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Item 7. Management’s Discussion and Analysis

2023-03-01 compared with 2022-02-28 · 227 added, 253 removed, 774 unchanged (38% of the section changed)

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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.

Such discussion and analysis should be read in conjunction with the Company's Consolidated Financial Statements and the related notes included in this report.

The emphasis of this discussion will be on the years ended December 31, 2022 and 2021.

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Its principal subsidiary is Seacoast National Bank (“Seacoast Bank”), a wholly owned national banking association.

The Company provides integrated financial services including commercial and consumer banking, wealth management, and mortgage services to customers through advanced online and mobile banking solutions, and Seacoast Bank's network of 54 traditional branches and commercial banking centers.

The Company provides integrated financial services including commercial and consumer banking, wealth management, mortgage and insurance services to customers through advanced online and mobile banking solutions, and Seacoast Bank's network of 78 traditional branches and commercial banking centers.

Seacoast operates primarily in Florida, with concentrations in the state's fastest growing markets, each with unique characteristics and opportunities.

The Company's offices stretch from the southeast, including Fort Lauderdale, Boca Raton and Palm Beach, north along the east coast to the Daytona area, into Orlando and Central Florida and the adjacent Tampa market, and west to

Okeechobee and surrounding counties.

In the first quarter of 2022, the footprint has expanded to include Naples, Sarasota, and Jacksonville.

The Company delivers integrated banking services, combining traditional retail locations with online and mobile technology and a convenient telephone banking center.

Seacoast has built a fully integrated distribution platform across all channels to provide customers with the ability to choose their path of convenience to satisfy their banking needs, allowing the Company an opportunity to reach customers through a variety of sales channels.

Seacoast has built a fully integrated distribution platform across all channels to provide customers with convenient options to satisfy their banking needs, allowing the Company an opportunity to reach customers through a variety of sales channels.

The Company believes its digital delivery and products are contributing to the franchise's growth.

Seacoast is executing a balanced growth strategy, combining organic growth with strategic acquisitions in Florida's most attractive growing markets.

In Orlando, Seacoast is now the largest Florida-based bank and a top-10 bank in the Orlando market overall.

In other key markets, including Palm Beach County, Fort Lauderdale, and Tampa, the Company has enhanced its footprint with 13 acquisitions since 2014, generating continued expansion and strengthening market share, increasing the customer base and lowering operating costs through economies of scale.

The Company has enhanced its footprint with 16 acquisitions since 2014, generating continued expansion and strengthening market share, increasing the customer base and lowering operating costs through economies of scale.

The acquisition of Professional Holding Corp.

(“Professional”) (NASDAQ:

PFHD), parent company of Professional Bank, was completed on January 31, 2023.

The transaction further expands Seacoast’s presence in the tri-county South Florida market, which includes Miami-Dade, Broward, and Palm Beach counties, Florida’s largest MSA and the 8th largest in the nation.

Professional Bank, the sixth largest bank headquartered in South Florida, had deposits of approximately $2.2 billion and loans of approximately $2.1 billion as of December 31, 2022.

The Company's acquisition strategy has not only increased customer households and been accretive to earnings, but has also opened markets and Seacoast's customer base.

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(In millions) Primary Market(s) Year of Acquisition Acquired Loans Acquired Deposits

Drummond Banking Company Gainesville and Ocala 2022 $ 545 $ 881

Apollo Bancshares, Inc.

Miami-Dade County 2022 667 855

Florida Business Bank/ Business Bank of Florida, Corp.

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Orlando 2014 365 516

1 Acquired loans and deposits presented for acquisitions closed in 2022 are preliminary and do not include fair value/purchase accounting adjustments.

Impact of COVID-19, the CARES Act and the Paycheck Protection Program on Comparability Among Periods

The COVID-19 pandemic and related responses taken by governments, businesses and individuals have caused unprecedented uncertainty, volatility and disruption in financial markets and in governmental, commercial and consumer activity in the United States and globally, including the markets that we serve.

The impact of the economic downturn caused by the pandemic was experienced differently across geographic areas, business sectors and demographic groups.

The Florida economy has experienced positive trends including population growth and lower unemployment than much of the rest of the country.

While the overall economic outlook has improved, there continues to be the risk of further resurgence of infections, including from variants, and possible reimplementation of business restrictions.

The Coronavirus Aid, Relief and Economic Security (“CARES”) Act encouraged financial institutions to provide loan modifications to assist borrowers financially impacted by COVID-19.

Seacoast began offering payment accommodations to eligible borrowers in March 2020 and, at June 30, 2020, loans with active payment accommodations peaked at $1.1 billion.

Nearly all such modifications have expired and borrowers returned to making payments under the original loan terms.

December 31, 2021 and 2020, loans with active payment accommodations totaled $1.2 million and $74.1 million, respectively.

In 2020, uncertainty related to the impact of the pandemic on the economy and on borrowers’ ability to repay loan obligations resulted in increases in the provisioning for credit losses during 2020.

As the overall economic outlook has improved and loan portfolio credit indicators have remained strong, the Company has reduced the level of allowance for credit losses in 2021 compared to 2020.

The future effects of the COVID-19 pandemic on economic activity remain uncertain, and future additional provisions for credit losses could be necessary.

The CARES Act also included provisions for the Paycheck Protection Program (“PPP”) offered through the U.S.

Small Business Administration (“SBA”).

Loans originated under this program have a contractual rate of interest of 1% with principal and interest that may be forgiven provided that the borrower uses the funds in a manner consistent with PPP guidelines.

Seacoast assisted borrowers with nearly 9,000 loans originated through the PPP.

The SBA established a fee structure based on loan size, and fees received by Seacoast, net of related costs, totaled $26.7 million, which were deferred and are being recognized as an adjustment to yield over time.

During 2020, Seacoast recognized net fees of $7.8 million and contractual interest of $4.2 million on PPP loans.

During 2021, Seacoast recognized net fees of $17.5 million and contractual interest of $3.8 million on PPP loans.

PPP loan balances outstanding at December 31, 2021 totaled $91.1 million, and the remaining $2.4 million in deferred PPP loan fees will be recognized over the loans' remaining contractual maturity or sooner, as loans are forgiven.

1 Acquired loans and deposits presented are preliminary and do not include fair value/purchase accounting adjustments.

2022 Financial Performance Highlights

• Record net income of $124.4 million, or $2.18 per diluted share, for the year ended December 31, 2021, an increase of 60% year-over-year.

• Steady build of shareholder value through consistent growth in tangible book value per share, which ended the period at $17.84, an increase of 10% year-over-year.

• The tangible common equity ratio of 11.09% supports Seacoast's ability to deploy capital for organic growth and opportunistic acquisitions.

• Increasing commercial loan originations, with the fourth quarter of 2021 increasing 47% over the prior year to a record $408.9 million, and a record commercial pipeline of $397.8 million at December 31, 2021.

• Growth in fee based revenues with year-over-year increases in interchange income of 18% to $16.2 million, wealth management income, which increased 28% to $9.6 million and SBA gains, which increased 124% to $1.5 million for the full year.

• Disciplined expense management with a focus on balancing investments by streamlining business and cost savings processes, maintaining a 2021 efficiency ratio of 55%, which includes the impact of merger-related expenses incurred during the year.

On an adjusted basis 1 , efficiency ratio was 53%.

• The successful acquisition of Legacy Bank of Florida in the third quarter of 2021 added experienced bankers and a net four new branches in Broward and Palm Beach counties.

First Second Third Fourth Total

• Net interest income increased $90.1 million, or 33%, to $366.7 million, and net interest margin (on a fully tax equivalent basis) 1 increased to 3.69% in 2022 from 3.27% in 2021 .

• Cost of deposits, supported by Seacoast’s longstanding relationship-based approach, remained low at 11 basis points in 2022 compared to 8 basis points in 2021.

• Achieved organic loan growth of 9% while maintaining strict credit underwriting standards and broad distribution amongst industries and collateral types.

• Tangible common equity to tangible assets of 9.1% and peer-leading capital levels support Seacoast’s continued achievement of strategic growth initiatives.

• Continued strong asset quality trends, with nonperforming loans representing 0.35% of total loans at December 31, 2022.

• Completed four acquisitions in 2022, further expanding the franchise in Florida’s most dynamic markets.

The Seacoast Bank footprint reaches from the south in Miami-Dade county, along the east coast to Jacksonville, throughout central and north Florida including Orlando, Gainesville, and Ocala, and on the west coast from Tampa/St.

Petersburg south to Naples.

First Second Third Fourth Year

2022 2022 2022 2022 2022 2021

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Adjusted net income 1 for the year ended December 31, 2022 totaled $136.1 million, or $2.12 per diluted share, compared to $135.0 million, or $2.36 per diluted share, in 2021.

During 2020, uncertainty related to the impact of COVID-19 resulted in increased provisioning for credit losses.

A strong economic recovery in the state of Florida as well as an improving economic outlook have resulted in a release of reserves throughout 2021.

In 2022, the Company's efficiency ratio, defined as noninterest expense less foreclosed property expense and amortization of intangibles divided by net operating revenue (net interest income on a fully tax equivalent basis plus noninterest income excluding securities gains and losses), was 60.01%, compared to 55.39% for 2021.

Changes from the prior year reflect higher 2021 expenses, resulting from organic and acquisition related expansion of the Company's footprint and investments in commercial banking talent, partially offset by lower funding costs and increases in noninterest income.

Changes from the prior year reflect higher 2022 expenses, resulting from organic and acquisition-related expansion of the Company's footprint and investments in commercial banking talent.

The adjusted efficiency ratio 1 in 2022 was 53.03% compared to 52.59% in 2021.

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In 2022 and 2021, net interest margin (on a fully tax equivalent basis) 1 was 3.69% and 3.27%, respectively.

The continued low interest rate environment during 2021 resulted in lower yields on securities and non-PPP loans.

Yield on securities contracted by 72 basis points from 2.33% to 1.61% while the yield on non-PPP loans declined 33 basis points from 4.62% to 4.29% as higher yielding securities and loans paid down and were replaced with lower yielding assets.

Yield on PPP loans increased from 2.86% to 5.57% resulting from loan forgiveness during the year.

The effect on net interest margin of interest and fees from PPP loans was an increase of 11 basis points in 2021 compared to a decrease of 3 basis points in 2020.

The effect on net interest margin of purchase discounts on acquired loans was an increase of 15 basis points in 2021 compared to 21 basis points in 2020.

The cost of deposits decreased by 24 basis points to 8 basis points in 2021, reflecting the impact of the continued low interest rate environment as well as a shift in product mix to include a higher proportion of noninterest bearing demand deposits to total deposits.

The following table details the Company’s average balance sheets, interest income and expenses, and yields and rates 1 , for the past three years:

The rising interest rate environment during 2022 resulted in higher yields on securities and loans.

Yield on securities increased by 60 basis points from 1.61% to 2.21% while the yield on loans increased 24 basis points from 4.38% to 4.62%.

The effect on net interest margin of interest and fees from Paycheck Protection Program ("PPP") loans was an increase of 2 basis points in 2022 compared to an increase of 11 basis points in 2021.

The effect on net interest margin of purchase discounts on acquired loans was an increase of 18 basis points in 2022 compared to an increase of 15 basis points in 2021.

The cost of deposits increased by three basis points to 11 basis points in 2022.

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

The following table details the Company’s average balance sheets, interest income and expenses, and yields and rates 1 , for the past three years:

For the Year Ended December 31,

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Nonaccrual loans are included in loan balances.

The following table shows the impact of value and rate on earning assets and interest bearing liabilities 1 :

The following table shows the impact of changes in volume and rate on earning assets and interest bearing liabilities 1 :

Due to Change in:

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Changes attributable to rate/volume (mix) are allocated to rate and volume on an equal basis.

Total average loans increased $72.3 million, or 1%, during 2021 compared to 2020.

Average loans (the highest yielding component of earning assets) as a percentage of average earning assets totaled 68% in 2021, compared to 79% in 2020.

Total average loans increased $1.1 billion, or 19%, during 2022 compared to 2021.

Average loans as a percentage of average earning assets totaled 69% in 2022, compared to 68% in 2021.

Loans secured by commercial real estate represented 57% of total loans, excluding PPP loans, at December 31, 2022, compared to 53% at December 31, 2021.

Residential loan balances with individuals (including home equity loans and lines and personal construction loans) represented 26% of total loans, excluding PPP loans, at December 31, 2021, compared to 28% at December 31, 2020 (see “Loan Portfolio”).

Average debt securities increased $565.4 million, or 44%, from 2020 reflecting the investment of excess liquidity into the securities portfolio.

Residential loan balances with individuals (including home equity loans and lines) represented 23% of total loans, excluding PPP loans, at both December 31, 2022 and 2021.

(see “Loan Portfolio”).

Average debt securities increased $725.8 million, or 39%, from 2021 reflecting the investment of excess liquidity into the securities portfolio early in 2022.

Securities comprised 26% and 22% of average earning assets in 2022 and 2021, respectively.

Yields on securities decreased from 2.33% in 2020 to 1.61% in 2021.

Yields on securities increased from 1.61% in 2021 to 2.21% in 2022.

Loan production is detailed in the following table for the periods specified:

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(In thousands) 2022 2021

Commercial/commercial real estate loan pipeline at year-end $ 397,822 $ 166,735

Commercial/commercial real estate loan pipeline at period end $ 395,652 $ 397,822

Commercial/commercial real estate loans closed 1,664,884 1,137,847

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PPP originations $ — $ 256,007

Commercial and commercial real estate loan production in 2021 totaled $1.1 billion, compared to $655.8 million in 2020.

Included in 2021 are $36.4 million in fixed-rate commercial real estate loans acquired through the wholesale market.

The combination of economic expansion and a focus on building the leading commercial bank in Florida with the addition of top talent resulted in significant growth in loan production during 2021.

Commercial and commercial real estate loan production in 2022 totaled $1.7 billion, compared to $1.1 billion in 2021.

Commercial originations remained strong and reflect the addition of well-established commercial bankers and expansion into new markets across the state, generating disciplined growth in full relationships, including credit facilities, deposit relationships, and wealth opportunities.

Residential loan production totaled $542.9 million in 2022, compared to $887.4 million in 2021.

Included in 2021 are purchases of $219.2 million in residential loans from the wholesale market.

No purchases were made in the wholesale market during 2020.

Included in 2022 and 2021 are purchases of $111.3 million and $219.2 million, respectively, in residential loans from the wholesale market.

Limited housing inventory and slowing refinance activity contributed to lower production.

Consumer originations totaled $408.7 million during 2022, compared to $249.5 million during 2021.

Seacoast originated $256.0 million in PPP loans during 2021 and $599.0 million in 2020.

No additional PPP originations are expected.

In 2021, the cost of average interest-bearing liabilities decreased 37 basis points to 0.16% from 2020, reflecting the impact of the continued low interest rate environment as well as a shift in product mix to include a higher proportion of noninterest bearing demand deposits to total deposits.

The low overall cost of funding reflects the Company’s successful core deposit focus that produced strong growth in customer relationships over the past several years.

The increases are primarily the result of consumer lending teams that joined the Company in late 2021.

In 2022, the cost of average interest-bearing liabilities increased nine basis points to 0.25% from 2021, reflecting the impact of the rising interest rate environment.

The low overall cost of funding reflects the Company’s successful core deposit focus and relationship-based approach.

Noninterest bearing demand deposits at December 31, 2022 represented 41% of total deposits, compared to 38% at December 31, 2021.

The cost of average total deposits (including noninterest bearing demand deposits) in 2022 was 0.11%, compared to 0.08% in 2021.

Given the decreasing money supply, increasing competition for deposits, and higher interest rates, we expect the cost of interest bearing liabilities to increase in coming periods.

The following table details the Company's customer relationship funding as of:

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The Company’s focus on convenience, with high-quality customer service, expanded digital offerings and distribution channels provides stable, low-cost core deposit funding.

Over the past several years, the Company has strengthened its retail deposit franchise using new strategies and product offerings, while maintaining a focus on growing customer relationships.

Seacoast believes that digital product offerings are central to core deposit growth and have proved to be of meaningful value to its customers.

Seacoast's call center and retail associates continue to lead the market in availability and customer service standards, with the call center out-performing large bank call center wait times and service level standards.

The impact of various government stimulus programs, as well as the acquisition of Legacy Bank of Florida in the third quarter of 2021, have also contributed to higher deposit balances.

The acquisitions in 2022 contributed to higher deposit balances, partially offset by outflows in the second half of 2022 spurred by the rising rate environment.

Despite increasing interest rates, the Company continued to manage its cost of deposits effectively, increasing to only 21 basis points in the fourth quarter of 2022.

During 2022, average transaction deposits (noninterest and interest bearing demand deposits) increased $1.2 billion, or 27%, compared to 2021.

Growth in core deposits has also provided low funding costs.

The Company’s deposit mix remains favorable, with 95% of average deposit balances comprised of savings, money market, and demand deposits in 2022.

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No federal funds purchased were utilized at December 31, 2022 or 2021.

The Company had no FHLB borrowings during the year ended December 31, 2021 or at December 31, 2020.

FHLB borrowings averaged $139.4 million at an average rate of 1.10% for the full year 2020 (see “Note 9 - Borrowings” to the Company’s consolidated financial statements).

In 2021, average subordinated debt of $71.5 million related to trust preferred securities issued by subsidiary trusts of the Company carried an average cost of 2.36%, down from 3.07% in 2020, reflecting the impact of lower interest rates as the subordinated debt cost is based on LIBOR plus a spread (see “Note 9 - Borrowings”).

The Company had $150 million in FHLB borrowings outstanding at December 31, 2022, with a weighted average rate of 3.42%.

No FHLB borrowings were utilized in 2021 (see “Note 9 - Borrowings” to the Company’s consolidated financial statements).

In 2022, average subordinated debt of $74.7 million related primarily to trust preferred securities issued by subsidiary trusts of the Company carried an average cost of 4.09%, up from 2.36% in 2021, reflecting the impact of rising interest rates as the subordinated debt cost is based on LIBOR plus a spread.

In the fourth quarter of 2022 through a bank acquisition the Company acquired $12.3 million in subordinated debt.

The notes carry a fixed interest rate of 5.50% until 2025, convert to a floating rate until maturity in 2030, and are callable at the Company’s discretion (see “Note 9 - Borrowings”).

Provision for Credit Losses

The provision for credit losses was a net benefit of $9.4 million for the full year 2021 compared to a provision of $38.2 million for the full year 2020.

The provision in 2021 reflects an improved economic outlook compared to heightened uncertainty in 2020 relating to the impact of COVID-19 on the economic environment.

On January 1, 2020, the Company adopted ASC Topic 326 - Financial Instruments - Credit Losses.

Under the CECL approach, the Company reserves for the full amount of expected credit losses over the life of the loans, which also contributed to the increase in provision in 2020.

The provision for credit losses was $26.2 million for the full year 2022 compared to a net benefit of $9.4 million for the full year 2021.

The increase in provision during 2022 was primarily driven by loan growth, provisioning for loans related to the four acquisitions during the year, along with changes in economic forecast factors.

Noninterest Income

Noninterest income (excluding securities gains and losses) totaled $71.3 million in 2021, an increase of $11.0 million, or 18%, compared to 2020.

Noninterest income (excluding securities gains and losses) totaled $67.2 million in 2022, a decrease of $4.1 million, or 6%, compared to 2021.

Noninterest income accounted for 16% of total revenue in 2022 and 21% in 2021 (net interest income plus noninterest income, excluding securities gains and losses).

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Service charges on deposits for the year ended December 31, 2022 compared to the year ended December 31, 2021 increased $3.9 million, or 40%, to $13.7 million.

This increase reflects a return to more normalized fee activity compared to the prior year, in part due to the waiver of certain account charges during the first half of 2020 in response to the COVID-19 pandemic.

This increase reflects the benefit of an expanded deposit base from acquisition activity in 2022.

Overdraft fees on business and consumer accounts represented 37% of total service charges on deposits in 2022 compared to 41% in 2021.

Interchange revenue totaled $16.2 million in 2021, an increase of 18% from $13.7 million in 2020.

Growth in the number of commercial and consumer customers, targeted marketing campaigns and a continued economic recovery all contributed to higher transaction volume and per-card spending for both consumer and commercial customers for the year.

Wealth management revenues, including brokerage commissions and fees and trust income, increased $2.1 million, or 28%, to $9.6 million for the year ended December 31, 2021.

The wealth management team has continued to grow relationships, resulting in an increase in assets under management of 42% year-over-year to $1.2 billion as of December 31, 2021.

Interchange revenue totaled $17.2 million in 2022, an increase of 6% from $16.2 million in 2021, primarily attributed to an expanded customer base.

Despite the impact of market declines, wealth management revenues, including brokerage commissions and fees and trust income, increased $1.4 million, or 15%, to $11.1 million for the year ended December 31, 2022.

The wealth management team has continued to demonstrate success in building new relationships, resulting in a 12% increase in assets under management year-over-year to $1.4 billion as of December 31, 2022.

Mortgage banking fees decreased by $8.3 million, or 70%, to $3.5 million for the year ended December 31, 2022 compared to 2021.

The prior year results benefited from a significant decrease in interest rates which resulted in a strong refinance market, while 2021 results reflect a slowdown in refinance activity and lower housing inventory.

Gains on sale of the guaranteed portion of SBA loans totaled $1.5 million for the year ended December 31, 2021, an increase of $0.8 million compared to 2020.

PPP loan production ended in the second quarter of 2021, resulting in a shift back to SBA borrowing in the second half of 2021.

The prior year results benefited from historically low interest rates which resulted in strong refinance demand, while 2022 results reflect a slowdown in refinance and purchase activity.

Gains on sale of the guaranteed portion of SBA loans totaled $0.8 million for the year ended December 31, 2022, a decrease of $0.7 million compared to 2021.

Bank owned life insurance (“BOLI”) income totaled $5.6 million in 2022, an increase of $1.4 million, or 34%, compared to the prior year.

The Company purchased or added through bank acquisition $69.1 million in BOLI in 2021.

Income from the Company's investments in Small Business Investment Companies (“SBICs”) increased by $5.4 million to $6.8 million compared to 2020.

The Company added $53.1 million in BOLI through bank acquisitions in 2022.

Income from the Company's investments in Small Business Investment Companies (“SBICs”) decreased by $5.5 million to $1.3 million compared to 2021.

The amounts recognized on SBIC investments will vary amongst periods.

Other income increased by $2.1 million year-over-year, reflecting $1.7 million from the resolution of contingencies on two loans acquired in 2017, and the sale of an internet domain name for $0.8 million.

These increases were partially offset by a decrease in loan swap fees.

Securities losses in 2021 totaled $0.6 million, resulting from a $0.4 million net loss on the sale of debt securities with a fair value of $102.1 million, and a $0.2 million decrease in the value of the CRA-qualified mutual fund investment.

Securities gains in 2020 totaled $1.2 million, resulting from net gains on the sale of $96.7 million of debt securities, and a $0.1 million increase in the value of the CRA-qualified mutual fund investment.

Other income increased by $2.4 million, or 22% year-over-year, reflecting higher loan swap fees and insurance agency commissions.

Securities losses in 2022 totaled $1.1 million, resulting solely from the decline in the market value of the CRA-qualified mutual fund investment.

Securities losses in 2021 totaled $0.6 million, resulting from a $0.4 million net loss on the sale of debt securities, and a $0.2 million decline in the value of the CRA-qualified mutual fund investment.

Noninterest Expense

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Noninterest expenses in 2022 totaled $267.9 million and included acquisition-related expenses of $27.9 million, and expenses related to branch consolidation and other expense reduction initiatives of $1.2 million.

In 2020, noninterest expenses totaled

$185.6 million, including $9.1 million in acquisition-related expenses, $0.8 million in expenses related to branch consolidation and other expense reduction initiatives, and $0.3 million in bonuses to retail associates for keeping critical functions operating at full capacity through the initial stages of the Company's response to the COVID-19 pandemic.

Adjusted noninterest expense 1 in 2021 totaled $182.4 million, an increase of 8% from 2020, reflecting overall growth of the organization.

In 2021, noninterest expenses totaled $197.4 million, including $7.9 million in acquisition-related expenses and $2.2 million in expenses related to branch consolidation and other expense reduction initiatives.

Adjusted noninterest expense 1 in 2022 totaled $229.7 million, an increase

of 26% from 2021, reflecting overall growth of the organization.

Changes in the categories of noninterest expense for the year ended 2022 compared to 2021 are further described below.

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Amortization of intangibles 9,101 5,033 81

Foreclosed property expense and net loss on sale (264) 2,263 (112)

Foreclosed property expense and net gain on sale (1,534) (264) 481

Provision for credit losses on unfunded commitments 1,157 133 770

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Results include $3.4 million in acquisition-related charges compared to $0.9 million in 2021.

Investments in 2021 included improvements to the digital commercial loan origination platform that has provided a quicker renewal process and a streamlined workflow for bankers and underwriters, and an automated PPP forgiveness solution integrated with the Company's existing technology infrastructure.

The Company continues to improve and enhance mobile and digital products and services through key third parties, and in the first quarter of 2022 upgraded its online and mobile banking platform, providing an enhanced digital experience for customers.

Outsourced data processing costs may increase in the future as customers adopt improved products and as business volumes grow.

Investments in 2022 included an upgrade of the online and mobile banking platform, providing an enhanced digital experience for consumers.

Outsourced data processing costs may continue to increase in the future as customers adopt improved products and as business volumes grow.

Telephone and data line expenses, including electronic communications with customers, between branch locations and personnel, and with third party data processors, increased by $0.6 million in 2022 to $3.8 million.

Total occupancy, furniture and equipment expenses in 2021 totaled $19.5 million, a decrease of $0.5 million, or 2%, compared to 2020.

Total occupancy, furniture and equipment expenses in 2022 totaled $25.0 million, an increase of $5.4 million, or 28%, compared to 2021, primarily due to expansion through acquisitions.

The Company continues to evolve its branch footprint in order to redirect capacity into attractive growth markets.

In alignment with this strategy, four banking center locations were consolidated in 2021, and two new branches opened.

In 2022 and 2021, marketing expenses totaled $6.3 million and $4.6 million, respectively.

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FDIC assessments were $3.1 million in 2022, compared to $2.4 million in 2021.

Expenses in the prior year were partially offset by $0.7 million in FDIC deposit insurance assessment credits.

For the year ended December 31, 2021, foreclosed property expenses were more than offset by net gains on sale, resulting in a benefit of $0.3 million, compared to foreclosed property expense and net losses on sale of $2.3 million in 2020.

Results in 2021 were the result of gains on the sale of OREO properties, while the prior year was impacted primarily by the write-downs of two properties.

Foreclosed property expenses were more than offset in each year by net gains on sale, resulting in a benefit of $1.5 million in 2022, compared to a benefit of $0.3 million in 2021.

Other expense totaled $23.7 million and $16.3 million in 2022 and 2021, respectively.

The increase of $0.5 million, or 3%, includes higher loan production-related expenses.

The increase of $7.3 million, or 45%, includes higher loan production-related expenses, and higher recruiting costs.

In 2022, the provision for income taxes totaled $31.6 million, compared to $34.3 million in 2021.

The increase reflects higher pre-tax income and is partially offset by a temporary reduction in the corporate state tax rate in 2021 to 3.535% compared to 4.5% for 2020.

The state tax rate increased to 5.5% effective January 1, 2022, resulting in an additional tax benefit of $0.8 million recognized in the fourth quarter of 2021 upon the adjustment of the value of deferred tax assets affected by the change.

The decrease reflects lower pre-tax income primarily resulting from higher provision for credit losses, and a $1.0 million refund of Florida corporate income tax paid in the prior year.

Discrete tax benefits related to share-based compensation were $1.1 million in 2022 and $0.9 million in 2021.

Fourth Quarter Results and Analysis

Net income totaled $36.3 million in the fourth quarter of 2021, an increase of $13.4 million, or 58%, from the third quarter of 2021, and an increase of $7.0 million, or 24%, compared to the fourth quarter of 2020.

Net income totaled $23.9 million in the fourth quarter of 2022, a decrease of $5.3 million, or 18%, from the third quarter of 2022, and a decrease of $12.4 million, or 34%, compared to the fourth quarter of 2021.

The fourth quarter of 2022 included $16.1 million in merger-related costs and $15.0 million in provision for credit losses associated with the Apollo and Drummond acquisitions.

Adjusted net income 1 totaled $39.9 million, an increase of $7.1 million, or 22%, from the third quarter of 2022, and an increase of $3.1 million, or 8%, compared to the fourth quarter of 2021.

Diluted earnings per common share (“EPS”) was $0.34 and adjusted diluted EPS 1 2 was $0.56 in the fourth quarter of 2022, compared to diluted EPS of $0.47 and adjusted diluted EPS 1 of $0.53 in the third quarter of 2022 and compared to diluted EPS of $0.62 and adjusted diluted EPS 1 of $0.62 in the fourth quarter of 2021.

Revenues increased $0.6 million, or 1%, from the third quarter of 2021 and increased $7.3 million, or 9%, from the fourth quarter of 2020.

Net revenues, which are calculated as net interest income on a fully taxable equivalent basis plus noninterest income excluding securities gains and losses, increased $33.0 million, or 32%, from the third quarter of 2022 and increased $46.4 million, or 51%, from the fourth quarter of 2021.

Net interest income increased $31.4 million, or 36%, compared to the third quarter of 2022 and increased $47.4 million, or 66%, compared to the fourth quarter of 2021.

Net interest income (on a tax-equivalent basis), for the fourth quarter of 2022 totaled $119.9 million, an increase of $31.5 million, or 36%, from the third quarter of 2022, and an increase of $47.4 million, or 66%, from the fourth quarter 2021.

Net interest margin (on a tax-equivalent basis), contracted six basis points to 3.16% from 3.22% in the third quarter of 2021.

Noninterest income, excluding securities gains and losses, totaled $19.1 million for the fourth quarter of 2021, in line with the third quarter of 2021 and an increase of $4.1 million, or 28%, from the fourth quarter of 2020.

Included in the fourth quarter was a gain of $0.8 million on the sale of a website domain name obtained in a prior bank acquisition, and an increase of $0.7 million in SBIC investment income compared to the third quarter of 2021.

These increases were offset by lower mortgage banking fees, which decreased by $0.5 million, due to slowing refinance activity and continuing low housing inventory levels, and lower SBA gains, which decreased by $0.6 million due to lower saleable production.

Noninterest expenses for the fourth quarter of 2021 totaled $50.3 million, a decrease of $5.0 million, or 9% from the prior quarter and an increase of $6.6 million, or 15%, from the fourth quarter of 2020.

Costs associated with bank acquisitions and expense initiatives were lower by $6.5 million in the fourth quarter of 2021 compared to the prior quarter.

Offsetting were increases in employee benefits expense associated with higher employee health insurance costs, and expenses incurred in preparing for the 2022 upgrade of the online and mobile banking platform.

The provision for loan losses was a net benefit of $3.9 million in the fourth quarter of 2021, reflecting continued improvement in the economic outlook, compared to a provision of $5.1 million in the prior quarter.

The prior quarter included an increase associated with onboarding the Legacy Bank of Florida acquisition.

The ratio of allowance for credit losses to total loans was 1.41% at December 31, 2021, compared to 1.49% at September 30, 2021.

Excluding PPP loans, the ratio was 1.43% at December 31, 2021, compared to 1.54% at September 30, 2021.

Net interest margin (on a tax-equivalent basis), increased 69 basis points to 4.36% from 3.67% in the third quarter of 2022.

Noninterest income, excluding securities gains and losses, totaled $17.6 million for the fourth quarter of 2022, an increase of $1.2 million, or 7%, when compared to the third quarter of 2022, and a decrease of $1.5 million, or 8%, compared to the fourth quarter of 2021.

• Service charges on deposits increased $0.5 million compared to the third quarter of 2022 and $1.4 million compared to the fourth quarter of 2021, reflecting the benefit of an expanded deposit base including from acquisitions.

• Interchange income increased $0.5 million compared to both the third quarter of 2022 and the fourth quarter of 2021, primarily attributed to an expanded customer base.

• Despite the impact of market declines, the wealth management division has demonstrated continued success in building relationships, and during the fourth quarter of 2022, assets under management grew $159.5 million, driving a $0.2 million, or 6%, increase in wealth management income compared to the third quarter of 2022 and a $0.5 million, or 22%, increase compared to the fourth quarter of 2021.

During the full year 2022, the wealth management division added a record breaking $425 million in new assets under management.

• Mortgage banking fees were $0.4 million, flat compared to the third quarter of 2022 and decreasing $1.6 million, or 79%, compared to the fourth quarter of 2021 as a result of the overall slowdown attributed to significant increases in mortgage rates and low inventory levels during 2022.

Noninterest expenses for the fourth quarter of 2022 totaled $91.5 million, an increase of $30.2 million, or 49%, from the third quarter of 2022 and an increase of $41.2 million, or 82%, from the fourth quarter of 2021.

The fourth quarter of 2022 included $16.1 million of merger related expenses, compared to $2.1 million in the third quarter of 2022 and $0.5 million in the fourth quarter of 2021.

• Salaries and wages increased $17.0 million to $45.4 million in the fourth quarter of 2022 compared to the third quarter of 2022.

The fourth quarter of 2022 includes $5.7 million in merger-related expenses as well as higher headcount associated with adding 20 branch locations, bankers, and operational staff with the acquisitions of Apollo and Drummond.

We expect the full benefit of cost synergies to materialize beginning in the second quarter of 2023.

1 2 Non-GAAP measure, see “ Explanation of Certain Unaudited Non-GAAP Financial Measures ” for more information and a reconciliation to GAAP.

• Employee benefits increased $1.2 million to $5.3 million in the fourth quarter of 2022 compared to the third quarter of 2022, reflecting higher payroll taxes and healthcare-related costs attributed to higher headcount.

• Outsourced data processing costs increased by $4.5 million in the fourth quarter of 2022 compared to the third quarter of 2022, including $2.6 million in direct acquisition related expenses.

The remainder of the increase is the result of higher transaction volume and the growth in customers with the two bank acquisitions.

• Occupancy, telephone and data lines, and furniture and equipment expenses collectively increased $1.1 million to $8.6 million in the fourth quarter of 2022 compared to the third quarter of 2022, reflecting the expanded footprint from the addition of Apollo and Drummond locations.

• Legal and professional fees increased by $5.4 million to $9.2 million in the fourth quarter of 2022 compared to the third quarter of 2022, including a $4.7 million increase in merger-related expenses during the quarter.

• Other expenses decreased by $1.4 million compared to the third quarter of 2022, driven by lower recruiting costs.

• Amortization of intangibles increased $3.3 million compared to the third quarter of 2022, with the addition of $61.7 million in intangible assets from the acquisitions of Drummond and Apollo.

These assets are comprised primarily of core deposit intangibles, which will be amortized using an accelerated amortization method over approximately six years.

The provision for credit losses was $14.1 million in the fourth quarter of 2022, compared to a provision of $4.7 million in the third quarter of 2022.

A $15.0 million provision recorded in the Apollo and Drummond acquisitions during the fourth quarter of 2022 was partially offset by the release of $2.1 million added in the third quarter of 2022 for potential losses related to Hurricane Ian that did not materialize.

Explanation of Certain Unaudited Non-GAAP Financial Measures

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Securities losses (gains), net (18) 362 300 452 1,096

Gain on sale of domain name (included in other income) (755) — — — (755)

Total Adjustments to Noninterest Income (18) 362 300 452 1,096

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Total Adjustments to Noninterest Expense (21,079) (4,460) (4,485) (8,212) (38,236)

Fourth Third Second First Total

(In thousands except per share data) 2022 2022 2022 2022 Year

Total Adjusted Noninterest Expense $ 70,431 $ 56,899 $ 51,663 $ 50,705 $ 229,698

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Tax effect of adjustments 5,338 1,222 1,213 2,196 9,969

Effect of change in corporate tax rate on deferred tax assets 774 — — — 774

Tax expense on BOLI surrender (276) — — — (276)

Total Adjustments to Income Taxes 5,062 1,222 1,213 2,196 9,693

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Adjusted Earnings per Diluted Share 0.56 0.53 0.59 0.44 2.12

Average diluted shares outstanding 59,016 57,645 55,901 55,992 57,088

Average diluted shares outstanding (in thousands) 71,374 61,961 61,923 61,704 64,264

Adjusted Noninterest Expense $ 70,431 $ 56,899 $ 51,663 $ 50,705 $ 229,698

Provision for credit losses on unfunded commitments — (1,015) — (142) (1,157)

Foreclosed property expense and net gain (loss) on sale 175 (66) 90 65 264

Fourth Third Second First Total

(In thousands except per share data) 2022 2022 2022 2022 Year

Foreclosed property expense and net gain (loss) on sale 411 (9) 968 164 1,534

Net Adjusted Noninterest Expense $ 70,842 $ 55,875 $ 52,631 $ 50,727 $ 230,075

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Adjusted Return on Average Tangible Assets 1.36 % 1.27 % 1.38 % 1.06 % 1.27 %

Pre-Tax Pre-Provision Return on average tangible assets 1.69 % 1.71 % 1.66 % 1.34 % 1.61 %

Impact of adjustments on Pre-Tax Pre-Provision earnings 0.59 0.18 0.11 0.30 0.30

Adjusted Pre-Tax Pre-Provision Return on Tangible Assets 2.28 1.89 1.77 1.64 1.91

Average Shareholders' Equity $1,573,704 $1,349,475 $1,350,568 $1,400,535 $1,418,855

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$ 105,437 $ 74,050 $ 69,388 $ 67,198 $ 316,073

Fourth Third Second First Total

(In thousands except per share data) 2022 2022 2022 2022 Year

Accretion on acquired loans (9,710) (2,242) (2,720) (3,717) (18,389)

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Impact of PPP — (0.01) (0.03) (0.06) (0.02)

Fourth Third Second First Total

(In thousands except per share data) 2021 2021 2021 2021 Year

Yield on loans excluding PPP and accretion on acquired loans 4.80 % 4.30 % 4.10 % 4.00 % 4.33 %

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Securities losses (gains), net 379 30 55 114 578

Gain on sale of domain name (included in other income) (755) — — — (755)

Total Adjustments to Noninterest Income (376) 30 55 114 (177)

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Total noninterest expense $ 50,263 $ 55,268 $ 45,784 $ 46,120 $ 197,435

Fourth Third Second First Total

(In thousands except per share data) 2021

Merger-related charges (482) (6,281) (509) (581) (7,853)

Amortization of intangibles (1,304) (1,306) (1,212) (1,211) (5,033)

Business continuity expenses — — — (307) (307)

Branch reductions and other expense initiatives (168) (870) (663) (449) (2,150)

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Tax effect of adjustments 280 2,081 598 577 3,536

Effect of change in corporate tax rate on deferred tax assets 774 — — — 774

Total Adjustments to Income Taxes 1,054 2,081 598 577 4,310

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Adjusted diluted earnings per share $ 0.62 $ 0.51 $ 0.59 $ 0.63 $ 2.36

Average diluted shares outstanding 55,739 54,301 53,308 52,284 53,930

Average diluted shares outstanding (in thousands) 59,016 57,645 55,901 55,992 57,088

Adjusted Noninterest Expense $ 48,309 $ 46,811 $ 43,400 $ 43,879 $ 182,399

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Adjusted Return on Average Tangible Assets 1.49 % 1.23 % 1.52 % 1.75 % 1.48 %

Pre-Tax Pre-Provision Return on average tangible assets 1.66 % 1.47 % 1.62 % 1.88 % 1.69 %

Impact of adjustments on Pre-Tax Pre-Provision earnings 0.05 0.36 0.11 0.12 0.12

Adjusted Pre-Tax Pre-Provision Return on Tangible Assets 1.71 1.83 1.73 2.00 1.81

Fourth Third Second First Total

(In thousands except per share data) 2021

Average Shareholders' Equity $1,303,686 $1,248,547 $1,170,395 $1,136,416 $1,215,312

1 unchanged sentence

Average Tangible Equity $1,035,994 $993,567 $934,431 $899,093 $966,223

Fourth Third Second First Total

(In thousands except per share data) 2020

Return on Average Shareholders' Equity 11.06 % 7.29 % 10.76 % 12.03 % 10.24 %

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Financial Condition

Total assets increased $1.3 billion, or 16%, year-over-year to $9.7 billion at December 31, 2021, reflecting a combination of organic growth and acquisitions, partially offset by PPP forgiveness.

Total assets increased $2.5 billion, or 25%, year-over-year to $12.1 billion at December 31, 2022, reflecting a combination of organic growth and acquisitions.

Information related to yields, maturities, carrying values and fair value of the Company’s securities is set forth in Tables 7 and 8 and “Note 3 - Securities” of the Company’s consolidated financial statements.

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The Company's total debt securities portfolio increased $336.2 million, or 15%, from December 31, 2021.

During the first quarter of 2021, the Company reclassified debt securities with an amortized cost of $210.8 million from available-for-sale to held-to-maturity.

These securities had net unrealized gains of $0.8 million at the date of transfer, which will continue to be reported in accumulated other comprehensive income and will be amortized over the remaining life of the securities as an adjustment of yield.

The effect on interest income of the amortization of net unrealized gains is offset by the amortization of the premium on the securities transferred.

The Company has the intent and ability to retain these securities until maturity.

During the year ended December 31, 2022, there were $899.7 million of debt security purchases and $367.7 million in paydowns and maturities over the same period.

For the year ended December 31, 2022, debt securities with a fair value of $515.2 million obtained through bank acquisition were sold with no gains or losses recognized.

During the year ended December 31, 2021, there were $1.5 billion of debt security purchases and $679.3 million in paydowns and maturities over the same period.

For the year ended December 31, 2021, debt securities with a fair value of $102.1 million were sold with net losses of $0.4 million.

During the year ended December 31, 2020, there were $830.3 million of debt security purchases and $379.9 million in paydowns and maturities over the same period.

For the year ended December 31, 2020, debt securities with a fair value of $96.7 million were sold with net gains of $1.1 million.

Debt securities generally return principal and interest monthly.

The modified duration of the securities portfolio at both December 31, 2021 and December 31, 2020 was 3.8 years.

The modified duration of the available-for-sale securities portfolio at December 31, 2022 was 3.7 and at December 31, 2021 was 3.8.

At December 31, 2022, available-for-sale securities had gross unrealized losses of $248.7 million and gross unrealized gains of $1.1 million, compared to gross unrealized losses of $20.9 million and gross unrealized gains of $11.5 million at December 31, 2021.

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The collateral underlying these mortgage investments includes both fixed-rate and adjustable-rate mortgage loans.

Non-guaranteed agency commercial securities total $25.1 million, with a fair value of $25.7 million.

Private label commercial securities total $17.2 million, with a fair value of $16.3 million.

These securities have weighted average credit support of 23%.

The collateral underlying these mortgages are primarily pooled multifamily loans.

The Company also has invested $292.7 million in uncapped 3-month LIBOR floating rate collateralized loan obligations.

The Company also has $313.2 million, with a fair value of $302.9 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.

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Loan Portfolio

Loans, net of unearned income and excluding the allowance for credit losses, were $5.9 billion at December 31, 2021, an increase of $189.7 million, or 3%, compared to December 31, 2020.

Increases reflect organic growth, along with the acquisition of Legacy Bank of Florida and the purchase of select loan pools, offset by PPP forgiveness.

During the first half of 2021, the Company participated in the second round of the PPP program, resulting in originations of $256.0 million.

Increases were offset by $777.6 million in PPP loans forgiven by the SBA during the year ended December 31, 2021.

In the third quarter of 2021, the Company successfully completed the acquisition of Legacy Bank of Florida, resulting in the addition of $477.2 million in loans.

For the year ended December 31, 2021, the Company originated $1.1 billion in commercial and commercial real estate loans, compared to $655.8 million for the year ended December 31, 2020, an increase of $482.0 million, or 73%.

Loans, net of unearned income and excluding the allowance for credit losses, were $8.1 billion at December 31, 2022, an increase of $2.2 billion, or 37%, compared to December 31, 2021.

The increase reflects organic growth along with the addition of acquired banks.

For the year ended December 31, 2022, the Company originated $1.7 billion in commercial and commercial real estate loans, compared to $1.1 billion for the year ended December 31, 2021, an increase of $527.0 million, or 46%.

The late-stage pipeline for commercial and commercial real estate loans totaled $395.7 million at December 31, 2022.

Prior year's production and pipeline reflect the impact of the onset of the COVID-19 pandemic where the Company purposefully slowed originations.

The current year activity reflects the Company's return to its pre-pandemic credit policy and continuation of strict underwriting guidelines.

The Company originated $310.7 million in residential loans retained in the portfolio during the year ended December 31, 2022, compared to originations of $245.4 million during the year ended December 31, 2021, an increase of $65.3 million, or 27%.

Residential loans retained in the portfolio includes a $180.8 million purchased pool consisting of 30-year fixed rate jumbo residential loans purchased in the third quarter of 2021 and a $38.4 million purchased pool consisting of 30-year jumbo rate residential loans purchased in the second quarter of 2021.

Saleable production decreased for the year ended December 31, 2022, representing $120.9 million versus $422.8 million during the year ended December 31, 2021, a decrease of 71%.

The Company originated $249.5 million consumer loans during the year ended December 31, 2021 compared to $219.3 million originated in the year ended December 31, 2020.

Saleable production in 2022 was impacted by the rapid increase in mortgage rates and low inventory levels.

The Company originated $408.7 million in consumer loans during the year ended December 31, 2022 compared to $249.5 million originated in the year ended December 31, 2021.

The increases are primarily the result of consumer lending teams that joined the Company in late 2021.

The Company remains committed to sound risk management procedures.

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Totals $ 4,929,672 $ 868,418 $ 126,939 $ 5,925,029

The amortized cost basis of loans at December 31, 2021 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 December 31, 2020, the amortized cost basis included net deferred costs of $22.6 million on non-PPP portfolio loans and net deferred fees of $9.5 million on PPP loans.

At December 31, 2021, the remaining fair value adjustments on acquired loans was $23.1 million, or 2.3% of the outstanding acquired loan balances.

At December 31, 2020, the remaining fair value adjustments on acquired loans was $30.2 million, or 2.9% 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 commercial real estate, increased $397.0 million, or 16%, totaling $2.9 billion at December 31, 2021, compared to December 31, 2020.

The amortized cost basis of loans at December 31, 2022 and 2021 included net deferred costs of $35.1 million and $28.6 million, respectively.

At December 31, 2022, the remaining fair value adjustments on acquired loans were $97.7 million, or 4.3% of the outstanding acquired loan balances, compared to $23.1 million, or 2.3% of the acquired loan balances at December 31, 2021.

The discount is 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 commercial real estate, increased $1.1 billion, or 39%, totaling $4.1 billion at December 31, 2022, compared to December 31, 2021.

Owner-occupied commercial real estate loans represent $1.5 billion, or 36%, of the commercial real estate portfolio.

During the year ended December 31, 2021, the Company participated in the most recent round of the PPP and originated 2,782 loans totaling $256.0 million.

Also during the year ended December 31, 2021, $777.6 million in PPP loans were forgiven by the SBA.

At December 31, 2021, Seacoast had $1.2 million of loans with payment accommodations to borrowers financially impacted by the COVID-19 pandemic, none of which have been classified as TDRs, compared to $74.1 million at December 31, 2020.

Co mmercial and financial loans increased year-over-year by $279.3 million, or 26%, totaling $1.3 billion at December 31, 2022.

The addition of well-established commercial bankers and expansion into new markets across the state have generated disciplined loan growth.

Residential mortgage loans increased $424.1 million, or 30%, year-over-year to $1.8 billion as of December 31, 2022.

Substantially all residential originations have been underwritten to conventional loan agency standards, including loans having balances that exceed agency value limitations.

At December 31, 2021, approximately $278.9 million, or 20%, of the Company’s residential mortgage balances were adjustable 1-4 family mortgage loans (including hybrid adjustable rate mortgages).

Fixed rate mortgages totaled $773.7 million, or 54%, of the residential mortgage portfolio at December 31, 2021, of which 15- and 30-year mortgages totaled $37.1 million and $399.6 million, respectively.

Remaining fixed rate balances were comprised of home improvement loans totaling $373.1 million, most with maturities of 10 years or less.

Home equity lines of credit (“HELOCs”), primarily floating rates, totaled $336.6 million at December 31, 2021.

Included in the balance as of December 31, 2022 were $964.3 million of fixed rate mortgages, $402.3 million of adjustable rate mortgages, and $482.9 million in home equity loans and home equity lines of credit ("HELOCs"), compared to $773.7 million, $278.9 million and $336.6 million, respectively, as of December 31, 2021.

The increases during 2022 include approximately $232 million acquired through bank acquisitions, and a $111 million residential mortgage pool purchased in the first quarter of 2022.

Borrowers in the residential real estate portfolio have an average credit score of 752.

Specifically for HELOCs, borrowers have an average credit score of 763.

Substantially all residential originations have been underwritten to conventional loan agency standards, including loans having balances that exceed agency value limitations.

The average LTV of our HELOC portfolio is 69% with 31% of the portfolio being in the first lien position at December 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 $14.6 million, or 8%, year-over-year to a total of $174.2 million at December 31, 2021, compared to $188.7 million at December 31, 2020.

Borrowers in the consumer portfolio have an average credit score of 734.

At December 31, 2021, the Company had unfunded commitments to make loans of $2.0 billion, compared to $1.5 billion at December 31, 2020 (see “Note 15 - Contingent Liabilities and Commitments with Off-Balance Sheet Risk” to the Company’s consolidated financial statements).

The Company also provides consumer loans, which include installment loans, auto loans, marine loans and other consumer loans, which increased $112.4 million, or 65%, year-over-year to a total of $286.6 million at December 31, 2022, compared to $174.2 million at December 31, 2021.

As part of the acquisition of Drummond Bank in the fourth quarter of 2022, the Company acquired approximately $90 million in digitally originated unsecured consumer loans, and as of the acquisition date, the Company ceased further originations of this type.

At December 31, 2022, the Company had unfunded commitments to extend credit of $2.8 billion, compared to $2.0 billion at December 31, 2021 (see “Note 15 - Contingent Liabilities and Commitments with Off-Balance Sheet Risk” to the Company’s consolidated financial statements).

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 commercial real estate (“CRE”) loan relationships greater than $10 million totaled $1.2 billion, representing 20% of the total portfolio at December 31, 2021, compared to $753.7 million, or 13%, at December 31, 2020.

Outstanding balances for commercial and commercial real estate (“CRE”) loan relationships greater than $10 million totaled $2.2 billion, representing 27% of the total portfolio at December 31, 2022, compared to $1.2 billion, or 20%, at December 31, 2021.

The Company’s ten largest commercial and commercial real estate funded and unfunded loan relationships at December 31, 2022 aggregated to $468.9 million, of which $312.4 million was funded, compared to $312.0 million at December 31, 2021, of which $157.8 million was funded.

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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 total risk based capital, were 21% and 177%, respectively, at December 31, 2021, compared to 26% and 169% as of December 31, 2020.

Construction and land development and CRE loan concentrations as a percentage of subsidiary bank total risk based capital, were 45% and 230%, respectively, at December 31, 2022, compared to 21% and 177% as of December 31, 2021.

Regulatory guidance suggests limits of 100% and 300%, respectively.

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Nonperforming assets (“NPAs”) at December 31, 2022 totaled $31.1 million, a decrease of $13.1 million, or 29.6%, compared to 2021, and were comprised of $28.8 million of nonaccrual loans and other real estate owned (“OREO”) of $2.3 million that includes $1.8 million of branches taken out of service.

Compared to December 31, 2020, nonaccrual loans decreased by $5.5 million, or 15%, and non-branch OREO increased $2.0 million, or 20%, due to $2.5 million in capital expenditures, partially offset by writedowns of $0.4 million.

Compared to December 31, 2021, nonaccrual loans decreased by $1.8 million, or 6%, and non-branch OREO decreased $11.7 million.

Approximately 57% of nonaccrual loans were secured with real estate at December 31, 2022.

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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 restructured loans totaled $3.9 million at December 31, 2021, compared to $4.2 million at December 31, 2020.

Accruing TDRs totaled $4.0 million at December 31, 2022, compared to $3.9 million at December 31, 2021.

Accruing TDRs are excluded from nonperforming asset ratios.

Beginning in March 2020, in response to the economic downturn resulting from the COVID-19 pandemic, the Company offered short-term payment deferrals to affected borrowers.

As of December 31, 2021, pandemic-related accommodations totaled $1.2 million and are not considered troubled debt restructurings (“TDRs”).

The table below sets forth details related to nonaccrual and accruing restructured loans.

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Total loans 71 $ 5,985 94 $ 8,571

During the year ended December 31, 2021, 12 loans totaling $0.8 million were modified to a TDR, compared to ten loans totaling $0.7 million for the year ended December 31, 2020.

During the year ended December 31, 2022, nine loans totaling $0.9 million were modified to a TDR, compared to 12 loans totaling $0.8 million for the year ended December 31, 2021.

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.

There was one default totaling $0.2 million on loans that had been modified in TDRs within the twelve months preceding December 31, 2021, and there were no defaults on loans that had been modified in TDRs within the twelve months preceding December 31, 2020.

There were three defaults totaling $41 thousand on loans that had been modified in TDRs within the twelve months preceding December 31, 2022, and there was one default totaling $0.2 million on loans that had been modified in TDRs within the twelve months preceding December 31, 2021.

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, or has been transferred to OREO.

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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

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 provision for credit losses was a net benefit of $9.4 million for the year ended December 31, 2021, compared to a provision of $37.8 million for the year ended December 31, 2020.

The prior year reflected the impact of economic uncertainty attributed primarily to the onset of the COVID-19 pandemic.

The removal of lockdown restrictions and a continued improvement in the economic outlook are reflected in the decrease in provisioning in 2021.

Management establishes the allowance using relevant available information from both internal and external sources, relating to past events, current conditions, and reasonable and supportable forecasts.

The forecasts of future economic conditions are over a period that has been deemed reasonable and supportable, and in segments where it can no longer develop reasonable and supportable forecasts, the Company reverts to longer-term historical loss experience to estimate losses over the remaining life of the loans.

Expected credit losses are estimated over the contractual term of the loans, adjusted for expected prepayments.

The provision for credit losses was $26.2 million for the year ended December 31, 2022, compared to a net benefit of $9.4 million for the year ended December 31, 2021.

The 2022 provision includes $20.2 million in initial provisioning for loans acquired through bank acquisitions, along with increases reflecting organic loan growth and changes in economic forecast factors.

The net benefit of $9.4 million in 2021 reflects the improvement in the economic outlook following the COVID-19 pandemic.

Net charge-offs for 2022 were $0.8 million, or 0.01% of average loans, excluding PPP loans, compared to $3.0 million, or 0.06%, for 2021.

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(In thousands) Beginning

Balance Impact of Adoption of ASC 326 Initial Allowance on PCD Loans Acquired During the Period Provision

Balance Initial Allowance on PCD Loans Acquired During the Period Provision

Losses Charge-

Offs Recoveries TDR

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Totals $ 92,733 3,046 $ (9,421) $ (6,098) $ 3,071 $ (16) $ 83,315

1 Excludes $0.4 million provision for credit losses on accrued interest receivable.

Concentrations of credit risk, discussed under the caption “Loan Portfolio” of this discussion and analysis, can affect the level of the allowance and may involve loans to one borrower, an affiliated group of borrowers, borrowers engaged in or dependent upon the same industry, or a group of borrowers whose loans are predicated on the same type of collateral.

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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 has ceased issuance of new LIBOR loans, and has approximately $250 million in existing loans for which the repricing index is tied to LIBOR.

In 2021, the Company ceased issuance of new LIBOR loans, and as of December 31, 2022, has approximately $244 million in existing loans for which the repricing index is tied to LIBOR.

The Company is actively working to address contracts without an alternative rate or sufficient fallback language in advance of cessation in June 2023;

however, the Company expects to leverage the LIBOR Act for its intended purpose, to address LIBOR exposures when necessary.

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.

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.

At this time, alternative reference rates are predominantly SOFR based.

Cash and Cash Equivalents, Liquidity Risk Management and Contractual Commitments

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Brokered deposits at December 31, 2022 totaled $58.6 million, compared to $8.0 million at December 31, 2021.

Cash and cash equivalents, including interest bearing deposits, totaled $737.7 million on a consolidated basis at December 31, 2021, compared to $404.1 million at December 31, 2020.

Higher cash and cash equivalent balances at December 31, 2021 are primarily the result of growth in deposits.

Cash and cash equivalents, including interest bearing deposits, totaled $201.9 million at December 31, 2022, compared to $737.7 million at December 31, 2021.

Lower cash and cash equivalent balances at December 31, 2022 are primarily the result of loan growth, securities purchases, and deposit outflows.

Contractual maturities for assets and liabilities are reviewed to meet current and expected future liquidity requirements.

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At December 31, 2022, the Company had available unsecured lines of $175.0 million and lines of credit under current lendable collateral value, which are subject to change, of $2.4 billion.

In addition, the Company had $1.9 billion of debt securities and $614.2 million in residential and commercial real estate loans available as collateral.

In addition, the Company had $2.0 billion of debt securities and $1.1 billion 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 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.

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(In thousands) Total or Less Three Years Five Years Years

Deposit maturities $ 8,067,589 $ 8,012,263 $ 41,977 $ 12,742 $ 607

Deposits $ 9,981,595 $ 9,926,586 $ 47,372 $ 7,009 $ 628

Securities sold under agreements to repurchase 172,029 172,029 — — —

FHLB borrowings 1

150,000 75,000 — — 75,000

Subordinated debt 84,533 — — — 84,533

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Total $ 10,448,323 $ 10,182,495 $ 64,053 $ 20,409 $ 181,366

1 Includes $75 million in a callable advance structure, which may be called at specified intervals with a maturity of up to 10 years.

2 Of the $60.2 million, approximately $3 million is related to offices taken out of service (closed).

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Total deposits increased $1.9 billion, or 24%, to $10.0 billion at December 31, 2022 compared to December 31, 2021.

The increase reflects growth in existing customer balances, the addition of new customers and the impact of the Legacy Bank of Florida acquisition which added $494.9 million in deposits during 2021.

Since December 31, 2020, interest bearing deposits, which includes interest bearing demand, savings and money markets deposits, increased $625.5 million, or 16%, to $4.4 billion at December 31, 2021, noninterest bearing demand deposits increased $785.7 million, or 34%, to $3.1 billion, and CDs decreased $276.2 million, or 33%, to $554.9 million.

The increase reflects the addition of new customers and the impact of the acquired banks, which added $2.3 billion in deposits during 2022, partially offset as the rising rate environment contributed to deposit outflows in the second half of 2022.

As a result of increasing interest rates and the Federal Reserve's monetary policy actions, we expect the competition for deposits to accelerate in the coming periods.

Since December 31, 2021, interest bearing deposits, which includes interest bearing demand, savings and money markets deposits, increased $950.8 million, or 21%, to $5.4 billion at December 31, 2022.

Noninterest bearing demand deposits increased $995.4 million, or 32%, to $4.1 billion, and CDs decreased $32.3 million, or 6%, to $522.7 million.

Noninterest demand deposits represented 41% of deposits at December 31, 2022 and 38% at December 31, 2021.

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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 December 31, 2021, and had sold, on an overnight basis, $228.0

million in deposits compared to $112.7 million at December 31, 2020.

These deposits are not included in the Consolidated Balance Sheets.

At December 31, 2022, the Company had sold no deposits under these programs, compared to $228 million sold on an overnight basis at December 31, 2021, which were not included in the Consolidated Balance Sheet at that date.

No unsecured federal funds purchased were outstanding at December 31, 2022 or December 31, 2021.

Borrowings were comprised of $71.6 million and $71.4 million at December 31, 2021 and December 31, 2020, respectively, related to trust preferred securities issued by trusts organized or acquired by the Company, and there were no borrowings from FHLB.

The Company issued subordinated debt in conjunction with its wholly owned trust subsidiaries in connection with bank acquisitions in previous years.

The acquired junior subordinated debentures (in accordance with ASC Topic 805 Business Combinations ) were recorded at fair value, which collectively is $3.5 million lower than face value at December 31, 2021.

This amount is being amortized into interest expense over the acquired subordinated debts’ remaining term to maturity.

All trust preferred securities are guaranteed by the Company on a junior subordinated basis.

At December 31, 2022 and 2021, borrowings included $71.9 million and $71.6 million, respectively, related to trust preferred securities issued by trusts organized or acquired by the Company.

Under Basel III and Federal Reserve rules, qualified trust preferred securities and other restricted capital elements can be included as Tier 1 capital, within limitations.

The Company believes that its trust preferred securities qualify under these capital rules.

The weighted average interest rate of our outstanding subordinated debt related to trust preferred securities was 2.36% for the year ended December 31, 2021, compared to 3.07% in 2020.

Go to “Note 9 - Borrowings” to the Company's consolidated financial statements for more detailed information pertaining to borrowings.

At December 31, 2022, the weighted average rate in effect on our outstanding subordinated debt related to trust preferred securities was 6.46%, compared to 1.91% at December 31, 2021.

The acquired junior subordinated debentures (in accordance with ASC Topic 805 Business Combinations ) were recorded at fair value, which collectively was $3.3 million lower than face value at December 31, 2022.

This amount is being amortized into interest expense over the acquired subordinated debts' remaining term to maturity.

All trust preferred securities are guaranteed by the Company on a junior subordinated basis.

On October 7, 2022 the Company acquired $12.3 million in subordinated debt through the acquisition of Apollo Bancshares, Inc.

Contractual interest is paid on a semiannual basis at a fixed rate of 5.50% until April 30, 2025, at which point the rate converts to a floating rate of 3-month SOFR plus 533 basis points.

The debt was recorded at fair value, resulting in a $0.4 million premium that is being amortized into interest expense over the remaining term to maturity.

Outstanding FHLB advances totaled $150.0 million at December 31, 2022, of which $75.0 million mature within 30 days with a weighted average rate of 4.28%.

The remaining $75.0 million is a callable advance structure with a fixed rate of 2.57% that could be called in the future at specified intervals throughout the life of the advance with a maturity of up to 10 years.

There were no borrowings from the FHLB outstanding at December 31, 2021.

See “Note 9 - Borrowings” to the Company's consolidated financial statements for more detailed information pertaining to borrowings.

Off-Balance Sheet Transactions

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These instruments are not recorded on the balance sheet until funds are advanced under the commitment.

Loan commitments were $2.0 billion at December 31, 2021, and $1.5 billion at December 31, 2020 (see “Note 15 - Contingent Liabilities and Commitments with Off-Balance Sheet Risk” to the Company’s consolidated financial statements).

Unfunded commitments to extend credit were $2.8 billion at December 31, 2022, and $2.0 billion at December 31, 2021 (see “Note 15 - Contingent Liabilities and Commitments with Off-Balance Sheet Risk” to the Company’s consolidated financial statements).

In the normal course of business, the Company and Seacoast Bank enter into agreements, or are subject to regulatory agreements that result in cash, debt and dividend restrictions.

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The Company's equity capital at December 31, 2022 increased $297.0 million, or 23%, from December 31, 2021, to $1.6 billion.

Changes in equity included increases from net income and the issuance of equity in conjunction with the acquisition of Legacy Bank of Florida, partially offset by the issuance of common stock dividends and the decrease in accumulated other comprehensive income primarily attributed to the decrease in market value of available-for-sale securities.

Changes in equity included increases from net income and the issuance of equity in conjunction with the acquisitions, partially offset by the issuance of common stock dividends and a decrease in accumulated other comprehensive income due to declines in the value of available-for-sale securities associated with the increasing interest rate environment.

The ratio of shareholders’ equity to period end total assets was 13.24% and 13.54% at December 31, 2022 and December 31, 2021, respectively.

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Net income 106,507 124,403

Cumulative change in accounting principle upon adoption of new accounting pronouncement — (16,876)

Issuance of common stock and conversion of options, pursuant to acquisitions 398,249 92,094

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The Company’s total risk-based capital ratio was 15.79% at December 31, 2022, a decrease from 18.21% at December 31, 2021.

During the first quarter of 2020, the Company adopted interagency guidance that delays the impact of CECL adoption on capital for two years followed by a three-year phase-in period.

As of December 31, 2022, the Bank’s leverage ratio (Tier 1 capital to adjusted total assets) was 10.44%, compared to 10.65% at December 31, 2021, well above the minimum to be well capitalized under regulatory guidelines.

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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 the Company, respectively.

of dividends by Seacoast Bank or the Company, respectively.

Under a recently adopted Federal Reserve policy, the board of directors of a bank holding company must consider different factors to ensure that its dividend level 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:

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;

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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 will be able to treat all $71.6 million of trust preferred securities as Tier 1 capital.

The Company believes that its trust preferred securities qualify under these revised regulatory capital rules and believes that it will be able to treat all its 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.

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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 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 A-Significant Accounting Policies” to the Company’s consolidated financial statements.

For more information regarding management’s judgments relating to significant accounting policies and recent accounting pronouncements, see “Note 1 – Significant Accounting Policies” 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.

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 Allowance for Credit Losses (ACL) represents management’s best estimate of expected future credit losses related to the loan portfolio at the balance sheet date.

The estimate of the ACL requires significant judgment and is based on a variety of factors.

Forecast data is sourced from Moody’s Analytics (“Moody’s”), a firm widely recognized for its research, analysis, and economic forecasts.

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 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 troubled debt restructurings (“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.

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 December 31, 2021, 2020 and 2019.

The forecasts of future economic conditions are over a period that has been deemed reasonable and supportable, and in

segments where it can no longer develop reasonable and supportable forecasts, the Company reverts to longer-term historical loss experience to estimate losses over the remaining life of the loans.

Expected credit losses are estimated over the contractual term of the loans, adjusted for expected prepayments.

One of the most significant judgments in estimating the Allowance for credit losses, relates to the macroeconomic forecasts.

As of December 31, 2022, the Company utilized a blend of Moody’s most recent “U.S.

Macroeconomic Outlook Baseline” and “Alternative Scenario 3 - Downside - 90th Percentile” scenarios.

The weighting applied in the December 31, 2022 analysis reflects a deterioration in the economic outlook as compared to the December 31, 2021 analysis and considers the continued actions taken by the Federal Reserve with regard to monetary policy and interest rates and the potential impact of those actions, the ongoing Russia-Ukraine conflict and the magnitude of the resulting market disruption, the potential impact of persistent high inflation on economic growth and expectations around a recession occurring over the next 12 to 24 months.

The forecasted credit losses incorporate numerous macroeconomic variables, although specific variables have a greater impact on the outcome than others.

Specifically, changes in expectations indicated by the Commercial Real Estate Price Index have the most significant impact on the estimate of expected losses for commercial real estate non-owner-occupied loans and construction and land development loans, the housing price index is the economic forecast variable most significantly impacting the estimate of expected losses for residential loans, and the unemployment rate is a significant contributor to commercial and consumer loans.

Changes in the assumptions and forecasts of economic conditions could significantly affect the estimate for the Company’s estimate of expected credit losses at the balance sheet date or lead to significant changes in the estimate from one reporting period to the next.

In the implementation of CECL at January 1, 2020 and through June 30, 2022, the Company utilized a top-down allowance model based on an analysis of the probability of default (“PD”) and loss given default (“LGD”) to determine an expected loss by loan segment.

During the third quarter of 2022, the Company transitioned to a tool that calculates the quantitative portion of expected credit losses at the individual loan level using a discounted cash flow methodology for its commercial loans and using a loss rate methodology for its consumer loans.

The new tool utilized produces more granular results of expected loan loss, incorporates more extensive historical loss data, and allows for a more efficient process.

This change did not result in a material impact to the Company’s financial statements.

Qualitative adjustments may be made to modeled reserves based on an assessment of internal and external influences on credit quality not fully reflected in the quantitative components of the allowance model.

For additional information regarding the Company's methodology for calculating the Allowance for Credit Losses, see Note 1 – Significant Accounting Policies and Note 5 – Allowance for Credit Losses in the Notes to the Consolidated Financial Statements.

Acquisition Accounting and Purchased Loans – Critical Accounting Policies and Estimates

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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

In contrast, expected credit losses on loans not considered PCD are recognized through the provision for credit losses 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.

Intangible assets consist of goodwill, core deposit intangible, customer relationship 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.

The core deposit intangible represents the excess intangible value of acquired deposit customer relationships.

Core deposit intangibles are amortized using an amortization method that reflects the expected value over time, 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.

We performed an annual impairment test of goodwill in the fourth quarter of 2022 and concluded that no impairment existed.

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.

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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.

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.

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Qualitative assessments consider a range of factors including:

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.

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

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 7. Management’s Discussion and Analysis