SEACOAST BANKING CORP OF FLORIDA (SBCF) FY 2022 MD&A

Item 7. 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 Consolidated Financial Statements and the related notes included in this report.

The emphasis of this discussion will be on the years ended December 31, 2022 and 2021. Additional information about the Company’s financial condition and results of operations in 2020 and changes in the Company’s financial condition and results of operations from 2020 to 2021 may be found in the Company’s Annual Report on Form 10-K for the year ended December 31, 2021.

This discussion and analysis contains statements that may be considered “forward-looking statements” as defined in, and subject to the protections of the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. See the “Special Cautionary Notice Regarding Forward-Looking Statements” 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.

Overview – Strategy and Results

Seacoast Banking Corporation of Florida (“Seacoast” or the “Company”), a financial holding company, registered under the Bank Holding Company Act of 1956, as amended (the “BHC Act”), is one of the largest community banks in Florida, with $12.1 billion in assets and $10.0 billion in deposits as of December 31, 2022. Its principal subsidiary is Seacoast National Bank (“Seacoast Bank”), a wholly owned national banking association. The Company provides integrated financial services including commercial and consumer banking, wealth management, mortgage and insurance services to customers through advanced online and mobile banking solutions, and Seacoast Bank's network of 78 traditional branches and commercial banking centers.

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

The Company delivers integrated banking services, combining traditional retail locations with online and mobile technology and a convenient telephone banking center. Seacoast has built a fully integrated distribution platform across all channels to provide customers with convenient options to satisfy their banking needs, allowing the Company an opportunity to reach customers through a variety of sales channels. The Company believes its digital delivery and products are contributing to the franchise's growth.

Seacoast is executing a balanced growth strategy, combining organic growth with strategic acquisitions in Florida's most attractive growing markets. The Company has enhanced its footprint with 16 acquisitions since 2014, generating continued expansion and strengthening market share, increasing the customer base and lowering operating costs through economies of scale. The acquisition of Professional Holding Corp. (“Professional”) (NASDAQ: PFHD), parent company of Professional Bank, was completed on January 31, 2023. The transaction further expands Seacoast’s presence in the tri-county South Florida market, which includes Miami-Dade, Broward, and Palm Beach counties, Florida’s largest MSA and the 8th largest in the nation. Professional Bank, the sixth largest bank headquartered in South Florida, had deposits of approximately $2.2 billion and loans of approximately $2.1 billion as of December 31, 2022.

The Company's acquisition strategy has not only increased customer households and been accretive to earnings, but has also opened markets and Seacoast's customer base. The table below summarizes acquisition activity in recent years:

2022 Financial Performance Highlights

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

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

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

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

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

•Completed four acquisitions in 2022, further expanding the franchise in Florida’s most dynamic markets. The Seacoast Bank footprint reaches from the south in Miami-Dade county, along the east coast to Jacksonville, throughout central and north Florida including Orlando, Gainesville, and Ocala, and on the west coast from Tampa/St. Petersburg south to Naples.

Results of Operations

Earnings Summary

For the year ended December 31, 2022, net income totaled $106.5 million, or $1.66 per diluted share, compared to $124.4 million, or $2.18 per diluted share, for the year ended December 31, 2021. Return on average assets (“ROA”) was 0.96% and return on average equity (“ROE”) was 7.51% in 2022, compared to 1.33% and 10.24%, respectively, in 2021.

Adjusted net income1 for the year ended December 31, 2022 totaled $136.1 million, or $2.12 per diluted share, compared to $135.0 million, or $2.36 per diluted share, in 2021.

In 2022, the Company's efficiency ratio, defined as noninterest expense less foreclosed property expense and amortization of intangibles divided by net operating revenue (net interest income on a fully tax equivalent basis plus noninterest income excluding securities gains and losses), was 60.01%, compared to 55.39% for 2021. Changes from the prior year reflect higher 2022 expenses, resulting from organic and acquisition-related expansion of the Company's footprint and investments in commercial banking talent. The adjusted efficiency ratio1 in 2022 was 53.03% compared to 52.59% in 2021.

Net Interest Income and Margin

Net interest income for the year ended December 31, 2022 totaled $366.2 million, increasing $90.1 million, or 33%, compared to the year ended December 31, 2021. Net interest income (on a fully taxable equivalent basis)1 for the year ended December 31, 2022 was $366.7 million, increasing $90.1 million, or 33%, compared to the year ended December 31, 2021. In 2022 and 2021, net interest margin (on a fully tax equivalent basis)1 was 3.69% and 3.27%, respectively.

The rising interest rate environment during 2022 resulted in higher yields on securities and loans. Yield on securities increased by 60 basis points from 1.61% to 2.21% while the yield on loans increased 24 basis points from 4.38% to 4.62%. The effect on net interest margin of interest and fees from Paycheck Protection Program ("PPP") loans was an increase of 2 basis points in 2022 compared to an increase of 11 basis points in 2021. The effect on net interest margin of purchase discounts on acquired loans was an increase of 18 basis points in 2022 compared to an increase of 15 basis points in 2021. The cost of deposits increased by three basis points to 11 basis points in 2022.

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

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The following table details the Company’s average balance sheets, interest income and expenses, and yields and rates1, for the past three years:

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The following table shows the impact of changes in volume and rate on earning assets and interest bearing liabilities1:

Total average loans increased $1.1 billion, or 19%, during 2022 compared to 2021. Average loans as a percentage of average earning assets totaled 69% in 2022, compared to 68% in 2021. Loans secured by commercial real estate represented 57% of total loans, excluding PPP loans, at December 31, 2022, compared to 53% at December 31, 2021. Residential loan balances with individuals (including home equity loans and lines) represented 23% of total loans, excluding PPP loans, at both December 31, 2022 and 2021. (see “Loan Portfolio”).

Average debt securities increased $725.8 million, or 39%, from 2021 reflecting the investment of excess liquidity into the securities portfolio early in 2022. Securities comprised 26% and 22% of average earning assets in 2022 and 2021, respectively. Yields on securities increased from 1.61% in 2021 to 2.21% in 2022.

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

Commercial and commercial real estate loan production in 2022 totaled $1.7 billion, compared to $1.1 billion in 2021. Commercial originations remained strong and reflect the addition of well-established commercial bankers and expansion into new markets across the state, generating disciplined growth in full relationships, including credit facilities, deposit relationships, and wealth opportunities.

Residential loan production totaled $542.9 million in 2022, compared to $887.4 million in 2021. Included in 2022 and 2021 are purchases of $111.3 million and $219.2 million, respectively, in residential loans from the wholesale market. Limited housing inventory and slowing refinance activity contributed to lower production.

Consumer originations totaled $408.7 million during 2022, compared to $249.5 million during 2021. The increases are primarily the result of consumer lending teams that joined the Company in late 2021.

In 2022, the cost of average interest-bearing liabilities increased nine basis points to 0.25% from 2021, reflecting the impact of the rising interest rate environment. The low overall cost of funding reflects the Company’s successful core deposit focus and relationship-based approach. Noninterest bearing demand deposits at December 31, 2022 represented 41% of total deposits, compared to 38% at December 31, 2021. The cost of average total deposits (including noninterest bearing demand deposits) in 2022 was 0.11%, compared to 0.08% in 2021. Given the decreasing money supply, increasing competition for deposits, and higher interest rates, we expect the cost of interest bearing liabilities to increase in coming periods.

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

The Company’s focus on convenience, with high-quality customer service, expanded digital offerings and distribution channels provides stable, low-cost core deposit funding. The acquisitions in 2022 contributed to higher deposit balances, partially offset by outflows in the second half of 2022 spurred by the rising rate environment. Despite increasing interest rates, the Company continued to manage its cost of deposits effectively, increasing to only 21 basis points in the fourth quarter of 2022. During 2022, average transaction deposits (noninterest and interest bearing demand deposits) increased $1.2 billion, or 27%, compared to 2021. The Company’s deposit mix remains favorable, with 95% of average deposit balances comprised of savings, money market, and demand deposits in 2022.

Sweep repurchase agreements with customers increased $50.5 million, or 42%, to $172.0 million at December 31, 2022 compared to $121.6 million at December 31, 2021. The average rate on customer repurchase accounts was 0.81% in 2022 compared to 0.12% in 2021. No federal funds purchased were utilized at December 31, 2022 or 2021.

The Company had $150 million in FHLB borrowings outstanding at December 31, 2022, with a weighted average rate of 3.42%. No FHLB borrowings were utilized in 2021 (see “Note 9 - Borrowings” to the Company’s consolidated financial statements).

In 2022, average subordinated debt of $74.7 million related primarily to trust preferred securities issued by subsidiary trusts of the Company carried an average cost of 4.09%, up from 2.36% in 2021, reflecting the impact of rising interest rates as the subordinated debt cost is based on LIBOR plus a spread. In the fourth quarter of 2022 through a bank acquisition the Company acquired $12.3 million in subordinated debt. The notes carry a fixed interest rate of 5.50% until 2025, convert to a floating rate until maturity in 2030, and are callable at the Company’s discretion (see “Note 9 - Borrowings”).

Provision for Credit Losses

The provision for credit losses was $26.2 million for the full year 2022 compared to a net benefit of $9.4 million for the full year 2021. The increase in provision during 2022 was primarily driven by loan growth, provisioning for loans related to the four acquisitions during the year, along with changes in economic forecast factors.

Noninterest Income

Noninterest income (excluding securities gains and losses) totaled $67.2 million in 2022, a decrease of $4.1 million, or 6%, compared to 2021. Noninterest income accounted for 16% of total revenue in 2022 and 21% in 2021 (net interest income plus noninterest income, excluding securities gains and losses).

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Noninterest income is detailed as follows:

Service charges on deposits for the year ended December 31, 2022 compared to the year ended December 31, 2021 increased $3.9 million, or 40%, to $13.7 million. This increase reflects the benefit of an expanded deposit base from acquisition activity in 2022. Overdraft fees on business and consumer accounts represented 37% of total service charges on deposits in 2022 compared to 41% in 2021.

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

Despite the impact of market declines, wealth management revenues, including brokerage commissions and fees and trust income, increased $1.4 million, or 15%, to $11.1 million for the year ended December 31, 2022. The wealth management team has continued to demonstrate success in building new relationships, resulting in a 12% increase in assets under management year-over-year to $1.4 billion as of December 31, 2022.

Mortgage banking fees decreased by $8.3 million, or 70%, to $3.5 million for the year ended December 31, 2022 compared to 2021. The prior year results benefited from historically low interest rates which resulted in strong refinance demand, while 2022 results reflect a slowdown in refinance and purchase activity.

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

Bank owned life insurance (“BOLI”) income totaled $5.6 million in 2022, an increase of $1.4 million, or 34%, compared to the prior year. The Company added $53.1 million in BOLI through bank acquisitions in 2022.

Income from the Company's investments in Small Business Investment Companies (“SBICs”) decreased by $5.5 million to $1.3 million compared to 2021. The amounts recognized on SBIC investments will vary amongst periods.

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

Securities losses in 2022 totaled $1.1 million, resulting solely from the decline in the market value of the CRA-qualified mutual fund investment. Securities losses in 2021 totaled $0.6 million, resulting from a $0.4 million net loss on the sale of debt securities, and a $0.2 million decline in the value of the CRA-qualified mutual fund investment.

Noninterest Expense

The Company has demonstrated its commitment to efficiency through disciplined, proactive management of its cost structure. Noninterest expenses in 2022 totaled $267.9 million and included acquisition-related expenses of $27.9 million, and expenses related to branch consolidation and other expense reduction initiatives of $1.2 million. In 2021, noninterest expenses totaled $197.4 million, including $7.9 million in acquisition-related expenses and $2.2 million in expenses related to branch consolidation and other expense reduction initiatives. Adjusted noninterest expense1 in 2022 totaled $229.7 million, an increase

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of 26% from 2021, reflecting overall growth of the organization. Changes in the categories of noninterest expense for the year ended 2022 compared to 2021 are further described below.

Salaries and wages totaled $130.1 million in 2022, an increase of $32.8 million, or 34%, compared to 2021. Results in 2022 include $9.2 million in bank acquisition-related charges compared to $2.6 million in 2021. The remaining increase compared to the prior year reflects higher salaries from headcount added through acquisitions and investments made to support organic growth.

During 2022, employee benefit costs, which include costs associated with the Company's self-funded health insurance benefits, 401(k) plan, payroll taxes, and unemployment compensation, increased $1.2 million, or 6%, compared to 2021. The increase reflects the impact of higher health insurance related costs and payroll taxes resulting from headcount added through acquisitions and investments made to support organic growth.

The Company utilizes third parties for 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 $27.5 million in 2022, an increase of $7.6 million, or 38%. Results include $3.4 million in acquisition-related charges compared to $0.9 million in 2021. Investments in 2022 included an upgrade of the online and mobile banking platform, providing an enhanced digital experience for consumers. Outsourced data processing costs may continue to increase in the future as customers adopt improved products and as business volumes grow.

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

Total occupancy, furniture and equipment expenses in 2022 totaled $25.0 million, an increase of $5.4 million, or 28%, compared to 2021, primarily due to expansion through acquisitions. The Company continues to evolve its branch footprint in order to redirect capacity into attractive growth markets.

In 2022 and 2021, marketing expenses totaled $6.3 million and $4.6 million, respectively. The Company continues to carefully manage the use of marketing campaigns to target potential high value customers in a cost effective manner through a mix of digital communications, direct mail, event sponsorships and donations.

Legal and professional fees increased by $9.3 million in 2022, or 82%, to $20.7 million, which includes $10.3 million in merger-related expenses in 2022, compared to $3.5 million in 2021.

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

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

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Other expense totaled $23.7 million and $16.3 million in 2022 and 2021, respectively. The increase of $7.3 million, or 45%, includes higher loan production-related expenses, and higher recruiting costs.

Income Taxes

In 2022, the provision for income taxes totaled $31.6 million, compared to $34.3 million in 2021. The decrease reflects lower pre-tax income primarily resulting from higher provision for credit losses, and a $1.0 million refund of Florida corporate income tax paid in the prior year. Discrete tax benefits related to share-based compensation were $1.1 million in 2022 and $0.9 million in 2021.

Fourth Quarter Results and Analysis

Net income totaled $23.9 million in the fourth quarter of 2022, a decrease of $5.3 million, or 18%, from the third quarter of 2022, and a decrease of $12.4 million, or 34%, compared to the fourth quarter of 2021. The fourth quarter of 2022 included $16.1 million in merger-related costs and $15.0 million in provision for credit losses associated with the Apollo and Drummond acquisitions. Adjusted net income1 totaled $39.9 million, an increase of $7.1 million, or 22%, from the third quarter of 2022, and an increase of $3.1 million, or 8%, compared to the fourth quarter of 2021. Diluted earnings per common share (“EPS”) was $0.34 and adjusted diluted EPS12was $0.56 in the fourth quarter of 2022, compared to diluted EPS of $0.47 and adjusted diluted EPS1 of $0.53 in the third quarter of 2022 and compared to diluted EPS of $0.62 and adjusted diluted EPS1 of $0.62 in the fourth quarter of 2021.

Net revenues, which are calculated as net interest income on a fully taxable equivalent basis plus noninterest income excluding securities gains and losses, increased $33.0 million, or 32%, from the third quarter of 2022 and increased $46.4 million, or 51%, from the fourth quarter of 2021. Net interest income increased $31.4 million, or 36%, compared to the third quarter of 2022 and increased $47.4 million, or 66%, compared to the fourth quarter of 2021.

Net interest income (on a tax-equivalent basis), for the fourth quarter of 2022 totaled $119.9 million, an increase of $31.5 million, or 36%, from the third quarter of 2022, and an increase of $47.4 million, or 66%, from the fourth quarter 2021. Net interest margin (on a tax-equivalent basis), increased 69 basis points to 4.36% from 3.67% in the third quarter of 2022.

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

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

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

•Despite the impact of market declines, the wealth management division has demonstrated continued success in building relationships, and during the fourth quarter of 2022, assets under management grew $159.5 million, driving a $0.2 million, or 6%, increase in wealth management income compared to the third quarter of 2022 and a $0.5 million, or 22%, increase compared to the fourth quarter of 2021. During the full year 2022, the wealth management division added a record breaking $425 million in new assets under management.

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

Noninterest expenses for the fourth quarter of 2022 totaled $91.5 million, an increase of $30.2 million, or 49%, from the third quarter of 2022 and an increase of $41.2 million, or 82%, from the fourth quarter of 2021. The fourth quarter of 2022 included $16.1 million of merger related expenses, compared to $2.1 million in the third quarter of 2022 and $0.5 million in the fourth quarter of 2021.

•Salaries and wages increased $17.0 million to $45.4 million in the fourth quarter of 2022 compared to the third quarter of 2022. The fourth quarter of 2022 includes $5.7 million in merger-related expenses as well as higher headcount associated with adding 20 branch locations, bankers, and operational staff with the acquisitions of Apollo and Drummond. We expect the full benefit of cost synergies to materialize beginning in the second quarter of 2023.

12Non-GAAP measure, see “Explanation of Certain Unaudited Non-GAAP Financial Measures” for more information and a reconciliation to GAAP.

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

•Outsourced data processing costs increased by $4.5 million in the fourth quarter of 2022 compared to the third quarter of 2022, including $2.6 million in direct acquisition related expenses. The remainder of the increase is the result of higher transaction volume and the growth in customers with the two bank acquisitions.

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

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

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

•Amortization of intangibles increased $3.3 million compared to the third quarter of 2022, with the addition of $61.7 million in intangible assets from the acquisitions of Drummond and Apollo. These assets are comprised primarily of core deposit intangibles, which will be amortized using an accelerated amortization method over approximately six years.

The provision for credit losses was $14.1 million in the fourth quarter of 2022, compared to a provision of $4.7 million in the third quarter of 2022. A $15.0 million provision recorded in the Apollo and Drummond acquisitions during the fourth quarter of 2022 was partially offset by the release of $2.1 million added in the third quarter of 2022 for potential losses related to Hurricane Ian that did not materialize.

Explanation of Certain Unaudited Non-GAAP Financial Measures

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.

The following tables provide reconciliation between GAAP and adjusted (non-GAAP) financial measures.

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Financial Condition

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

Securities

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

At December 31, 2022, the Company had $1.9 billion in securities available-for-sale, and $747.4 million in securities held-to-maturity. The Company's total debt securities portfolio increased $336.2 million, or 15%, from December 31, 2021.

During the year ended December 31, 2022, there were $899.7 million of debt security purchases and $367.7 million in paydowns and maturities over the same period. For the year ended December 31, 2022, debt securities with a fair value of $515.2 million obtained through bank acquisition were sold with no gains or losses recognized. During the year ended December 31, 2021, there were $1.5 billion of debt security purchases and $679.3 million in paydowns and maturities over the same period. For the year ended December 31, 2021, debt securities with a fair value of $102.1 million were sold with net losses of $0.4 million.

Debt securities generally return principal and interest monthly. The modified duration of the available-for-sale securities portfolio at December 31, 2022 was 3.7 and at December 31, 2021 was 3.8.

At December 31, 2022, available-for-sale securities had gross unrealized losses of $248.7 million and gross unrealized gains of $1.1 million, compared to gross unrealized losses of $20.9 million and gross unrealized gains of $11.5 million at December 31, 2021. The Company assesses securities in an unrealized loss position on a quarterly basis. As of December 31, 2022, the Company expected to recover the entire amortized cost basis of these securities and therefore no allowance for credit losses was recorded.

The credit quality of the Company’s securities holdings are primarily investment grade. U.S. Treasury and U.S. government agencies and obligations of U.S. government-sponsored entities totaled $2.1 billion, or 80%, of the total portfolio.

The portfolio includes $179.1 million, with a fair value of $166.4 million, in private label residential and commercial mortgage-backed securities and collateralized mortgage obligations. Included are $161.9 million, with a fair value of $150.1 million, in private label mortgage-backed residential securities with weighted average credit support of 25%. The collateral underlying these mortgage investments includes both fixed-rate and adjustable-rate mortgage loans. Private label commercial securities total $17.2 million, with a fair value of $16.3 million. These securities have weighted average credit support of 23%. The collateral underlying these mortgages are primarily pooled multifamily loans.

The Company also has $313.2 million, with a fair value of $302.9 million, in uncapped 3-month LIBOR floating rate collateralized loan obligations. Collateralized loan obligations are special purpose vehicles that purchase first lien broadly syndicated corporate loans while providing support to senior tranche investors. As of December 31, 2022, all of the Company's collateralized loan obligations were in AAA/AA tranches with average credit support of 32%. The Company utilizes credit models with assumptions of loan level defaults, recoveries, and prepayments to evaluate each security for potential credit losses. The result of this analysis did not indicate expected credit losses.

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

At December 31, 2022, the Company has determined that all debt securities in an unrealized loss position are the result of both broad investment type spreads and the current interest rate environment. Management believes that each investment will recover any price depreciation over its holding period as the debt securities move to maturity, and management has the intent and ability to hold these investments to maturity, if necessary. Therefore, at December 31, 2022, no allowance for credit losses has been recorded.

Loan Portfolio

Loans, net of unearned income and excluding the allowance for credit losses, were $8.1 billion at December 31, 2022, an increase of $2.2 billion, or 37%, compared to December 31, 2021. The increase reflects organic growth along with the addition of acquired banks.

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For the year ended December 31, 2022, the Company originated $1.7 billion in commercial and commercial real estate loans, compared to $1.1 billion for the year ended December 31, 2021, an increase of $527.0 million, or 46%. The late-stage pipeline for commercial and commercial real estate loans totaled $395.7 million at December 31, 2022.

The Company originated $310.7 million in residential loans retained in the portfolio during the year ended December 31, 2022, compared to originations of $245.4 million during the year ended December 31, 2021, an increase of $65.3 million, or 27%. Saleable production decreased for the year ended December 31, 2022, representing $120.9 million versus $422.8 million during the year ended December 31, 2021, a decrease of 71%. Saleable production in 2022 was impacted by the rapid increase in mortgage rates and low inventory levels.

The Company originated $408.7 million in consumer loans during the year ended December 31, 2022 compared to $249.5 million originated in the year ended December 31, 2021. The increases are primarily the result of consumer lending teams that joined the Company in late 2021.

The Company remains committed to sound risk management procedures. 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 December 31, 2022 and 2021 for portfolio loans, purchased credit deteriorated loans (“PCD”) and loans purchased which are not considered credit deteriorated (“Non-PCD”) as defined in “Note 4 - Loans”.

The amortized cost basis of loans at December 31, 2022 and 2021 included net deferred costs of $35.1 million and $28.6 million, respectively. At December 31, 2022, the remaining fair value adjustments on acquired loans were $97.7 million, or 4.3% of the outstanding acquired loan balances, compared to $23.1 million, or 2.3% of the acquired loan balances at December 31, 2021. The discount is accreted into interest income over the remaining lives of the related loans on a level yield basis.

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Commercial real estate (“CRE) loans, inclusive of owner-occupied commercial real estate, increased $1.1 billion, or 39%, totaling $4.1 billion at December 31, 2022, compared to December 31, 2021. Owner-occupied commercial real estate loans represent $1.5 billion, or 36%, of the commercial real estate portfolio.

Commercial and financial loans increased year-over-year by $279.3 million, or 26%, totaling $1.3 billion at December 31, 2022. The addition of well-established commercial bankers and expansion into new markets across the state have generated disciplined loan growth.

Residential mortgage loans increased $424.1 million, or 30%, year-over-year to $1.8 billion as of December 31, 2022. Included in the balance as of December 31, 2022 were $964.3 million of fixed rate mortgages, $402.3 million of adjustable rate mortgages, and $482.9 million in home equity loans and home equity lines of credit ("HELOCs"), compared to $773.7 million, $278.9 million and $336.6 million, respectively, as of December 31, 2021. The increases during 2022 include approximately $232 million acquired through bank acquisitions, and a $111 million residential mortgage pool purchased in the first quarter of 2022. Borrowers in the residential real estate portfolio have an average credit score of 752.

Substantially all residential originations have been underwritten to conventional loan agency standards, including loans having balances that exceed agency value limitations. The average LTV of our HELOC portfolio is 69% with 31% of the portfolio being in the first lien position at December 31, 2022, compared to an average LTV of 69% with 42% of the portfolio being in the first lien position at December 31, 2021.

The Company also provides consumer loans, which include installment loans, auto loans, marine loans and other consumer loans, which increased $112.4 million, or 65%, year-over-year to a total of $286.6 million at December 31, 2022, compared to $174.2 million at December 31, 2021. As part of the acquisition of Drummond Bank in the fourth quarter of 2022, the Company acquired approximately $90 million in digitally originated unsecured consumer loans, and as of the acquisition date, the Company ceased further originations of this type.

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

Loan Concentrations

The Company has developed prudent guardrails to manage loan types that are most impacted by stressed market conditions in order to minimize credit risk concentration to capital. Outstanding balances for commercial and commercial real estate (“CRE”) loan relationships greater than $10 million totaled $2.2 billion, representing 27% of the total portfolio at December 31, 2022, compared to $1.2 billion, or 20%, at December 31, 2021.

The Company’s ten largest commercial and commercial real estate funded and unfunded loan relationships at December 31, 2022 aggregated to $468.9 million, of which $312.4 million was funded, compared to $312.0 million at December 31, 2021, of which $157.8 million was funded. The Company had 250 commercial and commercial real estate relationships in excess of $5 million totaling $3.2 billion, of which $2.4 billion was funded at December 31, 2022, compared to 174 relationships totaling $1.9 billion at December 31, 2021, of which $1.4 billion was funded.

Concentrations in total construction and land development loans and total CRE loans are maintained well below regulatory limits. Construction and land development and CRE loan concentrations as a percentage of subsidiary bank total risk based capital, were 45% and 230%, respectively, at December 31, 2022, compared to 21% and 177% as of December 31, 2021. Regulatory guidance suggests limits of 100% and 300%, respectively. On a consolidated basis, construction and land development and commercial real estate loans represent 41% and 210%, 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, multifamily 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 Debt Restructurings, Other Real Estate Owned, and Credit Quality

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Table 6 provides certain information concerning nonperforming assets for the years indicated.

Nonperforming assets (“NPAs”) at December 31, 2022 totaled $31.1 million, a decrease of $13.1 million, or 29.6%, compared to 2021, and were comprised of $28.8 million of nonaccrual loans and other real estate owned (“OREO”) of $2.3 million that includes $1.8 million of branches taken out of service. Compared to December 31, 2021, nonaccrual loans decreased by $1.8 million, or 6%, and non-branch OREO decreased $11.7 million. Approximately 57% of nonaccrual loans were secured with real estate at December 31, 2022. Nonaccrual loans have been written down by approximately $5.8 million, including reserves on individually evaluated loans.

Nonperforming loans to total loans outstanding at December 31, 2022 decreased to 0.35% from 0.52% at December 31, 2021. Nonperforming assets to total assets at December 31, 2022 decreased to 0.26% from 0.46% at December 31, 2021.

The Company’s asset mitigation staff handles all foreclosure actions together with outside legal counsel.

The Company pursues loan restructurings in selected cases where it expects to realize better values than may be expected through traditional collection activities. The Company has worked with retail mortgage customers, when possible, to achieve lower payment structures in an effort to avoid foreclosure. Troubled debt restructurings (“TDRs”) have been a part of the Company’s loss mitigation activities and can include rate reductions, payment extensions and principal deferrals. Company policy requires TDRs that are classified as nonaccrual loans after restructuring remain on nonaccrual until performance can be verified, which usually requires six months of performance under the restructured loan terms. Accruing TDRs totaled $4.0 million at December 31, 2022, compared to $3.9 million at December 31, 2021. Accruing TDRs are excluded from nonperforming asset ratios.

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