SEACOAST BANKING CORP OF FLORIDA 10-Q

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 months ended March 31, 2022 compared to the three months ended March 31, 2021 for the consolidated statements of income. For the consolidated balance sheets, the emphasis of this discussion will be the balances as of March 31, 2022 compared to December 31, 2021. 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, 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 ongoing adverse effects of COVID-19 and any 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; • 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, including those that impact the money supply and inflation; • changes in accounting policies, rules and practices, including the impact of the adoption of the current expected credit losses (“CECL”) methodology; • 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; • interest rate risks, sensitivities and the shape of the yield curve; uncertainty related to the impact of LIBOR calculations on securities, loans and debt; 37 Table of Contents • 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 (including as a result of economic factors); • 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 and realize expected revenues and revenue synergies; • 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, including the impact of supply chain disruptions; • reduction in or the termination of Seacoast's ability to use the online- or mobile-based platforms that are critical to the Company's business growth strategy; • the effects of war or other conflicts including the impacts related to or resulting from Russia’s military action in Ukraine, 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; • 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, including as a result of the Company’s participation in the PPP; • the risks that deferred tax assets could be reduced if estimates of future taxable income from operations and tax planning strategies are less than currently estimated and sales of capital stock could trigger a reduction in the amount of net operating loss carryforwards that the Company may be able to utilize for income tax purposes; • 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; 38 Table of Contents • the failure of assumptions underlying the establishment of reserves for possible credit losses; 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 Proposed Acquisition of Apollo Bankshares, Inc. On March 29, 2022, the Company announced its proposed acquisition of Apollo Bancshares, Inc. (“Apollo”). The transaction, which is expected to close early in the fourth quarter of 2022, will expand the Company’s presence in Miami-Dade County, part of the Miami-Fort Lauderdale-Pompano Beach MSA, Florida’s largest MSA and the 8 th largest in the nation. Apollo operates five branches across Miami-Dade County with deposits of approximately $947 million and loans of $705 million as of March 31, 2022. Completion of the Apollo merger is subject to certain conditions, including the receipt of regulatory approvals, the approval of Apollo and Apollo Bank shareholders and the satisfaction of other customary closing conditions. Proposed Acquisition of Drummond Banking Company On May 4, 2022, the Company announced its proposed acquisition of Drummond Banking Company (“Drummond”). The transaction, which is expected to close early in the fourth quarter of 2022, will expand the Company’s presence in new Florida markets including Ocala and Gainesville. Drummond operates 18 branches across North Florida with deposits of approximately $932 million and loans of $543 million as of March 31, 2022. Completion of the Drummond merger is subject to certain conditions, including the receipt of regulatory approvals, the approval of Drummond shareholders and the satisfaction of other customary closing conditions. 2022 Acquisitions to Date On January 3, 2022, the Company completed the acquisitions of Sabal Palm Bancorp, Inc. (“Sabal Palm”) in Sarasota, and Business Bank of Florida, Corp. (“BBFC”) in Brevard County, which added a combined $367.9 million in loans, $562.3 million in deposits, and for which the Company recorded a $5.1 million provision for credit losses at acquisition. Consolidation activities for BBFC, including system conversion, are substantially complete. System conversion for Sabal Palm is planned early in the second quarter of 2022. Organic Growth and Expansion Seacoast’s balanced growth strategy includes organic growth initiatives across the state. During the first quarter of 2022, Seacoast expanded its footprint into Naples/Southwest Florida and Jacksonville/Northeast Florida with key additions to its commercial banking leadership and teams. Also in the first quarter of 2022, Seacoast added 14 experienced bankers in the state’s most dynamic and fastest growing markets and expects to continue to invest in well-established seasoned bankers over the remainder of 2022. Results of Operations For the first quarter of 2022, the Company reported net income of $20.6 million, or $0.33 per average diluted share, compared to $36.3 million, or $0.62 per average diluted share, for the fourth quarter of 2021 and $33.7 million, or $0.60 per average diluted share, for the first quarter of 2021. The first quarter of 2022 included merger-related costs and a $5.1 million increase in the provision for credit losses associated with acquisition activity during the quarter. Adjusted net income 1 for the first quarter of 2022 totaled $27.1 million, or $0.44 per average diluted share, compared to $36.9 million, or $0.62 per average diluted share, for the fourth quarter of 2021 and $35.5 million, or $0.63 per average diluted share, for the first quarter of 2021. Adjusted net income 1 for the first quarter of 2022 includes the $5.1 million provision for credit losses associated with acquisition activity during the quarter. 1 Non-GAAP measure - see “Explanation of Certain Unaudited Non-GAAP Financial Measures” for more information and a reconciliation to GAAP. 39 Table of Contents First Fourth First Quarter Quarter Quarter 2022 2021 2021 Return on average tangible assets 0.85 % 1.51 % 1.70 % Return on average tangible shareholders' equity 8.02 14.29 15.62 Efficiency ratio 62.33 53.70 53.21 Adjusted return on average tangible assets 1 1.06 % 1.49 % 1.75 % Adjusted return on average tangible shareholders' equity 1 10.01 14.11 16.01 Adjusted efficiency ratio 1 54.86 53.43 51.99 1 Non-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 first quarter of 2022 totaled $76.5 million, increasing $4.2 million, or 6%, compared to the fourth quarter of 2021, and increasing $9.9 million, or 15%, compared to the first quarter of 2021. The increases reflect higher balances and higher yields on securities and loans, partially offset by declines in interest and fees on Paycheck Protection Program (“PPP”) loans. Net interest margin (on a fully tax equivalent basis) 1 was 3.25% in the first quarter of 2022, compared to 3.16% in the fourth quarter of 2021, and 3.51% in the first quarter of 2021. The increase during the first quarter of 2022 reflects increases in yields on both securities and non-PPP loans. Compared to the fourth quarter of 2021, securities yields increased by 11 basis points to 1.68% and non-PPP loan yields increased by six basis points to 4.24% during the first quarter of 2022. The effect on net interest margin of accretion of purchase discounts on acquired loans was an increase of 15 basis points in each of the first quarter of 2022, the fourth quarter of 2021, and the first quarter of 2021. The effect of interest and fees on PPP loans was an increase of five basis points in the first quarter of 2022, an increase of ten basis points in the fourth quarter of 2021, and an increase of 11 basis points in the first quarter of 2021. The Company’s asset sensitive position, with significant core deposit funding and ample liquidity, will benefit in a higher rate environment. Higher interest rates through the remainder of 2022 are expected to contribute to increased net interest margin and to benefit net interest income as the Company’s assets are expected to reprice faster and to a greater degree than its liabilities. The cost of deposits was six basis points in the first quarter of 2022, compared to six basis points in the fourth quarter of 2021, and 13 basis points in the first quarter of 2021. Lower cost of deposits from the prior year quarter reflects lower market rates, and a favorable shift in product mix to include a higher proportion of noninterest bearing demand deposits to total deposits. 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 Income 1 Net Interest Margin 1 Yield on Earning Assets 1 Rate on Interest Bearing Liabilities First quarter 2022 $ 76,639 3.25 % 3.33 % 0.12 % Fourth quarter 2021 72,412 3.16 % 3.24 % 0.12 % First quarter 2021 66,741 3.51 % 3.65 % 0.23 % 1 On 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 increased $397.8 million, or 7%, for the first quarter of 2022 compared to the fourth quarter of 2021, and increased $579.5 million, or 10%, from the first quarter of 2021. The increase compared to the prior quarter reflects loan growth including loans acquired from BBFC and Sabal Palm. Average loans as a percentage of average earning assets totaled 66% for the first quarter of 2022, 65% for the fourth quarter of 2021 and 75% for the first quarter of 2021. 40 Table of Contents Loan production and late-stage pipelines (loans in underwriting and approval or approved and not yet closed) are detailed in the following table for the periods specified: First Fourth First Quarter Quarter Quarter (In thousands) 2022 2021 2021 Commercial pipeline at period end $ 619,547 $ 397,822 $ 240,871 Commercial loan originations 372,986 408,948 204,253 Residential pipeline - saleable at period end 25,745 30,102 92,141 Residential loans - sold 51,222 69,224 138,337 Residential pipeline - portfolio at period end 87,950 25,589 72,448 Residential loans - retained 175,457 49,065 46,620 Consumer pipeline at period end 61,613 29,739 28,127 Consumer originations 79,010 72,626 46,745 PPP originations — — 232,478 Commercial originations during the first quarter of 2022 were $373.0 million, a decrease of $36.0 million, or 9%, compared to the fourth quarter of 2021, and an increase of $168.7 million, or 83%, compared to the first quarter of 2021. Despite a seasonally slower quarter, commercial originations remained strong and pipelines continued to build during the first quarter of 2022. The commercial pipeline increased $221.7 million, or 56%, to $619.5 million at March 31, 2022, compared to December 31, 2021, and increased $378.7 million, or 157%, compared to March 31, 2021. The increase in pipeline reflects the addition of well-established commercial bankers and expansion into new markets across the state. The addition of experienced commercial bankers in recent periods is generating disciplined growth in full relationships, including credit facilities, deposit relationships, and wealth opportunities. Residential loans originated for sale in the secondary market totaled $51.2 million in the first quarter of 2022, compared to $69.2 million in the fourth quarter of 2021 and $138.3 million in the first quarter of 2021, a decrease of 26% and a decrease of 63%, respectively. Limited housing inventory and slowing refinance activity contributed to lower production. Residential saleable pipelines were $25.7 million as of March 31, 2022, compared to $30.1 million as of December 31, 2021 and $92.1 million as of March 31, 2021. Residential loan production retained in the portfolio for the first quarter of 2022 was $175.5 million compared to $49.1 million in the fourth quarter of 2021 and $46.6 million in the first quarter of 2021. The first quarter of 2022 includes the purchase of a $111.3 million wholesale residential home mortgage loan pool. The Company fully underwrites acquired loans prior to executing transactions. The pipeline of residential loans intended to be retained in the portfolio was $88.0 million as of March 31, 2022, compared to $25.6 million as of December 31, 2021, and $72.4 million as of March 31, 2021. Consumer originations totaled $79.0 million during the first quarter of 2022, an increase of $6.4 million, or 9%, from the fourth quarter of 2021 and an increase of $32.3 million, or 69%, from the first quarter of 2021. The consumer pipeline was $61.6 million as of March 31, 2022, compared to $29.7 million as of December 31, 2021 and $28.1 million at March 31, 2021. The increases are primarily the result of consumer lending teams that joined the Company in late 2021. Average debt securities increased $207.3 million, or 9%, during the first quarter of 2022 compared to the fourth quarter of 2021, and were $854.1 million, or 54%, higher compared to the first quarter of 2021. Increases reflect the investment of excess liquidity, partially offset by paydowns and maturities. The cost of average interest-bearing liabilities remained flat in the first quarter of 2022 at 12 basis points from the fourth quarter of 2021, and decreased from 23 basis points in the first quarter of 2021. The cost of average total deposits (including noninterest bearing demand deposits) was six basis points in both the first quarter of 2022 and the fourth quarter of 2021 and 13 basis points in the first quarter of 2021, reflecting continued repricing downward of interest-bearing deposits and time deposits. 41 Table of Contents During the first quarter of 2022, average transaction deposits (noninterest and interest bearing demand) increased $293.6 million, or 6%, compared to the fourth quarter of 2021 and increased $1.4 billion, or 35%, compared to the first quarter of 2021, reflecting the inflow of new customers, including from bank acquisitions, and higher deposit balances for existing customers. The Company’s deposit mix remains favorable, with 94% of average deposit balances comprised of savings, money market, and demand deposits for the three months ended March 31, 2022. The Company participates in programs with third party deposit networks as part of its liquidity management strategy. Through these programs, the Company can offer its customers access to FDIC insurance on large balances, and the Company can retain or sell, on an overnight basis, the underlying deposits. At March 31, 2022, the Company had sold, on an overnight basis, $231.3 million in deposits, compared to $228.0 million at December 31, 2021. These deposits are not included in the Consolidated Balance Sheet. Sweep repurchase agreements with customers increased $11.5 million, or 11%, quarter-over quarter and $5.3 million, or 5%, year-over-year. For the three months ended March 31, 2022, the average balance was $118.1 million compared to an average balance of $106.7 million for the three months ended December 31, 2021, and $112.8 million for the three months ended March 31, 2021. The average rate on customer sweep repurchase accounts was 0.13% for the three months ended March 31, 2022, compared to 0.11% for the three months ended December 31, 2021, and 0.15% for the three months ended March 31, 2021. For the three months ended March 31, 2022, subordinated debt averaged $71.7 million, compared to $71.6 million for the three months ended December 31, 2021, and $71.4 million for the three months ended March 31, 2021. The average rate on subordinated debt for the three months ended March 31, 2022 was 2.47%, compared to 2.32% for the three months ended December 31, 2021, and 2.43% for the three months ended March 31, 2021. The subordinated debt relates to trust preferred securities issued by subsidiary trusts of the Company. 42 Table of Contents 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 Rates 1 2022 2021 First Quarter Fourth Quarter First 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 $ 2,406,399 $ 10,041 1.67 % $ 2,198,517 $ 8,574 1.56 % $ 1,550,457 $ 6,298 1.62 % Nontaxable 24,042 177 2.94 24,664 176 2.85 25,932 187 2.89 Total Securities 2,430,441 10,218 1.68 2,223,181 8,750 1.57 1,576,389 6,485 1.65 Federal funds sold 738,588 350 0.19 878,875 337 0.15 293,506 74 0.10 Other investments 44,999 583 5.25 34,992 491 5.57 83,838 512 2.48 Loans excluding PPP loans 6,276,964 65,675 4.24 5,804,149 61,135 4.18 5,149,642 55,504 4.37 PPP Loans 61,923 1,523 9.98 136,942 3,352 9.71 609,733 6,886 4.58 Total Loans 6,338,887 67,198 4.30 5,941,091 64,487 4.31 5,759,375 62,390 4.39 Total Earning Assets 9,552,915 78,349 3.33 9,078,139 74,065 3.24 7,713,108 69,461 3.65 Allowance for loan losses (87,467) (88,484) (91,735) Cash and due from banks 365,835 359,287 255,685 Premises and equipment 75,876 72,148 74,272 Intangible assets 304,321 267,692 237,323 Bank owned life insurance 205,500 195,169 132,079 Other assets 211,536 177,431 164,622 Total Assets $ 10,628,516 $ 10,061,382 $ 8,485,354 Liabilities and Shareholders' Equity Interest-bearing liabilities: Interest-bearing demand $ 2,097,383 $ 190 0.04 % $ 1,960,083 $ 183 0.04 % $ 1,600,490 $ 258 0.07 % Savings 925,348 65 0.03 866,257 63 0.03 722,274 137 0.08 Money market 1,976,660 512 0.11 1,851,275 465 0.10 1,609,938 670 0.17 Time deposits 560,681 468 0.34 595,230 494 0.33 711,320 1,187 0.68 Securities sold under agreements to repurchase 118,146 39 0.13 106,691 30 0.11 112,834 41 0.15 Other borrowings 71,670 436 2.47 71,600 418 2.32 71,390 427 2.43 Total Interest-Bearing Liabilities 5,749,888 1,710 0.12 5,451,136 1,653 0.12 4,828,246 2,720 0.23 Noninterest demand 3,336,121 3,179,798 2,432,038 Other liabilities 141,972 126,762 88,654 Total Liabilities 9,227,981 8,757,696 7,348,938 Shareholders' equity 1,400,535 1,303,686 1,136,416 Total Liabilities & Equity $ 10,628,516 $ 10,061,382 $ 8,485,354 Cost of deposits 0.06 % 0.06 % 0.13 % Interest expense as a % of earning assets 0.07 % 0.07 % 0.14 % Net interest income as a % of earning assets $ 76,639 3.25 % $ 72,412 3.16 % $ 66,741 3.51 % 1 On 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. 43 Table of Contents Noninterest Income Noninterest income totaled $15.4 million for the first quarter of 2022, a decrease of $3.3 million, or 18%, compared to the fourth quarter of 2021 and a decrease of $2.3 million, or 13%, from the first quarter of 2021. Noninterest income is detailed as follows: First Fourth First Quarter Quarter Quarter (In thousands) 2022 2021 2021 Service charges on deposit accounts $ 2,801 $ 2,606 $ 2,338 Interchange income 4,128 4,135 3,820 Wealth management income 2,659 2,356 2,323 Mortgage banking fees 1,686 2,030 4,225 Marine finance fees 191 147 189 SBA gains 156 200 287 BOLI income 1,334 1,295 859 Other income 2,870 6,316 3,744 15,825 19,085 17,785 Securities losses, net (452) (379) (114) Total $ 15,373 $ 18,706 $ 17,671 Service charges on deposits were $2.8 million in the first quarter of 2022, $2.6 million in the fourth quarter of 2021 and $2.3 million in the first quarter of 2021. Overdraft-related fees for both consumer and business accounts represent 43% of total service charges on deposits for the first quarter of 2022. Interchange income remained flat at $4.1 million for the first quarter of 2022, compared to the fourth quarter of 2021, and increased $0.3 million, or 8%, compared to the first quarter of 2021. Wealth management income, including trust fees and brokerage commissions and fees, was a record $2.7 million in the first quarter of 2022, increasing $0.3 million, or 13%, from the fourth quarter of 2021 and increasing $0.3 million, or 14%, compared to the first quarter of 2021. The wealth management team continues to successfully win business with commercial relationships and high net worth families across the Company’s footprint. Mortgage banking fees decreased by $0.3 million, or 17%, to $1.7 million in the first quarter of 2022 compared to the fourth quarter of 2021, and decreased $2.5 million, or 60%, compared to the first quarter of 2021, reflecting lower salable production due to low housing inventory and slowing refinance demand. SBA gains were $0.2 million in the first quarter of 2022, compared to $0.2 million in the fourth quarter of 2021, and $0.3 million in the first quarter of 2021. Bank owned life insurance (“BOLI”) income was $1.3 million for the first quarter of 2022, an increase of 3% compared to the fourth quarter of 2021 and 55% compared to the first quarter of 2021. The increase is attributed to additions of $69.1 million in BOLI from acquisitions and purchases during 2021. Other income was $2.9 million in the first quarter of 2022, a decrease of $3.4 million quarter-over-quarter and a decrease of $0.9 million year-over-year, reflecting lower income on SBIC investments and a gain in the fourth quarter of 2021 on the sale of a website domain name, partially offset by higher loan-swap related income. The Company recognized $0.5 million in securities losses in the first quarter of 2022 compared to $0.4 million in the fourth quarter of 2021 and $0.1 million in the first quarter of 2021. In the second quarter of 2022, the Company expects to continue its focus on growing a broad base of revenue sources, and expects second quarter 2022 noninterest income to increase. 44 Table of Contents Noninterest Expenses For the first quarter of 2022, 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 62.33% compared to 53.70% for the fourth quarter of 2021 and 53.21% for the first quarter of 2021. The higher efficiency ratio in the first quarter of 2022 primarily reflects the impact of merger-related expenses. The adjusted efficiency ratio 1 2 was 54.86% in the first quarter of 2022, compared to 53.43% in the fourth quarter of 2021 and 51.99% in the first quarter of 2021. At March 31, 2022, adjusted noninterest expense 1 as a percent of average tangible assets was 1.99% for the first quarter of 2022 compared to 1.96% for the fourth quarter of 2021 and 2.16% for the first quarter of 2021. First Fourth First Quarter Quarter Quarter (In thousands, except ratios) 2022 2021 2021 Noninterest expense, as reported $ 58,917 $ 50,263 $ 46,120 Merger-related charges (6,692) (482) (581) Amortization of intangibles (1,446) (1,304) (1,211) Branch reductions and other expense initiatives (74) (168) (449) Adjusted noninterest expense 1 $ 50,705 $ 48,309 $ 43,879 Foreclosed property expense and net gain on sale 164 175 65 Provision for credit losses on unfunded commitments (142) — — Net adjusted noninterest expense 1 $ 50,727 $ 48,484 $ 43,944 Efficiency ratio 62.33 % 53.70 % 53.21 % Adjusted efficiency ratio 1,2 54.86 53.43 51.99 Adjusted noninterest expense as a percent of average tangible assets 1,2 1.99 1.96 2.16 1 Non-GAAP measure - see “Explanation of Certain Unaudited Non-GAAP Financial Measures” for more information and a reconciliation to GAAP. 2 Adjusted 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. 1 2 Non-GAAP measure - see “Explanation of Certain Unaudited Non-GAAP Financial Measures” for more information and a reconciliation to GAAP. 45 Table of Contents Noninterest expense for the first quarter of 2022 totaled $58.9 million, an increase of $8.7 million, or 17%, compared to the fourth quarter of 2021, and an increase of $12.8 million, or 28%, from the first quarter of 2021. Noninterest expenses are detailed as follows: First Fourth First Quarter Quarter Quarter (In thousands) 2022 2021 2021 Salaries and wages $ 28,219 $ 25,005 $ 21,393 Employee benefits 5,501 4,763 4,980 Outsourced data processing costs 6,156 5,165 4,468 Telephone/data lines 733 790 785 Occupancy 3,986 3,500 3,789 Furniture and equipment 1,426 1,403 1,254 Marketing 1,171 1,060 1,168 Legal and professional fees 4,789 2,461 2,582 FDIC assessments 789 713 526 Amortization of intangibles 1,446 1,304 1,211 Foreclosed property expense and net gain on sale (164) (175) (65) Provision for credit losses on unfunded commitments 142 — — Other 4,723 4,274 4,029 Total $ 58,917 $ 50,263 $ 46,120 Salaries and wages totaled $28.2 million for the first quarter of 2022, $25.0 million for the fourth quarter of 2021, and $21.4 million for the first quarter of 2021. The first quarter of 2022 includes $3.0 million in merger-related expenses associated with the BBFC and Sabal Palm acquisitions. The increase compared to the prior year quarter reflects higher salaries from headcount added through acquisitions and investments made to support organic growth. During the first quarter of 2022, 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 $5.5 million, an increase of $0.7 million, or 15%, compared to the fourth quarter of 2021, and an increase of $0.5 million, or 10%, compared to the first quarter of 2021. The first quarter of 2022 included higher seasonal payroll taxes and 401(k) contributions compared to the fourth quarter of 2021, and when compared to the first quarter of 2021, higher healthcare-related costs are attributed to increased headcount. 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 $6.2 million, $5.2 million, and $4.5 million for the first quarter of 2022, fourth quarter of 2021, and first quarter of 2021, respectively. The first quarter of 2022 included $0.6 million in merger-related costs related to data conversion. The increase in outsourced data processing costs in the first quarter of 2022 also includes incremental expenses from the upgrade of the Company’s online and mobile banking platform, which was completed during the first quarter of 2022. 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, were $0.7 million, $0.8 million, and $0.8 million for the first quarter of 2022, fourth quarter of 2021, and first quarter of 2021, respectively. Total occupancy, furniture and equipment expenses were $5.4 million in the first quarter of 2022, $4.9 million in the fourth quarter of 2021, and $5.0 million in the first quarter of 2021. Increases in the first quarter of 2022 reflect merger-related equipment disposals, as well as increases relating to the Company’s expansion during the quarter into Naples, Sarasota and Jacksonville. Marketing expenses totaled $1.2 million in the first quarter of 2022, $1.1 million in the fourth quarter of 2021, and $1.2 million in the first quarter of 2021. Legal and professional fees for the first quarter of 2022 were $4.8 million, an increase of $2.3 million, or 95%, compared to the fourth quarter of 2021, and an increase of $2.2 million, or 85%, compared to the first quarter of 2021. Acquisition-related expenses were $2.9 million in the first quarter of 2022, $0.4 million in the fourth quarter of 2021, and $0.6 million in the first quarter of 2021. 46 Table of Contents FDIC assessments were $0.8 million for the first quarter of 2022, $0.7 million in the fourth quarter of 2021, and $0.5 million in the first quarter of 2021. A provision of $0.1 million was recorded for potential credit losses on unfunded lending commitments in the first quarter of 2022 attributed to the acquisitions of BBFC and Sabal Palm. Other expense totaled $4.7 million, $4.3 million and $4.0 million for the first quarter of 2022, the fourth quarter of 2021 and the first quarter of 2021, respectively. The Company expects to maintain expense discipline while investing for growth. Expenses in the second quarter of 2022 are expected to increase, primarily as a result of continued investments in talent, and the full impact of additional overhead from new locations, including overhead associated with recent bank acquisitions. The Company expects that the adjusted efficiency ratio 3 1 will remain below 55% in the second quarter of 2022, and will decline throughout the year resulting in a full year 2022 ratio that will be in the low 50s. Provision for Credit Losses The provision for credit losses was $6.6 million for the first quarter of 2022 compared to a reversal of provision of $3.9 million for the fourth quarter of 2021 and a reversal of provision of $5.7 million for the first quarter of 2021. The first quarter of 2022 included $5.1 million in provisioning for loans acquired in the Sabal Palm and BBFC transactions as well as the impact of organic loan growth during the quarter. Income Taxes For the first quarter of 2022, the Company recorded tax expense of $5.8 million compared to $8.3 million in the fourth quarter of 2021 and $10.2 million in the first quarter of 2021. Changes to the Florida corporate income tax rate resulted in benefits of $1.5 million in the fourth quarter of 2021. Tax benefits related to stock-based compensation totaled $0.5 million in the first quarter of 2022, $0.6 million in the fourth quarter of 2021, and were nominal in the first quarter of 2021. 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. 3 1 Non-GAAP measure - see “Explanation of Certain Unaudited Non-GAAP Financial Measures” for more information and a reconciliation to GAAP. 47 Table of Contents Reconciliation of Non-GAAP Measures First Fourth First Quarter Quarter Quarter (In thousands, except per share data) 2022 2021 2021 Net income, as reported: Net income $ 20,588 $ 36,330 $ 33,719 Noninterest Income $ 15,373 $ 18,706 $ 17,671 Securities losses, net 452 379 114 Gain on sale of domain name (included in other income) — (755) — Total adjustments to noninterest income 452 (376) 114 Total Adjusted Noninterest Income $ 15,825 $ 18,330 $ 17,785 Noninterest Expense 58,917 $ 50,263 $ 46,120 Merger-related charges (6,692) (482) (581) Amortization of intangibles (1,446) (1,304) (1,211) Branch reductions and other expense initiatives 1 (74) (168) (449) Total adjustments to noninterest expense (8,212) (1,954) (2,241) Total Adjusted Noninterest Expense $ 50,705 $ 48,309 $ 43,879 Income Taxes $ 5,834 $ 8,344 $ 10,157 Tax effect of adjustments 2,196 280 577 Effect of change in corporate tax rate on deferred tax assets — 774 — Total adjustments to income taxes 2,196 1,054 577 Adjusted income taxes 8,030 9,398 10,734 Adjusted net income $ 27,056 $ 36,854 $ 35,497 Earnings per diluted share, as reported $ 0.33 $ 0.62 $ 0.60 Adjusted diluted earnings per share 0.44 0.62 0.63 Average diluted shares outstanding 61,704 59,016 55,992 Adjusted Noninterest Expense $ 50,705 $ 48,309 $ 43,879 Foreclosed property expense and net (loss) gain on sale 164 175 65 Provision for credit losses on unfunded commitments (142) — — Net Adjusted Noninterest Expense $ 50,727 $ 48,484 $ 43,944 Revenue $ 91,895 $ 90,995 $ 84,281 Total adjustments to revenue 452 (376) 114 Impact of FTE adjustment 117 123 131 Adjusted revenue on a fully tax equivalent basis $ 92,464 $ 90,742 $ 84,526 Adjusted Efficiency Ratio 54.86 % 53.43 % 51.99 % Net Adjusted Noninterest Expense as a Percent of Average Tangible Assets 2 1.99 % 1.96 % 2.16 % 48 Table of Contents First Fourth First Quarter Quarter Quarter (In thousands, except per share data) 2022 2021 2021 Net Interest Income $ 76,522 $ 72,289 $ 66,610 Impact of FTE adjustment 117 123 131 Net interest income including FTE adjustment 76,639 72,412 66,741 Noninterest income 15,373 18,706 17,671 Noninterest expense 58,917 50,263 46,120 Pre-Tax Pre-Provision Earnings 33,095 40,855 38,292 Adjustments to noninterest income 452 (376) 114 Adjustments to noninterest expense (8,190) (1,779) (2,176) Adjusted Pre-Tax Pre-Provision Earnings $ 41,737 $ 42,258 $ 40,582 Average Assets $ 10,628,516 $ 10,061,382 $ 8,485,354 Less average goodwill and intangible assets (304,321) (267,692) (237,323) Average Tangible Assets $ 10,324,195 $ 9,793,690 $ 8,248,031 Return on Average Assets (ROA) 0.79 % 1.43 % 1.61 % Impact of removing average intangible assets and related amortization 0.06 0.08 0.09 Return on Average Tangible Assets (ROTA) 0.85 1.51 1.70 Impact of other adjustments for Adjusted Net Income 0.21 (0.02) 0.05 Adjusted Return on Average Tangible Assets 1.06 % 1.49 % 1.75 % Average Shareholders' Equity $ 1,400,535 $ 1,303,686 $ 1,136,416 Less average goodwill and intangible assets (304,321) (267,692) (237,323) Average Tangible Equity $ 1,096,214 $ 1,035,994 $ 899,093 Return on Average Shareholders' Equity 5.96 % 11.06 % 12.03 % Impact of removing average intangible assets and related amortization 2.06 3.23 3.59 Return on Average Tangible Common Equity (ROTCE) 8.02 14.29 15.62 Impact of other adjustments for Adjusted Net Income 1.99 (0.18) 0.39 Adjusted Return on Average Tangible Common Equity 10.01 % 14.11 % 16.01 % Loan Interest Income 2 $ 67,198 $ 64,487 $ 62,390 Accretion on acquired loans (3,717) (3,520) (2,868) Interest and fees on PPP loans (1,523) (3,352) (6,886) Loan interest income excluding PPP and accretion on acquired loans 2 $ 61,958 $ 57,615 $ 52,636 Yield on Loans 2 4.30 % 4.31 % 4.39 % Impact of accretion on acquired loans (0.24) (0.24) (0.20) Impact of PPP loans (0.06) (0.13) (0.04) Yield on loans excluding PPP and accretion on acquired loans 2 4.00 % 3.94 % 4.15 % Net Interest Income 2 $ 76,639 $ 72,412 $ 66,741 Accretion on acquired loans (3,717) (3,520) (2,868) Interest and fees on PPP loans (1,523) (3,352) (6,886) Net interest income excluding PPP and accretion on acquired loans 2 $ 71,399 $ 65,540 $ 56,987 49 Table of Contents First Fourth First Quarter Quarter Quarter (In thousands, except per share data) 2022 2021 2021 Net Interest Margin 2 3.25 % 3.16 % 3.51 % Impact of accretion on acquired loans (0.15) (0.15) (0.15) Impact of PPP loans (0.05) (0.10) (0.11) Net interest margin excluding PPP and accretion on acquired loans 2 3.05 % 2.91 % 3.25 % Loan Interest Income 2 $ 67,198 $ 64,487 $ 62,390 Tax equivalent adjustment to loans (80) (86) (92) Loan interest income excluding tax equivalent adjustment $ 67,118 $ 64,401 $ 62,298 Securities Interest Income 2 $ 10,218 $ 8,750 $ 6,485 Tax equivalent adjustment to securities (37) (37) (39) Securities interest income excluding tax equivalent adjustment $ 10,181 $ 8,713 $ 6,446 Net Interest Income 2 $ 76,639 $ 72,412 $ 66,741 Tax equivalent adjustments to loans (80) (86) (92) Tax equivalent adjustments to securities (37) (37) (39) Net interest income excluding tax equivalent adjustments $ 76,522 $ 72,289 $ 66,610 1 Includes 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. 2 On a fully taxable equivalent basis. All yields and rates have been computed using amortized cost. Financial Condition Total assets increased $1.2 billion at March 31, 2022, or 13%, from December 31, 2021, reflecting the acquisitions of BBFC and Sabal Palm, which added $661.0 million in assets, as well as higher cash balances due to higher customer deposit balances. Securities Information related to yields, maturities, carrying values and fair value of the Company’s debt securities is set forth in “ Note 3 – Securities ” of the Company’s condensed consolidated financial statements. At March 31, 2022, the Company had $1.7 billion in securities available-for-sale and $747.0 million in securities held-to-maturity. The Company's total debt securities portfolio increased $170.7 million, or 7%, from December 31, 2021. During the three months ended March 31, 2022, there were $379.5 million of debt security purchases and $121.8 million in paydowns and maturities over the same period. Securities obtained in the acquisition of BBFC had a fair value of $26.0 million and were immediately sold with no gain or loss recognized. For the three months ended March 31, 2021, there were $196.5 million of debt security purchases and $199.2 million in paydowns and maturities over the same period. For the three months ended March 31, 2021, there were no sales of securities. In the second quarter of 2022, the Company expects to continue to steadily pace securities purchases, again expecting net growth in the portfolio of approximately $150 million to $250 million. Debt securities generally return principal and interest monthly. The modified duration of the available-for-sale portfolio at March 31, 2022 was 3.2, compared to 3.1 at December 31, 2021. At March 31, 2022, available-for-sale securities had gross unrealized losses of $97.6 million and gross unrealized gains of $1.7 million, compared to gross unrealized losses of $20.9 million and gross unrealized gains of $11.5 million at December 31, 2021. The decline in value was the result of rising interest rates during the period. The Company assesses securities in an unrealized loss position on a quarterly basis. As of March 31, 2022, the Company expected to recover the entire amortized cost basis of these securities, and therefore, no allowance for credit losses was recorded. The credit quality of the Company’s securities holdings is primarily investment grade. U.S. Treasury and U.S. government agencies and obligations of U.S. government sponsored entities totaled $2.0 billion, or 81%, of the total portfolio. 50 Table of Contents The portfolio includes $114.3 million, with a fair value of $111.3 million, in private label residential and commercial mortgage-backed securities and collateralized mortgage obligations. Included are $94.2 million, with a fair value of $91.3 million, in private label mortgage-backed residential securities with weighted average credit support of 24%. The collateral underlying these mortgage investments includes both fixed-rate and adjustable-rate mortgage loans. Non-guaranteed agency commercial securities totaled $20.1 million, with a fair value of $20.0 million. These securities have weighted average credit support of 19%. The collateral underlying these mortgages is primarily pooled multifamily loans. The Company also has invested $315.2 million in uncapped 3-month LIBOR floating rate collateralized loan obligations. Collateralized loan obligations are special purpose vehicles that purchase first lien broadly syndicated corporate loans while providing support to senior tranche investors. As of March 31, 2022, all of the Company’s collateralized loan obligations were in AAA/AA tranches with average credit support of 32%. 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 March 31, 2022, 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 March 31, 2022, no allowance for credit losses has been recorded. Loan Portfolio Loans, net of unearned income and excluding the allowance for credit losses, were $6.5 billion at March 31, 2022, a $526.2 million increase from December 31, 2021. Changes during the first quarter of 2022 included $367.9 million added through bank acquisitions, and the purchase of a $111.3 million residential loan pool. Removing the impacts of loans added through acquisitions and the purchased pool during the quarter, loans grew 7% on an annualized basis. The Company expects loan growth to continue, with an annualized growth rate excluding bank acquisitions in the high single digits for the remainder of 2022. For the three months ended March 31, 2022, the Company originated $373.0 million in commercial and commercial real estate loans, compared to $204.3 million for the three months ended March 31, 2021, an increase of $168.7 million, or 83%. The late-stage loan pipeline for commercial and commercial real estate loans totaled $619.5 million at March 31, 2022. The addition of well-established commercial bankers and expansion into new markets across the state has generated disciplined loan growth. The Company originated $175.5 million in residential loans retained in the portfolio during the three months ended March 31, 2022, compared to $46.6 million during the three months ended March 31, 2021, an increase of $128.8 million, or 276%. Residential loans retained in the portfolio includes the $111.3 million purchased residential loan pool consisting of 30-year fixed rate jumbo residential loans purchased in the first quarter of 2022. Saleable production decreased for the three months ended March 31, 2022, representing $51.2 million versus $138.3 million during the three months ended March 31, 2021, a decrease of $87.1 million, or 63%, reflecting limited housing inventory and slowing refinance activity. Consumer originations totaled $79.0 million for the three months ended March 31, 2022, an increase of $32.3 million, or 69%, compared to the three months ended March 31, 2021. The Company remains committed to sound risk management procedures. Lending policies contain guardrails that pertain to lending by type of collateral and purpose, along with limits regarding loan concentrations and the principal amount of loans. The Company's exposure to commercial real estate lending remains well below regulatory limits (see “Loan Concentrations”). 51 Table of Contents The following tables detail loan portfolio composition at March 31, 2022 and December 31, 2021 for portfolio loans, purchased credit deteriorated (“PCD”) and loans purchased which are not considered purchased credit deteriorated (“Non-PCD”) as defined in Note 4-Loans. March 31, 2022 (In thousands) Portfolio Loans Acquired Non-PCD Loans PCD Loans Total Construction and land development $ 226,149 $ 33,231 $ 41 $ 259,421 Commercial real estate - owner-occupied 990,929 273,498 20,088 1,284,515 Commercial real estate - non owner-occupied 1,400,270 488,400 77,480 1,966,150 Residential real estate 1,379,911 214,401 5,333 1,599,645 Commercial and financial 1,007,064 110,161 15,281 1,132,506 Consumer 165,650 4,074 — 169,724 Paycheck Protection Program 29,137 10,119 — 39,256 Totals $ 5,199,110 $ 1,133,884 $ 118,223 $ 6,451,217 December 31, 2021 (In thousands) Portfolio Loans Acquired Non-PCD Loans PCD Loans Total Construction and land development $ 199,341 $ 31,438 $ 45 $ 230,824 Commercial real estate - owner-occupied 983,517 186,812 27,445 1,197,774 Commercial real estate - non owner-occupied 1,278,180 382,554 75,705 1,736,439 Residential real estate 1,261,306 156,957 7,091 1,425,354 Commercial and financial 968,318 84,395 16,643 1,069,356 Consumer 169,507 4,658 10 174,175 Paycheck Protection Program 69,503 21,604 — 91,107 Totals $ 4,929,672 $ 868,418 $ 126,939 $ 5,925,029 The amortized cost basis of loans at March 31, 2022 included net deferred costs of $27.6 million on non-PPP portfolio loans and net deferred fees of $1.0 million on PPP loans. At December 31, 2021, the amortized cost basis included net deferred costs of $31.0 million on non-PPP portfolio loans and net deferred fees of $2.4 million on PPP loans. At March 31, 2022, the remaining fair value adjustments on acquired loans was $24.1 million, or 1.9%, of the outstanding acquired loan balances. At December 31, 2021, the remaining fair value adjustments for acquired loans was $23.1 million, or 2.3%, of the acquired loan balances. These amounts are accreted into interest income over the remaining lives of the related loans on a level yield basis. Commercial real estate (“CRE”) loans, inclusive of owner-occupied CRE, increased by $316.5 million, or 11%, in the three months ended March 31, 2022, totaling $3.3 billion at March 31, 2022 compared to $2.9 billion at December 31, 2021. Owner-occupied CRE loans represent $1.3 billion, or 40%, of the commercial real estate portfolio. Residential real estate loans increased $174.3 million, or 12%, to $1.6 billion as of March 31, 2022, compared to December 31, 2021. Substantially all residential mortgage originations have been underwritten to conventional loan agency standards, including loans having balances that exceed agency value limitations. At March 31, 2022, approximately $304.9 million, or 19%, of the Company’s residential mortgage balances were adjustable 1-4 family mortgage loans, which includes hybrid adjustable-rate mortgages, compared to $278.9 million, or 20%, at December 31, 2021. Fixed-rate mortgages totaled approximately $943.7 million, or 57%, at March 31, 2022, compared to $773.7 million, or 54%, at December 31, 2021. Home equity lines of credit (“HELOCs”), primarily floating rates, totaled $351.0 million at March 31, 2022 and $336.6 million at December 31, 2021. Borrowers in the residential real estate portfolio have an average credit score of 750. Specifically for HELOCs, borrowers have an average credit score of 763. The average LTV of our HELOC portfolio is 67% with 39% of the portfolio being in first lien position at March 31, 2022, compared to an average LTV of 69% with 42% of the portfolio being in the first lien position at December 31, 2021. The Company also provides consumer loans, which include installment loans, auto loans, marine loans, and other consumer loans, which decreased $4.5 million, or 3%, to total $169.7 million, compared to $174.2 million at December 31, 2021. Borrowers in the consumer portfolio have an average credit score of 735. 52 Table of Contents At March 31, 2022, the Company had unfunded loan commitments of $2.1 billion, compared to $2.0 billion at December 31, 2021. Loan Concentrations The Company has developed prudent guardrails to manage loan types that are most impacted by stressed market conditions in order to minimize credit risk concentration to capital. Outstanding balances for commercial and CRE loan relationships greater than $10 million totaled $1.2 billion and represented 18% of the total portfolio at March 31, 2022, compared to $1.2 billion, or 20%, at year-end 2021. The Company’s ten largest commercial and commercial real estate funded and unfunded loan relationships at March 31, 2022 aggregated to $311.9 million, of which $166.2 million was funded, compared to $312.0 million at December 31, 2021, of which $157.8 million was funded. The Company had 177 commercial and commercial real estate relationships in excess of $5 million totaling $1.9 billion, of which $1.5 billion was funded at March 31, 2022, compared to 174 relationships totaling $1.9 billion at December 31, 2021, of which $1.4 billion was funded. Concentrations in total construction and land development loans and total CRE loans are maintained well below regulatory limits. Construction and land development and CRE loan concentrations as a percentage of subsidiary bank total risk based capital were 22% and 189%, respectively, at March 31, 2022, compared to 23% and 168%, respectively, at December 31, 2021. Regulatory guidance suggests limits of 100% and 300%, respectively. On a consolidated basis, construction and land development and commercial real estate loans represent 20% and 172%, respectively, of total consolidated risk based capital. To determine these ratios, the Company defines CRE in accordance with the guidance on “Concentrations in Commercial Real Estate Lending” (the “Guidance”) issued by the federal bank regulatory agencies in 2006 (and reinforced in 2015), which defines CRE loans as exposures secured by land development and construction, including 1-4 family residential construction, multi-family property, and non-farm nonresidential property where the primary or a significant source of repayment is derived from rental income associated with the property (i.e., loans for which 50 percent or more of the source of repayment comes from third party, non-affiliated, rental income) or the proceeds of the sale, refinancing, or permanent financing of the property. Loans to real estate investment trusts (“REITs”) and unsecured loans to developers that closely correlate to the inherent risks in CRE markets would also be considered CRE loans under the Guidance. Loans on owner-occupied CRE are generally excluded. In addition, the Company is subject to a geographic concentration of credit because it primarily operates in Florida. At March 31, 2022, the Company had $1.6 billion in loans secured by residential real estate and $3.3 billion in loans secured by commercial real estate, representing 25% and 50% of total loans outstanding, respectively. In addition, the Company is subject to a geographic concentration of credit because it primarily operates in Florida. Nonperforming Loans, Troubled Debt Restructurings, Other Real Estate Owned, and Credit Quality Nonperforming assets (“NPAs”) at March 31, 2022 totaled $37.8 million, and were comprised of $26.2 million of nonaccrual loans, and $11.6 million of other real estate owned (“OREO”). Compared to December 31, 2021, nonaccrual loans decreased $4.4 million, primarily the result of paydowns. The decrease in OREO of $2.1 million reflects $3.4 million in sales and $0.1 million of write-downs, offset by $1.0 million added upon closure of a branch property, $0.1 million in acquired OREO, and $0.3 million in capital expenditures. Overall, NPAs decreased $6.4 million, or 15%, from $44.2 million as of December 31, 2021. At March 31, 2022, approximately 69% of nonaccrual loans were secured with real estate. See the tables below for details about nonaccrual loans. At March 31, 2022, nonaccrual loans were written down by approximately $5.9 million, including reserves on individually evaluated loans. Nonperforming loans to total loans outstanding at March 31, 2022 decreased to 0.41% from 0.52% at December 31, 2021. Nonperforming assets to total assets at March 31, 2022 decreased to 0.35% from 0.46% at December 31, 2021. The Company’s asset mitigation staff handles all foreclosure actions together with outside legal counsel. The Company pursues loan restructurings in select cases where it expects to realize better values than may be expected through traditional collection activities. The Company has worked with retail mortgage customers, when possible, to achieve lower payment structures in an effort to avoid foreclosure. Troubled debt restructurings (“TDRs”) have been a part of the Company’s loss mitigation activities and can include rate reductions, payment extensions and principal deferrals. Company policy requires TDRs that are classified as nonaccrual loans after restructuring remain on nonaccrual until performance can be verified, which usually requires six months of performance under the restructured loan terms. Accruing TDRs totaled $4.5 million at March 31, 2022, compared to $3.9 million at December 31, 2021. Accruing TDRs are excluded from the nonperforming asset ratios. 53 Table of Contents The table below sets forth details related to nonaccrual and accruing restructured loans. March 31, 2022 Nonaccrual Loans Accruing Restructured Loans (In thousands) Non-Current Current Total Construction and land development $ — $ 232 $ 232 $ 8 Commercial real estate - owner-occupied 310 3,532 3,842 99 Commercial real estate - non owner-occupied 3,210 1,572 4,782 — Residential real estate 3,361 5,881 9,242 3,863 Commercial and financial 2,720 5,030 7,750 310 Consumer 28 333 361 174 Total $ 9,629 $ 16,580 $ 26,209 $ 4,454 December 31, 2021 Nonaccrual Loans Accruing Restructured Loans (In thousands) Non-Current Current Total Construction and land development $ — $ 259 $ 259 $ 12 Commercial real estate - owner-occupied 261 3,705 3,966 101 Commercial real estate - non owner-occupied 3,218 2,687 5,905 — Residential real estate 5,130 7,915 13,045 3,298 Commercial and financial 2,914 3,955 6,869 318 Consumer 46 508 554 188 Total $ 11,569 $ 19,029 $ 30,598 $ 3,917 At March 31, 2022 and December 31, 2021, total TDRs (performing and nonperforming) were comprised of the following loans by type of modification: March 31, 2022 December 31, 2021 (In thousands) Number Amount Number Amount Maturity extended 55 $ 5,087 56 $ 5,385 Rate reduction 23 1,481 25 2,769 Chapter 7 bankruptcies 8 227 1 39 Not elsewhere classified 7 207 12 378 Total 93 $ 7,002 94 $ 8,571 During the three months ended March 31, 2022, there was one default totaling $33 thousand on a loan that had been modified to a TDR within the preceding twelve months. During the three months ended March 31, 2021, there were no defaults on loans that had been modified to a TDR within the preceding twelve months. 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. A restructured loan is considered in default when it becomes 90 days or more past due under the modified terms, has been transferred to nonaccrual status, has been charged off or has been transferred to OREO. In accordance with regulatory reporting requirements, loans are placed on nonaccrual following the Retail Classification of Loan interagency guidance. The accrual of interest is generally discontinued on loans, except consumer loans, that become 90 days past due as to principal or interest unless collection of both principal and interest is assured by way of collateralization, guarantees or other security. Consumer loans that become 120 days past due are generally charged off. The loan carrying value is analyzed and any changes are appropriately made as described above quarterly. Allowance for Credit Losses on Loans Management estimates the allowance using relevant available information, from both internal and external sources, relating to past events, current conditions, and reasonable and supportable forecasts. Historical credit losses provide the basis for 54 Table of Contents 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 environmental conditions, such as changes in unemployment rates, property values, occupancy rates, and other macroeconomic metrics. During the first quarter of 2022, the Company recorded a provision of $6.6 million, reflecting the impact of higher loans outstanding, including a provision of $5.1 million for loans acquired in the BBFC and Sabal Palm acquisitions as well as the impact of organic loan growth during the quarter. Net charge-offs for the first quarter of 2022 were $0.1 million, or less than 0.01% of average loans and, for the four most recent quarters, averaged 0.05% of outstanding loans. Excluding PPP loans, the ratio of allowance to total loans decreased to 1.40% at March 31, 2022 from 1.43% at December 31, 2021. The following tables present the activity in the allowance for credit losses on loans by segment: Three Months Ended March 31, 2022 (In thousands) Beginning Balance 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 $ 2,751 $ — $ (493) $ — $ 10 $ — $ 2,268 Commercial real estate - owner-occupied 8,579 — 715 — — — 9,294 Commercial real estate - non owner-occupied 36,617 31 7,274 — — — 43,922 Residential real estate 12,811 17 1,060 (1) 191 (3) 14,075 Commercial and financial 19,744 3 (1,628) (569) 177 — 17,727 Consumer 2,813 — (372) (95) 208 (2) 2,552 Paycheck Protection Program — — — — — — — Totals $ 83,315 $ 51 $ 6,556 $ (665) $ 586 $ (5) $ 89,838 Three Months Ended March 31, 2021 (In thousands) Beginning Balance Provision for Credit Losses Charge- Offs Recoveries TDR Allowance Adjustments Ending Balance Construction and land development $ 4,920 $ (510) $ — $ 18 $ — $ 4,428 Commercial real estate - owner-occupied 9,868 (76) — — — 9,792 Commercial real estate - non owner-occupied 38,266 (2,038) — 1 — 36,229 Residential real estate 17,500 (3,372) — 229 (4) 14,353 Commercial and financial 18,690 775 (756) 207 — 18,916 Consumer 3,489 (494) (185) 116 (1) 2,925 Paycheck Protection Program — — — — — — Totals $ 92,733 $ (5,715) $ (941) $ 571 $ (5) $ 86,643 LIBOR Transition The Company’s LIBOR transition steering committee is responsible for overseeing the execution of the Company’s enterprise-wide LIBOR transition program, and for evaluating and mitigating risks associated with the transition from LIBOR. The LIBOR transition program includes a comprehensive review of the financial products, agreements, contracts, and business 55 Table of Contents processes that may use LIBOR as a reference rate, and the development and execution of strategy to transition away from LIBOR, with appropriate consideration of the potential financial, customer, counterpart, regulatory and legal impacts. The Company continues to execute its LIBOR transition program, and to monitor regulatory and legislative activity to identify any necessary actions and facilitate the transition to alternative reference rates. As of December 31, 2021, the Company ceased issuance of new LIBOR loans. As of March 31, 2022, the Company has approximately $225 million in existing loans for which the repricing index is tied to LIBOR. The Company's swap agreements and other derivatives are governed by the International Swap Dealers Association (“ISDA”). ISDA has developed fallback language for swap agreements and has established a protocol to allow counterparties to modify legacy trades to include the new fallback language. The Company also invests in securities and has issued subordinated debt tied to LIBOR. The Company continues to monitor regulatory and legislative activity with regard to these products to identify and execute necessary actions to facilitate the transition to alternative reference rates. Cash and Cash Equivalents and Liquidity Risk Management Liquidity risk involves the risk of being unable to fund assets with the appropriate duration and rate-based liability, as well as the risk of not being able to meet unexpected cash needs. Liquidity planning and management are necessary to ensure the ability to fund operations cost effectively and to meet current and future potential obligations such as loan commitments and unexpected deposit outflows. Funding sources include primarily customer-based deposits, collateral-backed borrowings, brokered deposits, cash flows from operations, cash flows from the loan and investment portfolios and asset sales, primarily secondary marketing for residential real estate mortgages and marine loans. Cash flows from operations are a significant component of liquidity risk management and the Company considers both deposit maturities and the scheduled cash flows from loan and investment maturities and payments when managing risk. Deposits are a primary source of liquidity. The stability of this funding source is affected by numerous factors, including returns available to customers on alternative investments, the quality of customer service levels, perception of safety and competitive forces. The Company routinely uses debt securities and loans as collateral for secured borrowings. In the event of severe market disruptions, the Company has access to secured borrowings through the FHLB and the Federal Reserve Bank of Atlanta under its borrower-in-custody program. The Company does not rely on and is not dependent upon off-balance sheet financing or significant amounts of wholesale funding. Brokered deposits at March 31, 2022 were $126.2 million, an increase compared to $8.0 million at December 31, 2021, which reflected the Company’s year-end liquidity management activities. Cash and cash equivalents, including interest bearing deposits, totaled $1.2 billion on a consolidated basis at March 31, 2022, compared to $737.7 million at December 31, 2021. Higher cash and cash equivalent balances at March 31, 2022 reflect the benefit of deposits acquired from BBFC and Sabal Palm in addition to favorable organic deposit growth. Contractual maturities for assets and liabilities are reviewed to meet current and expected future liquidity requirements. Sources of liquidity are maintained through a portfolio of high quality marketable assets, such as residential mortgage loans, debt securities available-for-sale and interest-bearing deposits. The Company is also able to provide short-term financing of its activities by selling, under an agreement to repurchase, United States Treasury and Government agency debt securities not pledged to secure public deposits or trust funds. At March 31, 2022, the Company had available unsecured lines of credit of $165.0 million and secured lines of credit, which are subject to change, of $2.3 billion. In addition, the Company had $2.0 billion of debt securities and $684.3 million in residential and commercial real estate loans available as collateral. In comparison, at December 31, 2021, the Company had available unsecured lines of $165.0 million and secured lines of credit of $1.6 billion, and $1.9 billion of debt securities and $614.2 million in residential and commercial real estate loans available as collateral. The Company has traditionally relied upon dividends from Seacoast Bank and securities offerings to provide funds to pay the Company’s expenses and to service the Company’s debt. During the first quarter of 2022, Seacoast Bank distributed $14.7 million to the Company and, at March 31, 2022, is eligible to distribute dividends to the Company of approximately $144.6 million without prior regulatory approval. At March 31, 2022, the Company had cash and cash equivalents at the parent of approximately $108.2 million compared to $98.5 million at December 31, 2021. 56 Table of Contents Deposits and Borrowings Customer relationship funding is detailed in the following table for the periods specified: March 31, December 31, (In thousands, except ratios) 2022 2021 Noninterest demand $ 3,522,700 $ 3,075,534 Interest-bearing demand 2,253,562 1,890,212 Money market 1,999,027 1,651,881 Savings 937,839 895,019 Time certificates of deposit 530,640 554,943 Total deposits $ 9,243,768 $ 8,067,589 Customer sweep accounts $ 120,922 $ 121,565 Noninterest demand deposits as % of total deposits 38 % 38 % The Company’s balance sheet continues to be primarily funded by core deposits. Total deposits increased $1.2 billion, or 15%, to $9.2 billion at March 31, 2022, compared to $8.1 billion at December 31, 2021. The increase reflects growth in existing customer balances, the addition of new customers and the impact of the BBFC and Sabal Palm acquisitions, which added $166.3 million and $396.0 million, respectively, in deposits during the first quarter of 2022. The Company expects deposit growth to moderate, with an annualized growth rate excluding bank acquisitions in the mid-single digits for the remainder of 2022. Since December 31, 2021, interest bearing deposits (interest bearing demand, savings and money market deposits) increased $753.3 million, or 17%, to $5.2 billion, and CDs decreased $24.3 million, or 5%, to $530.6 million. Noninterest demand deposits were higher by $447.2 million, or 15%, compared to year-end 2021, totaling $3.5 billion. Noninterest demand deposits represented 38% of total deposits at both March 31, 2022 and December 31, 2021. As of March 31, 2022 and December 31, 2021, the Company did not hold any brokered CDs. Customer repurchase agreements totaled $120.9 million at March 31, 2022, decreasing $0.6 million from December 31, 2021. Repurchase agreements are offered by Seacoast to select customers who wish to sweep excess balances on a daily basis for investment purposes. Public funds comprise a significant amount of the outstanding balance. The Company participates in programs with third party deposit networks as part of its liquidity management strategy. Through these programs, the Company can offer its customers access to FDIC insurance on large balances, and the Company can retain or sell, on an overnight basis, the underlying deposits. At March 31, 2022, the Company had sold, on an overnight basis, $231.3 million in deposits, compared to $228.0 million at December 31, 2021. These deposits are not included in the Consolidated Balance Sheet. At March 31, 2022 and December 31, 2021, borrowings were comprised of subordinated debt of $71.7 million and $71.6 million, respectively, related to trust preferred securities issued by trusts organized or acquired by the Company, and there were no borrowings from FHLB during any of the periods presented. The weighted average interest rate of outstanding subordinated debt related to trust preferred securities was 2.47% and 2.43% for the three months ended March 31, 2022 and March 31, 2021, respectively. Off-Balance Sheet Transactions In the normal course of business, the Company may engage in a variety of financial transactions that, under generally accepted accounting principles, either are not recorded on the balance sheet or are recorded on the balance sheet in amounts that differ from the full contract or notional amounts. These transactions involve varying elements of market, credit and liquidity risk. Lending commitments include unfunded loan commitments and standby and commercial letters of credit. For loan commitments, the contractual amount of a commitment represents the maximum potential credit risk that could result if the entire commitment had been funded, the borrower had not performed according to the terms of the contract, and no collateral had been provided. A large majority of loan commitments and standby letters of credit expire without being funded, and 57 Table of Contents accordingly, total contractual amounts are not representative of actual future credit exposure or liquidity requirements. Loan commitments and letters of credit expose the Company to credit risk in the event that the customer draws on the commitment and subsequently fails to perform under the terms of the lending agreement. For commercial customers, loan commitments generally take the form of revolving credit arrangements. For retail customers, loan commitments generally are lines of credit secured by residential property. These instruments are not recorded on the balance sheet until funds are advanced under the commitment. Loan commitments were $2.1 billion at March 31, 2022 and $2.0 billion at December 31, 2021. Capital Resources The Company’s equity capital at March 31, 2022 increased $45.5 million, or 3%, from December 31, 2021 to $1.4 billion. Changes in equity included increases from net income of $20.6 million, and the issuance of $94.1 million in equity in connection with the BBFC and Sabal Palm acquisitions, partially offset by the issuance of a common stock dividend totaling $8.0 million and the decrease in accumulated other comprehensive income of $66.0 million attributed to the impact of rising interest rates on the market value of available-for-sale debt securities. The ratio of shareholders’ equity to period end total assets was 12.44% and 13.54% at March 31, 2022 and December 31, 2021, respectively. The ratio of tangible shareholders’ equity to tangible assets was 9.90% and 11.09% at March 31, 2022 and December 31, 2021, respectively. The decrease was due to growth in the balance sheet, the result of bank acquisitions and deposit growth, and the impact on equity of the decline in value of available-for-sale securities due to rising interest rates in the first quarter of 2022. Activity in shareholders’ equity for the three months ended March 31, 2022 and 2021 follows: (In thousands) 2022 2021 Beginning balance at December 31, 2021 and 2020 $ 1,310,736 $ 1,130,402 Net income 20,588 33,719 Common stock issued for stock options 3,403 840 Issuance of common stock and conversion of options pursuant to acquisitions 94,067 — Stock compensation, net of Treasury shares acquired 1,525 1,353 Issuance of common share dividend (7,994) — Change in accumulated other comprehensive income (66,040) (10,965) Ending balance at March 31, 2022 and 2021 $ 1,356,285 $ 1,155,349 Capital ratios are well above regulatory requirements for well-capitalized institutions. Seacoast management's use of risk-based capital ratios in its analysis of the Company’s capital adequacy are “non-GAAP” financial measures. Seacoast management uses these measures to assess the quality of capital and believes that investors may find it useful in their analysis of the Company. The capital measures are not necessarily comparable to similar capital measures that may be presented by other companies (see “ Note 8 – Equity Capital ”). See “Reconciliation of Non-GAAP Measures” for more information. March 31, 2022 Seacoast (Consolidated) Seacoast Bank Minimum to be Well- Capitalized 1 Total Risk-Based Capital Ratio 17.72% 16.18% 10.00% Tier 1 Capital Ratio 16.80 15.27 8.00 Common Equity Tier 1 Ratio (CET1) 15.81 15.27 6.50 Leverage Ratio 11.72 10.65 5.00 1 For subsidiary bank only. The Company’s total risk-based capital ratio was 17.72% at March 31, 2022, a decrease from 18.21% at December 31, 2021, primarily due to growth including the acquisitions of Sabal Palm and BBFC. At March 31, 2022, the Bank’s leverage ratio (Tier 1 capital to adjusted total assets) was 10.65%, well above the minimum to be well capitalized under regulatory guidelines. The Company and Seacoast Bank are subject to various general regulatory policies and requirements relating to the payment of dividends, including requirements to maintain adequate capital above regulatory minimums. The appropriate federal bank regulatory authority may prohibit the payment of dividends where it has determined that the payment of dividends would be an unsafe or unsound practice. The Company is a legal entity separate and distinct from Seacoast Bank and its other subsidiaries, 58 Table of Contents and the Company’s primary source of cash and liquidity, other than securities offerings and borrowings, is dividends from its bank subsidiary. Without Office of the Comptroller of the Currency (“OCC”) approval, Seacoast Bank can pay $144.6 million of dividends to the Company. The OCC and the Federal Reserve have policies that encourage banks and bank holding companies to pay dividends from current earnings, and have the general authority to limit the dividends paid by national banks and bank holding companies, respectively, if such payment may be deemed to constitute an unsafe or unsound practice. If, in the particular circumstances, either of these federal regulators determined that the payment of dividends would constitute an unsafe or unsound banking practice, either the OCC or the Federal Reserve may, among other things, issue a cease and desist order prohibiting the payment of dividends by Seacoast Bank or us, respectively. The board of directors of a bank holding company must consider different factors to ensure that its dividend level, if any, is prudent relative to the organization’s financial position and is not based on overly optimistic earnings scenarios such as any potential events that may occur before the payment date that could affect its ability to pay, while still maintaining a strong financial position. As a general matter, the Federal Reserve has indicated that the board of directors of a bank holding company, such as Seacoast, should consult with the Federal Reserve and eliminate, defer, or significantly reduce the bank holding company’s dividends if: (i) its net income available to shareholders for the past four quarters, net of dividends previously paid during that period, is not sufficient to fully fund the dividends; (ii) its prospective rate of earnings retention is not consistent with its capital needs and overall current and prospective financial condition; or (iii) it will not meet, or is in danger of not meeting, its minimum regulatory capital adequacy ratios. The Company has paid quarterly dividends since the second quarter of 2021. Whether the Company continues to pay quarterly dividends and the amount of any such dividends will be at the discretion of the Company's Board of Directors and will depend on the Company's earnings, financial condition, results of operations, business prospects, capital requirements, regulatory restrictions, and other factors that the Board of Directors may deem relevant. In the second quarter of 2022, the Company's Board of Directors approved a quarterly increase from $0.13 to $0.17 per share. The Company has seven wholly owned trust subsidiaries that have issued trust preferred stock. Trust preferred securities from acquisitions were recorded at fair value when acquired. All trust preferred securities are guaranteed by the Company on a junior subordinated basis. The Federal Reserve’s rules permit qualified trust preferred securities and other restricted capital elements to be included under Basel III capital guidelines, with limitations, and net of goodwill and intangibles. The Company believes that its trust preferred securities qualify under these revised regulatory capital rules and believes that it can treat all $71.7 million of trust preferred securities as Tier 1 capital. For regulatory purposes, the trust preferred securities are added to the Company’s tangible common shareholders’ equity to calculate Tier 1 capital. Critical Accounting Policies and Estimates The Company’s consolidated financial statements are prepared in accordance with U.S. generally accepted accounting principles, (“GAAP”), including prevailing practices within the financial services industry. The preparation of consolidated financial statements requires management to make judgments in the application of certain of its 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. Management, after consultation with the Company’s Audit Committee, believes the most critical accounting estimates and assumptions that involve the most difficult, subjective and complex assessments are: • the allowance and the provision for credit losses; • acquisition accounting and purchased loans; • intangible assets and impairment testing; • other fair value measurements; • impairment of debt securities; and • contingent liabilities. The following is a discussion of the critical accounting policies intended to facilitate a reader’s understanding of the judgments, estimates and assumptions underlying these accounting policies and the possible or likely events or uncertainties known to the 59 Table of Contents Company that could have a material effect on reported financial information. For more information regarding management’s judgments relating to significant accounting policies and recent accounting pronouncements, see “Note 1-Basis of Presentation” to the Company’s consolidated financial statements. Allowance for Credit Losses – Critical Accounting Policies and Estimates On January 1, 2020, the Company adopted ASC Topic 326 - Financial Instruments - Credit Losses, which replaced the incurred loss methodology with an expected loss methodology that is referred to as the current expected credit loss (“CECL”) methodology. For loans, management estimates the allowance for credit losses using relevant available information, from both internal and external sources, relating to past events, current conditions, and reasonable and supportable forecasts. Historical credit losses provide the basis for 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 environmental conditions, such as changes in unemployment rates, property values, occupancy rates, and other macroeconomic metrics. The allowance for credit losses is measured on a collective basis when similar risk characteristics exist. The Company has developed an allowance model based on an analysis of probability of default (“PD”) and loss given default (“LGD”) to determine an expected loss by loan segment. PDs and LGDs are developed by analyzing the average historical loss migration of loans to default. The allowance estimation process also applies an economic forecast scenario over a three year forecast period. The forecast may utilize one scenario or a composite of scenarios based on management's judgment and expectations around the current and future macroeconomic outlook. Expected credit losses are estimated over the contractual term of the loans, adjusted for expected prepayments when appropriate. For portfolio segments with a weighted average life longer than three years, the Company reverts to longer term historical loss experience, adjusted for prepayments, to estimate losses over the remaining life of the loans within each segment. Adjustments may be made to baseline reserves for some of the loan pools based on an assessment of internal and external influences on credit quality not fully reflected in the quantitative components of the allowance model. These influences may include elements such as changes in concentration, macroeconomic conditions, recent observable asset quality trends, staff turnover, regional market conditions, employment levels and loan growth. Based upon management's assessments of these factors, the Company may apply qualitative adjustments to the allowance. Loans that do not share risk characteristics are evaluated on an individual basis. Loans evaluated individually are not also included in the collective evaluation. When management determines that foreclosure is probable, expected credit losses are based on the fair value of the collateral at the reporting date, adjusted for selling costs as appropriate. The contractual term of a loan excludes expected extensions, renewals, and modification unless either of the following applies: management has a reasonable expectation at the reporting date that a troubled debt restructuring (“TDR”)will be executed with an individual borrower or the extension or renewal options are included in the original or modified contract at the reporting date and not unconditionally cancellable by the Company. The allowance for credit losses on TDRs is measured using the same method as all other loans held for investment, except when the value of a concession cannot be measured using a method other than the discounted cash flow method. When the value of a concession is measured using the discounted cash flow method, the allowance for credit losses is determining by discounting the expected future cash flows at the original interest rate of the loan. 60 Table of Contents It is the Company's practice to ensure that the charge-off policy meets or exceeds regulatory requirements. Losses on unsecured consumer loans are recognized at 90 days past due, compared to the regulatory loss criteria of 120 days. In compliance with Federal Financial Institution Examination Council guidelines, secured consumer loans, including residential real estate, are typically charged off or charged down between 120 and 180 days past due, depending on the collateral type. Commercial loans and real estate loans are typically placed on nonaccrual status when principal or interest is past due for 90 days or more, unless the loan is both secured by collateral having realizable value sufficient to discharge the debt in-full and the loan is in process of collection. Loans provided with short-term payment deferrals under the CARES Act or interagency guidance are not considered past due if in compliance with the terms of their deferral. Secured loans may be charged down to the estimated value of the collateral with previously accrued unpaid interest reversed against interest income. Subsequent charge-offs may be required as a result of changes in the market value of collateral or other repayment prospects. Initial charge-off amounts are based on valuation estimates derived from appraisals, broker price opinions, or other market information. Generally, new appraisals are not received until the foreclosure process is completed; however, collateral values are evaluated periodically based on market information and incremental charge-offs are recorded if it is determined that collateral values have declined from their initial estimates. Note 5 to the financial statements (titled “Allowance for Credit Losses”) summarizes the Company’s allocation of the allowance for credit losses on loans by loan segment and provides detail regarding charge-offs and recoveries for each loan segment and the composition of the loan portfolio at March 31, 2022 and March 31, 2021. Acquisition Accounting and Purchased Loans – Critical Accounting Policies and Estimates The Company accounts for acquisitions under ASC Topic 805, Business Combinations , which requires the use of the acquisition method of accounting. All identifiable assets acquired, including loans, are recorded at fair value. All loans acquired are recorded at fair value in accordance with the fair value methodology prescribed in ASC Topic 820, Fair Value Measurement . The fair value estimates associated with the loans include estimates related to expected prepayments and the amount and timing of expected principal, interest and other cash flows. Loans are identified as purchased credit deteriorated (“PCD”) when they have experienced more-than-insignificant deterioration in credit quality since origination. An allowance for expected credit losses on PCD loans is recorded at the date of acquisition through an adjustment to the loans’ amortized cost basis. In contrast, expected credit losses on loans not considered PCD are recognized in net income at the date of acquisition. Fair value estimates for acquired assets and assumed liabilities are based on the information available, and are subject to change for up to one year after the closing date of the acquisition as additional information relative to closing date fair values becomes available. Intangible Assets and Impairment Testing – Critical Accounting Policies and Estimates Intangible assets consist of goodwill, core deposit intangibles and loan servicing rights. Goodwill represents the excess purchase price over the fair value of net assets acquired in business acquisitions. The core deposit intangible represents the excess intangible value of acquired deposit customer relationships as determined by valuation specialists. Core deposit intangibles are amortized on a straight-line basis, and are evaluated for indications of potential impairment at least annually. Goodwill is not amortized but rather is evaluated for impairment on at least an annual basis. We performed an annual impairment test of goodwill, as required by ASC Topic 350, Intangibles—Goodwill and Other , in the fourth quarter of 2021, and concluded that no impairment existed. Fair value estimates for acquired assets and assumed liabilities are based on the information available, and are subject to change for up to one year after the closing date of the acquisition as additional information relative to closing date fair values becomes available. Other Fair Value Measurements – Critical Accounting Policies and Estimates The fair value of collateral-dependent loans, OREO and repossessed assets is typically based on current appraisals, which are reviewed quarterly to determine if fair value adjustments are necessary based on known changes in the market and/or the project assumptions. When necessary, the appraised value may be adjusted based on more recent appraisal assumptions received by the Company on other similar properties, the tax assessed market value, comparative sales and/or an internal valuation. Collateral-dependent loans are loans where repayment is solely dependent on the liquidation of the collateral or operation of the collateral for repayment. The Company also holds 11,330 shares of Visa Class B stock, which, following resolution of Visa’s litigation, will be converted to Visa Class A shares. Under the current conversion rate that became effective December 29, 2021, the Company expects to receive 1.6181 shares of Class A stock for each share of Class B stock for a total of 18,333 shares of Visa Class A 61 Table of Contents stock. The Company’s ownership is related to prior ownership in Visa's network while Visa operated as a cooperative. This ownership is recorded on the Company's financial records at a zero basis. Impairment of Debt Securities – Critical Accounting Policies and Estimates On January 1, 2020, the Company adopted ASC Topic 326 – Financial Instruments – Credit Losses , which requires expected credit losses on both held-to-maturity (“HTM”) and available-for-sale (“AFS”) securities to be recognized through a valuation allowance instead of as a direct write-down to the amortized cost basis of the security. For HTM securities, the guidance requires management to estimate expected credit losses over the remaining expected life and recognize this estimate as an allowance for credit losses. An AFS security is considered impaired if the fair value is less than amortized cost basis. For AFS securities, if any portion of the decline in fair value is related to credit, the amount of allowance is determined as the portion related to credit, limited to the difference between the amortized cost basis and the fair value of the security. If the fair value of the security increases in subsequent periods, or changes in factors used within the credit loss assessment result in a change in the estimated credit loss, the Company would reflect the change by decreasing the allowance. If the Company has the intent to sell or believes it is more likely than not that it will be required to sell an impaired AFS security before recovery of the amortized cost basis, the credit loss is recorded as a direct write-down of the amortized cost basis. Declines in the fair value of AFS securities that are not considered credit related are recognized in Accumulated Other Comprehensive Income on the Company’s Consolidated Balance Sheet. Seacoast analyzes AFS debt securities quarterly for credit losses. The analysis is performed on an individual security basis for all securities where fair value has declined below amortized cost. Fair value is based upon pricing obtained from third party pricing services. Based on internal review procedures and the fair values provided by the pricing services, the Company believes that the fair values provided by the pricing services are consistent with the principles of ASC Topic 820, Fair Value Measurement . However, on occasion pricing provided by the pricing services may not be consistent with other observed prices in the market for similar securities. Using observable market factors, including interest rate and yield curves, volatilities, prepayment speeds, loss severities and default rates, the Company may at times validate the observed prices using a discounted cash flow model and using the observed prices for similar securities to determine the fair value of its securities. The Company utilizes both quantitative and qualitative assessments to determine if a security has a credit loss. Quantitative assessments are based on a discounted cash flow method. Qualitative assessments consider a range of factors including: percent decline in fair value, rating downgrades, subordination, duration, amortized loan-to-value, and the ability of the issuers to pay all amounts due in accordance with the contractual terms. Contingent Liabilities – Critical Accounting Policies and Estimates Seacoast is subject to contingent liabilities, including judicial, regulatory and arbitration proceedings, and tax and other claims arising from the conduct of the Company's business activities. These proceedings include actions brought against the Company and/or its subsidiaries with respect to transactions in which the Company and/or its subsidiaries acted as a lender, a financial adviser, a broker or acted in a related activity. Accruals are established for legal and other claims when it becomes probable that the Company will incur an expense and the amount can be reasonably estimated. Company management, together with attorneys, consultants and other professionals, assesses the probability and estimated amounts involved in a contingency. Throughout the life of a contingency, the Company or its advisers may learn of additional information that can affect the assessments about probability or about the estimates of amounts involved. Changes in these assessments can lead to changes in recorded reserves. In addition, the actual costs of resolving these claims may be substantially higher or lower than the amounts reserved for the claims. At March 31, 2022 and December 31, 2021, the Company had no significant accruals for contingent liabilities and had no known pending matters that could potentially be significant. Interest Rate Sensitivity Fluctuations in interest rates may result in changes in the fair value of the Company’s financial instruments, cash flows and net interest income. This risk is managed using simulation modeling to calculate the most likely interest rate risk utilizing estimated loan and deposit growth. The objective is to optimize the Company’s financial position, liquidity, and net interest income while limiting their volatility. Senior management regularly reviews the overall interest rate risk position and evaluates strategies to manage the risk. The Company's Asset and Liability Management Committee (“ALCO”) uses simulation analysis to monitor changes in net interest income due to changes in market interest rates. The simulation of rising, declining and flat interest rate scenarios allows management to monitor and adjust interest rate sensitivity to minimize the impact of market interest rate swings. The analysis of the impact on net interest income over a twelve-month period is subjected to instantaneous changes in market rates of 100 basis point increases up to 200 basis points of change on net interest income and is monitored on a quarterly basis. 62 Table of Contents The following table presents the ALCO simulation model's projected impact of a change in interest rates on the projected baseline net interest income for the 12 and 24 month periods beginning on April 1, 2022, holding all balances on the balance sheet static. This change in interest rates assumes parallel shifts in the yield curve and does not take into account changes in the slope of the yield curve. % Change in Projected Baseline Net Change in Interest Rates Interest Income 1-12 months 13-24 months +2.00% 13.8% 17.1% +1.00% 6.8% 8.5% Current —% —% -1.00% (2.7%) (8.6%) The Company had a positive gap position based on contractual and prepayment assumptions for the next 12 months, with a positive cumulative interest rate sensitivity gap as a percentage of total earning assets of 28.8% at March 31, 2022. This result includes assumptions for core deposit re-pricing from a statistical study commissioned from a third party consulting group. The computations of interest rate risk do not necessarily include certain actions management may undertake to manage this risk in response to changes in interest rates. Derivative financial instruments, such as interest rate swaps, options, caps, floors, futures and forward contracts may be utilized as components of the Company’s risk management profile. Effects of Inflation and Changing Prices The condensed consolidated financial statements and related financial data presented herein have been prepared in accordance with U.S. GAAP, which require the measurement of financial position and operating results in terms of historical dollars, without considering changes in the relative purchasing power of money, over time, due to inflation. Unlike most industrial companies, virtually all of the assets and liabilities of a financial institution are monetary in nature. As a result, interest rates have a more significant impact on a financial institution’s performance than the general level of inflation. However, inflation affects financial institutions by increasing their cost of goods and services purchased, as well as the cost of salaries and benefits, occupancy expense, and similar items. Inflation and related increases in interest rates generally decrease the market value of investments and loans held and may adversely affect liquidity, earnings, and shareholders’ equity. Mortgage originations and re-financings tend to slow as interest rates increase, and higher interest rates likely will reduce the Company’s earnings from such activities and the income from the sale of residential mortgage loans in the secondary market.