SEACOAST BANKING CORP OF FLORIDA 10-Q

Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The purpose of this discussion and analysis is to aid in understanding significant changes in the financial condition of Seacoast Banking Corporation of Florida and its subsidiaries (“Seacoast” or the “Company”) and their results of operations. Nearly all of the Company’s operations are contained in its banking subsidiary, Seacoast National Bank (“Seacoast Bank” or the “Bank”). Such discussion and analysis should be read in conjunction with the Company’s Condensed Consolidated Financial Statements and the related notes included in this report. The emphasis of this discussion will be on the three and six months ended June 30, 2023 compared to the three and six months ended June 30, 2022 for the consolidated statements of income. For the consolidated balance sheets, the emphasis of this discussion will be the balances as of June 30, 2023 compared to December 31, 2022. This discussion and analysis contain statements that may be considered “forward-looking statements” as defined in, and subject to the protections of the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. See the following section for additional information regarding forward-looking statements. For purposes of the following discussion, the words “Seacoast” or the “Company” refer to the combined entities of Seacoast Banking Corporation of Florida and its direct and indirect wholly owned subsidiaries. Special Cautionary Notice Regarding Forward-Looking Statements Certain statements made or incorporated by reference herein which are not statements of historical fact, including those under “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and elsewhere herein, are “forward-looking statements” within the meaning, and protections, of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Forward-looking statements include statements with respect to the Company's beliefs, plans, objectives, goals, expectations, anticipations, assumptions, estimates, and intentions about future performance, and involve known and unknown risks, uncertainties and other factors, which may be beyond the Company's control, and which may cause the actual results, performance or achievements of Seacoast Banking Corporation of Florida (“Seacoast” or the “Company”) or its wholly-owned banking subsidiary, Seacoast National Bank (“Seacoast Bank”), to be materially different from those set forth in the forward-looking statements. All statements other than statements of historical fact could be forward-looking statements. You can identify these forward-looking statements through the use of words such as “may,” “will,” “anticipate,” “assume,” “should,” “support,” “indicate,” “would,” “believe,” “contemplate,” “expect,” “estimate,” “continue,” “further,” “plan,” “point to,” “project,” “could,” “intend,” “target” or other similar words and expressions of the future. These forward-looking statements may not be realized due to a variety of factors, including, without limitation: • The impact of current and future economic and market conditions generally (including seasonality) and in the financial services industry, nationally and within Seacoast’s primary market areas, including the effects of inflationary pressures, changes in interest rates, slowdowns in economic growth, and the potential for high unemployment rates, as well as the financial stress on borrowers and changes to customer and client behavior and credit risk as a result of the foregoing; • Potential impacts of the recent adverse developments in the banking industry highlighted by high-profile bank failures, including impacts on customer confidence, deposit outflows, liquidity and the regulatory response thereto; • Governmental monetary and fiscal policies, including interest rate policies of the Board of Governors of the Federal Reserve, as well as legislative, tax and regulatory changes, including those that impact the money supply and inflation; • The risks of changes in interest rates on the level and composition of deposits (as well as the cost of, and competition for, deposits), loan demand, liquidity and the values of loan collateral, securities, and interest rate sensitive assets and liabilities; • Interest rate risks, sensitivities and the shape of the yield curve; • Changes in accounting policies, rules and practices; • Changes in retail distribution strategies, customer preferences and behavior generally and as a result of economic factors, including heightened inflation; 42 Table of Content s • Changes in the availability and cost of credit and capital in the financial markets; • Changes in the prices, values and sales volumes of residential and commercial real estate; • The Company’s concentration in commercial real estate loans and in real estate collateral in Florida; • Seacoast's ability to comply with any regulatory requirements; • The effects of problems encountered by other financial institutions that adversely affect Seacoast or the banking industry; • Inaccuracies or other failures from the use of models, including the failure of assumptions and estimates, as well as differences in, and changes to, economic, market and credit conditions; • The impact on the valuation of Seacoast’s investments due to market volatility or counterparty payment risk, as well as the effect of a decline in stock market prices on our fee income from our wealth management business; • Statutory and regulatory dividend restrictions; increases in regulatory capital requirements for banking organizations generally; • The risks of mergers, acquisitions and divestitures, including Seacoast’s ability to continue to identify acquisition targets, successfully acquire and integrate desirable financial institutions and realize expected revenues and revenue synergies; • Changes in technology or products that may be more difficult, costly, or less effective than anticipated; • The Company’s ability to identify and address increased cybersecurity risks, including those impacting vendors and other third parties; • Fraud or misconduct by internal or external parties, which Seacoast may not be able to prevent, detect or mitigate; • Inability of Seacoast’s risk management framework to manage risks associated with the Company’s business; • Dependence on key suppliers or vendors to obtain equipment or services for the business on acceptable terms, including the impact of supply chain disruptions; • Reduction in or the termination of Seacoast’s ability to use the online- or mobile-based platform that is critical to the Company’s business growth strategy; • The effects of war or other conflicts, including the impacts related to or resulting from Russia’s military action in Ukraine, acts of terrorism, natural disasters, including hurricanes in the Company's footprint, health emergencies, epidemics or pandemics, or other catastrophic events that may affect general economic conditions; • Unexpected outcomes of and the costs associated with, existing or new litigation involving the Company; • Seacoast’s ability to maintain adequate internal controls over financial reporting; • Potential claims, damages, penalties, fines and reputational damage resulting from pending or future litigation, regulatory proceedings and enforcement actions; • The risks that deferred tax assets could be reduced if estimates of future taxable income from the Company’s operations and tax planning strategies are less than currently estimated and sales of capital stock could trigger a reduction in the amount of net operating loss carryforwards that the Company may be able to utilize for income tax purposes; • The effects of competition from other commercial banks, thrifts, mortgage banking firms, consumer finance companies, credit unions, non-bank financial technology providers, securities brokerage firms, insurance companies, money market and other mutual funds and other financial institutions operating in the Company’s market areas and elsewhere, including institutions operating regionally, nationally and internationally, together with such competitors offering banking products and services by mail, telephone, computer and the Internet; • The failure of assumptions underlying the estimate of reserves for expected credit losses; 43 Table of Content s • Risks related to environmental, social and governance ("ESG") matters, the scope and pace of which could alter Seacoast's reputation and shareholder, associate, customer and third-party affiliations; and • Other factors and risks described under “Risk Factors” herein and in any of the Company's subsequent reports filed with the SEC and available on its website at www.sec.gov. All written or oral forward-looking statements that are made or are attributable to Seacoast are expressly qualified in their entirety by this cautionary notice. The Company assumes no obligation to update, revise or correct any forward-looking statements that are made from time to time, either as a result of future developments, new information or otherwise, except as may be required by law. Business Developments Acquisition of Professional Holding Corp. On January 31, 2023, the Company completed the previously announced acquisition of Professional Holding Corp. (“Professional”), parent company of Professional Bank, adding deposits of approximately $2.1 billion and loans of approximately $2.0 billion. Full integration and system conversion activities, including the consolidation of five branches in the South Florida market, were completed in June 2023. Merger related expense synergies are expected to be fully realized in the second half of 2023. Results of Operations For the second quarter of 2023, the Company reported net income of $31.2 million, or $0.37 per average diluted share, an increase of $19.4 million, or 164%, from the first quarter of 2023 and a decrease of $1.5 million, or 5%, compared to the second quarter of 2022. The second quarter of 2023 included a $0.8 million reversal of provision for credit losses. The prior quarter included $31.6 million of provision for credit losses, including $26.6 million for loans acquired in the Professional acquisition. For the six months ended June 30, 2023, net income totaled $43.1 million, or $0.52 per average diluted share, a decrease of $10.3 million, or 19%, compared to the six months ended June 30, 2022. Adjusted net income 1 for the second quarter of 2023 totaled $49.2 million, or $0.58 per average diluted share, an increase of $20.0 million, or 68%, compared to the first quarter of 2023 and an increase of $12.9 million, or 35%, compared to the second quarter of 2022. For the six months ended June 30, 2023, adjusted net income 1 totaled $78.4 million, or $0.94 per average diluted share, compared to $63.4 million, or $1.03 per average diluted share for the six months ended June 30, 2022. Second First Second Six Months Ended Quarter Quarter Quarter June 30, 2023 2023 2022 2023 2022 Return on average tangible assets 1.06 % 0.52 % 1.29 % 0.80 % 1.07 % Return on average tangible shareholders' equity 12.08 5.96 13.01 9.14 10.46 Efficiency ratio 67.34 65.43 56.22 66.37 59.17 Adjusted return on average tangible assets 1 1.41 % 0.90 % 1.38 % 1.16 % 1.23 % Adjusted return on average tangible shareholders' equity 1 16.08 10.34 13.97 13.32 11.95 Adjusted efficiency ratio 1 56.44 53.10 53.15 54.76 53.97 1 Non-GAAP measure - see “Explanation of Certain Unaudited Non-GAAP Financial Measures” for more information and a reconciliation to GAAP. Net Interest Income and Margin Net interest income for the second quarter of 2023 totaled $127.0 million, a decrease of $4.2 million, or 3%, compared to the first quarter of 2023, and an increase of $45.3 million, or 56%, compared to the second quarter of 2022. The decrease from prior quarter reflects a decline of $1.8 million in accretion of purchase discount on acquired loans, and the impact of increasing competition on deposit rates. The increase from prior year is primarily due to higher balances and higher yields on securities and loans, partially offset by the higher cost of deposits. Net interest margin (on a fully tax equivalent basis) 1 was 3.86% in the second quarter of 2023, compared to 4.31% in the first quarter of 2023, and 3.38% in the second quarter of 2022. The decrease during the second quarter of 2023 compared to the prior quarter was driven by the continued effect of an inverted yield curve, a 1 Non-GAAP measure - see “Explanation of Certain Unaudited Non-GAAP Financial Measures” for more information and a reconciliation to GAAP. 44 Table of Content s decline in accretion on acquired loans and rising deposit costs. Compared to the first quarter of 2023, securities yields increased 28 basis points to 3.13% and loan yields increased three basis points to 5.89% during the second quarter of 2023. The securities yield benefited 12 basis points from swaps initiated during the quarter. The effect on net interest margin of accretion of purchase discounts on acquired loans were increases of 43 basis points in the second quarter of 2023, 53 basis points in the first quarter of 2023, and 12 basis points in the second quarter of 2022. For the six months ended June 30, 2023, net interest margin (on a fully tax equivalent basis) 1 was 4.09%, compared to 3.32% for the six months ended June 30, 2022. The yield on securities increased from 1.83% for the six months ended June 30, 2022 to 2.99% for the six months ended June 30, 2023, reflecting the impact of a higher interest rate environment. The yield on total loans increased from 4.30% for the six months ended June 30, 2022 to 5.88% for the six months ended June 30, 2023, reflecting the impact of the higher interest rate environment. Cost of deposits increased from six basis points for the six months ended June 30, 2022 to 1.09% for the six months ended June 30, 2023. The effect on net interest margin of purchase discounts on acquired loans was an increase of 48 basis points for the six months ended June 30, 2023 compared to an increase of 14 basis points for the six months ended June 30, 2022. The cost of deposits was 1.38% in the second quarter of 2023, compared to 77 basis points in the first quarter of 2023, and six basis points in the second quarter of 2022. For the six months ended June 30, 2023, the cost of deposits was 1.09%, an increase of 103 basis points compared to the six months ended June 30, 2022. The higher cost of deposits in the first half of 2023 reflects the impact of the Professional acquisition and an increasingly competitive market for deposits. The following table details the trend for net interest income and margin results (on a tax equivalent basis) 1 , the yield on earning assets and the rate paid on interest bearing liabilities for the periods specified: (In thousands, except ratios) Net Interest Income 1 Net Interest Margin 1 Yield on Earning Assets 1 Rate on Interest Bearing Liabilities Second quarter 2023 $ 127,153 3.86 % 5.30 % 2.26 % First quarter 2023 131,351 4.31 % 5.19 % 1.43 % Second quarter 2022 81,764 3.38 % 3.46 % 0.14 % Six months ended June 30, 2023 258,504 4.09 % 5.26 % 1.87 % Six months ended June 30, 2022 158,403 3.32 % 3.40 % 0.13 % 1 On tax equivalent basis, a non-GAAP measure - see "Explanation of Certain Unaudited Non-GAAP Financial Measures" for more information and a reconciliation to GAAP. Total average loans increased $0.7 billion, or 8%, for the second quarter of 2023 compared to the first quarter of 2023, and increased $3.6 billion, or 56%, from the second quarter of 2022. The increase compared to the prior year quarter includes $3.2 billion in loans added in recent bank acquisitions. Average loans as a percentage of average earning assets totaled 76% for the second quarter of 2023, 76% for the first quarter of 2023 and 67% for the second quarter of 2022. 45 Table of Content s Loan production and late-stage pipelines (loans in underwriting and approval or approved and not yet closed) are detailed in the following table for the periods specified: Second First Second Six Months Ended Quarter Quarter Quarter June 30, (In thousands) 2023 2023 2022 2023 2022 Commercial/commercial real estate loan pipeline at period end $ 217,574 $ 297,380 $ 476,693 $ 217,574 $ 476,693 Commercial/commercial real estate loans closed 317,378 321,665 461,855 639,043 834,841 Residential pipeline - saleable at period end 11,492 6,614 14,700 11,492 14,700 Residential loans - sold 19,078 13,935 42,666 33,013 93,888 Residential pipeline - portfolio at period end 27,110 48,371 53,092 27,110 53,092 Residential loans - retained 85,294 90,058 102,996 175,352 278,453 Consumer pipeline at period end 28,446 38,742 75,532 28,446 75,532 Consumer originations 97,184 110,602 130,784 207,786 214,008 Commercial originations during the second quarter of 2023 were $317.4 million, a decrease of $4.3 million, or 1%, compared to the first quarter of 2023, and a decrease of $144.5 million, or 31%, compared to the second quarter of 2022. For the six months ended June 30, 2023, commercial originations were $639.0 million compared to $834.8 million for the six months ended June 30, 2022, a decrease of $195.8 million, or 23%. Commercial pipelines were $217.6 million as of June 30, 2023, a decrease of 27% from $297.4 million at March 31, 2023, and a decrease of 54% from $476.7 million at June 30, 2022. The declines were the result of the impact of higher rates and a continued selective approach on new credit facilities given a cautious economic outlook. Residential loans originated for sale in the secondary market totaled $19.1 million in the second quarter of 2023, compared to $13.9 million in the first quarter of 2023 and $42.7 million in the second quarter of 2022. For the six months ended June 30, 2023, residential loans originated for sale in the secondary market totaled $33.0 million compared to $93.9 million for the six months ended June 30, 2022, a decrease of $60.9 million, or 65%. Residential saleable pipelines were $11.5 million as of June 30, 2023, compared to $6.6 million as of March 31, 2023 and $14.7 million as of June 30, 2022. Residential loan production retained in the portfolio for the second quarter of 2023 was $85.3 million, compared to $90.1 million in the first quarter of 2023 and $103.0 million in the second quarter of 2022. The pipeline of residential loans intended to be retained in the portfolio was $27.1 million as of June 30, 2023, compared to $48.4 million as of March 31, 2023, and $53.1 million as of June 30, 2022. Consumer originations totaled $97.2 million during the second quarter of 2023, compared to $110.6 million in the first quarter of 2023 and $130.8 million in the second quarter of 2022. For the six months ended June 30, 2023, consumer originations totaled $207.8 million compared to $214.0 million for the six months ended June 30, 2022, a decrease of $6.2 million, or 3%. The consumer pipeline was $28.4 million as of June 30, 2023, compared to $38.7 million as of March 31, 2023 and $75.5 million at June 30, 2022. Average investment securities decreased $27.1 million, or 1%, during the second quarter of 2023 compared to the first quarter of 2023, and were $148.9 million, or 6%, higher compared to the second quarter of 2022. Average investment securities were $2.7 billion for the six months ended June 30, 2023, an increase of $217.1 million, or 9%, compared to the six months ended 2022. Increases in the first half of 2023 include securities added through the Professional acquisition, partially offset by paydowns and maturities. The cost of average interest-bearing liabilities increased 83 basis points in the second quarter of 2023 to 2.26% from 1.43% in the first quarter of 2023, and from 14 basis points in the second quarter of 2022. The cost of average total deposits (including noninterest bearing demand deposits) was 1.38% in the second quarter of 2023, 77 basis points in the first quarter of 2023 and six basis points in the second quarter of 2022. For the six months ended June 30, 2023, the cost of average total deposits (including noninterest bearing demand deposits) was 1.09% compared to six basis points for the six months ended June 30, 2022. 46 Table of Content s During the second quarter of 2023, average transaction deposits (noninterest and interest bearing demand) increased $173.5 million, or 3%, compared to the first quarter of 2023 and increased $1.2 billion, or 20%, compared to the second quarter of 2022. For the six months ended June 30, 2023, average transaction deposits increased $1.3 billion or 23%, compared to the six months ended June 30, 2022. The Company’s deposit mix remains favorable, with 90% of average deposit balances comprised of savings, money market, and demand deposits for the six months ended June 30, 2023. Average balances of sweep repurchase agreements with customers increased $71.3 million, or 41%, from the first quarter of 2023 and $124.4 million, or 103% compared to the second quarter of 2022. The average rate on customer sweep repurchase accounts was 2.61% for the three months ended June 30, 2023, compared to 2.02% for the three months ended March 31, 2023, and 0.31% for the three months ended June 30, 2022. For the six months ended June 30, 2023, the average balance was $209.4 million compared to an average balance of $119.3 million for the six months ended June 30, 2022. The average rate on customer sweep repurchase accounts was 2.37% for the six months ended June 30, 2023, compared to 0.22% for the six months ended June 30, 2022. Subordinated debt balances averaged $105.9 million in the second quarter of 2023, $98.4 million in the first quarter of 2023, and $71.7 million in the second quarter of 2022. The average rate on subordinated debt for the second quarter of 2023 was 6.80%, an increase of 15 basis points compared to the first quarter of 2023 and an increase of 3.56% compared to the second quarter of 2022. For the six months ended June 30, 2023, subordinated debt averaged $102.2 million, compared to $71.7 million for the six months ended June 30, 2022. The average rate on subordinated debt for the six months ended June 30, 2023 was 6.73%, an increase of 3.88% compared to the six months ended June 30, 2022. The subordinated debt is comprised of trust preferred securities issued by subsidiary trusts of the Company, and subordinated notes assumed in bank acquisitions in 2022 and 2023. 47 Table of Content s The following tables detail average balances, net interest income and margin results (on a tax equivalent basis, a non-GAAP measure) for the periods presented: Average Balances, Interest Income and Expenses, Yields and Rates 1 2023 2022 Second Quarter First Quarter Second Quarter Average Yield/ Average Yield/ Average Yield/ (In thousands, except ratios) Balance Interest Rate Balance Interest Rate Balance Interest Rate Assets Earning assets: Securities: Taxable $ 2,673,633 $ 20,898 3.13 % $ 2,700,122 $ 19,244 2.85 % $ 2,517,879 $ 12,387 1.97 % Nontaxable 15,621 120 3.08 16,271 131 3.22 22,443 175 3.12 Total Securities 2,689,254 21,018 3.13 2,716,393 19,375 2.85 2,540,322 12,562 1.98 Federal funds sold 327,433 4,313 5.28 106,778 1,294 4.91 644,144 1,281 0.80 Interest bearing deposits with other banks and other investments 90,783 710 3.14 178,463 2,180 4.95 46,257 636 5.51 Loans excluding PPP loans 10,096,394 148,420 5.90 9,363,873 135,329 5.86 6,454,444 68,647 4.27 PPP Loans 4,834 12 1.00 5,328 12 0.91 26,322 741 11.29 Total Loans 10,101,228 148,432 5.89 9,369,201 135,341 5.86 6,480,766 69,388 4.29 Total Earning Assets 13,208,698 174,473 5.30 12,370,835 158,190 5.19 9,711,489 83,867 3.46 Allowance for credit losses (156,207) (139,989) (90,242) Cash and due from banks 165,625 156,235 389,695 Premises and equipment 117,726 116,083 74,614 Intangible assets 842,988 750,694 307,411 Bank owned life insurance 293,251 274,517 206,839 Other assets including deferred tax assets 415,208 419,601 240,712 Total Assets $ 14,887,289 $ 13,947,976 $ 10,840,518 Liabilities and Shareholders' Equity Interest-bearing liabilities: Interest-bearing demand $ 2,666,314 $ 7,560 1.14 % $ 2,452,113 $ 3,207 0.53 % $ 2,262,408 $ 293 0.05 % Savings 906,936 427 0.19 1,053,220 400 0.15 962,264 64 0.03 Money market 2,806,672 19,196 2.74 2,713,224 12,426 1.86 1,938,421 637 0.13 Time deposits 1,425,344 14,477 4.07 812,422 5,552 2.77 496,186 436 0.35 Securities sold under agreements to repurchase 244,824 1,593 2.61 173,498 864 2.02 120,437 94 0.31 Federal Home Loan Bank borrowings 251,596 2,272 3.62 282,444 2,776 3.99 — — — Subordinated debt 105,861 1,795 6.80 98,425 1,614 6.65 71,740 579 3.24 Total Interest-Bearing Liabilities 8,407,547 47,320 2.26 7,585,346 26,839 1.43 5,851,456 2,103 0.14 Noninterest demand 4,294,251 4,334,969 3,520,700 Other liabilities 114,962 130,616 117,794 Total Liabilities 12,816,760 12,050,931 9,489,950 Shareholders' equity 2,070,529 1,897,045 1,350,568 Total Liabilities & Equity $ 14,887,289 $ 13,947,976 $ 10,840,518 Cost of deposits 1.38 % 0.77 % 0.06 % Interest expense as a % of earning assets 1.44 % 0.88 % 0.09 % 48 Table of Content s Net interest income as a % of earning assets $ 127,153 3.86 % $ 131,351 4.31 % $ 81,764 3.38 % 1 On a fully taxable equivalent basis, a non-GAAP measure - see "Explanation of Certain Unaudited Non-GAAP Financial Measures" for more information and a reconciliation to GAAP. All yields and rates have been computed on an annual basis using amortized cost. Fees on loans have been included in interest on loans. Nonaccrual loans are included in loan balances. 49 Table of Content s Average Balances, Interest Income and Expenses, Yields and Rates 1 2023 2022 Year to Date Year to Date Average Yield/ Average Yield/ (In thousands, except ratios) Balance Interest Rate Balance Interest Rate Assets Earning assets: Securities: Taxable $ 2,686,804 $ 40,142 2.99 % $ 2,462,447 $ 22,428 1.82 % Nontaxable 15,944 251 3.15 23,238 352 3.03 Total Securities 2,702,748 40,393 2.99 2,485,685 22,780 1.83 Federal funds sold 228,491 5,787 5.11 691,105 1,631 0.48 Interest bearing deposits with other banks and other investments 90,750 2,710 6.02 45,631 1,219 5.39 Loans excluding PPP loans 9,732,156 283,749 5.88 6,366,194 134,322 4.25 PPP Loans 5,080 24 0.95 44,024 2,264 10.37 Total Loans 9,737,236 283,773 5.88 6,410,218 136,586 4.30 Total Earning Assets 12,759,225 332,663 5.26 9,632,639 162,216 3.40 Allowance for credit losses (148,143) (88,862) Cash and due from banks 193,811 377,831 Premises and equipment 116,909 75,241 Intangible assets 797,096 305,875 Bank owned life insurance 283,936 206,173 Other assets including deferred tax assets 417,393 226,205 Total Assets $ 14,420,227 $ 10,735,102 Liabilities and Shareholders' Equity Interest-bearing liabilities: Interest-bearing demand $ 2,559,805 $ 10,767 0.85 % $ 2,180,351 $ 483 0.04 % Savings 979,674 827 0.17 943,908 129 0.03 Money market 2,760,207 31,622 2.31 1,957,435 1,149 0.12 Time deposits 1,120,576 20,029 3.60 528,255 904 0.35 Securities sold under agreements to repurchase 209,358 2,456 2.37 119,298 133 0.22 Federal Home Loan Bank borrowings 266,935 5,048 3.81 — — — Subordinated debt 102,164 3,410 6.73 71,706 1,015 2.85 Total Interest-Bearing Liabilities 7,998,719 74,159 1.87 5,800,953 3,813 0.13 Noninterest demand 4,314,498 3,428,921 Other liabilities 122,746 129,815 Total Liabilities 12,435,963 9,359,689 Shareholders' equity 1,984,264 1,375,413 Total Liabilities & Equity $ 14,420,227 $ 10,735,102 Cost of deposits 1.09 % 0.06 % Interest expense as a % of earning assets 1.17 % 0.08 % Net interest income as a % of earning assets $ 258,504 4.09 % $ 158,403 3.32 % 1 On a fully taxable equivalent basis, a non-GAAP measure - see "Explanation of Certain Unaudited Non-GAAP Financial Measures" for more information and a reconciliation to GAAP. All yields and rates have been computed on an annual basis using amortized cost. Fees on loans have been included in interest on loans. Nonaccrual loans are included in loan balances. 50 Table of Content s Noninterest Income Noninterest income totaled $21.6 million for the second quarter of 2023, a decrease of $0.9 million, or 4%, compared to the first quarter of 2023 and an increase of $4.6 million, or 27%, from the second quarter of 2022. Noninterest income totaled $44.0 million for the six months ended June 30, 2023, an increase of $11.7 million, or 36%, compared to the six months ended months ended June 30, 2022. Noninterest income is detailed as follows: Second First Second Six Months Ended Quarter Quarter Quarter June 30, (In thousands) 2023 2023 2022 2023 2022 Service charges on deposit accounts $ 4,560 $ 4,242 $ 3,408 $ 8,802 $ 6,209 Interchange income 5,066 4,694 4,255 9,760 8,383 Wealth management income 3,318 3,063 2,774 6,381 5,433 Mortgage banking fees 576 426 932 1,002 2,618 Insurance agency income 1,160 1,101 — 2,261 — SBA gains 249 322 473 571 629 BOLI income 2,068 1,916 1,349 3,984 2,683 Other income 4,755 6,574 4,073 11,329 7,134 21,752 22,338 17,264 44,090 33,089 Securities (losses) gains, net (176) 107 (300) (69) (752) Total $ 21,576 $ 22,445 $ 16,964 $ 44,021 $ 32,337 Service charges on deposits were $4.6 million in the second quarter of 2023, $4.2 million in the first quarter of 2023 and $3.4 million in the second quarter of 2022. For the six months ended June 30, 2023, service charges on deposits totaled $8.8 million, an increase of $2.6 million, or 42%, compared to the six months ended June 30, 2022. Increases in fees primarily reflect the benefit of an expanded deposit base, including from acquisitions, and the continued benefit of the expansion of treasury management services to commercial customers. Overdraft-related fees for both consumer and commercial accounts represent 35% of total service charges on deposits for the six months ended June 30, 2023, and 38% for the six months ended June 30, 2022. Interchange income increased to $5.1 million for the second quarter of 2023, compared to $4.7 million for the first quarter of 2023, and $4.3 million for the second quarter of 2022. For the six months ended June 30, 2023, interchange income totaled $9.8 million, an increase of $1.4 million, or 16%, compared to the six months ended June 30, 2022. Beginning in the third quarter of 2023, the Company’s interchange income will be reduced by the requirements of the Durbin amendment, which became effective for the Company on July 1, 2023. Wealth management income, including trust fees and brokerage commissions and fees, was $3.3 million in the second quarter of 2023, compared to $3.1 million for the first quarter of 2023 and $2.8 million for the second quarter of 2022. Assets under management increased by $60.0 million in the second quarter of 2023, bringing total assets under management to $1.6 billion. For the six months ended June 30, 2023, wealth management income totaled $6.4 million, an increase of $0.9 million, or 17%, compared to the six months ended June 30, 2022. The wealth management team continues to demonstrate notable success in building relationships. Mortgage banking fees totaled $0.6 million in the second quarter of 2023, compared to $0.4 million the first quarter of 2023, and $0.9 million in the second quarter of 2022. For the six months ended June 30, 2023, mortgage banking fees totaled $1.0 million, a decrease of $1.6 million, or 62%, compared to the six months ended June 30, 2022, reflecting lower saleable production due to significantly higher interest rates and limited housing inventory. Insurance agency income increased $0.1 million, or 5%, compared to the first quarter of 2023 and totaled $1.2 million. The Company acquired a commercial insurance agency during the fourth quarter of 2022 in conjunction with the acquisition of Drummond, adding another source of noninterest income. SBA gains were $0.2 million in the second quarter of 2023, compared to $0.3 million in the first quarter of 2023, and $0.5 million in the second quarter of 2022. For the six months ended June 30, 2023, SBA gains totaled $0.6 million, a decrease of $0.1 million, or 9%, compared to the six months ended June 30, 2022. 51 Table of Content s Bank owned life insurance (“BOLI”) income was $2.1 million for the second quarter of 2023, an increase of $0.2 million, or 8%, compared to the first quarter of 2023 and an increase of $0.7 million, or 53%, compared to the second quarter of 2022. The increases are attributed to additions of $53.1 million in BOLI in the fourth quarter of 2022 and $55.1 million in the first quarter of 2023 from bank acquisitions. BOLI income totaled $4.0 million for the six months ended June 30, 2023 and $2.7 million for the six months ended June 30, 2022. Other income was $4.8 million in the second quarter of 2023, a decrease of $1.8 million quarter-over-quarter and an increase of $0.7 million year-over-year. The decrease from prior quarter is primarily the result of BOLI death benefits of $2.1 million recognized in the prior quarter. For the six months ended June 30, 2023, other income totaled $11.3 million, an increase of $4.2 million, or 59%, compared to the six months ended June 30, 2022. Securities losses in the second quarter of 2023 totaled $0.2 million, resulting from mark to market adjustments on the Company’s CRA qualified mutual funds. Noninterest Expenses Noninterest expense for the second quarter of 2023 totaled $107.9 million, an increase of $0.4 million, or 0.4%, compared to the first quarter of 2023, and an increase of $51.7 million, or 92%, from the second quarter of 2022. For the six months ended June 30, 2023, noninterest expense totaled $215.3 million, an increase of $100.3 million, or 87%, compared to the six months ended June 30, 2022. Noninterest expenses are detailed as follows: Second First Second Six Months Ended Quarter Quarter Quarter June 30, (In thousands) 2023 2023 2022 2023 2022 Salaries and wages $ 45,155 $ 47,616 $ 28,056 $ 92,771 $ 56,275 Employee benefits 7,472 8,562 4,151 16,034 9,652 Outsourced data processing costs 20,222 14,553 6,043 34,775 12,199 Telephone/data lines 1,518 1,081 908 2,599 1,641 Occupancy 7,065 6,938 4,050 14,003 8,036 Furniture and equipment 2,345 2,267 1,588 4,612 3,014 Marketing 2,047 2,238 1,882 4,285 3,053 Legal and professional fees 4,062 7,479 2,946 11,541 7,735 FDIC assessments 2,116 1,443 699 3,559 1,488 Amortization of intangibles 7,654 6,727 1,446 14,381 2,892 Foreclosed property expense and net (gain) loss on sale (57) 195 (968) 138 (1,132) Provision for credit losses on unfunded commitments — 1,239 — 1,239 142 Other 8,266 7,137 5,347 15,403 10,070 Total $ 107,865 $ 107,475 $ 56,148 $ 215,340 $ 115,065 Salaries and wages totaled $45.2 million for the second quarter of 2023, $47.6 million for the first quarter of 2023, and $28.1 million for the second quarter of 2022. The second quarter of 2023 reflects $1.6 million in merger-related expenses compared to $4.2 million in the first quarter of 2023. For the six months ended June 30, 2023, salaries and wages totaled $92.8 million, an increase of $36.5 million, or 65%, compared to the six months ended June 30, 2022. Excluding merger-related expenses, increases in 2023 are the result of the overall growth in the organization. In the third quarter of 2023, the Company is continuing its focus on efficiency and streamlining operations, and in late July 2023, executed a reduction in the Company’s workforce by approximately 5%. The Company will incur severance charges in a range of approximately $2.0 to $3.0 million in the third quarter of 2023. The resulting lower compensation expense in the third quarter of 2023 will largely be offset by investments in marketing to drive low-cost deposit growth, and lower expense deferral associated with slowing loan originations. The Company expects the full benefit of the reduction in workforce to materialize in the fourth quarter of 2023. During the second quarter of 2023, employee benefit costs, which include costs associated with the Company's self-funded health insurance benefits, 401(k) plan, payroll taxes, and unemployment compensation, were $7.5 million, a decrease of $1.1 52 Table of Content s million, or 13%, compared to the first quarter of 2023, and an increase of $3.3 million, or 80%, compared to the second quarter of 2022. The decrease from the first quarter of 2023 reflects higher seasonal payroll taxes impacting the first quarter of 2023. For the six months ended June 30, 2023, employee benefit costs totaled $16.0 million, an increase of $6.4 million, or 66%, compared to the six months ended June 30, 2022. The Company utilizes third parties for its core data processing systems. Ongoing data processing costs are directly related to the number of transactions processed and the negotiated rates associated with those transactions. Outsourced data processing costs totaled $20.2 million, $14.6 million, and $6.0 million for the second quarter of 2023, first quarter of 2023, and second quarter of 2022, respectively. For the six months ended June 30, 2023 and June 30, 2022, outsourced data processing costs totaled $34.8 million and $12.2 million, respectively. Higher expenses in the second quarter of 2023 included $10.9 million in direct acquisition-related costs, including termination penalties on acquired technology contracts upon system conversion, compared to $6.6 million in the first quarter of 2023, and $0.4 million in the second quarter of 2022. Telephone and data line expenditures, including electronic communications with customers and between branch and customer support locations and personnel, as well as with third-party data processors, were $1.5 million, $1.1 million, and $0.9 million for the second quarter of 2023, first quarter of 2023, and second quarter of 2022, respectively. For the six months ended June 30, 2023, telephone and data line expenditures totaled $2.6 million, an increase of $1.0 million, or 58%, compared to the six months ended June 30, 2022. The increases during 2023 reflect the expansion of the branch footprint. Total occupancy, furniture and equipment expenses were $9.4 million in the second quarter of 2023, $9.2 million in the first quarter of 2023, and $5.6 million in the second quarter of 2022. For the six months ended June 30, 2023, total occupancy, furniture and equipment expenses totaled $18.6 million, an increase of $7.6 million, or 68%, compared to the six months ended June 30, 2022. Year over year increases reflect the expansion of the Company’s footprint across Florida. Marketing expenses totaled $2.0 million in the second quarter of 2023, $2.2 million in the first quarter of 2023, and $1.9 million in the second quarter of 2022. For the six months ended June 30, 2023, marketing expenses totaled $4.3 million, an increase of $1.2 million, or 40%, compared to the six months ended June 30, 2022. Legal and professional fees for the second quarter of 2023 were $4.1 million, a decrease of $3.4 million, or 46%, compared to the first quarter of 2023, and an increase of $1.1 million, or 38%, compared to the second quarter of 2022. Acquisition-related expenses were $1.7 million in the second quarter of 2023, $4.8 million in the first quarter of 2023, and $1.4 million in the second quarter of 2022. For the six months ended June 30, 2023, legal and professional fees totaled $11.5 million, an increase of $3.8 million, or 49%, compared to the six months ended June 30, 2022. Acquisition-related expenses were $6.5 million for the six months ended June 30, 2023 and $4.3 million for the six months ended June 30, 2022. FDIC assessments were $2.1 million for the second quarter of 2023, $1.4 million in the first quarter of 2023, and $0.7 million in the second quarter of 2022. For the six months ended June 30, 2023, FDIC assessments totaled $3.6 million compared to $1.5 million for the six months ended June 30, 2022. The increases reflect deposit growth from acquisitions in the fourth quarter of 2022 and first quarter of 2023. Amortization of intangibles increased by $0.9 million compared to the first quarter of 2023 and $6.2 million compared to the second quarter of 2022. For the six months ended June 30, 2023, amortization of intangibles totaled $14.4 million compared to $2.9 million for the six months ended June 30, 2022. The acquisitions in the fourth quarter of 2022 and first quarter of 2023 added $110.6 million in core deposit intangible assets, which are amortized using an accelerated amortization method. Foreclosed property expense and net gain/loss on sale was net a gain of $0.1 million in the second of 2023, a net loss of $0.2 million in the first quarter of 2023, and a net gain of $1.0 million in the second quarter of 2022. No adjustments were recorded to the reserve for potential credit losses on unfunded lending commitments in the second quarter of 2023. This compares to $1.2 million in provision recorded during the first quarter of 2023, primarily associated with the acquisition of Professional, and no adjustments recorded for the second quarter of 2022. Other expenses totaled $8.3 million, $7.1 million and $5.3 million for the second quarter of 2023, the first quarter of 2023 and the second quarter of 2022, respectively. For the six months ended June 30, 2023, other expense totaled $15.4 million, an increase of $5.3 million, or 53%, compared to the six months ended June 30, 2022. Increases reflect higher costs in general business and customer support activities resulting from growth in the customer base and the expanded branch footprint, and to maintaining parallel activities and processes prior to the conversion of Professional in June 2023. For the second quarter of 2023, the efficiency ratio, defined as noninterest expense less amortization of intangibles and gains, losses, and expenses on foreclosed properties divided by net operating revenue (net interest income on a fully taxable equivalent basis plus noninterest income excluding securities gains and losses), was 67.34%, compared to 65.43% for the first 53 Table of Content s quarter of 2023 and 56.22% for the second quarter of 2022. For the six months ended June 30, 2023, the efficiency ratio was 66.37%, compared to 59.17% for the six months ended June 30, 2022. The adjusted efficiency ratio 1 was 56.44% in the second quarter of 2023, compared to 53.10% in the first quarter of 2023 and 53.15% in the second quarter of 2022. The increase from first quarter 2023 primarily reflects the impact of higher deposit rates on net interest income during the period. For the six months ended June 30, 2023, the adjusted efficiency ratio 1 was 54.76%, compared to 53.97% for the six months ended June 30, 2022. Second First Second Six Months Ended Quarter Quarter Quarter June 30, (In thousands, except ratios) 2023 2023 2022 2023 2022 Noninterest expense, as reported $ 107,865 $ 107,475 $ 56,148 $ 215,340 $ 115,065 Merger related charges Salaries and wages (1,573) (4,240) (652) (5,813) (3,605) Outsourced data processing costs (10,904) (6,551) (420) (17,455) (1,052) Legal and professional fees (1,664) (4,789) (1,381) (6,453) (4,272) Other categories (1,507) (1,952) (586) (3,459) (802) Total merger related charges (15,648) (17,532) (3,039) (33,180) (9,731) Amortization of intangibles (7,654) (6,727) (1,446) (14,381) (2,892) Branch reductions and other expense initiatives (571) (1,291) — (1,862) (74) Adjusted noninterest expense 1 $ 83,992 $ 81,925 $ 51,663 $ 165,917 $ 102,368 Foreclosed property expense and net gain (loss) on sale 57 (195) 968 (138) 1,132 Provision for credit losses on unfunded commitments — (1,239) — (1,239) (142) Net adjusted noninterest expense 1 $ 84,049 $ 80,491 $ 52,631 $ 164,540 $ 103,358 Efficiency ratio 67.34 % 65.43 % 56.22 % 66.37 % 59.17 % Adjusted efficiency ratio 1,2 56.44 53.10 53.15 54.76 53.97 1 Non-GAAP measure - see “Explanation of Certain Unaudited Non-GAAP Financial Measures” for more information and a reconciliation to GAAP. 2 Adjusted efficiency ratio is defined as noninterest expense, including adjustments to noninterest expense divided by aggregated tax equivalent net interest income and noninterest income, including adjustments to revenue. Provision for Credit Losses The provision for credit losses was a net benefit of $0.8 million for the second quarter of 2023, compared to provision expense of $31.6 million for the first quarter of 2023, and provision expense of $0.8 million for the second quarter of 2022. The first quarter of 2023 included $26.6 million day one provision recorded in conjunction with the Professional acquisition. Income Taxes For the second quarter of 2023, the Company recorded tax expense of $10.2 million, compared to $2.7 million in the first quarter of 2023 and $8.9 million in the second quarter of 2022, with an effective tax rate of 24.6%, 18.6% and 21.3%, respectively. The first quarter of 2023 included a discrete benefit of $0.6 million related to the BOLI distribution which, combined with lower overall pre-tax income, resulted in a lower effective tax rate. Tax expense related to stock-based compensation totaled $0.3 million in the second quarter of 2023, compared to a tax benefit of $0.2 million in the first quarter of 2023, and a tax benefit of $0.4 million in the second quarter of 2022. For the six months ended June 30, 2023, tax expense totaled $12.9 million, a decrease of $1.8 million, or 12%, compared to the six months ended June 30, 2022 due to lower pre-tax income. 54 Table of Content s Explanation of Certain Unaudited Non-GAAP Financial Measures This report contains financial information determined by methods other than Generally Accepted Accounting Principles (“GAAP”). The financial highlights provide reconciliations between GAAP and adjusted financial measures including net income, fully taxable equivalent net interest income, noninterest income, noninterest expense, tax adjustments, net interest margin and other financial ratios. Management uses these non-GAAP financial measures in its analysis of the Company’s performance and believes these presentations provide useful supplemental information, and a clearer understanding of the Company’s performance. The Company believes the non-GAAP measures enhance investors’ understanding of the Company’s business and performance and if not provided would be requested by the investor community. These measures are also useful in understanding performance trends and facilitate comparisons with the performance of other financial institutions. The limitations associated with operating measures are the risk that persons might disagree as to the appropriateness of items comprising these measures and that different companies might define or calculate these measures differently. The Company provides reconciliations between GAAP and these non-GAAP measures. These disclosures should not be considered an alternative to GAAP. 55 Table of Content s Reconciliation of Non-GAAP Measures Second First Second Six Months Ended Quarter Quarter Quarter June 30, (In thousands, except per share data) 2023 2023 2022 2023 2022 Net income, as reported: Net income $ 31,249 $ 11,827 $ 32,755 $ 43,076 $ 53,343 Noninterest Income $ 21,576 $ 22,445 $ 16,964 $ 44,021 $ 32,337 Securities losses (gains), net 176 (107) 300 69 752 BOLI benefits on death (included in other income) — (2,117) — (2,117) — Total adjustments to noninterest income 176 (2,224) 300 (2,048) 752 Total Adjusted Noninterest Income $ 21,752 $ 20,221 $ 17,264 $ 41,973 $ 33,089 Noninterest Expense $ 107,865 $ 107,475 $ 56,148 $ 215,340 $ 115,065 Salaries and wages (1,573) (4,240) (652) (5,813) (3,605) Outsourced data processing costs (10,904) (6,551) (420) (17,455) (1,052) Legal and professional fees (1,664) (4,789) (1,381) (6,453) (4,272) Other categories (1,507) (1,952) (586) (3,459) (802) Total merger-related charges (15,648) (17,532) (3,039) (33,180) (9,731) Amortization of intangibles (7,654) (6,727) (1,446) (14,381) (2,892) Branch reductions and other expense initiatives 1 (571) (1,291) — (1,862) (74) Total adjustments to noninterest expense (23,873) (25,550) (4,485) (49,423) (12,697) Total Adjusted Noninterest Expense $ 83,992 $ 81,925 $ 51,663 $ 165,917 $ 102,368 Income Taxes $ 10,189 $ 2,697 $ 8,886 $ 12,886 $ 14,720 Tax effect of adjustments 6,095 5,912 1,213 12,007 3,409 Adjusted income taxes 16,284 8,609 10,099 24,893 18,129 Adjusted net income $ 49,203 $ 29,241 $ 36,327 $ 78,444 $ 63,383 Earnings per diluted share, as reported $ 0.37 $ 0.15 $ 0.53 $ 0.52 $ 0.86 Adjusted diluted earnings per share 0.58 0.36 0.59 0.94 1.03 Average diluted shares outstanding 85,536 80,717 61,923 83,260 61,818 Adjusted Noninterest Expense $ 83,992 $ 81,925 $ 51,663 $ 165,917 $ 102,368 Foreclosed property expense and net gain (loss) on sale 57 (195) 968 (138) 1,132 Provision for credit losses on unfunded commitments — (1,239) — (1,239) (142) Net Adjusted Noninterest Expense $ 84,049 $ 80,491 $ 52,631 $ 164,540 $ 103,358 Revenue $ 148,539 $ 153,597 $ 98,611 $ 302,136 $ 190,506 Total adjustments to revenue 176 (2,224) 300 (2,048) 752 Impact of FTE adjustment 190 199 117 389 234 Adjusted revenue on a fully tax equivalent basis $ 148,905 $ 151,572 $ 99,028 $ 300,477 $ 191,492 Adjusted Efficiency Ratio 56.44 % 53.10 % 53.15 % 54.76 % 53.97 % Net Interest Income $ 126,963 $ 131,152 $ 81,647 $ 258,115 $ 158,169 Impact of FTE adjustment 190 199 117 389 234 Net interest income including FTE adjustment 127,153 131,351 81,764 258,504 158,403 Noninterest income 21,576 22,445 16,964 44,021 32,337 Noninterest expense 107,865 107,475 56,148 215,340 115,065 56 Table of Content s Second First Second Six Months Ended Quarter Quarter Quarter June 30, (In thousands, except per share data) 2023 2023 2022 2023 2022 Pre-Tax Pre-Provision Earnings 40,864 46,321 42,580 87,185 75,675 Adjustments to noninterest income 176 (2,224) 300 (2,048) 752 Adjustments to noninterest expense (23,816) (26,984) (3,517) (50,800) (11,707) Adjusted Pre-Tax Pre-Provision Earnings $ 64,856 $ 71,081 $ 46,397 $ 135,937 $ 88,134 Average Assets $ 14,887,289 $ 13,947,976 $ 10,840,518 $ 14,420,227 $ 10,735,102 Less average goodwill and intangible assets (842,988) (750,694) (307,411) (797,096) (305,875) Average Tangible Assets $ 14,044,301 $ 13,197,282 $ 10,533,107 $ 13,623,131 $ 10,429,227 Return on Average Assets (ROA) 0.84 % 0.34 % 1.21 % 0.60 % 1.00 % Impact of removing average intangible assets and related amortization 0.22 0.18 0.08 0.20 0.07 Return on Average Tangible Assets (ROTA) 1.06 0.52 1.29 0.80 1.07 Impact of other adjustments for Adjusted Net Income 0.35 0.38 0.09 0.36 0.16 Adjusted Return on Average Tangible Assets 1.41 % 0.90 % 1.38 % 1.16 % 1.23 % Pre-Tax Pre-Provision return on Average Tangible Assets 1.33 % 1.58 % 1.66 % 1.45 % 1.51 % Impact of adjustments on Pre-Tax Pre-Provision earnings 0.52 0.60 0.11 0.56 0.19 Adjusted Pre-Tax Pre-Provision Return on Tangible Assets 1.85 % 2.18 % 1.77 % 2.01 % 1.70 % Average Shareholders' Equity $ 2,070,529 $ 1,897,045 $ 1,350,568 $ 1,984,264 $ 1,375,413 Less average goodwill and intangible assets (842,988) (750,694) (307,411) (797,096) (305,875) Average Tangible Equity $ 1,227,541 $ 1,146,351 $ 1,043,157 $ 1,187,168 $ 1,069,538 Return on Average Shareholders' Equity 6.05 % 2.53 % 9.73 % 4.38 % 7.82 % Impact of removing average intangible assets and related amortization 6.03 3.43 3.28 4.76 2.64 Return on Average Tangible Common Equity (ROTCE) 12.08 5.96 13.01 9.14 10.46 Impact of other adjustments for Adjusted Net Income 4.00 4.38 0.96 4.18 1.49 Adjusted Return on Average Tangible Common Equity 16.08 % 10.34 % 13.97 % 13.32 % 11.95 % Loan Interest Income 2 $ 148,432 $ 135,341 $ 69,388 $ 283,773 $ 136,586 Accretion on acquired loans (14,191) (15,942) (2,720) (30,133) (6,437) Loan interest income excluding accretion on acquired loans 2 $ 134,241 $ 119,399 $ 66,668 $ 253,640 $ 130,149 Yield on Loans 2 5.89 % 5.86 % 4.29 % 5.88 % 4.30 % Impact of accretion on acquired loans (0.56) (0.69) (0.16) (0.63) (0.21) Yield on loans excluding accretion on acquired loans 2 5.33 % 5.17 % 4.13 % 5.25 % 4.09 % Net Interest Income 2 $ 127,153 $ 131,351 $ 81,764 $ 258,504 $ 158,403 Accretion on acquired loans (14,191) (15,942) (2,720) (30,133) (6,437) Net interest income excluding accretion on acquired loans 2 $ 112,962 $ 115,409 $ 79,044 $ 228,371 $ 151,966 57 Table of Content s Second First Second Six Months Ended Quarter Quarter Quarter June 30, (In thousands, except per share data) 2023 2023 2022 2023 2022 Net Interest Margin 2 3.86 % 4.31 % 3.38 % 4.09 % 3.32 % Impact of accretion on acquired loans (0.43) (0.53) (0.12) (0.48) (0.14) Net interest margin excluding accretion on acquired loans 2 3.43 % 3.78 % 3.26 % 3.61 % 3.18 % Loan Interest Income 2 $ 148,432 $ 135,341 $ 69,388 $ 283,773 $ 136,586 Tax equivalent adjustment to loans (167) (173) (81) (340) (161) Loan interest income excluding tax equivalent adjustment $ 148,265 $ 135,168 $ 69,307 $ 283,433 $ 136,425 Securities Interest Income 2 $ 21,018 $ 19,375 $ 12,562 $ 40,393 $ 22,780 Tax equivalent adjustment to securities (23) (26) (36) (49) (73) Securities interest income excluding tax equivalent adjustment $ 20,995 $ 19,349 $ 12,526 $ 40,344 $ 22,707 Net Interest Income 2 $ 127,153 $ 131,351 $ 81,764 $ 258,504 $ 158,403 Tax equivalent adjustments to loans (167) (173) (81) (340) (161) Tax equivalent adjustments to securities (23) (26) (36) (49) (73) Net interest income excluding tax equivalent adjustments $ 126,963 $ 131,152 $ 81,647 $ 258,115 $ 158,169 1 Includes severance, contract termination costs, disposition of branch premises and fixed assets, and other costs to effect the Company's branch consolidation and other expense reduction strategies. 2 On a fully taxable equivalent basis. All yields and rates have been computed using amortized cost. Financial Condition Total assets as of June 30, 2023 were $15.0 billion, an increase of $2.9 billion, or 24%, from December 31, 2022. The increase primarily reflects the acquisition of Professional on January 31, 2023, which added $2.7 billion in assets. Securities Information related to yields, maturities, carrying values and fair value of the Company’s debt securities is set forth in “Note 3 – Securities” of the Company’s condensed consolidated financial statements. At June 30, 2023, the Company had $1.9 billion in securities available-for-sale and $707.8 million in securities held-to-maturity. The Company's total debt securities portfolio increased $4.9 million from December 31, 2022. During the six months ended June 30, 2023, there were $22.4 million of debt securities purchased, $167.1 million acquired through the acquisition of Professional and $149.6 million in paydowns and maturities over the same period. $22.1 million of the securities acquired from Professional were immediately sold with no gain or loss recognized. Debt securities generally return principal and interest monthly. The modified duration of the available-for-sale portfolio at June 30, 2023 was 4.1, compared to 3.7 at December 31, 2022. At June 30, 2023, available-for-sale securities had gross unrealized losses of $253.4 million and gross unrealized gains of $0.9 million, compared to gross unrealized losses of $248.7 million and gross unrealized gains of $1.1 million at December 31, 2022. The changes were the result of changes in benchmark interest rates and product spreads during the period. The Company assesses securities in an unrealized loss position on a quarterly basis. As of June 30, 2023, the Company expected to recover the entire amortized cost basis of these securities, and therefore, no allowance for credit losses was recorded. The credit quality of the Company’s securities holdings is primarily investment grade. U.S. Treasury and U.S. government agencies and obligations of U.S. government sponsored entities totaled $2.1 billion, or 82%, of the total portfolio. 58 Table of Content s The portfolio includes $143.0 million, with a fair value of $129.7 million, in private label residential and commercial mortgage-backed securities and collateralized mortgage obligations. Included are $130.8 million, with a fair value of $118.5 million, in private label mortgage-backed residential securities with weighted average credit support of 22%. The collateral underlying these mortgage investments includes both fixed-rate and adjustable-rate mortgage loans. Non-guaranteed agency commercial securities totaled $12.2 million, with a fair value of $11.2 million. These securities have weighted average credit support of 22%. The collateral underlying these mortgages is primarily pooled multifamily loans. The Company also has invested $310.5 million in floating rate collateralized loan obligations. Collateralized loan obligations are special purpose vehicles that purchase first lien broadly syndicated corporate loans while providing support to senior tranche investors. As of June 30, 2023, all of the Company’s collateralized loan obligations were in AAA/AA tranches with average credit support of 32%. The Company utilizes credit models with assumptions of loan level defaults, recoveries, and prepayments to evaluate each security for potential credit losses. The result of this analysis did not indicate expected credit losses. Held-to-maturity securities consist solely of mortgage-backed securities and collateralized mortgage obligations guaranteed by U.S. government-sponsored entities, each of which is expected to recover any price depreciation over its holding period as the debt securities move to maturity. The Company has significant liquidity and available borrowing capacity through other sources if needed, and has the intent and ability to hold these investments to maturity. At June 30, 2023, the Company has determined that all debt securities in an unrealized loss position are the result of both broad investment type spreads and the current interest rate environment. Management believes that each investment will recover any price depreciation over its holding period as the debt securities move to maturity, and management has the intent and ability to hold these investments to maturity if necessary. Therefore, at June 30, 2023, no allowance for credit losses has been recorded. Loan Portfolio Loans, net of unearned income and excluding the allowance for credit losses, were $10.1 billion at June 30, 2023, a $2.0 billion increase from December 31, 2022. The increase during the first half of 2023 included $2.0 billion added through the Professional acquisition. The Company remains committed to sound risk management procedures. Portfolio diversification in terms of asset mix, industry, and loan type has been an important element of the Company's lending strategy. The average loan size is only $278 thousand, and the average commercial loan size is only $685 thousand at June 30, 2023, reflecting the Company's longtime focus on granularity and on creating valuable customer relationships. Lending policies contain guardrails that pertain to lending by type of collateral and purpose, along with limits regarding loan concentrations and the principal amount of loans. The Company's exposure to commercial real estate lending remains well below regulatory limits (see “Loan Concentrations”). The following table details loan portfolio composition at June 30, 2023 and December 31, 2022 for portfolio loans, purchased credit deteriorated (“PCD”) and loans purchased which are not considered purchased credit deteriorated (“Non-PCD”) as defined in Note 4-Loans. June 30, 2023 (In thousands) Portfolio Loans Acquired Non-PCD Loans PCD Loans Total Construction and land development $ 424,964 $ 347,876 $ 21,531 $ 794,371 Commercial real estate - owner occupied 1,026,700 594,211 48,458 1,669,369 Commercial real estate - non-owner occupied 1,818,307 1,381,801 170,103 3,370,211 Residential real estate 1,674,505 691,863 29,984 2,396,352 Commercial and financial 1,152,360 376,571 81,964 1,610,895 Consumer 166,250 103,667 2,165 272,082 PPP Loans 958 3,681 — 4,639 Totals $ 6,264,044 $ 3,499,670 $ 354,205 $ 10,117,919 59 Table of Content s December 31, 2022 (In thousands) Portfolio Loans Acquired Non-PCD Loans PCD Loans Total Construction and land development $ 364,900 $ 201,333 $ 21,100 $ 587,332 Commercial real estate - owner occupied 995,154 451,202 31,946 1,478,302 Commercial real estate - non-owner occupied 1,695,411 767,138 127,225 2,589,774 Residential real estate 1,558,643 271,378 19,482 1,849,503 Commercial and financial 1,151,273 182,124 15,238 1,348,636 Consumer 177,338 89,458 19,791 286,587 PPP Loans 1,474 3,116 — 4,590 Totals $ 5,944,193 $ 1,965,749 $ 234,782 $ 8,144,724 The amortized cost basis of loans included net deferred costs of $37.6 million at June 30, 2023 and $35.1 million at December 31, 2022. At June 30, 2023, the remaining fair value adjustments on acquired loans were $201.8 million, or 5.0%, of the outstanding acquired loan balances, compared to $97.7 million, or 4.3%, of the acquired loan balances at December 31, 2022. The discount is accreted into interest income over the remaining lives of the related loans on a level yield basis. The following table details commercial real estate - non-owner occupied loans. June 30, 2023 (In thousands) Amortized Cost Basis % of Total Loans Commercial real estate - non-owner occupied Retail $ 1,104,772 10.92 % Office 625,562 6.18 Multifamily 5+ 512,762 5.07 Hotel/Motel 424,472 4.20 Industrial/Warehouse 369,124 3.65 Other 333,519 3.30 Total commercial real estate - non-owner occupied $ 3,370,211 33.32 % Commercial real estate (“CRE”) non-owner occupied loans increased by $780.4 million in the six months ended June 30, 2023, totaling $3.4 billion at June 30, 2023 compared to $2.6 billion at December 31, 2022. Non-owner occupied CRE loans are collateralized by properties where the source of repayment is typically from the sale or lease of the property. Within the non-owner occupied CRE portfolio, the largest segment is Retail properties, which totaled approximately $1.1 billion at June 30, 2023. This segment targets grocery or credit tenant-anchored shopping plazas, single credit tenant retail buildings, smaller outparcels, and other small retail units. Loans in this segment have a weighted average loan to value of 52% and an average loan size of $2.1 million. The second-largest segment in the non-owner occupied CRE portfolio is Office properties, which totaled approximately $625.6 million at June 30, 2023. This segment targets low to mid-rise suburban offices and is broadly diversified across many types of professional services. There is limited exposure to central business districts. Loans in this segment have a weighted average loan to value of 55% and an average loan size of $1.7 million. Owner-occupied CRE loans increased by $191.1 million in the six months ended June 30, 2023 to $1.7 billion. Owner-occupied CRE is used by the owner, where the primary source of repayment is the cash flow from business operations housed within the property. Commercial and financial loans are extended to commercial customers for working capital, physical asset expansion, asset acquisition or other business purposes. Balances increased from December 31, 2022 by $262.3 million, or 19%, totaling $1.6 billion at June 30, 2023, largely attributed to the Professional acquisition. 60 Table of Content s Residential mortgage loans increased $546.8 million to $2.4 billion as of June 30, 2023. Included in the balance as of June 30, 2023, were $1.1 billion of fixed rate mortgages, $817.2 million of adjustable rate mortgages and $481.2 million in primarily floating rate home equity lines of credit (“HELOCs”), compared to $964.3 million, $402.3 million and $482.9 million, respectively, at December 31, 2022. The increases from December 31, 2022 include approximately $483.6 million acquired through the Professional acquisition. Borrowers in the residential real estate portfolio have an average credit score of 754. Substantially all residential originations have been underwritten to conventional loan agency standards, including loan balances that exceed agency value limitations. The average LTV of our HELOC portfolio is 62%, with 31% of the loans being in first lien position at June 30, 2023, compared to an average LTV of 69%, with 31% of the portfolio being in the first lien position at December 31, 2022. The Company also provides consumer loans, which include installment loans, auto loans, marine loans, and other consumer loans, which decreased $14.5 million, or 5%, to total $272.1 million at June 30, 2023, compared to $286.6 million at December 31, 2022. At June 30, 2023, the Company had unfunded commitments to extend credit of $4.2 billion, compared to $2.8 billion at December 31, 2022. Loan Concentrations The Company has developed prudent guardrails to manage loan types that are most impacted by stressed market conditions to minimize credit risk concentration to capital. Outstanding balances for commercial and CRE loans individually greater than $15 million totaled $628.3 million and represented 6% of the total portfolio at June 30, 2023. Concentrations in total construction and land development loans and total CRE loans are maintained well below regulatory limits. Construction and land development and CRE loan concentrations as a percentage of subsidiary bank total risk based capital were 52% and 256%, respectively, at June 30, 2023, compared to 45% and 230%, respectively, at December 31, 2022. The increase was primarily the result of the acquisition of Professional Bank. Regulatory guidance suggests limits of 100% and 300%, respectively. On a consolidated basis, construction and land development and commercial real estate loans represent 48% and 241%, respectively, of total consolidated risk based capital. To determine these ratios, the Company defines CRE in accordance with the guidance on “Concentrations in Commercial Real Estate Lending” (the “Guidance”) issued by the federal bank regulatory agencies in 2006 (and reinforced in 2015), which defines CRE loans as exposures secured by land development and construction, including 1-4 family residential construction, multi-family property, and non-farm nonresidential property where the primary or a significant source of repayment is derived from rental income associated with the property (i.e., loans for which 50 percent or more of the source of repayment comes from third party, non-affiliated, rental income) or the proceeds of the sale, refinancing, or permanent financing of the property. Loans to real estate investment trusts (“REITs”) and unsecured loans to developers that closely correlate to the inherent risks in CRE markets would also be considered CRE loans under the Guidance. Loans on owner-occupied CRE are generally excluded. In addition, the Company is subject to a geographic concentration of credit because it primarily operates in Florida. Nonperforming Loans, Troubled Borrower Modifications, Other Real Estate Owned and Credit Quality Nonperforming assets (“NPAs”) at June 30, 2023 totaled $55.9 million, and were comprised of $48.3 million of nonaccrual loans, and $7.5 million of other real estate owned (“OREO”). Compared to December 31, 2022, nonaccrual loans increased $19.5 million, primarily the result of the acquisition of Professional. The $5.2 million increase in OREO is the result of closures of three branch properties in the first quarter of 2023. Overall, NPAs increased $24.7 million from $31.1 million as of December 31, 2022. At June 30, 2023, approximately 49% of nonaccrual loans were secured with real estate. See the tables below for details about nonaccrual loans. At June 30, 2023, nonaccrual loans reflected cumulative write downs of approximately $18.7 million, including reserves on individually evaluated loans. Nonperforming loans to total loans outstanding at June 30, 2023 increased to 0.48% from 0.35% at December 31, 2022. Nonperforming assets to total assets at June 30, 2023 increased to 0.37% from 0.26% at December 31, 2022. 61 Table of Content s The table below sets forth details related to nonaccrual loans. June 30, 2023 Nonaccrual Loans (In thousands) Non-Current Current Total Construction and land development $ 210 $ 36 $ 246 Commercial real estate - owner occupied 1,274 4,622 5,896 Commercial real estate - non-owner occupied 3,158 5,512 8,670 Residential real estate 2,271 6,380 8,651 Commercial and financial 6,407 17,062 23,469 Consumer 1,143 251 1,394 Total $ 14,463 $ 33,863 $ 48,326 December 31, 2022 Nonaccrual Loans (In thousands) Non-Current Current Total Construction and land development $ 53 $ 562 $ 615 Commercial real estate - owner occupied — 2,597 2,597 Commercial real estate - non-owner occupied 2,892 1,292 4,184 Residential real estate 2,213 6,896 9,109 Commercial and financial 4,189 7,426 11,615 Consumer 18 705 723 Total $ 9,365 $ 19,478 $ 28,843 In accordance with regulatory reporting requirements, loans are placed on nonaccrual following the Retail Classification of Loan interagency guidance. The accrual of interest is generally discontinued on loans, except consumer loans, that become 90 days past due as to principal or interest unless collection of both principal and interest is assured by way of collateralization, guarantees or other security. Consumer loans that become 120 days past due are generally charged off. The loan carrying value is analyzed and any changes are appropriately made as described above quarterly. On January 1, 2023, the Company adopted ASU 2022-02 which includes disclosure requirements related to certain modifications of loans to borrowers experiencing financial difficulty, which the Company refers to as troubled borrower modifications (“TBMs”). TBMs are typically in the form of an interest rate reduction, an extension of the amortization period and/or converting the loan to interest only for a limited period of time. In addition to the change in payment terms, the Company seeks to obtain additional collateral and/or guarantors to provide additional support for the loan. The Company does not typically provide forgiveness of principal as a modification. As of June 30, 2023, there were five loans totaling $0.9 million that were TBMs, which is considered immaterial. Allowance for Credit Losses on Loans 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. During the six months ended June 30, 2023, the Company recorded provision expense of $30.8 million. The provision expense included $26.6 million for loans acquired in the Professional acquisition. The Company reported net charge-offs for the six months ended June 30, 2023 of $3.9 million and, for the four most recent quarters, net charge-offs averaged 0.06% of outstanding loans. The ratio of allowance for credit losses to total loans was 1.58% at June 30, 2023, 1.40% at December 31, 2022, and 1.39% at June 30, 2022. 62 Table of Content s LIBOR Transition The Company’s LIBOR transition steering committee has been responsible for overseeing the execution of the Company’s enterprise-wide LIBOR transition program, and for evaluating and mitigating risks associated with the transition from LIBOR. The remaining tenors of U.S. dollar LIBOR ceased publication after June 30, 2023. The Company reviewed its LIBOR loan contracts and customer swap agreements to identify required remediation to support the transition away from LIBOR. As of June 30, 2023, substantially all of these contracts include standardized fallback language or have been amended to new reference rates, which are predominantly SOFR-based. The Company also invests in securities and has issued subordinated debt indexed to LIBOR which, as expected, have transitioned to SOFR-based reference rates or will transition on their next reset date in accordance with existing fallback provisions of the LIBOR Act. The transition did not have a material impact on the Company’s financial position, and results and operations. Cash and Cash Equivalents and Liquidity Risk Management Liquidity risk involves the risk of being unable to fund assets with the appropriate duration and rate-based liability, as well as the risk of not being able to meet unexpected cash needs. Liquidity planning and management are necessary to ensure the ability to fund operations cost effectively and to meet current and future potential obligations such as loan commitments and unexpected deposit outflows. Funding sources include primarily customer-based deposits, collateral-backed borrowings, brokered deposits, cash flows from operations, cash flows from the loan and investment portfolios and asset sales, primarily secondary marketing for residential real estate mortgages and marine loans. Cash flows from operations are a significant component of liquidity risk management and the Company considers both deposit maturities and the scheduled cash flows from loan and investment maturities and payments when managing risk. Cash and cash equivalents, including interest bearing deposits, totaled $727.9 million at June 30, 2023, compared to $201.9 million at December 31, 2022. Higher cash and cash equivalent balances at June 30, 2023 reflect the Company’s increased liquidity position strategy during the year. Deposits are a primary source of liquidity. The stability of this funding source is affected by numerous factors, including returns available to customers on alternative investments, the quality of customer service levels, perception of safety and competitive forces. Uninsured deposits represented only 34% of overall deposit accounts at June 30, 2023. This includes public funds under the Florida Qualified Public Depository program, which provides loss protection to depositors beyond FDIC insurance limits. Excluding such balances, the uninsured and uncollateralized deposits were 28% of total deposits. The Company routinely uses debt securities and loans as collateral for secured borrowings. In the event of severe market disruptions, the Company has access to secured borrowings through the FHLB and the Federal Reserve Bank of Atlanta under its borrower-in-custody program. The Company has liquidity sources as discussed below, including cash and lines of credit with the Federal Reserve and FHLB, that represent 155% of uninsured deposits, and 184% of uninsured and uncollateralized deposits. In addition to $0.7 billion in cash and cash equivalents at June 30, 2023, the Company had $5.7 billion in available borrowing capacity, including $4.7 billion in available collateralized lines of credit, $0.7 billion of unpledged debt securities available as collateral for potential additional borrowings, and available unsecured lines of credit of $0.3 billion. Included in available borrowing capacity is approximately $0.4 billion under the Federal Reserve's Bank Term Funding Program, which the Company has not utilized and does not plan to utilize. The Company may also access funding by acquiring brokered deposits. Brokered deposits at June 30, 2023, December 31, 2022, and June 30, 2022 totaled $591.5 million, $58.6 million, and $106.8 million, respectively. Contractual maturities for assets and liabilities are reviewed to meet current and expected future liquidity requirements. Sources of liquidity are maintained through a portfolio of high quality marketable assets, such as residential mortgage loans, debt securities available-for-sale and interest-bearing deposits. The Company is also able to provide short-term financing of its activities by selling, under an agreement to repurchase, United States Treasury and Government agency debt securities not pledged to secure public deposits or trust funds. The Company has traditionally relied upon dividends from Seacoast Bank and securities offerings to provide funds to pay the Company’s expenses and to service the Company’s debt. During the second quarter of 2023, Seacoast Bank distributed $5.1 million to the Company and, at June 30, 2023, is eligible to distribute dividends to the Company of approximately $168.8 63 Table of Content s million without prior regulatory approval. At June 30, 2023, the Company had cash and cash equivalents at the parent of approximately $117.9 million, compared to $111.8 million at December 31, 2022. Deposits and Borrowings Customer relationship funding is detailed in the following table for the periods specified: June 30, December 31, (In thousands, except ratios) 2023 2022 Noninterest demand $ 4,139,052 $ 4,070,973 Interest-bearing demand 2,816,656 2,337,590 Money market 2,859,164 1,985,974 Savings 824,255 1,064,392 Time certificates of deposit 1,644,140 522,666 Total deposits $ 12,283,267 $ 9,981,595 Customer sweep accounts $ 290,156 $ 172,029 Noninterest demand deposits as % of total deposits 34 % 41 % The Company’s balance sheet continues to be primarily funded by core deposits. Consumer deposits represent 43% of total deposits, with an average balance per account of $23 thousand. Business deposits represent 57% of total deposits, with an average balance per account of $109 thousand. Highlighting the Company's longstanding relationship-based strategy, the average tenure for a Seacoast customer is 9.6 years. Total deposits increased $2.3 billion, or 23%, to $12.3 billion at June 30, 2023, compared to $10.0 billion at December 31, 2022. The increase primarily reflects the impact of the Professional acquisition, which added $2.1 billion in deposits during the first quarter of 2023. Noninterest demand deposits represented 34% of total deposits at June 30, 2023 and 41% at December 31, 2022. Transaction account balances (noninterest demand and interest-bearing demand) represented 57% of total deposits at June 30, 2023, compared to 64% at December 31, 2022. Customer repurchase agreements totaled $290.2 million at June 30, 2023, increasing $118.1 million from December 31, 2022. Repurchase agreements are offered by Seacoast to select customers who wish to sweep excess balances on a daily basis for investment purposes. At June 30, 2023 and December 31, 2022, borrowings included $72.1 million and $71.6 million, respectively, related to trust preferred securities issued by trusts organized or acquired by the Company. On October 7, 2022 the Company acquired $12.3 million in subordinated debt through the acquisition of Apollo. 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. On January 31, 2023, the Company assumed subordinated debt in the acquisition of Professional having an outstanding principal amount of $25.0 million and estimated fair value of $21.1 million. The acquired debt carries a fixed interest rate of 3.375% until 2027, then converts to a floating rate note until maturity in 2032. The weighted average interest rate of outstanding subordinated debt was 6.73% and 2.85% for the six months ended June 30, 2023 and June 30, 2022, respectively. Federal Home Loan Bank advances totaled $160.0 million at June 30, 2023 with a weighted average interest rate of 3.64%, compared to $150.0 million at December 31, 2022 with a weighted average interest rate of 3.42%. 64 Table of Content s Off-Balance Sheet Transactions In the normal course of business, the Company may engage in a variety of financial transactions that, under generally accepted accounting principles, either are not recorded on the balance sheet or are recorded on the balance sheet in amounts that differ from the full contract or notional amounts. These transactions involve varying elements of market, credit and liquidity risk. Lending commitments include unfunded loan commitments and standby and commercial letters of credit. For loan commitments, the contractual amount of a commitment represents the maximum potential credit risk that could result if the entire commitment had been funded, the borrower had not performed according to the terms of the contract, and no collateral had been provided. A large majority of loan commitments and standby letters of credit expire without being funded, and accordingly, total contractual amounts are not representative of actual future credit exposure or liquidity requirements. Loan commitments and letters of credit expose the Company to credit risk in the event that the customer draws on the commitment and subsequently fails to perform under the terms of the lending agreement. For commercial customers, loan commitments generally take the form of revolving credit arrangements. For retail customers, loan commitments generally are lines of credit secured by residential property. These instruments are not recorded on the balance sheet until funds are advanced under the commitment. Unfunded commitments to extend credit were $4.2 billion at June 30, 2023 and $2.8 billion at December 31, 2022. Capital Resources The Company’s equity capital at June 30, 2023 increased $446.3 million, or 28%, from December 31, 2022 to $2.1 billion. Changes in equity included increases from net income of $43.1 million, the issuance of $421.0 million in equity in connection with the Professional acquisition, and an increase in accumulated other comprehensive income of $1.2 million, partially offset by the issuance of common stock dividends totaling $29.9 million. The ratio of shareholders’ equity to period end total assets was 13.66% and 13.24% at June 30, 2023 and December 31, 2022, respectively. The ratio of tangible shareholders’ equity to tangible assets was 8.53% and 9.08% at June 30, 2023 and December 31, 2022, respectively. The decrease in the tangible common equity ratio was due to growth in the balance sheet from the Professional acquisition. Changes in the value of held-to-maturity securities are not reflected under GAAP; however, illustratively, if all held-to-maturity securities were presented at fair value, the tangible common equity ratio would have been 7.87% at June 30, 2023. Activity in shareholders’ equity for the six months ended June 30, 2023 and 2022 follows: (In thousands) 2023 2022 Beginning balance at December 31, 2022 and 2021 $ 1,607,775 $ 1,310,736 Net income 43,076 53,343 Common stock issued for stock options 5,040 3,442 Issuance of common stock and conversion of options pursuant to acquisitions 421,042 94,067 Stock compensation, net of Treasury shares acquired 5,787 3,035 Issuance of common share dividend (29,852) (18,510) Change in accumulated other comprehensive income 1,209 (116,538) Repurchase of common stock (45) — Ending balance at June 30, 2023 and 2022 $ 2,054,032 $ 1,329,575 Capital ratios are well above regulatory requirements for well-capitalized institutions. Management’s use of risk-based capital ratios in its analysis of the Company’s capital adequacy are not GAAP financial measures. Seacoast’s management uses these measures to assess the quality of capital and believes that investors may find it useful in their analysis of the Company. The capital measures are not necessarily comparable to similar capital measures that may be presented by other companies and Seacoast does not nor should investors consider such non-GAAP financial measures in isolation from, or as a substitute for GAAP financial information (see “Note 8 – Equity Capital”). 65 Table of Content s June 30, 2023 Seacoast (Consolidated) Seacoast Bank Minimum to be Well- Capitalized 1 Total Risk-Based Capital Ratio 14.70% 13.84% 10.00% Tier 1 Capital Ratio 13.53 12.67 8.00 Common Equity Tier 1 Ratio (CET1) 12.89 12.67 6.50 Leverage Ratio 10.56 9.87 5.00 1 For subsidiary bank only. The Company’s total risk-based capital ratio was 14.70% at June 30, 2023, a decrease from 15.79% at December 31, 2022, primarily due to growth including the acquisition of Professional. At June 30, 2023, the Bank’s leverage ratio (Tier 1 capital to adjusted total assets) was 9.87%, well above the minimum to be well-capitalized under regulatory guidelines. The Company and Seacoast Bank are subject to various general regulatory policies and requirements relating to the payment of dividends, including requirements to maintain adequate capital above regulatory minimums. The appropriate federal bank regulatory authority may prohibit the payment of dividends where it has determined that the payment of dividends would be an unsafe or unsound practice. The Company is a legal entity separate and distinct from Seacoast Bank and its other subsidiaries, and the Company’s primary source of cash and liquidity, other than securities offerings and borrowings, is dividends from its bank subsidiary. Without Office of the Comptroller of the Currency (“OCC”) approval, Seacoast Bank can pay $168.8 million of dividends to the Company. The OCC and the Federal Reserve have policies that encourage banks and bank holding companies to pay dividends from current earnings, and have the general authority to limit the dividends paid by national banks and bank holding companies, respectively, if such payment may be deemed to constitute an unsafe or unsound practice. If, in the particular circumstances, either of these federal regulators determined that the payment of dividends would constitute an unsafe or unsound banking practice, either the OCC or the Federal Reserve may, among other things, issue a cease and desist order prohibiting the payment of dividends by Seacoast Bank or us, respectively. The board of directors of a bank holding company must consider different factors to ensure that its dividend level, if any, is prudent relative to the organization’s financial position and is not based on overly optimistic earnings scenarios such as any potential events that may occur before the payment date that could affect its ability to pay, while still maintaining a strong financial position. As a general matter, the Federal Reserve has indicated that the board of directors of a bank holding company, such as Seacoast, should consult with the Federal Reserve and eliminate, defer, or significantly reduce the bank holding company’s dividends if: (i) its net income available to shareholders for the past four quarters, net of dividends previously paid during that period, is not sufficient to fully fund the dividends; (ii) its prospective rate of earnings retention is not consistent with its capital needs and overall current and prospective financial condition; or (iii) it will not meet, or is in danger of not meeting, its minimum regulatory capital adequacy ratios. The Company has paid quarterly dividends since the second quarter of 2021. Whether the Company continues to pay quarterly dividends and the amount of any such dividends will be at the discretion of the Company's Board of Directors and will depend on the Company's earnings, financial condition, results of operations, business prospects, capital requirements, regulatory restrictions, and other factors that the Board of Directors may deem relevant. The Company has seven wholly owned trust subsidiaries that have issued trust preferred stock. Trust preferred securities from acquisitions were recorded at fair value when acquired. All trust preferred securities are guaranteed by the Company on a junior subordinated basis. The Federal Reserve’s rules permit qualified trust preferred securities and other restricted capital elements to be included under Basel III capital guidelines, with limitations, and net of goodwill and intangibles. The Company believes that its trust preferred securities qualify under these revised regulatory capital rules and believes that it can treat all 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. 66 Table of Content s Critical Accounting Policies and Estimates The Company’s consolidated financial statements are prepared in accordance with U.S. generally accepted accounting principles, (“GAAP”), including prevailing practices within the financial services industry. The preparation of consolidated financial statements requires management to make judgments in the application of certain of its accounting policies that involve significant estimates and assumptions. The Company has established policies and control procedures that are intended to ensure valuation methods are well controlled and applied consistently from period to period. These estimates and assumptions, which may materially affect the reported amounts of certain assets, liabilities, revenues and expenses, are based on information available as of the date of the financial statements, and changes in this information over time and the use of revised estimates and assumptions could materially affect amounts reported in subsequent financial statements. Management, after consultation with the Company’s Audit Committee, believes the most critical accounting estimates and assumptions that involve the most difficult, subjective and complex assessments are: • the allowance and the provision for credit losses; • acquisition accounting and purchased loans; • intangible assets and impairment testing; • other fair value measurements; • impairment of debt securities; and • contingent liabilities. The critical accounting policies are discussed in MD&A in Seacoast’s Annual Report on Form 10-K for the year ended December 31, 2022. Significant accounting policies and changes in accounting principles and effects of recently issued accounting pronouncements are discussed in “Note 1 – Significant Accounting Policies” in Form 10-K for the year ended December 31, 2022. Disclosures regarding the effects of new accounting pronouncements are included in “Note 1 – Basis of Presentation” in this report. There have been no changes to the Company’s critical accounting policies during 2023. Interest Rate Sensitivity Fluctuations in interest rates may result in changes in the fair value of the Company’s financial instruments, cash flows and net interest income. This risk is managed using simulation modeling to calculate the most likely interest rate risk utilizing estimated loan and deposit growth. The objective is to optimize the Company’s financial position, liquidity, and net interest income while limiting volatility. Senior management regularly reviews the overall interest rate risk position and evaluates strategies to manage the risk. The Company's Asset and Liability Management Committee (“ALCO”) uses simulation analysis to monitor changes in net interest income due to changes in market interest rates. The simulation of rising, declining and flat interest rate scenarios allows management to monitor and adjust interest rate sensitivity to assess the impact of market interest rate swings. The analysis of the impact on net interest income over a twelve-month period is subjected to instantaneous changes in market rates and is monitored on a quarterly basis. The following table presents the ALCO simulation model's projected impact of a change in interest rates on the projected baseline net interest income for the 12 month period beginning July 1, 2023, holding all balances on the balance sheet static. This change in interest rates assumes parallel shifts in the yield curve and does not consider changes in the slope of the yield curve. In particular, the steepening or inversion of the yield curve as well as gradually changing interest rate changes could result in different outcomes when compared to the parallel shifts contemplated below. 67 Table of Content s % Change in Projected Baseline Change in Interest Rates Net Interest Income 1-12 months +2.00% (8.5)% +1.00% (4.0)% Current —% -1.00% 1.8% -2.00% 3.6% -3.00% 5.0% The computations of interest rate risk do not necessarily include certain actions management may undertake to manage this risk in response to changes in interest rates. Management may adjust asset or liability pricing or structure in order to manage interest rate risk through an interest rate cycle. This may include the use of investment portfolio purchases or sales or the use of derivative financial instruments, such as interest rate swaps, options, caps, floors, futures or forward contracts. Effects of Inflation and Changing Prices The condensed consolidated financial statements and related financial data presented herein have been prepared in accordance with U.S. GAAP, which require the measurement of financial position and operating results in terms of historical dollars, without considering changes in the relative purchasing power of money, over time, due to inflation. Unlike most industrial companies, virtually all of the assets and liabilities of a financial institution are monetary in nature. As a result, interest rates have a more significant impact on a financial institution’s performance than the general level of inflation. However, inflation affects financial institutions by increasing their cost of goods and services purchased, as well as the cost of salaries and benefits, occupancy expense, and similar items. Inflation and related increases in interest rates generally decrease the market value of investments and loans held and may adversely affect liquidity, earnings, and shareholders’ equity. Mortgage origination and refinancing tends to slow as interest rates increase, and higher interest rates likely will reduce the Company’s earnings from such activities and the income from the sale of residential mortgage loans in the secondary market.