturity	73,697		33,969
Proceeds from sale of debt securities available-for-sale	56,217		92,314
Purchases of debt securities available-for-sale	(468,430)		(239,160)
Purchases of debt securities held-to-maturity	(172,004)		0
Maturities of time deposits with other banks	0		1,246
Net new loans and principal repayments	346,173		(431,182)
Purchases of loans held for investment	(38,822)		0
Proceeds from sale of other real estate owned	4,954		4,503
Additions to other real estate owned	(1,310)		0
Proceeds from sale of FHLB and Federal Reserve Bank Stock	2,704		33,448
Purchase of FHLB and Federal Reserve Bank Stock	(59)		(26,227)
Net cash from bank acquisition	0		33,883
Purchase of bank owned life insurance	(25,000)		0
Additions to bank premises and equipment	(701)		(880)
Net cash provided by (used in) investing activities	65,590		(363,598)

 See notes to unaudited condensed consolidated financial statements.

6

SEACOAST BANKING CORPORATION OF FLORIDA AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)

	Six Months Ended June 30,
(In thousands)	2021		2020
Cash Flows from Financing Activities
Net increase in deposits	$	903,875	$	908,288
Net increase in repurchase agreements	364		6,004
Net decrease in FHLB borrowings with original maturities of three months or less	0		(315,000)
Proceeds from FHLB borrowings with original maturities of more than three months	0		135,000
Stock based employee benefit plans	369		(1,331)
Dividends paid	(7,155)		0
Net cash provided by financing activities	897,453		732,961
Net increase in cash and cash equivalents	1,044,757		399,789
Cash and cash equivalents at beginning of period	404,088		124,531
Cash and cash equivalents at end of period	$	1,448,845	$	524,320
Supplemental disclosure of cash flow information:
Cash paid during the period for interest	$	6,462	$	15,756
Cash paid during the period for taxes	17,700		3,492
Recognition of operating lease right-of-use assets	35		52
Recognition of operating lease liabilities	35		52
Supplemental disclosure of non-cash investing activities:
Transfer of debt securities from available-for-sale to held-to-maturity	$	210,805	$	0
Unsettled purchases of debt securities available-for-sale	28,750		0
Transfers from loans to other real estate owned	0		6,186
Transfers from bank premises to other real estate owned	3,318		1,289

See notes to unaudited condensed consolidated financial statements.

7

SEACOAST BANKING CORPORATION OF FLORIDA AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (Unaudited)

													Accumulated Other Comprehensive Income (Loss)
	Common Stock			Paid-in Capital			Retained Earnings			Treasury Stock
(In thousands)	Shares	Amount													Total
Balance at March 31, 2021	55,294	$	5,529		$	858,688		$	290,420		$	(8,693)	$	9,405	$	1,155,349
Comprehensive income	—	—			—			31,410			—		396		31,806
Stock based compensation expense	—	—			2,503			—			—		—		2,503
Common stock transactions related to stock based employee benefit plans	94	10			(18)			—			(1,487)		—		(1,495)
Common stock issued for stock options	48	5			1,425			—			—		—		1,430
Dividends on common stock ($0.13 per share)	—	—			—			(7,246)			—		—		(7,246)
Three months ended June 30, 2021	142	15			3,910			24,164			(1,487)		396		26,998
Balance at June 30, 2021	55,436	$	5,544		$	862,598		$	314,584		$	(10,180)	$	9,801	$	1,182,347

													Accumulated Other Comprehensive Income (Loss)
	Common Stock			Paid-in Capital			Retained Earnings			Treasury Stock
(In thousands)	Shares	Amount													Total
Balance at March 31, 2020	52,709	$	5,271		$	809,533		$	179,646		$	(7,422)	$	4,759	$	991,787
Comprehensive income	—	—			—			25,080			—		12,535		37,615
Stock based compensation expense	—	—			1,523			—			—		—		1,523
Common stock transactions related to stock based employee benefit plans	262	26			(15)			—			(615)		—		(604)
Common stock issued for stock options	20	2			280			—			—		—		282
Three months ended June 30, 2020	282	28			1,788			25,080			(615)		12,535		38,816
Balance at June 30, 2020	52,991	$	5,299		$	811,321		$	204,726		$	(8,037)	$	17,294	$	1,030,603

													Accumulated Other Comprehensive Income (Loss)
	Common Stock			Paid-in Capital			Retained Earnings			Treasury Stock
(In thousands)	Shares	Amount													Total
Balance at December 31, 2020	55,243	$	5,524		$	856,092		$	256,701		$	(8,285)	$	20,370	$	1,130,402
Comprehensive income	—	—			—			65,129			—		(10,569)		54,560
Stock based compensation expense	—	—			4,262			—			—		—		4,262
Common stock transactions related to stock based employee benefit plans	114	12			(18)			—			(1,895)		—		(1,901)
Common stock issued for stock options	79	8			2,262			—			—		—		2,270
Dividends on common stock ($0.13 per share)	—	—			—			(7,246)			—		—		(7,246)
Six months ended June 30, 2021	193	20			6,506			57,883			(1,895)		(10,569)		51,945
Balance at June 30, 2021	55,436	$	5,544		$	862,598		$	314,584		$	(10,180)	$	9,801	$	1,182,347

													Accumulated Other Comprehensive Income (Loss)
	Common Stock			Paid-in Capital			Retained Earnings			Treasury Stock
(In thousands)	Shares	Amount													Total
Balance at December 31, 2019	51,514	$	5,151		$	786,242		$	195,813		$	(6,032)	$	4,465	$	985,639
Comprehensive income	—	—			—			25,789			—		12,829		38,618
Stock based compensation expense	—	—			3,523			—			—		—		3,523
Common stock transactions related to stock based employee benefit plans	377	38			(47)			—			(2,005)		—		(2,014)
Common stock issued for stock options	57	6			676			—			—		—		682
Cumulative change in accounting principle upon adoption of new accounting pronouncement	—	—			—			(16,876)			—		—		(16,876)
Issuance of common stock, pursuant to acquisition	1,043	104			20,927			—			—		—		21,031
Six months ended June 30, 2020	1,477	148			25,079			8,913			(2,005)		12,829		44,964
Balance at June 30, 2020	52,991	$	5,299		$	811,321		$	204,726		$	(8,037)	$	17,294	$	1,030,603

 See notes to unaudited condensed consolidated financial statements.

8

SEACOAST BANKING CORPORATION OF FLORIDA AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

Note A – Basis of Presentation

Basis of Presentation: The accompanying unaudited condensed consolidated financial statements of Seacoast Banking Corporation of Florida and its subsidiaries (the "Company") have been prepared in accordance with U.S. generally accepted accounting principles ("U.S. GAAP") for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Certain prior period amounts have been reclassified to conform to the current period presentation.

Operating results for the three and six months ended June 30, 2021 are not necessarily indicative of the results that may be expected for the year ending December 31, 2021 or any other period. For further information, refer to the consolidated financial statements and footnotes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2020.

Use of Estimates: The preparation of these condensed consolidated financial statements requires management to make judgments in the application of certain accounting policies that involve significant estimates and assumptions. The Company has established policies and control procedures that are intended to ensure valuation methods are well controlled and applied consistently from period to period. These estimates and assumptions, which may materially affect the reported amounts of certain assets, liabilities, revenues and expenses, are based on information available as of the date of the financial statements, and changes in this information over time and the use of revised estimates and assumptions could materially affect amounts reported in subsequent financial statements. Specific areas, among others, requiring the application of management’s estimates include determination of the allowance for credit losses, acquisition accounting and purchased loans, intangible assets and impairment testing, other fair value measurements and contingent liabilities.

Note B – Recently Issued Accounting Standards, Not Yet Adopted

None applicable this period.

9

Note C – Earnings per Share

Basic earnings per common share is computed by dividing net income available to common shareholders by the weighted average number of shares of common stock outstanding during the period.

For the three and six months ended June 30, 2021, 0 options to purchase shares of the Company's common stock were anti-dilutive, compared to 508,000 and 489,000 shares that were excluded in the computation of diluted earnings per share for the three and six months ended June 30, 2020, respectively.

	Three Months Ended June 30,				Six Months Ended June 30,
(Dollars in thousands, except per share data)	2021		2020		2021		2020
Basic earnings per share
Net income	$	31,410	$	25,080	$	65,129	$	25,789
Average common shares outstanding	55,421		52,985		55,347		52,394
Net income per share	$	0.57	$	0.47	$	1.18	$	0.49
Diluted earnings per share
Net income	$	31,410	$	25,080	$	65,129	$	25,789
Average common shares outstanding	55,421		52,985		55,347		52,394
Add: Dilutive effect of employee restricted stock and stock options	480		323		480		413
Average diluted shares outstanding	55,901		53,308		55,827		52,807
Net income per share	$	0.56	$	0.47	$	1.17	$	0.49
Net income has not been allocated to unvested restricted stock awards that are participating securities because the amounts that would be allocated are not material to net income per share of common stock. Unvested restricted stock awards that are participating securities represent less than one percent of all of the outstanding shares of common stock for each of the periods presented.

Note D – Securities

The amortized cost, gross unrealized gains and losses and fair value of securities available-for-sale and held-to-maturity at June 30, 2021 and December 31, 2020 are summarized as follows:

	June 30, 2021
(In thousands)	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
Debt securities available-for-sale
U.S. Treasury securities and obligations of U.S. government agencies	$	7,412	$	439	$	(2)	$	7,849
Mortgage-backed securities and collateralized mortgage obligations of U.S. government-sponsored entities	987,402		14,224		(5,906)		995,720
Private mortgage-backed securities and collateralized mortgage obligations	73,469		1,938		(218)		75,189
Collateralized loan obligations	209,835		22		(165)		209,692
Obligations of state and political subdivisions	32,288		2,038		0		34,326
Totals	$	1,310,406	$	18,661	$	(6,291)	$	1,322,776
Debt securities held-to-maturity
Mortgage-backed securities and collateralized mortgage obligations of U.S. government-sponsored entities	$	493,467	$	5,697	$	(9,875)	$	489,289
Totals	$	493,467	$	5,697	$	(9,875)	$	489,289

10

	December 31, 2020
(In thousands)	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
Debt securities available-for-sale
U.S. Treasury securities and obligations of U.S. government agencies	$	8,250	$	528	$	(1)	$	8,777
Mortgage-backed securities and collateralized mortgage obligations of U.S. government-sponsored entities	1,038,437		23,457		(1,240)		1,060,654
Private mortgage-backed securities and collateralized mortgage obligations	89,284		2,131		(210)		91,205
Collateralized loan obligations	202,563		279		(647)		202,195
Obligations of state and political subdivisions	33,005		2,321		0		35,326
Totals	$	1,371,539	$	28,716	$	(2,098)	$	1,398,157
Debt securities held-to-maturity
Mortgage-backed securities of U.S. government-sponsored entities	$	184,484	$	7,818	$	(123)	$	192,179
Totals	$	184,484	$	7,818	$	(123)	$	192,179

Proceeds from sales of securities for the three and six months ended June 30, 2021 were $56.2 million, resulting in gross gains of $0.2 million and gross losses of $0.3 million. For the three months ended June 30, 2020, proceeds from sales of securities were $64.5 million, which resulted in gross gains of $2.3 million and gross losses of $1.1 million. For the six months ended June 30, 2020, proceeds from sales of securities were $92.3 million, which resulted in gross gains of $2.4 million and gross losses of $1.3 million.

Also included in “Securities gains (losses), net” is an increase of $18 thousand and a decrease of $0.1 million for the three and six months ended June 30, 2021, respectively, and increases of $0.1 million and $0.2 million for the three and six months ended June 30, 2020, respectively, in the value of a CRA-qualified mutual fund.

During the first quarter of 2021, the Company reclassified debt securities with an amortized cost of $210.8 million from available-for-sale to held-to-maturity, as it has the ability and intent to hold these securities to maturity. These securities had net unrealized gains of $0.8 million at the date of transfer, which will continue to be reported in accumulated other comprehensive income, and will be amortized over the remaining life of the securities as an adjustment of yield. The effect on interest income of the amortization of net unrealized gains is offset by the amortization of the premium on the securities transferred.

At June 30, 2021, debt securities with a fair value of $388.1 million were pledged primarily as collateral for public deposits and secured borrowings.

The amortized cost and fair value of debt securities held-to-maturity and available-for-sale at June 30, 2021, by contractual maturity, are shown below. Expected maturities will differ from contractual maturities because prepayments of the underlying collateral for these securities may occur, due to the right to call or repay obligations with or without call or prepayment penalties. Securities not due at a single maturity date are shown separately.

11

	Held-to-Maturity				Available-for-Sale
(In thousands)	Amortized Cost		Fair Value		Amortized Cost		Fair Value
Due in less than one year	$	0	$	0	$	400	$	402
Due after one year through five years	0		0		12,316		13,175
Due after five years through ten years	0		0		8,505		8,923
Due after ten years	0		0		18,479		19,675
	0		0		39,700		42,175
Mortgage-backed securities and collateralized mortgage obligations of U.S. government-sponsored entities	493,467		489,289		987,402		995,720
Private mortgage-backed securities and collateralized mortgage obligations	0		0		73,469		75,189
Collateralized loan obligations	0		0		209,835		209,692
Totals	$	493,467	$	489,289	$	1,310,406	$	1,322,776

The estimated fair value of a security is determined based on market quotations when available or, if not available, by using quoted market prices for similar securities, pricing models or discounted cash flows analyses, or using observable market data. The tables below indicate the fair value of available-for-sale debt securities with unrealized losses for which no allowance for credit losses has been recorded.

	June 30, 2021
	Less Than 12 Months				12 Months or Longer				Total
(In thousands)	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
U.S. Treasury securities and obligations of U.S. government agencies	$	0	$	0	$	251	$	(2)	$	251	$	(2)
Mortgage-backed securities and collateralized mortgage obligations of U.S. government-sponsored entities	538,907		(5,866)		4,389		(40)		543,296		(5,906)
Private mortgage-backed securities and collateralized mortgage obligations	14,979		(195)		1,738		(23)		16,717		(218)
Collateralized loan obligations	82,191		(108)		9,450		(57)		91,641		(165)
Totals	$	636,077	$	(6,169)	$	15,828	$	(122)	$	651,905	$	(6,291)

	December 31, 2020
	Less Than 12 Months				12 Months or Longer				Total
(In thousands)	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
U.S. Treasury securities and obligations of U.S. government agencies	$	0	$	0	$	256	$	(1)	$	256	$	(1)
Mortgage-backed securities and collateralized mortgage obligations of U.S. government-sponsored entities	203,405		(1,218)		569		(22)		203,974		(1,240)
Private mortgage-backed securities and collateralized mortgage obligations	23,997		(210)		0		0		23,997		(210)
Collateralized loan obligations	104,697		(102)		72,513		(545)		177,210		(647)
Totals	$	332,099	$	(1,530)	$	73,338	$	(568)	$	405,437	$	(2,098)

At June 30, 2021, the Company had $5.9 million of unrealized losses on mortgage-backed securities and collateralized mortgage obligations issued by government-sponsored entities having a fair value of $543.3 million. These securities are either explicitly or implicitly guaranteed by the U.S. government and have a long history of no credit losses. The implied government guarantee of principal and interest payments and the high credit rating of the portfolio provide sufficient basis for the current expectation that there is no risk of loss if default were to occur. Based on the assessment of all relevant factors, the Company believes that the unrealized loss positions on these debt securities are a function of changes in investment spreads and interest

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rate movements and not changes in credit quality, and expects to recover the entire amortized cost basis of these securities. Therefore, at June 30, 2021, 0 allowance for credit losses has been recorded.

At June 30, 2021, the Company had $0.2 million of unrealized losses on private label residential and commercial mortgage-backed securities and collateralized mortgage obligations having a fair value of $16.7 million. The collateral underlying these mortgage investments is primarily residential real estate. The securities have average credit support of 35%. Based on the assessment of all relevant factors, the Company believes that the unrealized loss positions on these debt securities are a function of changes in investment spreads and interest rate movements and not changes in credit quality, and expects to recover the entire amortized cost basis of these securities. Therefore, at June 30, 2021, 0 allowance for credit losses has been recorded.

At June 30, 2021, the Company had $0.2 million in unrealized losses in uncapped 3-month LIBOR floating rate collateralized loan obligations ("CLOs") having a fair value of $91.6 million. CLOs are special purpose vehicles and those in which the Company has invested acquire nearly all first-lien, broadly syndicated corporate loans across a diversified band of industries while providing support to senior tranche investors. As of June 30, 2021, these positions are in AAA and AA tranches, with average credit support of 34% and 23%, respectively. The Company evaluates the securities for potential credit losses by modeling expected loan-level defaults, recoveries, and prepayments for each CLO security. Based on the assessment of all relevant factors, the Company believes that the unrealized loss positions on these debt securities are a function of changes in investment spreads and interest rate movements and not changes in credit quality, and expects to recover the entire amortized cost basis of these securities. Therefore, at June 30, 2021, 0 allowance for credit losses has been recorded.

All HTM debt securities are issued by government-sponsored entities, which are either explicitly or implicitly guaranteed by the U.S. government and have a long history of no credit losses. While the potential for default on these securities may be something greater than zero, the long history with no credit losses, the implied government guarantee of principal and interest payments and the high credit rating of the HTM portfolio provide sufficient basis for the current expectation that there is no risk of loss if default were to occur. As a result, as of June 30, 2021, 0 allowance for credit losses has been recorded.

Included in other assets at June 30, 2021 is $31.2 million of Federal Home Loan Bank and Federal Reserve Bank stock stated at par value. The Company has not identified events or changes in circumstances that may have a significant adverse effect on the fair value of these cost method investment securities. Also included in other assets is a $6.4 million investment in a CRA-qualified mutual fund carried at fair value. Accrued interest receivable on AFS and HTM debt securities of $2.6 million and $0.8 million at June 30, 2021, respectively, and $3.2 million and $0.4 million at December 31, 2020, respectively, is also included in other assets.

The Company holds 11,330 shares of Visa Class B stock, which, following resolution of Visa litigation, will be converted to Visa Class A shares. Under the current conversion ratio that became effective September 27, 2019, the Company would receive 1.6228 shares of Class A stock for each share of Class B stock for a total of 18,386 shares of Visa Class A stock. The ownership of Visa stock is related to prior ownership in Visa's network while Visa operated as a cooperative, and is recorded on the Company's financial records at a zero basis.

Note E – Loans

Loans held for investment are categorized into the following segments:

•Construction and land development: Loans are extended to both commercial and consumer customers which are collateralized by and for the purpose of funding land development and construction projects, including 1-4 family residential construction, multi-family property and non-farm residential property where the primary source of repayment is from proceeds of the sale, refinancing or permanent financing of the property.

•Commercial real estate - owner-occupied: Loans are extended to commercial customers for the purpose of acquiring real estate to be occupied by the borrower's business. These loans are collateralized by the subject property and the repayment of these loans is largely dependent on the performance of the company occupying the property.

•Commercial real estate - non owner-occupied: Loans are extended to commercial customers for the purpose of acquiring commercial property where occupancy by the borrower is not their primary intent. These loans are viewed primarily as cash flow loans, collateralized by the subject property, and the repayment of these loans is largely dependent on rental income from the successful operation of the property.

•Residential real estate: Loans are extended to consumer customers and collateralized primarily by 1-4 family residential properties and include fixed and variable rate mortgages, home equity mortgages, and home equity lines of

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credit. Loans are primarily written based on conventional loan agency guidelines, including loans that exceed agency value limitations. Sources of repayment may be from the occupant of the residential property or from cash flows on rental income from the successful operation of the property.

•Commercial and financial: Loans are extended to commercial customers. The purpose of the loans can be working capital, physical asset expansion, asset acquisition or other business purposes. Loans may be collateralized by assets owned by the borrower or the borrower's business. Commercial loans are based primarily on the historical and projected cash flow of the borrower's business and secondarily on the capacity of credit enhancements, guarantees and underlying collateral provided by the borrower.

•Consumer: Loans are extended to consumer customers. The segment includes both installment loans and lines of credit which may be collateralized or non-collateralized.

•Paycheck Protection Program ("PPP"): Loans originated under a temporary program established by the CARES Act, and extended by the Economic Aid Act. Under the terms of the program, balances may be forgiven if the borrower uses the funds in a manner consistent with the program guidelines, and repayment is guaranteed by the U.S. government.

The following tables present net loan balances by segment as of:

	June 30, 2021
(In thousands)	Portfolio Loans		Acquired Non-PCD Loans		PCD Loans		Total
Construction and land development	$	223,412	$	10,408	$	527	$	234,347
Commercial real estate - owner-occupied	889,221		203,847		34,572		1,127,640
Commercial real estate - non owner-occupied	1,112,290		274,772		25,377		1,412,439
Residential real estate	1,087,313		131,131		8,092		1,226,536
Commercial and financial	811,580		75,245		13,381		900,206
Consumer	166,806		4,949		14		171,769
Paycheck Protection Program	350,531		13,581		0		364,112
Totals	$	4,641,153	$	713,933	$	81,963	$	5,437,049

	December 31, 2020
(In thousands)	Portfolio Loans		Acquired Non-PCD Loans		PCD Loans		Total
Construction and land development	$	216,420	$	26,250	$	2,438	$	245,108
Commercial real estate - owner occupied	854,769		247,090		39,451		1,141,310
Commercial real estate - non-owner occupied	1,043,459		323,273		29,122		1,395,854
Residential real estate	1,155,914		176,105		10,609		1,342,628
Commercial and financial	743,846		94,627		16,280		854,753
Consumer	181,797		6,660		278		188,735
Paycheck Protection Program	515,532		51,429		0		566,961
Totals	$	4,711,737	$	925,434	$	98,178	$	5,735,349

The amortized cost basis of loans at June 30, 2021 included net deferred costs of $25.2 million on non-PPP portfolio loans and net deferred fees of $10.6 million on PPP loans. At December 31, 2020, the amortized cost basis included net deferred costs of $22.6 million on non-PPP portfolio loans and net deferred fees of $9.5 million on PPP loans. At June 30, 2021, the remaining fair value adjustments on acquired loans were $24.4 million, or 3.0%, of the outstanding acquired loan balances, compared to $30.2 million, or 2.9%, of the acquired loan balances at December 31, 2020. These amounts are accreted into interest income over the remaining lives of the related loans on a level yield basis.

Accrued interest receivable is included within Other Assets and was $15.7 million and $25.8 million at June 30, 2021 and December 31, 2020, respectively.

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The following tables present the status of net loan balances as of June 30, 2021 and December 31, 2020. Loans on short-term payment deferral at the reporting date are reported as current.

	June 30, 2021
(In thousands)	Current		Accruing 30-59 Days Past Due		Accruing 60-89 Days Past Due		Accruing Greater Than 90 Days		Nonaccrual		Total
Portfolio Loans
Construction and land development	$	223,348	$	0	$	0	$	0	$	64	$	223,412
Commercial real estate - owner-occupied	887,266		0		0		0		1,955		889,221
Commercial real estate - non owner-occupied	1,110,608		261		0		0		1,421		1,112,290
Residential real estate	1,076,165		199		50		0		10,899		1,087,313
Commercial and financial	804,139		2,890		0		0		4,551		811,580
Consumer	166,426		211		35		0		134		166,806
Paycheck Protection Program	350,531		0		0		0		0		350,531
Total Portfolio Loans	$	4,618,483	$	3,561	$	85	$	0	$	19,024	$	4,641,153
Acquired Non-PCD Loans
Construction and land development	$	10,408	$	0	$	0	$	0	$	0	$	10,408
Commercial real estate - owner-occupied	202,269		958		0		0		620		203,847
Commercial real estate - non owner-occupied	272,945		0		0		0		1,827		274,772
Residential real estate	128,579		0		71		0		2,481		131,131
Commercial and financial	71,814		423		1,998		339		671		75,245
Consumer	4,949		0		0		0		0		4,949
Paycheck Protection Program	13,581		0		0		0		0		13,581
Total Acquired Non-PCD Loans	$	704,545	$	1,381	$	2,069	$	339	$	5,599	$	713,933
PCD Loans
Construction and land development	$	520	$	0	$	0	$	0	$	7	$	527
Commercial real estate - owner-occupied	30,673		1,084		0		0		2,815		34,572
Commercial real estate - non owner-occupied	21,508		0		0		0		3,869		25,377
Residential real estate	6,555		71		431		0		1,035		8,092
Commercial and financial	12,642		168		0		0		571		13,381
Consumer	14		0		0		0		0		14
Total PCD Loans	$	71,912	$	1,323	$	431	$	0	$	8,297	$	81,963
Total Loans	$	5,394,940	$	6,265	$	2,585	$	339	$	32,920	$	5,437,049

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	December 31, 2020
(In thousands)	Current		Accruing 30-59 Days Past Due		Accruing 60-89 Days Past Due		Accruing Greater Than 90 Days		Nonaccrual		Total
Portfolio Loans
Construction and land development	$	216,262	$	0	$	0	$	0	$	158	$	216,420
Commercial real estate - owner occupied	851,222		1,076		0		0		2,471		854,769
Commercial real estate - non-owner occupied	1,041,306		0		0		0		2,153		1,043,459
Residential real estate	1,142,893		3,002		1,427		61		8,531		1,155,914
Commercial and financial	737,362		135		1,967		0		4,382		743,846
Consumer	180,879		203		138		2		575		181,797
Paycheck Protection Program	515,532		0		0		0		0		515,532
Total Portfolio Loans	$	4,685,456	$	4,416	$	3,532	$	63	$	18,270	$	4,711,737
Acquired Non-PCD Loans
Construction and land development	$	26,250	$	0	$	0	$	0	$	0	$	26,250
Commercial real estate - owner occupied	244,486		0		0		0		2,604		247,090
Commercial real estate - non-owner occupied	322,264		0		0		0		1,009		323,273
Residential real estate	171,507		1,605		104		0		2,889		176,105
Commercial and financial	93,223		216		0		0		1,188		94,627
Consumer	6,640		20		0		0		0		6,660
Paycheck Protection Program	51,429		0		0		0		0		51,429
Total Acquired Non-PCD Loans	$	915,799	$	1,841	$	104	$	0	$	7,690	$	925,434
PCD Loans
Construction and land development	$	2,429	$	0	$	0	$	0	$	9	$	2,438
Commercial real estate - owner occupied	36,345		0		0		0		3,106		39,451
Commercial real estate - non-owner occupied	24,200		0		0		0		4,922		29,122
Residential real estate	9,537		0		0		0		1,072		10,609
Commercial and financial	15,121		125		0		0		1,034		16,280
Consumer	271		0		0		0		7		278
Total PCD Loans	$	87,903	$	125	$	0	$	0	$	10,150	$	98,178
Total Loans	$	5,689,158	$	6,382	$	3,636	$	63	$	36,110	$	5,735,349

All interest accrued but not received for loans placed on nonaccrual is reversed against interest income. Interest subsequently received on such loans is accounted for under the cost-recovery method, whereby interest income is not recognized until the loan balance is reduced to zero. Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current, and future payments are reasonably assured. The Company recognized $0.4 million and $0.3 million in interest income on nonaccrual loans during the three months ended June 30, 2021 and 2020, respectively. The Company recognized $0.6 million and $0.4 million in interest income on nonaccrual loans during the six months ended June 30, 2021 and 2020, respectively.

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The following tables present net balances of loans on nonaccrual status and the related allowance for credit losses, if any, as of:

	June 30, 2021
(In thousands)	Nonaccrual Loans With No Related Allowance		Nonaccrual Loans With an Allowance		Total Nonaccrual Loans		Allowance for Credit Losses
Construction and land development	$	71	$	0	$	71	$	0
Commercial real estate - owner-occupied	4,340		1,050		5,390		467
Commercial real estate - non owner-occupied	3,248		3,869		7,117		1,708
Residential real estate	13,710		705		14,415		349
Commercial and financial	3,733		2,060		5,793		1,266
Consumer	37		97		134		97
Totals	$	25,139	$	7,781	$	32,920	$	3,887

	December 31, 2020
(In thousands)	Nonaccrual Loans With No Related Allowance		Nonaccrual Loans With an Allowance		Total Nonaccrual Loans		Allowance for Credit Losses
Construction and land development	$	148	$	19	$	167	$	8
Commercial real estate - owner-occupied	7,893		288		8,181		287
Commercial real estate - non owner-occupied	5,666		2,418		8,084		1,640
Residential real estate	9,520		2,972		12,492		1,587
Commercial and financial	3,175		3,429		6,604		2,235
Consumer	222		360		582		75
Totals	$	26,624	$	9,486	$	36,110	$	5,832

Collateral-Dependent Loans

Loans are considered collateral-dependent when the repayment, based on the Company's assessment as of the reporting date, is expected to be provided substantially through the operation or sale of the underlying collateral and there are no other available and reliable sources of repayment. The following table presents collateral-dependent loans as of:

(In thousands)	June 30, 2021		December 31, 2020
Construction and land development	$	71	$	189
Commercial real estate - owner-occupied	6,662		11,992
Commercial real estate - non owner-occupied	6,480		7,285
Residential real estate	13,907		16,652
Commercial and financial	8,565		11,198
Consumer	89		586
Totals	$	35,774	$	47,902

Loans by Risk Rating

The Company utilizes an internal asset classification system as a means of identifying problem and potential problem loans. The following classifications are used to categorize loans under the internal classification system:

•Pass: Loans that are not problem loans or potential problem loans are considered to be pass-rated.

•Special Mention: Loans that do not currently expose the Company to sufficient risk to warrant classification in the Substandard or Doubtful categories, but possess weaknesses that deserve management's close attention are deemed to be Special Mention.

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•Substandard: Loans with the distinct possibility that the Company will sustain some loss if the deficiencies are not corrected.

•Substandard Impaired: Loans typically placed on nonaccrual and considered to be collateral-dependent or accruing TDRs.

•Doubtful: Loans that have all the weaknesses inherent in those classified Substandard with the added characteristic that the weakness present makes collection or liquidation in full, on the basis of currently existing facts, conditions and values, highly questionable and improbable. The principal balance of loans classified as doubtful are likely to be charged off.

The following tables present the risk rating of loans by year of origination as of:

	June 30, 2021
(In thousands)	2021		2020		2019		2018		2017		Prior		Revolving		Total
Construction and Land Development
Risk Ratings:
Pass	$	37,114	$	55,457	$	41,969	$	26,223	$	6,326	$	23,567	$	40,656	$	231,312
Special Mention	0		0		372		2,517		0		0		0		2,889
Substandard	0		0		0		0		0		17		0		17
Substandard Impaired	0		0		0		0		37		92		0		129
Doubtful	0		0		0		0		0		0		0		0
Total	$	37,114	$	55,457	$	42,341	$	28,740	$	6,363	$	23,676	$	40,656	$	234,347
Commercial real estate - owner-occupied
Risk Ratings:
Pass	$	87,486	$	145,245	$	184,017	$	141,827	$	130,013	$	393,389	$	12,018	$	1,093,995
Special Mention	0		11,267		841		1,286		0		5,287		0		18,681
Substandard	0		0		0		0		3,805		4,356		0		8,161
Substandard Impaired	0		0		2,883		685		1,445		1,790		0		6,803
Doubtful	0		0		0		0		0		0		0		0
Total	$	87,486	$	156,512	$	187,741	$	143,798	$	135,263	$	404,822	$	12,018	$	1,127,640
Commercial real estate - non owner-occupied
Risk Ratings:
Pass	$	121,245	$	159,336	$	292,367	$	183,456	$	100,887	$	484,963	$	8,018	$	1,350,272
Special Mention	0		0		953		9,399		16,522		9,931		—		36,805
Substandard	0		0		0		9,718		0		8,528		0		18,246
Substandard Impaired	0		0		2,378		0		0		4,738		0		7,116
Doubtful	0		0		0		0		0		0		0		0
Total	$	121,245	$	159,336	$	295,698	$	202,573	$	117,409	$	508,160	$	8,018	$	1,412,439
Residential real estate
Risk Ratings:
Pass	$	129,061	$	107,121	$	105,930	$	149,520	$	153,851	$	241,216	$	320,702	$	1,207,401
Special Mention	0		0		0		30		0		218		221		469
Substandard	0		0		0		0		0		214		486		700
Substandard Impaired	0		496		741		77		4,462		9,879		2,311		17,966
Doubtful	0		0		0		0		0		0		0		0
Total	$	129,061	$	107,617	$	106,671	$	149,627	$	158,313	$	251,527	$	323,720	$	1,226,536

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	June 30, 2021
(In thousands)	2021		2020		2019		2018		2017		Prior		Revolving		Total
Commercial and financial
Risk Ratings:
Pass	$	148,832	$	201,500	$	120,225	$	87,159	$	48,385	$	70,755	$	194,503	$	871,359
Special Mention	0		5,795		864		891		270		33		1,130		8,983
Substandard	0		411		0		2,480		1,369		3,512		26		7,798
Substandard Impaired	0		0		5,478		3,258		1,427		1,811		92		12,066
Doubtful	0		0		0		0		0		0		0		0
Total	$	148,832	$	207,706	$	126,567	$	93,788	$	51,451	$	76,111	$	195,751	$	900,206
Consumer
Risk Ratings:
Pass	$	23,549	$	38,229	$	33,441	$	22,421	$	13,837	$	23,735	$	13,959	$	169,171
Special Mention	0		58		46		15		62		30		1,330		1,541
Substandard	0		0		0		35		14		0		655		704
Substandard Impaired	0		0		64		26		80		183		0		353
Doubtful	0		0		0		0		0		0		0		0
Total	$	23,549	$	38,287	$	33,551	$	22,497	$	13,993	$	23,948	$	15,944	$	171,769
Paycheck Protection Program
Risk Ratings:
Pass	$	246,107	$	118,005	$	0	$	0	$	0	$	0	$	0	$	364,112
Total	$	246,107	$	118,005	$	0	$	0	$	0	$	0	$	0	$	364,112
Consolidated
Risk Ratings:
Pass	$	793,394	$	824,893	$	777,949	$	610,606	$	453,299	$	1,237,625	$	589,856	$	5,287,622
Special Mention	0		17,120		3,076		14,138		16,854		15,499		2,681		69,368
Substandard	0		411		0		12,233		5,188		16,627		1,167		35,626
Substandard Impaired	0		496		11,544		4,046		7,451		18,493		2,403		44,433
Doubtful	0		0		0		0		0		0		0		0
Total	$	793,394	$	842,920	$	792,569	$	641,023	$	482,792	$	1,288,244	$	596,107	$	5,437,049

	December 31, 2020
(In thousands)	2020		2019		2018		2017		2016		Prior		Revolving		Total
Construction and Land Development
Risk Ratings:
Pass	$	62,107	$	52,384	$	46,067	$	15,873	$	7,335	$	17,873	$	35,324	$	236,963
Special Mention	206		245		5,918		0		0		1,449		0		7,818
Substandard	0		0		0		0		0		51		0		51
Substandard Impaired	0		0		0		37		0		239		0		276
Doubtful	0		0		0		0		0		0		0		0
Total	$	62,313	$	52,629	$	51,985	$	15,910	$	7,335	$	19,612	$	35,324	$	245,108
Commercial real estate - owner-occupied
Risk Ratings:
Pass	$	155,953	$	198,559	$	156,276	$	138,341	$	148,389	$	287,772	$	14,255	$	1,099,545
Special Mention	5,773		1,858		3,305		0		4,471		4,050		2		19,459
Substandard	0		0		0		4,709		1,955		5,508		0		12,172
Substandard Impaired	0		3,151		747		1,362		0		4,874		0		10,134
Doubtful	0		0		0		0		0		0		0		0
Total	$	161,726	$	203,568	$	160,328	$	144,412	$	154,815	$	302,204	$	14,257	$	1,141,310

19

	December 31, 2020
(In thousands)	2020		2019		2018		2017		2016		Prior		Revolving		Total
Commercial real estate - non owner-occupied
Risk Ratings:
Pass	$	159,299	$	313,287	$	201,112	$	123,357	$	175,623	$	356,943	$	8,596	$	1,338,217
Special Mention	0		431		9,487		7,580		10,240		114		0		27,852
Substandard	0		0		9,709		0		8,311		3,682		0		21,702
Substandard Impaired	0		2,418		0		0		125		5,540		0		8,083
Doubtful	0		0		0		0		0		0		0		0
Total	$	159,299	$	316,136	$	220,308	$	130,937	$	194,299	$	366,279	$	8,596	$	1,395,854
Residential real estate
Risk Ratings:
Pass	$	96,819	$	144,329	$	204,077	$	205,046	$	160,612	$	159,742	$	350,502	$	1,321,127
Special Mention	0		0		33		720		0		966		479		2,198
Substandard	350		0		0		896		0		1,452		100		2,798
Substandard Impaired	109		726		1,520		1,762		715		9,671		2,002		16,505
Doubtful	0		0		0		0		0		0		0		0
Total	$	97,278	$	145,055	$	205,630	$	208,424	$	161,327	$	171,831	$	353,083	$	1,342,628
Commercial and financial
Risk Ratings:
Pass	$	214,774	$	146,511	$	103,769	$	60,782	$	39,692	$	53,758	$	204,304	$	823,590
Special Mention	71		946		965		5,612		67		635		209		8,505
Substandard	154		41		3,016		1,609		553		3,239		764		9,376
Substandard Impaired	317		4,595		3,199		2,292		2,074		704		81		13,262
Doubtful1	0		0		0		0		0		0		20		20
Total	$	215,316	$	152,093	$	110,949	$	70,295	$	42,386	$	58,336	$	205,378	$	854,753
Consumer
Risk Ratings:
Pass	$	46,476	$	43,143	$	30,433	$	18,937	$	21,880	$	9,488	$	15,089	$	185,446
Special Mention	58		27		14		41		42		21		1,854		2,057
Substandard	0		0		0		42		4		151		228		425
Substandard Impaired	7		50		193		24		329		183		21		807
Doubtful	0		0		0		0		0		0		0		0
Total	$	46,541	$	43,220	$	30,640	$	19,044	$	22,255	$	9,843	$	17,192	$	188,735
Paycheck Protection Program
Risk Ratings:
Pass	$	566,961	$	0	$	0	$	0	$	0	$	0	$	0	$	566,961
Total	$	566,961	$	0	$	0	$	0	$	0	$	0	$	0	$	566,961
Consolidated
Risk Ratings:
Pass	$	1,302,389	$	898,213	$	741,734	$	562,336	$	553,531	$	885,576	$	628,070	$	5,571,849
Special Mention	6,108		3,507		19,722		13,953		14,820		7,235		2,544		67,889
Substandard	504		41		12,725		7,256		10,823		14,083		1,092		46,524
Substandard Impaired	433		10,940		5,659		5,477		3,243		21,211		2,104		49,067
Doubtful1	0		0		0		0		0		0		20		20
Total	$	1,309,434	$	912,701	$	779,840	$	589,022	$	582,417	$	928,105	$	633,830	$	5,735,349
1Loans classified as doubtful are fully reserved at December 31, 2020.

Loans Modified in Connection with COVID-19 Pandemic

The CARES Act, which was signed into law on March 27, 2020, and amended by the Consolidated Appropriations Act on December 27, 2020, encourages financial institutions to practice prudent efforts to work with borrowers financially impacted by the COVID-19 pandemic by providing an option to exclude from TDR consideration certain loan modifications that might otherwise be categorized as TDRs under ASC 310-40. This option is available for modifications that are deemed to be COVID-related, where the borrower was not more than 30 days past due on December 31, 2019, and the modification is executed between March 1, 2020 and the earlier of (i) January 1, 2022 or (ii) 60 days after the end of the COVID-19 national emergency.

20

Federal banking regulators issued similar guidance that also allows lenders to conclude that short-term modifications for borrowers affected by the pandemic should not be considered TDRs if the borrower was current at the time of modification. Seacoast has provided financially impacted borrowers with loan accommodations, primarily consisting of payment deferrals of up to six months. At its peak on June 30, 2020, loans on deferral represented $1.1 billion, or 21%, of total non-PPP loans. In the second half of 2020, the large majority of these borrowers successfully resumed making contractual payments, and the level of loans with accommodations has decreased to $6.8 million, or 0.1%, of total non-PPP loans as of June 30, 2021. Types of outstanding accommodations at June 30, 2021 included a combination of one or more of the following: full payment deferral, partial payment deferral, reduction of interest rate, extension of the original maturity date, or re-amortization of the facility.

The following table presents the balance of loans with active payment accommodations at the specified dates, excluding PPP loans:

(In thousands)	June 30, 2021		December 31, 2020
Construction and land development	$	0	$	1,032
Commercial real estate - owner-occupied	1,612		14,248
Commercial real estate - non owner-occupied	2,257		32,549
Residential real estate	1,702		12,839
Commercial and financial	811		11,915
Consumer	399		1,479
Totals	$	6,781	$	74,062

Troubled Debt Restructured Loans

The Company’s TDR concessions granted to certain borrowers generally do not include forgiveness of principal balances, but may include interest rate reductions, an extension of the amortization period and/or converting the loan to interest only for a limited period of time. Loan modifications are not reported in calendar years after modification if the loans were modified at an interest rate equal to the yields of new loan originations with comparable risk and the loans are performing based on the terms of the restructuring agreements.

The following table presents loans that were modified in a troubled debt restructuring during the three and six months ended:

	Three Months Ended June 30,
	2021					2020
(In thousands)	Number of Contracts	Pre-Modification Outstanding Recorded Investment		Post-Modification Outstanding Recorded Investment		Number of Contracts	Pre-Modification Outstanding Recorded Investment		Post-Modification Outstanding Recorded Investment
Construction and land development	0	$	0	$	0	1	$	12	$	12
Commercial real estate - owner-occupied	0	0		0		0	0		0
Commercial real estate - non owner-occupied	0	0		0		0	0		0
Residential real estate	2	52		52		0	0		0
Commercial and financial	1	142		142		0	0		0
Consumer	0	0		0		2	47		47
Totals	3	$	194	$	194	3	$	59	$	59

21

	Six Months Ended June 30,
	2021					2020
(In thousands)	Number of Contracts	Pre-Modification Outstanding Recorded Investment		Post-Modification Outstanding Recorded Investment		Number of Contracts	Pre-Modification Outstanding Recorded Investment		Post-Modification Outstanding Recorded Investment
Construction and land development	0	$	0	$	0	1	$	12	$	12
Commercial real estate - owner-occupied	0	0		0		0	0		0
Commercial real estate - non owner-occupied	0	0		0		0	0		0
Residential real estate	3	79		79		1	45		45
Commercial and financial	1	142		142		4	437		437
Consumer	0	0		0		2	47		47
Totals	4	$	221	$	221	8	$	541	$	541

The TDRs described above resulted in a specific allowance for credit losses of $0.2 million as of June 30, 2021 and $0.4 million as of June 30, 2020. During the six months ended June 30, 2021, there were 2 defaults totaling $0.1 million of loans that had been modified in TDRs within the preceding twelve months. During the six months ended June 30, 2020, there were 3 defaults totaling $1.4 million of loans to a single borrower that had been modified to a TDR within the preceding twelve months. The Company considers a loan to have defaulted when it becomes 90 days or more delinquent under the modified terms, has been transferred to nonaccrual status, is charged off or has been transferred to other real estate owned. For loans measured based on the present value of expected future cash flows, $6,000 and $21,000 for the three months ended June 30, 2021, and 2020, respectively, and $11,000 and $46,000 for the six months ended June 30, 2021, and 2020, respectively, was included in interest income and represents the change in present value attributable to the passage of time.

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Note F – Allowance for Credit Losses

Activity in the allowance for credit losses is summarized as follows:

	Three Months Ended June 30, 2021
(In thousands)	Beginning Balance		Provision for Credit Losses		Charge- Offs		Recoveries		TDR Allowance Adjustments		Ending Balance
Construction and land development	$	4,428	$	(469)	$	0	$	96	$	(2)	$	4,053
Commercial real estate - owner-occupied	9,792		(1,116)		0		0		0		8,676
Commercial real estate - non owner-occupied	36,229		(1,423)		0		1		0		34,807
Residential real estate	14,353		(2,407)		(21)		621		(3)		12,543
Commercial and financial	18,916		399		(1,564)		265		0		18,016
Consumer	2,925		161		(199)		146		(1)		3,032
Paycheck Protection Program	0		0		0		0		0		0
Totals	$	86,643	$	(4,855)	$	(1,784)	$	1,129	$	(6)	$	81,127

	Three Months Ended June 30, 2020
(In thousands)	Beginning Balance		Provision for Credit Losses		Charge- Offs		Recoveries		TDR Allowance Adjustments		Ending Balance
Construction and land development	$	4,646	$	2,478	$	0	$	37	$	0	$	7,161
Commercial real estate - owner occupied	5,327		229		0		18		(12)		5,562
Commercial real estate - non-owner occupied	35,643		3,345		0		4		0		38,992
Residential real estate	19,899		574		(113)		101		(8)		20,453
Commercial and financial	15,470		1,319		(1,768)		493		0		15,514
Consumer	4,426		(334)		(614)		91		(1)		3,568
Paycheck Protection Program	0		0		0		0		0		0
Totals	$	85,411	$	7,611	$	(2,495)	$	744	$	(21)	$	91,250

	Six Months Ended June 30, 2021
(In thousands)	Beginning Balance		Provision for Credit Losses		Charge- Offs		Recoveries		TDR Allowance Adjustments		Ending Balance
Construction and land development	$	4,920	$	(979)	$	0	$	114	$	(2)	$	4,053
Commercial real estate - owner-occupied	9,868		(1,192)		0		0		0		8,676
Commercial real estate - non owner-occupied	38,266		(3,461)		0		2		0		34,807
Residential real estate	17,500		(5,779)		(21)		850		(7)		12,543
Commercial and financial	18,690		1,174		(2,320)		472		0		18,016
Consumer	3,489		(333)		(384)		262		(2)		3,032
Paycheck Protection Program	0		0		0		0		0		0
Totals	$	92,733	$	(10,570)	$	(2,725)	$	1,700	$	(11)	$	81,127

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	Six Months Ended June 30, 2020
(In thousands)	Beginning Balance		Impact of Adoption of ASC 326		Initial Allowance on PCD Loans Acquired During the Period		Provision for Credit Losses		Charge- Offs		Recoveries		TDR Allowance Adjustments		Ending Balance
Construction and land development	$	1,842	$	1,479	$	48	$	3,727	$	0	$	66	$	(1)	$	7,161
Commercial real estate - owner occupied	5,361		80		207		(34)		(45)		18		(25)		5,562
Commercial real estate - non-owner occupied	7,863		9,341		140		21,628		(12)		32		0		38,992
Residential real estate	7,667		5,787		97		6,834		(131)		218		(19)		20,453
Commercial and financial	9,716		3,677		11		4,063		(2,866)		913		0		15,514
Consumer	2,705		862		13		906		(1,087)		170		(1)		3,568
Paycheck Protection Program	0		0		0		0		0		0		0		0
Totals	$	35,154	$	21,226	$	516	$	37,124	$	(4,141)	$	1,417	$	(46)	$	91,250

Management establishes the allowance using relevant available information from both internal and external sources, relating to past events, current conditions, and reasonable and supportable forecasts to project losses over a three-year forecast period. Forecast data is sourced primarily from Moody’s Analytics, a firm widely recognized for its research, analysis, and economic forecasts. For portfolio segments with a weighted average life longer than three years, the Company reverts to longer-term historical loss experience to estimate losses over the remaining life of the loans within each segment.

Historical credit losses provide the basis for the estimation of expected credit losses. Adjustments to historical loss information are made for differences in current loan-specific risk characteristics such as differences in underwriting standards, portfolio mix, delinquency level, loan to value ratios, borrower credit characteristics, loan seasoning or term as well as for changes in current and forecasted environmental conditions, such as changes in unemployment rates, property values, occupancy rates, and other macroeconomic metrics.

As of June 30, 2021, the Company utilized Moody’s most recent “U.S. Macroeconomic Outlook Baseline” scenario and considered the uncertainty associated with the assumptions in the Baseline scenario, including the potential for increasing COVID-19 infections, including from variants, and the resulting potential erosion in consumer confidence, and the risk that government stimulus programs are less effective than expected. Outcomes in any or all of these factors could differ from the Baseline scenario, and the Company incorporated qualitative considerations reflecting the risk of uncertain economic conditions, and for additional dimensions of risk not captured in the quantitative model.

In the Construction and Land Development segment, the decrease in reserves during the quarter reflects improved economic variables relating to residential real estate. In this segment, the primary source of repayment is typically from proceeds of the sale, refinancing, or permanent financing of the underlying property; therefore, industry and collateral type and estimated collateral values are among the relevant factors in assessing expected losses.

In the Commercial Real Estate - Owner-Occupied segment, the decrease in reserves is primarily the result of improved economic variables relating to unemployment. Risk characteristics include but are not limited to, collateral type, loan seasoning, and lien position.

In the Commercial Real Estate - Non Owner-Occupied segment, the decrease in reserves reflects lower loan balances and improved economic forecast variables including lower unemployment. Repayment is often dependent upon rental income from the successful operation of the underlying property. Loan performance may be adversely affected by general economic conditions or conditions specific to the real estate market, including property types. Collateral type, loan seasoning, and lien position are among the risk characteristics analyzed for this segment.

The Residential Real Estate segment includes first mortgages secured by residential property, and home equity lines of credit. The decrease in reserves reflects lower loan balances and improved economic forecast variables including lower unemployment. Risk characteristics considered for this segment include, but are not limited to, collateral type, lien position, loan to value ratios, and loan seasoning.

In the Commercial and Financial segment, borrowers are primarily small to medium sized professional firms and other businesses, and loans are generally supported by projected cash flows of the business, collateralized by business assets, and/or guaranteed by the business owners. The decrease in reserves is primarily attributed to improvement in economic forecast

24

variables including unemployment, partially offset by higher loan balances. Industry, collateral type, estimated collateral values and loan seasoning are among the relevant factors in assessing expected losses.

Consumer loans include installment and revolving lines, loans for automobiles, boats, and other personal or family purposes. Risk characteristics considered for this segment include, but are not limited to, collateral type, loan to value ratios, loan seasoning and FICO score. Nominal changes in the reserve during the quarter reflect changes in underlying economic variables.

Balances outstanding under the Paycheck Protection Program are guaranteed by the U.S. government and have not been assigned a reserve.

The allowance for credit losses is composed of specific allowances for loans individually evaluated and general allowances for loans grouped into loan pools based on similar characteristics, which are collectively evaluated. The Company’s loan portfolio and related allowance at June 30, 2021 and December 31, 2020 is shown in the following tables:

	June 30, 2021
	Individually Evaluated				Collectively Evaluated				Total
(In thousands)	Recorded Investment		Associated Allowance		Recorded Investment		Associated Allowance		Recorded Investment		Associated Allowance
Construction and land development	$	129	$	3	$	234,218	$	4,050	$	234,347	$	4,053
Commercial real estate - owner occupied	7,209		503		1,120,431		8,173		1,127,640		8,676
Commercial real estate - non owner-occupied	7,217		1,708		1,405,222		33,099		1,412,439		34,807
Residential real estate	18,651		504		1,207,885		12,039		1,226,536		12,543
Commercial and financial	12,632		2,142		887,574		15,874		900,206		18,016
Consumer	352		122		171,417		2,910		171,769		3,032
Paycheck Protection Program	0		0		364,112		0		364,112		0
Totals	$	46,190	$	4,982	$	5,390,859	$	76,145	$	5,437,049	$	81,127

	December 31, 2020
	Individually Evaluated				Collectively Evaluated				Total
(In thousands)	Recorded Investment		Associated Allowance		Recorded Investment		Associated Allowance		Recorded Investment		Associated Allowance
Construction and land development	$	276	$	13	$	244,832	$	4,907	$	245,108	$	4,920
Commercial real estate - owner occupied	10,243		402		1,131,067		9,466		1,141,310		9,868
Commercial real estate - non owner-occupied	8,083		1,640		1,387,771		36,626		1,395,854		38,266
Residential real estate	16,506		2,064		1,326,122		15,436		1,342,628		17,500
Commercial and financial	13,281		3,498		841,472		15,192		854,753		18,690
Consumer	807		91		187,928		3,398		188,735		3,489
Paycheck Protection Program	0		0		566,961		0		566,961		0
Totals	$	49,196	$	7,708	$	5,686,153	$	85,025	$	5,735,349	$	92,733

25

Note G – Derivatives

Back-to-Back Swaps

The Company offers interest rate swaps when requested by customers to allow them to hedge the risk of rising interest rates on their variable rate loans. Upon entering into these swaps, the Company enters into offsetting positions with counterparties in order to minimize the interest rate risk. These back-to-back swaps qualify as freestanding financial derivatives with the fair values reported in other assets and other liabilities. The Company is party to master netting arrangements with its financial institution counterparties; however, the Company does not offset assets and liabilities under the arrangements for financial statement presentation purposes. Gains and losses on these back-to-back swaps, which offset, are recorded through noninterest income. No net gains or losses have been recognized to date on these instruments. As of June 30, 2021, the interest rate swaps had an aggregate notional value of $182.1 million, with a fair value of $9.5 million recorded in other assets and other liabilities. As of December 31, 2020, the interest rate swaps had an aggregate notional value of $182.4 million, with a fair value of $13.3 million recorded in other assets and other liabilities. The weighted average maturity was 7.2 years at June 30, 2021 and 7.5 years at December 31, 2020.

Interest Rate Floors Designated as Cash Flow Hedges

The Company has entered into interest rate floor contracts to mitigate exposure to the variability of future cash flows due to changes in interest rates on certain segments of its variable-rate loans. During 2020, the Company entered into 2 interest rate floor contracts, each with a notional amount of $150.0 million, maturing in October 2023 and November 2023. The Company considers these derivatives to be highly effective at achieving offsetting changes in cash flows attributable to changes in interest rates and has designated them as cash flow hedges. Therefore, changes in the fair value of these derivative instruments are recognized in other comprehensive income. Amortization of the premium paid on cash flow hedges is recognized in earnings over the term of the hedge in the same caption as the hedged item. For the three and six months ended June 30, 2021, the Company recognized a loss through other comprehensive income of $0.1 million and $0.3 million, respectively, and reclassified $57 thousand and $100 thousand, respectively, out of accumulated other comprehensive income and into interest income. As of June 30, 2021 and December 31, 2020, the interest rate floors had a fair value of $0.7 million and $1.0 million, respectively, recorded in other assets in the consolidated balance sheet. Over the next twelve months the Company expects to reclassify $0.3 million from accumulated other comprehensive income into interest income related to these agreements.

(In thousands)	Notional Amount		Fair Value		Balance Sheet Category
At June 30, 2021
Back-to-back swaps	$	182,058	$	9,497	Other Assets and Other Liabilities
Interest rate floors	300,000		705		Other Assets
At December 31, 2020
Back-to-back swaps	$	182,379	$	13,339	Other Assets and Other Liabilities
Interest rate floors	300,000		1,004		Other Assets

Note H – Securities Sold Under Agreements to Repurchase

Securities sold under agreements to repurchase are accounted for as secured borrowings. For securities sold under agreements to repurchase, the Company is required to pledge collateral with value sufficient to fully collateralized borrowings. Company securities pledged were as follows by collateral type and maturity as of: 

(In thousands)	June 30, 2021		December 31, 2020
Fair value of pledged securities - overnight and continuous:
Mortgage-backed securities and collateralized mortgage obligations of U.S. government sponsored entities	$	136,619	$	137,268

26

Note I – Noninterest Income and Expense

Details of noninterest income and expenses for the three and six months ended June 30, 2021 and 2020 are as follows:

	Three Months Ended June 30,				Six Months Ended June 30,
(In thousands)	2021		2020		2021		2020
Noninterest income
Service charges on deposit accounts	$	2,338	$	1,939	$	4,676	$	4,764
Interchange income	4,145		3,187		7,965		6,433
Wealth management income	2,387		1,719		4,710		3,586
Mortgage banking fees	2,977		3,559		7,202		5,767
Marine finance fees	177		157		366		303
SBA gains	232		181		519		320
BOLI income	872		887		1,731		1,773
Other income	2,249		2,147		5,993		5,499
	15,377		13,776		33,162		28,445
Securities (losses) gains, net	(55)		1,230		(169)		1,249
Total	$	15,322	$	15,006	$	32,993	$	29,694
Noninterest expense
Salaries and wages	$	22,966	$	20,226	$	44,359	$	43,924
Employee benefits	3,953		3,379		8,933		7,634
Outsourced data processing costs	4,676		4,059		9,144		8,692
Telephone/data lines	838		791		1,623		1,505
Occupancy	3,310		3,385		7,099		6,738
Furniture and equipment	1,166		1,358		2,420		2,981
Marketing	1,002		997		2,170		2,275
Legal and professional fees	2,182		2,277		4,764		5,640
FDIC assessments	515		266		1,041		266
Amortization of intangibles	1,212		1,483		2,423		2,939
Foreclosed property expense and net (gain) loss on sale	(90)		245		(155)		(70)
Provision for credit losses on unfunded commitments	0		178		0		224
Other	4,054		3,755		8,083		7,449
Total	$	45,784	$	42,399	$	91,904	$	90,197

Note J – Equity Capital

The Company is well capitalized and at June 30, 2021, the Company and the Company’s principal banking subsidiary, Seacoast Bank, exceeded the common equity Tier 1 (CET1) capital ratio regulatory threshold of 6.5% for well-capitalized institutions under the Basel III standardized transition approach, as well as risk-based and leverage ratio requirements for well capitalized banks under the regulatory framework for prompt corrective action.

Note K – Contingent Liabilities

The Company and its subsidiaries, because of the nature of their business, are at all times subject to numerous legal actions, threatened or filed. Management presently believes that none of the legal proceedings to which it is a party are likely to have a materially adverse effect on the Company’s consolidated financial condition, operating results or cash flows.

27

Note L – Fair Value

Under ASC Topic 820, fair value measurements for items measured at fair value on a recurring and nonrecurring basis at June 30, 2021 and December 31, 2020 included:

(In thousands)	Fair Value Measurements		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
At June 30, 2021
Financial Assets
Available-for-sale debt securities1	$	1,322,776	$	199	$	1,322,577	$	0
Derivative financial instruments2	10,202		0		10,202		0
Loans held for sale2	42,793		0		42,793		0
Loans3	10,212		0		1,073		9,139
Other real estate owned4	12,804		0		390		12,414
Equity securities5	6,434		6,434		0		0
Financial Liabilities
Derivative financial instruments2	$	9,497	$	0	$	9,497	$	0
At December 31, 2020
Financial Assets
Available-for-sale debt securities1	$	1,398,157	$	101	$	1,398,056	$	0
Derivative financial instruments2	14,343		0		14,343		0
Loans held for sale2	68,890		0		68,890		0
Loans3	8,806		0		1,900		6,906
Other real estate owned4	12,750		0		72		12,678
Equity securities5	6,530		6,530		0		0
Financial Liabilities
Derivative financial instruments2	$	13,339	$	0	$	13,339	$	0
1See “Note D – Securities” for further detail of fair value of individual investment categories.
2Recurring fair value basis determined using observable market data.
3See “Note E – Loans.” Nonrecurring fair value adjustments to collateral-dependent loans reflect full or partial write-downs that are based on current appraised values of the collateral in accordance with ASC Topic 310.
4Fair value is measured on a nonrecurring basis in accordance with ASC Topic 360.
5An investment in shares of a mutual fund that invests primarily in CRA-qualified debt securities, reported at fair value in Other Assets. Recurring fair value basis is determined using market quotations.

Available-for-sale debt securities: Level 1 securities consist of U.S. Treasury securities. Other securities are reported at fair value utilizing Level 2 inputs. The estimated fair value of a security is determined based on market quotations when available or, if not available, by using quoted market prices for similar securities, pricing models or discounted cash flow analyses, using observable market data where available.

The Company reviews the prices supplied by independent pricing services, as well as their underlying pricing methodologies, for reasonableness and to ensure such prices are aligned with traditional pricing matrices. The fair value of collateralized loan obligations is determined from broker quotes. From time to time, the Company will validate, on a sample basis, prices supplied by the independent pricing service by comparison to prices obtained from other brokers and third-party sources or derived using internal models.

Derivative financial instruments: The Company offers interest rate swaps to certain loan customers to allow them to hedge the risk of rising interest rates on their variable rate loans. The Company originates a variable rate loan and enters into a variable-to-fixed interest rate swap with the customer. The Company also enters into an offsetting swap with a correspondent bank. These back-to-back agreements are intended to offset each other and allow the Company to originate a variable rate loan, while

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providing a contract for fixed interest payments for the customer. The fair value of these derivatives is based on a discounted cash flow approach. Due to the observable nature of the inputs used in deriving the fair value of these derivative contracts, the valuation of interest rate swaps is classified as Level 2. Other derivatives consist of interest rate floors designated as cash flow hedges. The fair values of these instruments are based upon the estimated amount the Company would receive or pay to terminate the instruments, taking into account current interest rates and, when appropriate, the current creditworthiness of the counterparties. Interest rate floors designated as cash flow hedges are classified within Level 2.

Loans held for sale: Fair values are based upon estimated values to be received from independent third party purchasers. These loans are intended for sale and the Company believes that the fair value is the best indicator of the resolution of these loans. Fair market value changes occur due to changes in interest rates, the borrower’s credit, the secondary loan market and the market for a borrower’s debt. Interest income is recorded based on the contractual terms of the loan and in accordance with the Company’s policy on loans held for investment. None of the loans were 90 days or more past due or on nonaccrual as of June 30, 2021 and December 31, 2020.

The aggregate fair value and contractual balance of loans held for sale as of June 30, 2021 and December 31, 2020 is as follows:

(In thousands)	June 30, 2021		December 31, 2020
Aggregate fair value	$	42,793	$	68,890
Contractual balance	41,629		66,415
Excess	1,164		2,475

Loans: Loans carried at fair value consist of collateral-dependent real estate loans. Fair value is based on recent real estate appraisals less estimated costs of sale. These evaluations may use either a single valuation approach or a combination of approaches, such as comparative sales, cost and/or income approach. A significant unobservable input in the income approach is the estimated capitalization rate for a given piece of collateral. At June 30, 2021 capitalization rates utilized to determine fair value of the underlying collateral averaged approximately 7.2%. Adjustments to comparable sales may be made by an appraiser to reflect local market conditions or other economic factors and may result in changes in the fair value of an asset over time. As such, the fair value of these loans is considered level 3 in the fair value hierarchy. Collateral-dependent loans measured at fair value totaled $14.3 million with a specific reserve of $4.1 million at June 30, 2021, compared to $16.5 million with a specific reserve of $7.7 million at December 31, 2020.

For loans classified as Level 3, changes included loan additions of $3.7 million offset by $1.5 million in paydowns and charge-offs for the six months ended June 30, 2021.

Other real estate owned: When appraisals are used to determine fair value and the appraisals are based on a market approach, the fair value of other real estate owned (“OREO”) is classified as a Level 2 input. When the fair value of OREO is based on appraisals which require significant adjustments to market-based valuation inputs or apply an income approach based on unobservable cash flows, the fair value of OREO is classified as Level 3.

For OREO classified as Level 3 at June 30, 2021, changes during the six months ended included additions of $1.3 million offset by sales and writedowns of $1.6 million.

Transfers between levels of the fair value hierarchy are recognized on the actual date of the event or circumstances that caused the transfer, which generally coincides with the Company’s monthly and/or quarterly valuation process. There were no such transfers during the six months ended June 30, 2021 and 2020.

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The carrying amount and fair value of the Company’s other financial instruments that were not disclosed previously in the balance sheet and for which carrying amount is not fair value as of June 30, 2021 and December 31, 2020 is as follows:

(In thousands)	Carrying Amount		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
June 30, 2021
Financial Assets
Debt securities held-to-maturity1	$	493,467	$	0	$	489,289	$	0
Time deposits with other banks	750		0		759		0
Loans, net	5,345,710		0		0		5,367,748
Financial Liabilities
Deposit liabilities	7,836,436		0		0		7,838,507
Subordinated debt	71,506		0		58,342		0
December 31, 2020
Financial Assets
Debt securities held-to-maturity1	$	184,484	$	0	$	192,179	$	0
Time deposits with other banks	750		0		762		0
Loans, net	5,633,810		0		0		5,686,019
Financial Liabilities
Deposit liabilities	6,932,561		0		0		6,936,097
Subordinated debt	71,365		0		58,227		0
1See “Note D – Securities” for further detail of individual investment categories.

The short maturity of Seacoast’s assets and liabilities results in having a significant number of financial instruments whose fair value equals or closely approximates carrying value. Such financial instruments are reported in the following balance sheet captions: cash and due from banks, interest bearing deposits with other banks, FHLB borrowings and securities sold under agreements to repurchase, maturing within 30 days.

The following methods and assumptions were used to estimate the fair value of each class of financial instrument for which it is practicable to estimate that value at June 30, 2021 and December 31, 2020:

Held-to-maturity debt securities: These debt securities are reported at fair value utilizing level 2 inputs. The estimated fair value of a security is determined based on market quotations when available or, if not available, by using quoted market prices for similar securities, pricing models or discounted cash flow analyses, using observable market data where available.

The Company reviews the prices supplied by independent pricing services, as well as their underlying pricing methodologies, for reasonableness and to ensure such prices are aligned with traditional pricing matrices. From time to time, the Company will validate, on a sample basis, prices supplied by the independent pricing service by comparison to prices obtained from other brokers and third-party sources or derived using internal models.

Loans: Fair values are estimated for portfolios of loans with similar financial characteristics. Loans are segregated by type, such as commercial or mortgage. Each loan category is further segmented into fixed and adjustable-rate interest terms as well as performing and nonperforming categories. The fair value of loans is calculated by discounting scheduled cash flows through the estimated life including prepayment considerations, using estimated market discount rates that reflect the risks inherent in the loan. The fair value approach considers market-driven variables including credit related factors and reflects an “exit price” as defined in ASC Topic 820.

Deposit liabilities: The fair value of demand deposits, savings accounts and money market deposits is the amount payable at the reporting date. The fair value of fixed maturity certificates of deposit is estimated using the rates currently offered for funding of similar remaining maturities.

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Note M – Business Combinations

Proposed Acquisition of Legacy Bank of Florida

On March 23, 2021, the Company announced that it had entered into an agreement and plan of merger with Legacy Bank of Florida (“Legacy”). Pursuant to the terms of the merger agreement, Legacy, headquartered in Boca Raton, FL, will be merged with and into Seacoast Bank. Legacy operates 5 branches in Broward and Palm Beach counties in Florida’s largest metropolitan statistical area with $476.0 million in loans and $485.6 million in deposits as of June 30, 2021. All regulatory and shareholder approvals have been received and the acquisition is expected to close in August 2021.

Acquisition of Fourth Street Banking Company

On August 21, 2020, the Company completed its acquisition of Fourth Street Banking Company (“Fourth Street”). Simultaneously, upon completion of the merger of Fourth Street and the Company, Fourth Street's wholly owned subsidiary bank, Freedom Bank, was merged with and into Seacoast Bank. Prior to the acquisition, Freedom Bank operated 2 branches in St. Petersburg, Florida.

As a result of this acquisition, the Company expects to enhance its presence in St. Petersburg, expand its customer base and leverage operating cost through economies of scale, and positively affect the Company’s operating results.

The Company acquired 100% of the outstanding common stock of Fourth Street. Under the terms of the definitive agreement, each share of Fourth Street common stock was converted into the right to receive 0.1275 share of Seacoast common stock.

(In thousands, except per share data)	August 21, 2020
Number of Fourth Street common shares outstanding	11,220
Shares issued upon conversion of convertible debt	5,405
Per share exchange ratio	0.1275
Number of shares of common stock issued	2,120
Multiplied by common stock price per share on August 21, 2020	$	19.40
Value of common stock issued	41,121
Cash paid for Fourth Street vested stock options	596
Total purchase price	$	41,717

The acquisition of Fourth Street was accounted for under the acquisition method in accordance with ASC Topic 805, Business Combinations. The Company recognized goodwill of $9.0 million for this acquisition that is nondeductible for tax purposes. Determining fair values of assets and liabilities, especially the loan portfolio, core deposit intangibles, and deferred taxes, is a complicated process involving significant judgment regarding methods and assumptions used to calculate estimated fair values. The fair values initially assigned to assets acquired and liabilities assumed are preliminary and could change for up to one year after the closing date of the acquisition as new information and circumstances relative to closing date fair values becomes known.

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(In thousands)	Initially Measured August 21, 2020
Assets:
Cash	$	38,082
Investment securities	3,498
Loans	303,434
Bank premises and equipment	9,480
Core deposit intangibles	1,310
Goodwill	9,030
Other assets	7,088
Total assets	$	371,922
Liabilities:
Deposits	$	329,662
Other liabilities	543
Total liabilities	$	330,205

The table below presents information with respect to the fair value and unpaid principal balance of acquired loans at the acquisition date.

	August 21, 2020
(In thousands)	Book Balance		Fair Value
Loans:
Construction and land development	$	9,197	$	8,851
Commercial real estate - owner-occupied	77,936		75,215
Commercial real estate - non owner-occupied	76,014		71,171
Residential real estate	23,548		23,227
Commercial and financial	72,745		68,096
Consumer	2,748		2,694
PPP loans	55,005		54,180
Total acquired loans	$	317,193	$	303,434

The table below presents the carrying amount of loans for which, at the date of acquisition, there was evidence of more than insignificant deterioration of credit quality since origination:

(In thousands)	August 21, 2020
Book balance of loans at acquisition	$	59,455
Allowance for credit losses at acquisition	(5,763)
Non-credit related discount	(4,319)
Total PCD loans acquired	$	49,373

The Company believes the deposits assumed in the acquisition have an intangible value. In determining the valuation amount, deposits were analyzed based on factors such as type of deposit, deposit retention, interest rates and age of deposit relationships.

Acquisition of First Bank of the Palm Beaches

On March 13, 2020, the Company completed its acquisition of First Bank of the Palm Beaches (“FBPB”). FBPB was merged with and into Seacoast Bank. FBPB operated 2 branches in the Palm Beach market.

As a result of this acquisition, the Company expects to enhance its presence in the Palm Beach market, expand its customer base and leverage operating cost through economies of scale, and positively affect the Company’s operating results.

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The Company acquired 100% of the outstanding common stock of FBPB. Under the terms of the definitive agreement, each share of FBPB common stock was converted into the right to receive 0.2000 share of Seacoast common stock.

(In thousands, except per share data)	March 13, 2020
Number of FBPB common shares outstanding	5,213
Per share exchange ratio	0.2000
Number of shares of common stock issued	1,043
Multiplied by common stock price per share on March 13, 2020	$	20.17
Value of common stock issued	21,031
Cash paid for FBPB vested stock options	866
Total purchase price	$	21,897

The acquisition of FBPB was accounted for under the acquisition method in accordance with ASC Topic 805, Business Combinations. The Company recognized goodwill of $6.9 million for this acquisition that is nondeductible for tax purposes. Determining fair values of assets and liabilities, especially the loan portfolio, core deposit intangibles, and deferred taxes, is a complicated process involving significant judgment regarding methods and assumptions used to calculate estimated fair values. The adjustment reflected in the table below are the result of information obtained subsequent to the initial measurement.

(In thousands)	Initially Measured March 13, 2020		Measurement Period Adjustments		As Adjusted March 13, 2020
Assets:
Cash	$	34,749	$	0	$	34,749
Investment securities	447		0		447
Loans	146,839		(62)		146,777
Bank premises and equipment	6,086		0		6,086
Core deposit intangibles	819		0		819
Goodwill	6,799		62		6,861
Other assets	1,285		20		1,305
Total assets	$	197,024	$	20	$	197,044
Liabilities:
Deposits	$	173,741	$	0	$	173,741
Other liabilities	1,386		20		1,406
Total liabilities	$	175,127	$	20	$	175,147

The table below presents information with respect to the fair value and unpaid principal balance of acquired loans at the acquisition date.

	March 13, 2020
(In thousands)	Book Balance		Fair Value
Loans:
Construction and land development	$	9,493	$	9,012
Commercial real estate - owner-occupied	46,221		45,171
Commercial real estate - non owner-occupied	36,268		35,079
Residential real estate	47,569		47,043
Commercial and financial	9,659		9,388
Consumer	1,132		1,084
Total acquired loans	$	150,342	$	146,777

The table below presents the carrying amount of loans for which, at the date of acquisition, there was evidence of more than insignificant deterioration of credit quality since origination:

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(In thousands)	March 13, 2020
Book balance of loans at acquisition	$	43,682
Allowance for credit losses at acquisition	(516)
Non-credit related discount	(128)
Total PCD loans acquired	$	43,038

The Company believes the deposits assumed in the acquisition have an intangible value. In determining the valuation amount, deposits were analyzed based on factors such as type of deposit, deposit retention, interest rates and age of deposit relationships.

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Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 

The purpose of this discussion and analysis is to aid in understanding significant changes in the financial condition of Seacoast Banking Corporation of Florida and its subsidiaries ("Seacoast" or the “Company”) and their results of operations. Nearly all of the Company’s operations are contained in its banking subsidiary, Seacoast National Bank (“Seacoast Bank” or the “Bank”). Such discussion and analysis should be read in conjunction with the Company’s Condensed Consolidated Financial Statements and the related notes included in this report.

The emphasis of this discussion will be on the three and six months ended June 30, 2021 compared to the three and six months ended June 30, 2020 for the consolidated statements of income. For the consolidated balance sheets, the emphasis of this discussion will be the balances as of June 30, 2021 compared to December 31, 2020.

This discussion and analysis contains statements that may be considered “forward-looking statements” as defined in, and subject to the protections of the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. See the following section for additional information regarding forward-looking statements.

For purposes of the following discussion, the words “Seacoast" or the "Company” refer to the combined entities of Seacoast Banking Corporation of Florida and its direct and indirect wholly owned subsidiaries.

Special Cautionary Notice Regarding Forward-Looking Statements

Certain statements made or incorporated by reference herein which are not statements of historical fact, including those under “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and elsewhere herein, are “forward-looking statements” within the meaning, and protections, of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Forward-looking statements include statements with respect to the Company's beliefs, plans, objectives, goals, expectations, anticipations, assumptions, estimates, and intentions about future performance, and involve known and unknown risks, uncertainties and other factors, any of which may be impacted by the COVID-19 pandemic and related effects on the U.S. economy, which may be beyond the Company's control, and which may cause the actual results, performance or achievements of Seacoast Banking Corporation of Florida (“Seacoast” or the “Company”) or its wholly-owned banking subsidiary, Seacoast National Bank (“Seacoast Bank), to be materially different from those set forth in the forward-looking statements.

All statements other than statements of historical fact could be forward-looking statements. You can identify these forward-looking statements through the use of words such as "may," "will," "anticipate," "assume," "should," "support," "indicate," "would," "believe," "contemplate," "expect," "estimate," "continue," "further," "plan," "point to," "project," "could," "intend," "target" or other similar words and expressions of the future. These forward-looking statements may not be realized due to a variety of factors, including, without limitation:

•the effects of future economic and market conditions, including seasonality;

•the adverse impact of COVID-19 and variants thereof (economic and otherwise) on the Company and its customers, counterparties, employees, and third-party service providers, and the adverse impacts to our business, financial position, results of operations, and prospects, including the ongoing potential to adversely affect Seacoast’s revenues and values of its assets and liabilities, lead to a tightening of credit, and increase stock price volatility;

•government or regulatory responses to the COVID-19 pandemic, including the risk of inflation and interest rate increases resulting from monetary and fiscal stimulus response, which may have unanticipated adverse effects on our customers, and our financial condition and results of operations;

•governmental monetary and fiscal policies, including interest rate policies of the Board of Governors of the Federal Reserve ("Federal Reserve"), as well as legislative, tax and regulatory changes;

•changes in accounting policies, rules and practices, including the impact of the adoption of the current expected credit losses (“CECL”) methodology;

•our participation in the Paycheck Protection Program (“PPP”);

•the risks of changes in interest rates on the level and composition of deposits, loan demand, liquidity and the values of loan collateral, securities, and interest rate sensitive assets and liabilities;

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•interest rate risks, sensitivities and the shape of the yield curve; uncertainty related to the impact of LIBOR calculations on securities, loans and debt;

•governmental actions to stimulate the economy and provide support for small businesses have resulted in material increases to the Company’s liquidity position, adversely affecting the net interest margin. The duration of this liquidity remaining on the balance sheet is uncertain;

•changes in borrower credit risks and payment behaviors, including as a result of the financial impact of COVID-19;

•changes in retail distribution strategies, customer preferences and behavior;

•changes in the availability and cost of credit and capital in the financial markets;

•changes in the prices, values and sales volumes of residential and commercial real estate;

•the Company's ability to comply with any regulatory requirements;

•the effects of problems encountered by other financial institutions that adversely affect Seacoast or the banking industry;

•Seacoast's concentration in commercial real estate loans and in real estate collateral in the state of Florida;

•inaccuracies or other failures from the use of models, including the failure of assumptions and estimates, as well as differences in, and changes to, economic, market and credit conditions;

•the impact on the valuation of Seacoast's investments due to market volatility or counterparty payment risk;

•statutory and regulatory dividend restrictions;

•increases in regulatory capital requirements for banking organizations generally;

•the risks of mergers, acquisitions and divestitures, including Seacoast's ability to continue to identify acquisition targets and successfully acquire and integrate desirable financial institutions;

•changes in technology or products that may be more difficult, costly, or less effective than anticipated;

•the Company's ability to identify and address increased cybersecurity risks, including as a result of employees working remotely;

•inability of Seacoast's risk management framework to manage risks associated with the business;

•dependence on key suppliers or vendors to obtain equipment or services for the business on acceptable terms;

•reduction in or the termination of Seacoast's ability to use the mobile-based platform that is critical to the Company's business growth strategy;

•the effects of war or other conflicts, acts of terrorism, natural disasters, health emergencies, epidemics or pandemics, or other catastrophic events that may affect general economic conditions;

•unexpected outcomes of, and the costs associated with, existing or new litigation involving the Company, including as a result of the Company’s participation in the PPP;

•Seacoast's ability to maintain adequate internal controls over financial reporting;

•potential claims, damages, penalties, fines and reputational damage resulting from pending or future litigation, regulatory proceedings and enforcement actions;

•the effects of competition from other commercial banks, thrifts, mortgage banking firms, consumer finance companies, credit unions, non-bank financial technology providers, securities brokerage firms, insurance companies, money market and other mutual funds and other financial institutions operating in the Company's market areas and elsewhere, including institutions operating regionally, nationally and internationally, together with such competitors offering banking products and services by mail, telephone, computer and the Internet;

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•the failure of assumptions underlying the establishment of reserves for possible credit losses;

•the risks relating to the Legacy Bank of Florida proposed merger including, without limitation: the timing to consummate the proposed merger; the risk that a condition to closing of the proposed merger may not be satisfied; the risk that the merger may not be completed at all; the diversion of management time on issues related to the proposed merger; unexpected transaction costs, including the costs of integrating operations; the risks that the businesses will not be integrated successfully or such integration may be more difficult, time-consuming or costly than expected; the potential failure to fully or timely realize expected revenues and revenue synergies, including as the result of revenues following the merger being lower than expected; the risk of deposit and customer attrition; any changes in deposit mix; unexpected operating and other costs, which may differ or change from expectation; the risk of customer and employee loss and business disruptions, including, without limitation, as the result of difficulties in maintaining relationships with employees; increased competitive pressures on solicitations of customers by competitors; as well as difficulties and risks inherent with entering new markets; and,

•other factors and risks described under “Risk Factors” herein and in any of the Company's subsequent reports filed with the SEC and available on its website at www.sec.gov.

All written or oral forward-looking statements that are made or are attributable to Seacoast are expressly qualified in their entirety by this cautionary notice. The Company assumes no obligation to update, revise or correct any forward-looking statements that are made from time to time, either as a result of future developments, new information or otherwise, except as may be required by law.

Business Developments

Impact of COVID-19 Pandemic

The COVID-19 pandemic and related restrictive measures taken by governments, businesses and individuals have caused unprecedented uncertainty, volatility and disruption in financial markets and in governmental, commercial and consumer activity in the United States and globally, including the markets that we serve. As the restrictive measures have been eased during 2020 and into 2021, the U.S. economy has begun to recover and with the availability and distribution of multiple COVID-19 vaccines, we anticipate continued improvements in commercial and consumer activity and the U.S. economy. While the overall outlook has improved based on the availability of the vaccine to all adults and older children, there has been a recent rise in hospitalization and infection rates in the country, but especially in our footprint, caused by the Delta variant, a rapidly spreading strain of coronavirus. Therefore, the risk of further resurgence and possible reimplementation of restrictions remains.

While indications of recovery exist, we recognize that our business and consumer customers are experiencing varying degrees of financial distress, which is expected to continue into the second half of 2021, especially if new COVID-19 variant infections increase (or are not adequately contained) and new economic restrictions are mandated. Changing consumer behavior and the impact of government support programs including the PPP have contributed to higher customer deposit balances, which may adversely affect our net interest income and net interest margin. Commercial activity has improved, but has not returned to the levels existing prior to the outbreak of the pandemic, which may result in our customers’ inability to meet their loan obligations to us. In addition, the economic pressures and uncertainties related to the COVID-19 pandemic have resulted in changes in consumer spending behaviors, which may negatively impact the demand for loans and other services we offer. Our borrowers include customers in industries such as hotel/lodging, restaurants and retail and commercial real estate, all of which have been significantly impacted by the COVID-19 pandemic, or remain at heightened risk of future negative economic impact, which may be caused or exacerbated by increased COVID-19 variant infections, vaccine hesitancy, or new economic restrictions in our footprint. We recognize that these industries may take longer to recover as consumers may be hesitant to return to full social interaction or may change their spending habits on a more permanent basis as a result of the pandemic. We continue to monitor these customers closely.

We have taken deliberate actions to maintain our balance sheet strength to serve our clients and communities, including maintaining higher levels of liquidity and managing our assets and liabilities in order to maintain a strong capital position and support business growth and acquisition opportunities; however, future economic conditions are subject to significant uncertainty. Uncertainties associated with the pandemic include the duration of the COVID-19 outbreak and any related variant infections, the availability, acceptance, and effectiveness of COVID-19 vaccines, the impact to our customers, employees and vendors and the impact to the economy as a whole. We continuously seek to monitor and anticipate developments, but cannot predict all of the various adverse effects COVID-19 will have on our business, financial condition, liquidity or results of operations.

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Results of Operations

For the second quarter of 2021, the Company reported net income of $31.4 million, or $0.56 per average diluted share, compared to $33.7 million, or $0.60, for the first quarter of 2021 and $25.1 million, or $0.47, for the second quarter of 2020. For the six months ended June 30, 2021, net income totaled $65.1 million or $1.17 per average diluted share, an increase of $39.3 million, or 153%, compared to the six months ended June 30, 2020. Adjusted net income1 for the second quarter of 2021 totaled $33.3 million, or $0.59 per average diluted share, compared to $35.5 million, or $0.63, for the first quarter of 2021 and $25.5 million, or $0.48, for the second quarter of 2020. For the six months ended June 30, 2021, adjusted net income1 totaled $68.7 million, or $1.23 per average diluted share, compared to $30.9 million, or $0.59 per average diluted share for the six months ended June 30, 2020.

	Second		First		Second		Six Months Ended
	Quarter		Quarter		Quarter		June 30,
	2021		2021		2020		2021		2020
Return on average tangible assets	1.48	%	1.70	%	1.37	%	1.58	%	0.78	%
Return on average tangible shareholders' equity	13.88		15.62		13.47		14.73		7.27
Efficiency ratio	54.93		53.21		50.11		54.05		54.88
Adjusted return on average tangible assets1	1.52	%	1.75	%	1.33	%	1.63	%	0.86	%
Adjusted return on average tangible shareholders' equity1	14.27		16.01		13.09		15.12		8.02
Adjusted efficiency ratio1	53.49		51.99		49.60		52.72		51.53
1Non-GAAP measure - see “Explanation of Certain Unaudited Non-GAAP Financial Measures” for more information and a reconciliation to GAAP.

Net Interest Income and Margin

Net interest income for the second quarter of 2021 totaled $65.8 million, decreasing $0.8 million, or 1%, compared to the first quarter of 2021, and decreasing $1.5 million, or 2%, compared to the second quarter of 2020. For the six months ended June 30, 2021, net interest income totaled $132.4 million, an increase of $2.0 million, or 2%, compared to the six months ended June 30, 2020. The decrease quarter-over-quarter reflects lower income on Paycheck Protection Program (“PPP”) loans, partially offset by lower interest expense on deposits, while the decrease from the second quarter of 2020 reflects the impact of the lower interest rate environment. Net interest margin (on a fully tax equivalent basis)1 was 3.23% in the second quarter of 2021, compared to 3.51% in the first quarter of 2021 and 3.70% in the second quarter of 2020. The decrease during the second quarter of 2021 was largely the result of significant growth in transaction account deposit balances. This increase in funding occurred across our customer base at near-zero rates, as new clients were onboarded and existing clients continue to see expansion in cash balances. The resulting increase in liquidity negatively impacted net interest margin by 23 basis points in the second quarter of 2021. Excluding this increase in liquidity, the remaining decline in net interest margin compared to the first quarter of 2021 is attributed to lower PPP interest and fees as a result of declining balances as PPP loans are forgiven. Compared to the first quarter of 2021, securities yields declined by only two basis points to 1.63% and non-PPP loan yields declined by only one basis point to 4.36% during the second quarter of 2021. Offsetting and favorable was the decline in the cost of deposits from 13 basis points in the first quarter of 2021 to eight basis points in the second quarter of 2021. The effect on net interest margin of purchase discounts on acquired loans was an increase of 14 basis points in the second quarter of 2021 compared to an increase of 15 basis points in the first quarter of 2021 and an increase of 16 basis points in the second quarter of 2020. The effect of interest and fees on PPP loans was an increase of six basis points in the second quarter of 2021, an increase of 11 basis points in the first quarter of 2021 and an increase of eight basis points in the second quarter of 2020. For the six months ended June 30, 2021, net interest margin (on a fully tax equivalent basis)1 was 3.37%, compared to 3.81% for the six months ended June 30, 2020. The yield on securities declined from 2.85% for the six months ended June 30, 2020 to 1.64% for the six months ended June 30, 2021, reflecting the impact of a lower interest rate environment including the payoff of higher yielding securities being replaced with lower yields on new purchases. The yield on non-PPP loans declined from 4.72% for the six months ended June 30, 2020 to 4.36% for the six months ended June 30, 2021, reflecting the impact of the lower interest rate environment. Offsetting and favorable was the decline in the cost of deposits from 43 basis points for the six months ended June 30, 2020 to 10 basis points for the six months ended June 30, 2021.

The effect on net interest margin of purchase discounts on acquired loans was an increase of 15 basis points for the six months ended June 30, 2021 compared to an increase of 21 basis points for the six months ended June 30, 2020. The effect of interest

1Non-GAAP measure - see “Explanation of Certain Unaudited Non-GAAP Financial Measures” for more information and a reconciliation to GAAP.

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and fees on PPP loans was an increase of eight basis points for the six months ended June 30, 2021,compared to an increase of four basis points for the six months ended June 30, 2020.

The cost of deposits declined to eight basis points in the second quarter of 2021, compared to 13 basis points in the first quarter of 2021 and 31 basis points in the second quarter of 2020. Lower cost of deposits reflects lower market rates, and a favorable shift in product mix to include a higher proportion of noninterest bearing demand deposits to total deposits. For the six months ended June 30, 2021, the cost of deposits was ten basis points, a decrease of 33 basis points compared to the six months ended June 30, 2020.

The following table details the trend for net interest income and margin results (on a tax equivalent basis)1, the yield on earning assets and the rate paid on interest bearing liabilities for the periods specified:

(In thousands, except ratios)	Net Interest Income1		Net Interest Margin1		Yield on Earning Assets1		Rate on Interest Bearing Liabilities
Second quarter 2021	$	65,933	3.23	%	3.33	%	0.16	%
First quarter 2021	66,741		3.51	%	3.65	%	0.23	%
Second quarter 2020	67,388		3.70	%	4.03	%	0.51	%
Six months ended June 30, 2021	132,674		3.37	%	3.49	%	0.19	%
Six months ended June 30, 2020	130,679		3.81	%	4.27	%	0.70	%
1On tax equivalent basis, a non-GAAP measure - see "Explanation of Certain Unaudited Non-GAAP Financial Measures" for more information and a reconciliation to GAAP.

Total average loans decreased $161.1 million, or 3%, for the second quarter of 2021 compared to the first quarter of 2021, and decreased $130.3 million, or 2%, from the second quarter of 2020. The decrease from the prior quarter reflects a net decrease in PPP loans as a result of loan forgiveness. The decrease from the prior year reflects PPP loan forgiveness and a conservative slowdown in originations of commercial and consumer loans, partially offset by loans acquired from Freedom Bank.

Average loans as a percentage of average earning assets totaled 68% for the second quarter of 2021, 75% for the first quarter of 2021 and 78% for the second quarter of 2020.

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Loan production and pipelines (loans in underwriting and approval or approved and not yet closed) are detailed in the following table for the periods specified:

	Second		First		Second		Six Months Ended
	Quarter		Quarter		Quarter		June 30,
(In thousands)	2021		2021		2020		2021		2020
Commercial pipeline at period end	$	322,014	$	240,871	$	117,042	$	322,014	$	117,042
Commercial loan originations	193,028		204,253		106,857		397,281		290,187
Residential pipeline - saleable at period end	60,585		92,141		94,666		60,585		94,666
Residential loans - sold	120,099		138,337		122,459		258,436		185,324
Residential pipeline - portfolio at period end	54,132		72,448		13,199		54,132		13,199
Residential loans - retained	118,126		46,620		23,539		164,746		49,315
Consumer pipeline at period end	31,748		28,127		30,647		31,748		30,647
Consumer originations	63,702		46,745		57,956		110,447		109,472
PPP originations	23,529		232,478		590,718		256,007		590,718

Commercial originations during the second quarter of 2021 were $193.0 million, a decrease of $11.2 million, or 5%, compared to the first quarter of 2021, and an increase of $86.2 million, or 81%, compared to the second quarter of 2020.

The commercial pipeline increased $81.1 million, or 34%, to $322.0 million at June 30, 2021, compared to March 31, 2021, and increased $205.0 million, or 175%, compared to June 30, 2020. The increases reflect increasing demand in line with Florida’s expanding economy and the addition of new commercial bankers.

The Company originates residential mortgage loans identified for sale to investors in the secondary market. The Company uses rate locks with investors at the time of application, thereby eliminating interest rate risk. Residential loans originated for sale in the secondary market totaled $120.1 million in the second quarter of 2021, compared to $138.3 million in the first quarter of 2021 and $122.5 million in the second quarter of 2020, a decrease of 13% and a decrease of 2%, respectively. Refinance activity has slowed from the peaks seen in the last several quarters, and housing inventory is low. Residential saleable pipelines were $60.6 million as of June 30, 2021, compared to $92.1 million as of March 31, 2021 and $94.7 million as of June 30, 2020.

Residential loan production retained in the portfolio for the second quarter of 2021 was $118.1 million compared to $46.6 million in the first quarter of 2021 and $23.5 million in the second quarter of 2020, an increase of 153% and an increase of 402%, respectively. The pipeline of residential loans intended to be retained in the portfolio was $54.1 million as of June 30, 2021, compared to $72.4 million as of March 31, 2021, and $13.2 million as of June 30, 2020. Residential loans retained in the second quarter of 2021 includes a $38.4 million purchased pool consisting of 30-year fixed rate jumbo residential loans.

Consumer originations totaled $63.7 million during the second quarter of 2021, an increase of $17.0 million, or 36%, from the first quarter of 2021 and an increase of $5.7 million, or 10%, from the second quarter of 2020. The consumer pipeline was $31.7 million as of June 30, 2021, compared to $28.1 million as of March 31, 2021 and $30.6 million at June 30, 2020.

In March 2020, the Coronavirus Aid, Relief and Economic Security (“CARES”) Act was signed into law. The CARES Act includes provisions for the Paycheck Protection Program (“PPP”) offered through the U.S. Small Business Administration (“SBA”). Loans originated under this program have a contractual rate of interest of 1% with principal and interest that may be forgiven, provided that the borrower uses the funds in a manner consistent with PPP guidelines. Seacoast has assisted more than 8,000 borrowers through the PPP since inception, $529.7 million in PPP loan balances have been forgiven, and remaining outstanding balances total $364.1 million at June 30, 2021.

Average debt securities increased $78.6 million, or 5%, during the second quarter of 2021 compared to the first quarter of 2021, and were $499.9 million, or 43%, higher compared to the second quarter of 2020. Increases reflect the investment of excess liquidity, partially offset by paydowns and maturities.

The cost of average interest-bearing liabilities contracted in the second quarter of 2021 to 16 basis points from 23 basis points for the first quarter of 2021, and from 51 basis points for the second quarter of 2020. The cost of average total deposits (including noninterest bearing demand deposits) in the second quarter of 2021 was 8 basis points compared to 13 basis points in

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the first quarter of 2021 and 31 basis points in the second quarter of 2020, reflecting continued repricing downward of interest-bearing deposits and time deposits.

During the second quarter of 2021, average transaction deposits (noninterest and interest bearing demand) increased $459.3 million, or 11%, compared to the first quarter of 2021 and increased $1.1 billion, or 32%, compared to the second quarter of 2020, reflecting the inflow of new customers and higher deposit balances for existing customers.

The Company’s deposit mix remains favorable, with 93% of average deposit balances comprised of savings, money market, and demand deposits for the six months ended June 30, 2021. Seacoast's average cost of deposits, including noninterest bearing demand deposits, decreased to 10 basis points for the six months ended June 30, 2021 compared to 43 basis points for the six months ended June 30, 2020, reflecting the lower interest rate environment and shifts in deposit mix with a higher proportion of low cost deposits. Brokered CDs totaled $20.0 million at June 30, 2021, with a weighted average rate of 0.32%.

Sweep repurchase agreements with customers increased $41.3 million, or 57%, year-over-year. For the six months ended June 30, 2021, the average balance was $114.2 million compared to an average balance of $72.9 million for the six months ended June 30, 2020. The average rate on customer sweep repurchase accounts was 0.13% for the six months ended June 30, 2021, compared to 0.55% for the six months ended June 30, 2020. No federal funds purchased were utilized at June 30, 2021 nor June 30, 2020.

The Company had no FHLB borrowings during the six months ended June 30, 2021 compared to $224.9 million with an average rate of 1.14% for the six months ended June 30, 2020. The decrease reflects the impact of higher average deposit balances that were sufficient to fund the Company’s liquidity needs during 2021.

For the six months ended June 30, 2021, subordinated debt averaged $71.4 million, compared to $71.1 million for the six months ended June 30, 2020. The average rate on subordinated debt for the six months ended June 30, 2021 was 2.40%, compared to 3.69% for the six months ended June 30, 2020. The subordinated debt relates to trust preferred securities issued by subsidiary trusts of the Company.

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The following tables detail average balances, net interest income and margin results (on a tax equivalent basis, a non-GAAP measure) for the periods presented:

Average Balances, Interest Income and Expenses, Yields and Rates1
	2021												2020
	Second Quarter						First Quarter						Second Quarter
	Average				Yield/		Average				Yield/		Average				Yield/
(In thousands, except ratios)	Balance		Interest		Rate		Balance		Interest		Rate		Balance		Interest		Rate
Assets
Earning assets:
Securities:
Taxable	$	1,629,410	$	6,559	1.61	%	$	1,550,457	$	6,298	1.62	%	$	1,135,698	$	7,573	2.67	%
Nontaxable	25,581		186		2.90		25,932		187		2.89		19,347		152		3.14
Total Securities	1,654,991		6,745		1.63		1,576,389		6,485		1.65		1,155,045		7,725		2.68
Federal funds sold and other investments	925,323		709		0.31		377,344		586		0.63		433,626		684		0.63
Loans excluding PPP loans	5,092,897		55,313		4.36		5,149,642		55,504		4.37		5,304,381		59,861		4.54
PPP Loans	505,339		5,127		4.07		609,733		6,886		4.58		424,171		5,068		4.81
Total Loans	5,598,236		60,440		4.33		5,759,375		62,390		4.39		5,728,552		64,929		4.56
Total Earning Assets	8,178,550		67,894		3.33		7,713,108		69,461		3.65		7,317,223		73,338		4.03
Allowance for loan losses	(86,042)						(91,735)						(84,965)
Cash and due from banks	327,171						255,685						103,919
Premises and equipment	70,033						74,272						71,173
Intangible assets	235,964						237,323						230,871
Bank owned life insurance	133,484						132,079						127,386
Other assets	166,686						164,622						147,395
Total Assets	$	9,025,846					$	8,485,354					$	7,913,002
Liabilities and Shareholders' Equity
Interest-bearing liabilities:
Interest-bearing demand	$	1,692,178	$	235	0.06	%	$	1,600,490	$	258	0.07	%	$	1,298,639	$	297	0.09	%
Savings	790,734		118		0.06		722,274		137		0.08		591,040		165		0.11
Money market	1,736,481		627		0.14		1,609,938		670		0.17		1,193,969		741		0.25
Time deposits	533,350		524		0.39		711,320		1,187		0.68		1,293,766		3,820		1.19
Securities sold under agreements to repurchase	115,512		35		0.12		112,834		41		0.15		74,717		34		0.18
Federal Home Loan Bank borrowings	—		—		—		—		—		—		199,698		312		0.63
Other borrowings	71,460		422		2.37		71,390		427		2.43		71,185		581		3.28
Total Interest-Bearing Liabilities	4,939,715		1,961		0.16		4,828,246		2,720		0.23		4,723,014		5,950		0.51
Noninterest demand	2,799,643						2,432,038						2,097,038
Other liabilities	116,093						88,654						79,855
Total Liabilities	7,855,451						7,348,938						6,899,907
Shareholders' equity	1,170,395						1,136,416						1,013,095
Total Liabilities & Equity	$	9,025,846					$	8,485,354					$	7,913,002
Cost of deposits					0.08	%					0.13	%					0.31	%
Interest expense as a % of earning assets					0.10	%					0.14	%					0.33	%
Net interest income as a % of earning assets			$	65,933	3.23	%			$	66,741	3.51	%			$	67,388	3.70	%
1On a fully taxable equivalent basis, a non-GAAP measure - see "Explanation of Certain Unaudited Non-GAAP Financial Measures" for more information and a reconciliation to GAAP. All yields and rates have been computed on an annual basis using amortized cost. Fees on loans have been included in interest on loans. Nonaccrual loans are included in loan balances.

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Average Balances, Interest Income and Expenses, Yields and Rates1
	2021						2020
	Year to Date						Year to Date
	Average				Yield/		Average				Yield/
(In thousands, except ratios)	Balance		Interest		Rate		Balance		Interest		Rate
Assets
Earning assets:
Securities:
Taxable	$	1,590,152	$	12,857	1.62	%	$	1,144,086	$	16,269	2.84	%
Nontaxable	25,756		373		2.90		19,544		304		3.11
Total Securities	1,615,908		13,230		1.64		1,163,630		16,573		2.85
Federal funds sold and other investments	652,847		1,295		0.40		260,775		1,418		1.09
Loans excluding PPP loans	5,121,114		110,817		4.36		5,259,808		123,385		4.72
PPP Loans	557,247		12,013		4.35		212,085		5,068		4.81
Total Loans	5,678,361		122,830		4.36		5,471,893		128,453		4.72
Total Earning Assets	7,947,116		137,355		3.49		6,896,298		146,444		4.27
Allowance for loan losses	(88,873)						(70,948)
Cash and due from banks	291,626						97,002
Premises and equipment	72,141						69,379
Intangible assets	236,640						228,791
Bank owned life insurance	132,785						126,939
Other assets	165,658						136,811
Total Assets	$	8,757,093					$	7,484,272
Liabilities and Shareholders' Equity
Interest-bearing liabilities:
Interest-bearing demand	$	1,646,587	$	493	0.06	%	$	1,236,285	$	1,131	0.18	%
Savings	756,693		255		0.07		558,883		513		0.18
Money market	1,673,559		1,297		0.16		1,161,363		2,749		0.48
Time deposits	621,844		1,711		0.55		1,222,758		8,588		1.41
Securities sold under agreements to repurchase	114,181		76		0.13		72,891		201		0.55
Federal Home Loan Bank borrowings	—		—		—		224,860		1,279		1.14
Other borrowings	71,425		849		2.40		71,149		1,304		3.69
Total Interest-Bearing Liabilities	4,884,289		4,681		0.19		4,548,189		15,765		0.70
Noninterest demand	2,616,856						1,861,126
Other liabilities	102,450						71,413
Total Liabilities	7,603,595						6,480,728
Shareholders' equity	1,153,498						1,003,544
Total Liabilities & Equity	$	8,757,093					$	7,484,272
Cost of deposits					0.10	%					0.43	%
Interest expense as a % of earning assets					0.12	%					0.46	%
Net interest income as a % of earning assets			$	132,674	3.37	%			$	130,679	3.81	%
1On a fully taxable equivalent basis, a non-GAAP measure - see "Explanation of Certain Unaudited Non-GAAP Financial Measures" for more information and a reconciliation to GAAP. All yields and rates have been computed on an annual basis using amortized cost. Fees on loans have been included in interest on loans. Nonaccrual loans are included in loan balances.

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Noninterest Income

Noninterest income totaled $15.3 million for the second quarter of 2021, a decrease of $2.3 million, or 13%, compared to the first quarter of 2021 and an increase of $0.3 million, or 2%, from the second quarter of 2020. Noninterest income totaled $33.0 million for the six months ended June 30, 2021, an increase of $3.3 million, or 11%, compared to the six months ended June 30, 2020.

Noninterest income is detailed as follows:

	Second		First		Second		Six Months Ended
	Quarter		Quarter		Quarter		June 30,
(In thousands)	2021		2021		2020		2021		2020
Service charges on deposit accounts	$	2,338	$	2,338	$	1,939	$	4,676	$	4,764
Interchange income	4,145		3,820		3,187		7,965		6,433
Wealth management income	2,387		2,323		1,719		4,710		3,586
Mortgage banking fees	2,977		4,225		3,559		7,202		5,767
Marine finance fees	177		189		157		366		303
SBA gains	232		287		181		519		320
BOLI income	872		859		887		1,731		1,773
Other income	2,249		3,744		2,147		5,993		5,499
	15,377		17,785		13,776		33,162		28,445
Securities (losses) gains, net	(55)		(114)		1,230		(169)		1,249
Total	$	15,322	$	17,671	$	15,006	$	32,993	$	29,694

Service charges on deposits were $2.3 million in the second quarter of 2021, $2.3 million in the first quarter of 2021 and $1.9 million in the second quarter of 2020. For the six months ended June 30, 2021, service charges on deposits totaled $4.7 million, a decrease of $0.1 million, or 2%, compared to the six months ended June 30, 2020. The decrease in service charges for the six-month period reflects the impact on overdraft fees of higher average deposit balances in the 2021 period. Overdraft fees represent 39% of total service charges on deposits for the six months ended June 30, 2021 and 46% for the six months ended June 30, 2020.

Interchange income reached a record $4.1 million for the three months ended June 30, 2021, an increase of $0.3 million, or 9%, compared to the three months ended March 31, 2021, and an increase of $1.0 million, or 30%, compared to the three months ended June 30, 2020. For the six months ended June 30, 2021, interchange income totaled $8.0 million, an increase of $1.5 million, or 24%, compared to the six months ended June 30, 2020. The 2021 periods reflect higher transactional volume and higher per-card spending with the first half of 2020 negatively impacted by the effect of COVID-19-related shutdowns on consumer consumption.

Wealth management income, including trust fees and brokerage commissions and fees, was a record $2.4 million in the second quarter of 2021, increasing $0.1 million, or 3%, from the first quarter of 2021 and increasing $0.7 million, or 39%, compared to the second quarter of 2020. For the six months ended June 30, 2021, wealth management income totaled $4.7 million, an increase of $1.1 million, or 31%, compared to the six months ended June 30, 2020. Assets under management have grown significantly as the team continues to deliver strong growth through the addition of new relationships. Assets under management have increased $451 million from June 30, 2020 to exceed $1.2 billion at June 30, 2021.

Mortgage banking fees decreased by $1.2 million, or 30%, to $3.0 million in the second quarter of 2021 compared to the first quarter of 2021, and decreased $0.6 million, or 16%, compared to the second quarter of 2020, reflecting the impact of slowing refinance activity and low housing inventory levels. For the six months ended June 30, 2021, mortgage banking fees totaled $7.2 million, an increase of $1.4 million, or 25%, compared to the six months ended June 30, 2020.

SBA gains totaled $0.2 million, a decrease of $0.1 million, or 19%, compared to the first quarter of 2021 and an increase of $0.1 million, or 28%, compared to the second quarter of 2020. For the six months ended June 30, 2021, SBA gains totaled $0.5 million, an increase of $0.2 million, or 62%, compared to the six months ended June 30, 2020.

Bank owned life insurance (“BOLI”) income totaled $0.9 million for the second quarter of 2021, in line with comparative periods. BOLI income totaled $1.7 million for the six months ended June 30, 2021 and $1.8 million for the six months ended

44

June 30, 2020. The Company purchased $25.0 million of BOLI late in the second quarter of 2021 with a tax equivalent first year yield of 4.50% that will positively impact future periods.

Other income was $2.2 million in the second quarter of 2021, a decrease of $1.5 million, or 40%, quarter-over-quarter and an increase of $0.1 million, or 5%, year-over-year. For the six months ended June 30, 2021, other income totaled $6.0 million, an increase of $0.5 million, or 9%, compared to the six months ended June 30, 2020. Included in other income in the first quarter of 2021 was $1.7 million in income associated with the resolution of contingencies on two loans acquired in 2017. Similar activity is not expected in subsequent periods.

Noninterest Expenses

The Company has demonstrated its commitment to efficiency through disciplined, proactive management of its cost structure. For the second quarter of 2021, the efficiency ratio, defined as noninterest expense less amortization of intangibles and gains, losses, and expenses on foreclosed properties divided by net operating revenue (net interest income on a fully taxable equivalent basis plus noninterest income excluding securities gains and losses), was 54.93% compared to 53.21% for the first quarter of 2021 and 50.11% for the second quarter of 2020. The increase in the efficiency ratio quarter-over-quarter primarily reflects lower PPP income and lower mortgage banking gains from slowing refinance activity and low housing inventory levels, partially offset by lower cost of deposits and lower noninterest expense. The increase in the efficiency ratio when compared to the prior year quarter reflects higher noninterest expense primarily associated with lower deferrals of salary costs attributed to lower PPP loan production in the second quarter of 2021, and the impact of the lower rate environment on interest income, partially offset by lower cost of deposits. For the six months ended June 30, 2021, the efficiency ratio was 54.05% compared to 54.88% for the six months ended June 30, 2020.

The adjusted efficiency ratio1 was 53.49% in the second quarter of 2021, compared to 51.99% in the first quarter of 2021 and 49.60% in the second quarter of 2020. The increase in the adjusted efficiency ratio quarter-over-quarter primarily reflects lower PPP income, and lower mortgage banking gains from slowing refinance activity and low housing inventory levels, partially offset by lower cost of deposits. The increase in the efficiency ratio when compared to the prior year quarter reflects higher noninterest expense primarily associated with lower deferrals of salary costs attributed to lower PPP loan production in the second quarter of 2021, and the impact of the lower rate environment on interest income, partially offset by lower cost of deposits. At June 30, 2021, adjusted noninterest expense1 as a percent of average tangible assets was 1.98% for the second quarter of 2021 compared to 2.16% for the first quarter of 2021 and 2.11% for the second quarter of 2020. For the six months ended June 30, 2021 the adjusted efficiency ratio1 was 52.72% compared to 51.53% for the six months ended June 30, 2020.

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	Second			First			Second			Six Months Ended
	Quarter			Quarter			Quarter			June 30,
(In thousands, except ratios)	2021			2021			2020			2021			2020
Noninterest expense, as reported	$	45,784		$	46,120		$	42,399		$	91,904		$	90,197
Merger-related charges	(509)			(581)			(240)			(1,090)			(4,793)
Amortization of intangibles	(1,212)			(1,211)			(1,483)			(2,423)			(2,939)
Business continuity expenses	—			—			—			—			(307)
Branch reductions and other expense initiatives	(663)			(449)			—			(1,112)			—
Adjusted noninterest expense1	$	43,400		$	43,879		$	40,676		$	87,279		$	82,158
Foreclosed property expense and net (loss)/gain on sale	90			65			(245)			155			70
Provision for credit losses on unfunded commitments	—			—			(178)			—			(224)
Net adjusted noninterest expense1	$	43,490		$	43,944		$	40,253		$	87,434		$	82,004
Efficiency ratio	54.93		%	53.21		%	50.11		%	54.05		%	54.88		%
Adjusted efficiency ratio1,2	53.49			51.99			49.60			52.72			51.53
Adjusted noninterest expense as a percent of average tangible assets1,2	1.98			2.16			2.11			2.07			2.28
1Non-GAAP measure - see “Explanation of Certain Unaudited Non-GAAP Financial Measures” for more information and a reconciliation to GAAP.
2Adjusted efficiency ratio is defined as noninterest expense, including adjustments to noninterest expense divided by aggregated tax equivalent net interest income and noninterest income, including adjustments to revenue.

Noninterest expense for the second quarter of 2021 totaled $45.8 million, a decrease of $0.3 million, or 1%, compared to the first quarter of 2021, and an increase of $3.4 million, or 8%, from the second quarter of 2020. For the six months ended June

46

30, 2021, noninterest expenses totaled $91.9 million, an increase of $1.7 million, or 2%, compared to the six months ended June 30, 2020. Noninterest expenses are detailed as follows:

	Second		First		Second		Six Months Ended
	Quarter		Quarter		Quarter		June 30,
(In thousands)	2021		2021		2020		2021		2020
Salaries and wages	$	22,966	$	21,393	$	20,226	$	44,359	$	43,924
Employee benefits	3,953		4,980		3,379		8,933		7,634
Outsourced data processing costs	4,676		4,468		4,059		9,144		8,692
Telephone/data lines	838		785		791		1,623		1,505
Occupancy	3,310		3,789		3,385		7,099		6,738
Furniture and equipment	1,166		1,254		1,358		2,420		2,981
Marketing	1,002		1,168		997		2,170		2,275
Legal and professional fees	2,182		2,582		2,277		4,764		5,640
FDIC assessments	515		526		266		1,041		266
Amortization of intangibles	1,212		1,211		1,483		2,423		2,939
Foreclosed property expense and net (gain) loss on sale	(90)		(65)		245		(155)		(70)
Provision for credit losses on unfunded commitments	—		—		178		—		224
Other	4,054		4,029		3,755		8,083		7,449
Total	$	45,784	$	46,120	$	42,399	$	91,904	$	90,197

Salaries and wages totaled $23.0 million for the second quarter of 2021, $21.4 million for the first quarter of 2021, and $20.2 million for the second quarter of 2020. Lower PPP loan production in the second quarter of 2021 resulted in lower deferrals of related salary costs. For the six months ended June 30, 2021, salaries and wages totaled $44.4 million, an increase of $0.4 million, or 1%, compared to the six months ended June 30, 2020. The increase compared to the prior year reflects higher salaries from headcount added through acquisition and investments made to support organic growth.

During the second quarter of 2021, employee benefit costs, which include costs associated with the Company's self-funded health insurance benefits, 401(k) plan, payroll taxes, and unemployment compensation, were $4.0 million, a decrease of $1.0 million, or 21%, compared to the first quarter of 2021 and an increase of $0.6 million, or 17%, compared to the second quarter of 2020. The first quarter of 2021 included higher seasonal payroll taxes and 401(k) plan contributions, as well as higher healthcare-related costs. For the six months ended June 30, 2021, employee benefit costs totaled $8.9 million, an increase of $1.3 million, or 17%, compared to the six months ended June 30, 2020. The increase reflects the impact of higher health insurance related costs and payroll taxes resulting from headcount added through acquisition and investments made to support organic growth.

The Company utilizes third parties for its core data processing systems. Ongoing data processing costs are directly related to the number of transactions processed and the negotiated rates associated with those transactions. Outsourced data processing costs totaled $4.7 million, $4.5 million and $4.1 million for the second quarter of 2021, first quarter of 2021 and second quarter of 2020, respectively. For the six months ended June 30, 2021, outsourced data processing costs totaled $9.1 million, an increase of $0.5 million, or 5%, compared to the six months ended June 30, 2020. The Company continues to improve and enhance mobile and other digital products and services through key third parties. Outsourced data processing costs may increase in the future as customers adopt improved products and as business volumes grow.

Telephone and data line expenditures, including electronic communications with customers and between branch and customer support locations and personnel, as well as with third-party data processors, remained flat at $0.8 million for the second quarter of 2021, first quarter of 2021, and second quarter of 2020, respectively. For the six months ended June 30, 2021, telephone and data line expenditures totaled $1.6 million, an increase of $0.1 million, or 8%, compared to the six months ended June 30, 2020.

Total occupancy, furniture and equipment expenses were $4.5 million for the second quarter of 2021, $5.0 million in the first quarter of 2021, and $4.7 million in the second quarter of 2020. For the six months ended June 30, 2021, total occupancy, furniture and equipment expenses totaled $9.5 million, an increase of $0.2 million, or 2%, compared to the six months ended June 30, 2020.

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Marketing expenses totaled $1.0 million in the second quarter of 2021, $1.2 million in the first quarter of 2021 and $1.0 million in the second quarter of 2020. For the six months ended June 30, 2021, marketing expenses totaled $2.2 million, a decrease of $0.1 million, or 5%, compared to the six months ended June 30, 2020. Targeted marketing campaigns allow the Company to engage new and existing customers while maintaining a controlled expense base.

Legal and professional fees for the second quarter of 2021 were $2.2 million, a decrease of $0.4 million, or 15%, compared to the first quarter of 2021, and a decrease of $0.1 million, or 4%, compared to the second quarter of 2020. For the six months ended June 30, 2021, legal and professional fees totaled $4.8 million, a decrease of $0.9 million, or 16%, compared to the six months ended June 30, 2020. Acquisition-related expenses were $0.5 million in the second quarter of 2021, $0.6 million in the first quarter of 2021 and $0.2 million in the second quarter of 2020. Acquisition-related expenses were $1.1 million in the six months ended June 30, 2021 and $1.4 million for the six months ended June 30, 2020.

FDIC assessments were $0.5 million for the second quarter of 2021 and $0.5 million the first quarter of 2021, while the second quarter of 2020 benefited from FDIC small bank assessment credits to offset expenses. These credits were fully utilized by the second quarter of 2020. For the six months ended June 30, 2021, FDIC assessments totaled $1.0 million compared to $0.3 million for the six months ended June 30, 2020.

During the second quarter of 2021, the Company recorded gains on the sale of OREO, net of other expenses of $0.1 million compared to gains of $0.1 million in the first quarter of 2021 and write-downs of $0.2 million in the second quarter of 2020 (see “Nonperforming Loans, Troubled Debt Restructurings, Other Real Estate Owned, and Credit Quality” for more discussion). For the six months ended June 30, 2021, the Company recorded gains on the sale of OREO, net of other expenses of $0.2 million compared to gains of $0.1 million for the six months ended June 30, 2020.

No adjustment to the reserve for credit losses on unfunded lending commitments was recorded in the first or second quarter of 2021, compared to a $0.2 million increase in reserves in the second quarter of 2020.

Other expense totaled $4.1 million, $4.0 million and $3.8 million for the second quarter of 2021, the first quarter of 2021 and the second quarter of 2020, respectively. For the six months ended June 30, 2021, other expense totaled $8.1 million, an increase of $0.6 million, or 9%, compared to the six months ended June 30, 2020.

Income Taxes

For the second quarter of 2021, the Company recorded tax expense of $8.8 million compared to tax expense of $10.2 million in the first quarter of 2021 and $7.2 million in the second quarter of 2020. For the six months ended June 30, 2021, tax expense totaled $18.9 million, an increase of $11.9 million, or 169%, compared to the six months ended June 30, 2020. A tax benefit related to stock-based compensation totaled $0.6 million in the second quarter of 2021, compared to a tax benefit of $0.1 million in the first quarter of 2021 and tax expense of $0.2 million in the second quarter of 2020.

Explanation of Certain Unaudited Non-GAAP Financial Measures

This report contains financial information determined by methods other than Generally Accepted Accounting Principles (“GAAP”). The financial highlights provide reconciliations between GAAP and adjusted financial measures including net income, fully taxable equivalent net interest income, noninterest income, noninterest expense, tax adjustments, net interest margin and other financial ratios. Management uses these non-GAAP financial measures in its analysis of the Company’s performance and believes these presentations provide useful supplemental information, and a clearer understanding of the Company’s performance. The Company believes the non-GAAP measures enhance investors’ understanding of the Company’s business and performance and if not provided would be requested by the investor community. These measures are also useful in understanding performance trends and facilitate comparisons with the performance of other financial institutions. The limitations associated with operating measures are the risk that persons might disagree as to the appropriateness of items comprising these measures and that different companies might define or calculate these measures differently. The Company provides reconciliations between GAAP and these non-GAAP measures. These disclosures should not be considered an alternative to GAAP.

Reconciliation of Non-GAAP Measures

	Second		First		Second		Six Months Ended
	Quarter		Quarter		Quarter		June 30,
(In thousands, except per share data)	2021		2021		2020		2021		2020
Net income, as reported:
Net income	$	31,410	$	33,719	$	25,080	$	65,129	$	25,789

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	Second			First			Second			Six Months Ended
	Quarter			Quarter			Quarter			June 30,
(In thousands, except per share data)	2021			2021			2020			2021			2020
Diluted earnings per share	$	0.56		$	0.60		$	0.47		$	1.17		$	0.49
Noninterest Income	$	15,322		$	17,671		$	15,006		$	32,993		$	29,694
Securities (gains) losses, net	55			114			(1,230)			169			(1,249)
Total adjustments to noninterest income	55			114			(1,230)			169			(1,249)
Total Adjusted Noninterest Income	$	15,377		$	17,785		$	13,776		$	33,162		$	28,445
Noninterest Expense	45,784			$	46,120		$	42,399		$	91,904		$	90,197
Merger-related charges	(509)			(581)			(240)			(1,090)			(4,793)
Amortization of intangibles	(1,212)			(1,211)			(1,483)			(2,423)			(2,939)
Business continuity expenses	—			—			—			—			(307)
Branch reductions and other expense initiatives1	(663)			(449)			—			(1,112)			—
Total adjustments to noninterest expense	(2,384)			(2,241)			(1,723)			(4,625)			(8,039)
Total Adjusted Noninterest Expense	$	43,400		$	43,879		$	40,676		$	87,279		$	82,158
Income Taxes	$	8,785		$	10,157		$	7,188		$	18,942		$	7,033
Tax effect of adjustments	598			577			121			1,175			1,665
Total adjustments to income taxes	598			577			121			1,175			1,665
Adjusted income taxes	9,383			10,734			7,309			20,117			8,698
Adjusted net income	$	33,251		$	35,497		$	25,452		$	68,748		$	30,914
Earnings per diluted share, as reported	$	0.56		$	0.60		$	0.47		$	1.17		$	0.49
Adjusted diluted earnings per share	0.59			0.63			0.48			1.23			0.59
Average diluted shares outstanding	55,901			55,992			53,308			55,827			52,807
Adjusted Noninterest Expense	$	43,400		$	43,879		$	40,676		$	87,279		$	82,158
Foreclosed property expense and net (loss) gain on sale	90			65			(245)			155			70
Provision for unfunded commitments	—			—			(178)			—			(224)
Net Adjusted Noninterest Expense	$	43,490		$	43,944		$	40,253		$	87,434		$	82,004
Revenue	$	81,124		$	84,281		$	82,278		$	165,405		$	160,143
Total adjustments to revenue	55			114			(1,230)			169			(1,249)
Impact of FTE adjustment	131			131			116			262			230
Adjusted revenue on a fully tax equivalent basis	$	81,310		$	84,526		$	81,164		$	165,836		$	159,124
Adjusted Efficiency Ratio	53.49		%	51.99		%	49.60		%	52.72		%	51.53		%
Net Adjusted Noninterest Expense as a Percent of Average Tangible Assets2	1.98		%	2.16		%	2.11		%	2.07		%	2.28		%
Net Interest Income	$	65,802		$	66,610		$	67,272		$	132,412		$	130,449
Impact of FTE adjustment	131			131			116			262			230
Net interest income including FTE adjustment	65,933			66,741			67,388			132,674			130,679
Noninterest income	15,322			17,671			15,006			32,993			29,694
Noninterest expense	45,784			46,120			42,399			91,904			90,197
Pre-Tax Pre-Provision Earnings	35,471			38,292			39,995			73,763			70,176
Adjustments to noninterest income	55			114			(1,230)			169			(1,249)
Adjustments to noninterest expense	(2,294)			(2,176)			(2,146)			(4,470)			(8,193)
Adjusted Pre-Tax Pre-Provision Earnings	$	37,820		$	40,582		$	40,911		$	78,402		$	77,120

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	Second			First			Second			Six Months Ended
	Quarter			Quarter			Quarter			June 30,
(In thousands, except per share data)	2021			2021			2020			2021			2020
Average Assets	$	9,025,846		$	8,485,354		$	7,913,002		$	8,757,093		$	7,484,272
Less average goodwill and intangible assets	(235,964)			(237,323)			(230,871)			(236,640)			(228,791)
Average Tangible Assets	$	8,789,882		$	8,248,031		$	7,682,131		$	8,520,453		$	7,255,481
Return on Average Assets (ROA)	1.40		%	1.61		%	1.27		%	1.50		%	0.69		%
Impact of removing average intangible assets and related amortization	0.08			0.09			0.10			0.08			0.09
Return on Average Tangible Assets (ROTA)	1.48			1.70			1.37			1.58			0.78
Impact of other adjustments for Adjusted Net Income	0.04			0.05			(0.04)			0.05			0.08
Adjusted Return on Average Tangible Assets	1.52		%	1.75		%	1.33		%	1.63		%	0.86		%
Average Shareholders' Equity	$	1,170,395		$	1,136,416		$	1,013,095		$	1,153,498		$	1,003,544
Less average goodwill and intangible assets	(235,964)			(237,323)			(230,871)			(236,640)			(228,791)
Average Tangible Equity	$	934,431		$	899,093		$	782,224		$	916,858		$	774,753
Return on Average Shareholders' Equity	10.76		%	12.03		%	9.96		%	11.39		%	5.17		%
Impact of removing average intangible assets and related amortization	3.12			3.59			3.51			3.34			2.10
Return on Average Tangible Common Equity (ROTCE)	13.88			15.62			13.47			14.73			7.27
Impact of other adjustments for Adjusted Net Income	0.39			0.39			(0.38)			0.39			0.75
Adjusted Return on Average Tangible Common Equity	14.27		%	16.01		%	13.09		%	15.12		%	8.02		%
Loan Interest Income2	$	60,440		$	62,390		$	64,929		$	122,830		$	128,453
Accretion on acquired loans	(2,886)			(2,868)			(2,988)			(5,754)			(7,275)
Interest and fees on PPP loans	(5,127)			(6,886)			(5,068)			(12,013)			(5,068)
Loan interest income excluding PPP and accretion on acquired loans2	$	52,427		$	52,636		$	56,873		$	105,063		$	116,110
Yield on Loans2	4.33		%	4.39		%	4.56		%	4.36		%	4.72		%
Impact of accretion on acquired loans	(0.21)			(0.20)			(0.21)			(0.20)			(0.27)
Impact of PPP loans	0.01			(0.04)			(0.04)			(0.02)			(0.01)
Yield on loans excluding PPP and accretion on acquired loans2	4.13		%	4.15		%	4.31		%	4.14		%	4.44		%
Net Interest Income2	$	65,933		$	66,741		$	67,388		$	132,674		$	130,679
Accretion on acquired loans	(2,886)			(2,868)			(2,988)			(5,754)			(7,275)
Interest and fees on PPP loans	(5,127)			(6,886)			(5,068)			(12,013)			(5,068)
Net interest income excluding PPP and accretion on acquired loans2	$	57,920		$	56,987		$	59,332		$	114,907		$	118,336
Net Interest Margin2	3.23		%	3.51		%	3.70		%	3.37		%	3.81		%
Impact of accretion on acquired loans	(0.14)			(0.15)			(0.16)			(0.15)			(0.21)
Impact of PPP loans	(0.06)			(0.11)			(0.08)			(0.08)			(0.04)
Net interest margin excluding PPP and accretion on acquired loans2	3.03		%	3.25		%	3.46		%	3.14		%	3.56		%
Loan Interest Income2	$	60,440		$	62,390		$	64,929		$	122,830		$	128,453
Tax equivalent adjustment to loans	(92)			(92)			(85)			(184)			(169)
Loan interest income excluding tax equivalent adjustment	$	60,348		$	62,298		$	64,844		$	122,646		$	128,284

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	Second		First		Second		Six Months Ended
	Quarter		Quarter		Quarter		June 30,
(In thousands, except per share data)	2021		2021		2020		2021		2020
Securities Interest Income2	$	6,745	$	6,485	$	7,725	$	13,230	$	16,573
Tax equivalent adjustment to securities	(39)		(39)		(31)		(78)		(61)
Securities interest income excluding tax equivalent adjustment	$	6,706	$	6,446	$	7,694	$	13,152	$	16,512
Net Interest Income2	$	65,933	$	66,741	$	67,388	$	132,674	$	130,679
Tax equivalent adjustments to loans	(92)		(92)		(85)		(184)		(169)
Tax equivalent adjustments to securities	(39)		(39)		(31)		(78)		(61)
Net interest income excluding tax equivalent adjustments	$	65,802	$	66,610	$	67,272	$	132,412	$	130,449
1Includes severance, contract termination costs, disposition of branch premises and fixed assets, and other costs to effect the Company's branch consolidation and other expense reduction strategies.
2On a fully taxable equivalent basis. All yields and rates have been computed using amortized cost.

Financial Condition

Total assets increased $1.0 billion at June 30, 2021, or 12%, from December 31, 2020, reflecting higher cash balances due to higher customer deposit balances, as well as the origination of PPP loans under the renewed program.

Securities

Information related to maturities, carrying values and fair value of the Company’s debt securities is set forth in “Note D – Securities” of the Company’s condensed consolidated financial statements.

At June 30, 2021, the Company had $1.3 billion in debt securities available-for-sale and $493.5 million in debt securities held-to-maturity. The Company's total debt securities portfolio increased $233.6 million, or 15%, from December 31, 2020.

During the first quarter of 2021, the Company reclassified debt securities with an amortized cost of $210.8 million from available-for-sale to held-to-maturity. These securities had net unrealized gains of $0.8 million at the date of transfer, which will continue to be reported in accumulated other comprehensive income and will be amortized over the remaining life of the securities as an adjustment of yield. The effect on interest income of the amortization of net unrealized gains is offset by the amortization of the premium on the securities transferred. The Company has the intent and ability to retain these securities until maturity.

During the six months ended June 30, 2021, there were $669.2 million of debt security purchases and $361.9 million in aggregated paydowns and maturities. For the six months ended June 30, 2021, the Company had $56.2 million in proceeds from sales of securities with net losses of $0.1 million. For the six months ended June 30, 2020, there were $239.2 million debt security purchases and aggregated maturities and principal paydowns totaled $140.3 million. Proceeds from sales of securities during the six months ended June 30, 2020 totaled $92.3 million, with net gains of $1.1 million.

Debt securities generally return principal and interest monthly. At June 30, 2021, available-for-sale debt securities had gross unrealized losses of $6.3 million and gross unrealized gains of $18.7 million, compared to gross unrealized losses of $2.1 million and gross unrealized gains of $28.7 million at December 31, 2020. The modified duration of the available-for-sale portfolio at June 30, 2021 was 3.2 years, compared to 3.8 years at December 31, 2020.

The credit quality of the Company’s securities holdings is primarily investment grade. U.S. Treasuries, obligations of U.S. government agencies and obligations of U.S. government sponsored entities totaled $1.5 billion, or 82%, of the total portfolio.

The portfolio includes $73.5 million, with a fair value of $75.2 million, in private label residential and commercial mortgage-backed securities and collateralized mortgage obligations. Included are $48.4 million, with a fair value of $49.0 million, in private label mortgage-backed residential securities with weighted average credit support of 34%. The collateral underlying these mortgage investments includes both fixed-rate and adjustable-rate mortgage loans. Non-guaranteed agency commercial securities total $25.0 million, with a fair value of $26.2 million. These securities have weighted average credit support of 11%. The collateral underlying these mortgages are primarily pooled multifamily loans.

The Company also has invested $209.8 million, with a fair value of $209.7 million, in uncapped 3-month LIBOR floating rate collateralized loan obligations (“CLOs”). CLOs are special purpose vehicles, and the Company’s holdings purchase nearly all

51

first lien broadly syndicated corporate loans across a diversified band of industries while providing support to senior tranche investors. As of June 30, 2021, the Company held 26 total positions, all of which were in AAA/AA tranches with average credit support of 31%. The Company utilizes credit models with assumptions of loan level defaults, recoveries, and prepayments to evaluate each security for potential credit losses. The result of this analysis did not indicate expected credit losses.

Held-to-maturity securities consist solely of mortgage-backed securities and collateralized mortgage obligations guaranteed by government agencies.

At June 30, 2021, the Company has determined that all debt securities in an unrealized loss position are the result of both broad investment type spreads and the current interest rate environment. Management believes that each investment will recover any price depreciation over its holding period as the debt securities move to maturity, and management has the intent and ability to hold these investments to maturity if necessary. Therefore, at June 30, 2021, no allowance for credit losses has been recorded.

Loan Portfolio

Loans, net of unearned income and excluding the allowance for credit losses, were $5.4 billion at June 30, 2021, a $298.3 million decrease from December 31, 2020. During the six months ended June 30, 2021, the Company participated in the most recent round of the PPP, resulting in originations of $256.0 million. This was offset by $457.0 million in PPP loans that were forgiven by the SBA during the six months ended June 30, 2021. Remaining decreases in loans reflect the impact of continued paydowns, as loan growth is expected to return in the second half of 2021.

For the six months ended June 30, 2021, the Company originated $397.3 million in commercial and commercial real estate loans, compared to $290.2 million for the six months ended June 30, 2020, an increase of $107.1 million, or 37%. The loan pipeline for commercial and commercial real estate loans totaled $322.0 million at June 30, 2021. Prior year’s production and pipeline reflect the impact of the onset of the COVID-19 pandemic where the Company purposefully slowed originations. The current year activity reflects the Company’s return to its pre-pandemic credit policy and strict underwriting guidelines.

The Company originated $164.7 million in residential loans retained in the portfolio during the six months ended June 30, 2021, compared to $49.3 million during the six months ended June 30, 2020, an increase of $115.4 million, or 234%. Residential loans retained in the portfolio in the second quarter of 2