Seacoast Banking of Florida(SBCF) - 2022 Q3 - Quarterly Report

Part I Item 1. Financial Statements (Unaudited) This section presents Seacoast Banking Corporation of Florida's unaudited condensed consolidated financial statements, including income, comprehensive income, balance sheets, cash flows, and shareholders' equity, with detailed notes on accounting policies, securities, loans, credit losses, derivatives, and business combinations Condensed Consolidated Statements of Income Net Income for Q3 2022 increased 27.4% year-over-year, driven by higher interest income, while year-to-date net income decreased 6.2% due to increased credit loss provisions | Metric (in thousands) | 3 Months Ended Sep 30, 2022 | 3 Months Ended Sep 30, 2021 | YoY Change (%) | | :-------------------- | :-------------------------- | :-------------------------- | :------------- | | Total Interest Income | $91,404 | $73,209 | 24.86% | | Total Interest Expense | $3,120 | $1,885 | 65.52% | | Net Interest Income | $88,284 | $71,324 | 23.78% | | Provision for credit losses | $4,676 | $5,091 | -8.15% | | Total Noninterest Income | $16,103 | $19,028 | -15.37% | | Total Noninterest Expense | $61,359 | $55,268 | 11.02% | | Income Before Income Taxes | $38,352 | $29,993 | 27.87% | | Net Income | $29,237 | $22,944 | 27.43% | | Diluted EPS | $0.47 | $0.40 | 17.50% | | Metric (in thousands) | 9 Months Ended Sep 30, 2022 | 9 Months Ended Sep 30, 2021 | YoY Change (%) | | :-------------------- | :-------------------------- | :-------------------------- | :------------- | | Total Interest Income | $253,385 | $210,302 | 20.49% | | Total Interest Expense | $6,932 | $6,566 | 5.58% | | Net Interest Income | $246,453 | $203,736 | 20.97% | | Provision for credit losses | $12,054 | $(5,479) | -320.00% |\ | Total Noninterest Income | $48,440 | $52,021 | -6.90% | | Total Noninterest Expense | $176,424 | $147,172 | 19.88% | | Income Before Income Taxes | $106,415 | $114,064 | -6.71% | | Net Income | $82,580 | $88,073 | -6.24% | | Diluted EPS | $1.33 | $1.56 | -14.74% | Condensed Consolidated Statements of Comprehensive Income The Company reported a Comprehensive Loss for both three and nine months ended September 30, 2022, primarily due to significant unrealized losses on available-for-sale securities | Metric (in thousands) | 3 Months Ended Sep 30, 2022 | 3 Months Ended Sep 30, 2021 | YoY Change (%) | | :-------------------- | :-------------------------- | :-------------------------- | :------------- | | Net Income | $29,237 | $22,944 | 27.43% | | Unrealized losses on AFS securities, net of tax benefit | $(63,736) | $(4,459) | 1339.00% | | Total other comprehensive (loss) income | $(63,682) | $(4,532) | 1305.00% | | Comprehensive (Loss) Income | $(34,445) | $18,412 | -287.00% | | Metric (in thousands) | 9 Months Ended Sep 30, 2022 | 9 Months Ended Sep 30, 2021 | YoY Change (%) | | :-------------------- | :-------------------------- | :-------------------------- | :------------- | | Net Income | $82,580 | $88,073 | -6.24% | | Unrealized losses on AFS securities, net of tax benefit | $(180,221) | $(15,014) | 1099.00% | | Total other comprehensive (loss) income | $(180,220) | $(15,101) | 1099.00% | | Comprehensive (Loss) Income | $(97,640) | $72,972 | -234.00% | Condensed Consolidated Balance Sheets Total Assets increased 6.8% to $10.3 billion, driven by loans and debt securities, while Total Liabilities rose 8.2% due to deposits, and Shareholders' Equity decreased 1.8% | Metric (in thousands) | Sep 30, 2022 | Dec 31, 2021 | Change (%) | | :-------------------- | :----------- | :----------- | :--------- | | Total cash and cash equivalents | $218,615 | $737,729 | -70.36% | | Total debt securities | $2,635,440 | $2,282,959 | 15.44% | | Loans, net of allowance for credit losses | $6,595,516 | $5,841,714 | 12.90% | | Total Assets | $10,345,235 | $9,681,433 | 6.85% | | Deposits | $8,765,414 | $8,067,589 | 8.65% | | Total Liabilities | $9,057,433 | $8,370,697 | 8.20% | | Total Shareholders' Equity | $1,287,802 | $1,310,736 | -1.75% | Consolidated Statements of Cash Flows Net cash from operating activities increased 40.7%, but a significant rise in investing activities and a sharp drop in financing cash led to a net decrease in cash and equivalents | Metric (in thousands) | 9 Months Ended Sep 30, 2022 | 9 Months Ended Sep 30, 2021 | YoY Change (%) | | :-------------------- | :-------------------------- | :-------------------------- | :------------- | | Net cash provided by operating activities | $147,363 | $104,764 | 40.66% | | Net cash used in investing activities | $(748,667) | $(129,217) | 479.38% | | Net cash provided by financing activities | $82,190 | $848,060 | -90.31% | | Net (decrease) increase in cash and cash equivalents | $(519,114) | $823,607 | -163.03% | | Cash and cash equivalents at end of period | $218,615 | $1,227,695 | -82.20% | Consolidated Statements of Shareholders' Equity Total Shareholders' Equity decreased by $71.0 million in Q3 2022 and $22.9 million year-to-date, primarily due to significant accumulated other comprehensive losses, despite net income and stock issuances | Metric (in thousands) | 3 Months Ended Sep 30, 2022 | 3 Months Ended Sep 30, 2021 | YoY Change (%) | | :-------------------- | :-------------------------- | :-------------------------- | :------------- | | Net Income | $29,237 | $22,944 | 27.43% | | Accumulated Other Comprehensive Income (Loss) | $(63,682) | $(4,532) | 1305.00% | | Dividends on common stock | $(10,502) | $(7,610) | 38.00% | | Total Shareholders' Equity Change | $(71,015) | $108,173 | -165.64% | | Metric (in thousands) | 9 Months Ended Sep 30, 2022 | 9 Months Ended Sep 30, 2021 | YoY Change (%) | | :-------------------- | :-------------------------- | :-------------------------- | :------------- | | Net Income | $82,580 | $88,073 | -6.24% | | Issuance of common stock, pursuant to acquisition | $90,234 | $86,487 | 4.33% | | Accumulated Other Comprehensive Income (Loss) | $(180,220) | $(15,101) | 1099.00% | | Dividends on common stock | $(29,012) | $(14,856) | 95.29% | | Total Shareholders' Equity Change | $(22,934) | $160,118 | -114.32% | Notes to Condensed Consolidated Financial Statements These notes provide detailed disclosures on accounting policies, EPS, securities, loans, credit losses, derivatives, repurchase agreements, equity, contingent liabilities, fair value, and business combinations Note 1 – Basis of Presentation Unaudited financial statements adhere to U.S. GAAP, relying on management's critical estimates for credit losses, acquisitions, and fair value, with ASU 2022-02 not expected to be material - The financial statements are unaudited and prepared in accordance with U.S. GAAP for interim financial information, including normal recurring accruals[19] - Management's estimates are critical for areas such as allowance for credit losses, acquisition accounting, intangible assets, fair value measurements, and contingent liabilities[21] - ASU 2022-02, effective for fiscal years beginning after December 15, 2022, eliminates TDR accounting guidance and introduces new disclosures; its adoption is not expected to be material[22] Note 2 – Earnings per Share Basic EPS is net income divided by weighted average shares, while diluted EPS includes stock options; Q3 2022 diluted EPS was $0.47, with some options anti-dilutive | Metric | 3 Months Ended Sep 30, 2022 | 3 Months Ended Sep 30, 2021 | 9 Months Ended Sep 30, 2022 | 9 Months Ended Sep 30, 2021 | | :----- | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | Net income | $29,237 | $22,944 | $82,580 | $88,073 | | Basic EPS | $0.48 | $0.40 | $1.35 | $1.57 | | Diluted EPS | $0.47 | $0.40 | $1.33 | $1.56 | | Average diluted shares outstanding | 61,961 | 57,645 | 61,867 | 56,441 | - For the three and nine months ended September 30, 2022, 1,505 options to purchase shares were anti-dilutive[23] Note 3 – Securities Total debt securities reached $2.64 billion, with significant unrealized losses of $246.7 million on available-for-sale securities due to rising interest rates, not credit quality, with no allowance recorded | Metric (in thousands) | Sep 30, 2022 | Dec 31, 2021 | Change (%) | | :-------------------- | :----------- | :----------- | :--------- | | Debt securities available-for-sale (Fair Value) | $1,860,734 | $1,644,319 | 13.16% | | Debt securities held-to-maturity (Amortized Cost) | $774,706 | $638,640 | 21.30% | | Total Debt Securities | $2,635,440 | $2,282,959 | 15.44% | | Metric (in thousands) | Sep 30, 2022 | Dec 31, 2021 | Change (%) | | :-------------------- | :----------- | :----------- | :--------- | | Gross Unrealized Gains (AFS) | $251 | $11,518 | -97.82% | | Gross Unrealized Losses (AFS) | $(246,654) | $(20,857) | 1082.10% | | Gross Unrealized Gains (HTM) | $65 | $3,828 | -98.30% | | Gross Unrealized Losses (HTM) | $(129,332) | $(15,070) | 758.27% | - Unrealized losses on mortgage-backed securities, CLOs, private mortgage-backed securities, and municipal securities are attributed to changes in investment spreads and interest rate movements, not credit quality, with full recovery of amortized cost expected[32][33][34][35] - No allowance for credit losses has been recorded for held-to-maturity debt securities, as they are government-sponsored entities with implied government guarantees and high credit ratings[36] Note 4 – Loans The loan portfolio grew to $6.69 billion, driven by construction and commercial real estate, with a $100 million reclassification and improved credit quality metrics, including reduced nonaccrual loans | Loan Segment (in thousands) | Sep 30, 2022 | Dec 31, 2021 | Change (%) | | :-------------------------- | :----------- | :----------- | :--------- | | Construction and land development | $361,913 | $230,824 | 56.79% | | Commercial real estate - owner-occupied | $1,253,459 | $1,197,774 | 4.65% | | Commercial real estate - non owner-occupied | $2,107,614 | $1,736,439 | 21.38% | | Residential real estate | $1,599,765 | $1,425,354 | 12.24% | | Commercial and financial | $1,182,384 | $1,069,356 | 10.57% | | Consumer | $180,416 | $174,175 | 3.58% | | Paycheck Protection Program | $5,294 | $91,107 | -94.18% | | Totals | $6,690,845 | $5,925,029 | 12.92% | - In Q3 2022, $100 million in loans to commercial borrowers collateralized by residential properties were reclassified from 'Residential real estate' to 'Commercial real estate - non owner-occupied'[41] | Metric (in thousands) | Sep 30, 2022 | Dec 31, 2021 | Change (%) | | :-------------------- | :----------- | :----------- | :--------- | | Total Nonaccrual Loans | $21,464 | $30,598 | -29.86% | | Total Collateral-Dependent Loans | $21,333 | $35,716 | -40.27% | - The Company recognized $0.2 million and $1.4 million in interest income on nonaccrual loans during the three and nine months ended September 30, 2022, respectively[47] Note 5 – Allowance for Credit Losses The allowance for credit losses increased to $95.3 million, driven by loan growth, a negative economic outlook, and Hurricane Ian impacts, with a new discounted cash flow methodology for commercial loans | Metric (in thousands) | Sep 30, 2022 | Dec 31, 2021 | Change (%) | | :-------------------- | :----------- | :----------- | :--------- | | Ending Balance Allowance for Credit Losses | $95,329 | $83,315 | 14.42% | | Metric (in thousands) | 3 Months Ended Sep 30, 2022 | 3 Months Ended Sep 30, 2021 | 9 Months Ended Sep 30, 2022 | 9 Months Ended Sep 30, 2021 | | :-------------------- | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | Provision for Credit Losses | $4,676 | $5,091 | $12,054 | $(5,479) | | Total Charge Offs | $(408) | $(2,052) | $(1,525) | $(4,777) | | Total Recoveries | $305 | $620 | $1,467 | $2,320 | - The allowance increase reflects higher loan balances, a more negative economic outlook, and a $2.1 million increase for estimated impacts from Hurricane Ian[62][64] - The Company transitioned to a discounted cash flow methodology for commercial loans and a loss rate methodology for consumer loans for calculating expected credit losses[61] Note 6 – Derivatives The Company uses back-to-back interest rate swaps (notional $302.8 million) and interest rate floor contracts (notional $300.0 million) to hedge variable-rate loan risk, with fair value changes recognized in other comprehensive income | Derivative Type | Notional Amount (Sep 30, 2022) | Fair Value (Sep 30, 2022) | Notional Amount (Dec 31, 2021) | Fair Value (Dec 31, 2021) | | :-------------- | :----------------------------- | :------------------------ | :----------------------------- | :------------------------ | | Back-to-back swaps | $302,840 | $24,096 | $175,392 | $8,022 | | Interest rate floors | $300,000 | $20 | $300,000 | $290 | - Back-to-back swaps are used to hedge customer variable-rate loan risk, with offsetting positions to minimize interest rate risk[72] - Interest rate floor contracts are designated as cash flow hedges to mitigate exposure to variability of future cash flows on variable-rate loans, with changes in fair value recognized in other comprehensive income[73] Note 7 – Securities Sold Under Agreements to Repurchase Securities sold under repurchase agreements are secured borrowings, with $125.8 million in pledged mortgage-backed securities and collateralized mortgage obligations of U.S. government-sponsored entities | Collateral Type (in thousands) | Sep 30, 2022 | Dec 31, 2021 | | :----------------------------- | :----------- | :----------- | | Mortgage-backed securities and collateralized mortgage obligations of U.S. government sponsored entities | $125,824 | $134,577 | - Securities sold under agreements to repurchase are accounted for as secured borrowings, requiring sufficient collateral[75] Note 8 – Equity Capital The Company and Seacoast Bank are well-capitalized, exceeding all Basel III regulatory capital thresholds, including the 6.5% common equity Tier 1 (CET1) capital ratio - The Company and Seacoast Bank exceeded the common equity Tier 1 (CET1) capital ratio regulatory threshold of 6.5% for well-capitalized institutions under Basel III as of September 30, 2022[76] Note 9 – Contingent Liabilities The Company faces routine legal actions, but management believes current proceedings will not materially adversely affect financial condition, operating results, or cash flows - Management believes current legal proceedings are not likely to have a materially adverse effect on the Company's consolidated financial condition, operating results, or cash flows[77] Note 10 – Fair Value Fair value measurements use Level 1, 2, or 3 inputs, with AFS debt securities and derivatives primarily Level 2, while collateral-dependent loans and OREO use Level 3 due to unobservable inputs | Financial Instrument (in thousands) | Fair Value (Sep 30, 2022) | Level 1 | Level 2 | Level 3 | | :-------------------------------- | :------------------------ | :------ | :------ | :------ | | Available-for-sale debt securities | $1,860,734 | $184 | $1,860,550 | $— | | Derivative financial instruments (Assets) | $24,116 | $— | $24,116 | $— | | Loans held for sale | $1,620 | $— | $1,620 | $— | | Loans | $5,990 | $— | $1,262 | $4,728 | | Other real estate owned | $2,419 | $— | $2,419 | $— | | Equity securities | $8,202 | $8,202 | $— | $— | | Derivative financial instruments (Liabilities) | $24,096 | $— | $24,096 | $— | - Fair value of collateral-dependent loans is based on real estate appraisals less estimated costs of sale, using a single or combination of valuation approaches, with capitalization rates as a significant unobservable input (Level 3)[83] - The fair value of loans is calculated by discounting scheduled cash flows through the estimated life, including prepayment considerations, using estimated market discount rates that reflect inherent risks[90] Note 11 – Business Combinations The Company completed multiple acquisitions in 2021-2022, including BBFC, Sabal Palm, Legacy Bank, Apollo Bancshares, and Drummond Banking, expanding its Florida presence, with Professional Holding Corp. proposed for Q1 2023 - On January 3, 2022, the Company acquired Business Bank of Florida, Corp. (BBFC) for $31.98 million, issuing 889 thousand shares of common stock and recognizing $8.0 million in goodwill[94] - On January 3, 2022, the Company acquired Sabal Palm Bancorp, Inc. for $62.1 million, issuing 1.66 million shares of common stock and recognizing $26.5 million in goodwill[102] - On August 6, 2021, the Company acquired Legacy Bank of Florida for $91.2 million, issuing 2.69 million shares of common stock and recognizing $31.0 million in goodwill[111] - On October 7, 2022, the Company completed the acquisitions of Apollo Bancshares, Inc. ($145.8 million purchase price) and Drummond Banking Company ($158.3 million purchase price), issuing 4.52 million and 5.14 million shares of common stock, respectively[121][124] - A proposed acquisition of Professional Holding Corp. was announced on August 8, 2022, expected to close in Q1 2023, further expanding the Company's presence in South Florida[125] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations This section analyzes the Company's financial condition and results for Q3 and YTD 2022, covering key metrics, business developments, net interest income, noninterest income/expenses, credit quality, liquidity, capital, and critical accounting policies Special Cautionary Notice Regarding Forward-Looking Statements Forward-looking statements are subject to risks from economic conditions, regulatory changes, interest rate fluctuations, credit risks, and M&A, with no obligation to update unless legally required - Forward-looking statements are subject to known and unknown risks, uncertainties, and other factors beyond the Company's control[130] - Key risk factors include future economic and market conditions, government monetary and fiscal policies (including interest rates), changes in accounting policies, borrower credit risks, and the impact of mergers and acquisitions[131][134] - The Company assumes no obligation to update, revise, or correct any forward-looking statements unless required by law[135] Business Developments Seacoast completed Apollo and Drummond acquisitions in October 2022, following earlier 2022 acquisitions, and announced Professional Holding Corp. for Q1 2023, while expanding organically and increasing credit loss provisions due to Hurricane Ian - Completed acquisitions of Apollo Bancshares, Inc. (adding $718 million loans, $857 million deposits) and Drummond Banking Company (adding $590 million loans, $882 million deposits) on October 7, 2022[136][137] - Completed acquisitions of Sabal Palm Bancorp, Inc. and Business Bank of Florida, Corp. in Q1 2022, adding $368 million loans and $562 million deposits[138] - Proposed acquisition of Professional Holding Corp. announced for Q1 2023 to increase market share in South Florida[139] - Expanded into Naples/Southwest Florida, Jacksonville/Northeast Florida, and Ocala with new commercial banking teams[140] - Increased provision for credit losses by $2.1 million in Q3 2022 due to estimated impacts from Hurricane Ian[141] Results of Operations Q3 2022 Net Income was $29.2 million ($0.47 diluted EPS), up from Q3 2021, but year-to-date net income decreased 6% to $82.6 million due to a $12.1 million provision for credit losses | Metric | Q3 2022 | Q2 2022 | Q3 2021 | 9 Months 2022 | 9 Months 2021 | | :----- | :------ | :------ | :------ | :------------ | :------------ | | Net Income (in millions) | $29.2 | $32.8 | $22.9 | $82.6 | $88.1 | | Diluted EPS | $0.47 | $0.53 | $0.40 | $1.33 | $1.56 | - Year-to-date 2022 net income included $12.1 million in provision for credit losses, compared to a $5.5 million reversal in the prior year[142] | Metric | Q3 2022 | Q2 2022 | Q3 2021 | 9 Months 2022 | 9 Months 2021 | | :----- | :------ | :------ | :------ | :------------ | :------------ | | Return on average tangible assets | 1.17% | 1.29% | 1.00% | 1.11% | 1.37% | | Return on average tangible shareholders' equity | 11.53% | 13.01% | 9.56% | 10.82% | 12.89% | | Efficiency ratio | 57.13% | 56.22% | 59.55% | 58.45% | 55.99% | Net Interest Income and Margin Net interest income increased 24% year-over-year to $88.3 million, with net interest margin (FTE) rising to 3.67% due to higher yields on securities and non-PPP loans, and low deposit costs | Metric (in thousands) | Q3 2022 | Q2 2022 | Q3 2021 | 9 Months 2022 | 9 Months 2021 | | :-------------------- | :------ | :------ | :------ | :------------ | :------------ | | Net Interest Income | $88,284 | $81,647 | $71,324 | $246,453 | $203,736 | | Net Interest Margin (FTE) | 3.67% | 3.38% | 3.22% | 3.44% | 3.32% | | Yield on Earning Assets (FTE) | 3.80% | 3.46% | 3.31% | 3.53% | 3.42% | | Rate on Interest Bearing Liabilities (FTE) | 0.22% | 0.14% | 0.14% | 0.16% | 0.17% | | Cost of deposits | 0.09% | 0.06% | 0.07% | 0.07% | 0.09% | - Securities yields increased by 38 basis points to 2.36% and non-PPP loan yields increased by sixteen basis points to 4.43% in Q3 2022 compared to Q2 2022[144] - Average loans increased $127.2 million (2%) quarter-over-quarter and $903.9 million (16%) year-over-year in Q3 2022[146] - Commercial loan originations for the nine months ended September 30, 2022, increased $446.4 million (61%) compared to the prior year, reflecting new bankers and market expansion[149] - Residential loans originated for sale decreased by 69% year-over-year for the nine months ended September 30, 2022, due to higher interest rates and limited housing inventory[151] Noninterest Income Total noninterest income decreased 15% year-over-year to $16.1 million in Q3 2022 and 7% year-to-date to $48.4 million, primarily due to lower mortgage banking fees and SBA gains | Metric (in thousands) | Q3 2022 | Q2 2022 | Q3 2021 | 9 Months 2022 | 9 Months 2021 | | :-------------------- | :------ | :------ | :------ | :------------ | :------------ | | Total Noninterest Income | $16,103 | $16,964 | $19,028 | $48,440 | $52,021 | | Service charges on deposit accounts | $3,504 | $3,408 | $2,495 | $9,713 | $7,171 | | Mortgage banking fees | $434 | $932 | $2,550 | $3,052 | $9,752 | | SBA gains | $108 | $473 | $812 | $737 | $1,331 | | BOLI income | $1,363 | $1,349 | $1,128 | $4,046 | $2,859 | - Mortgage banking fees decreased by 83% year-over-year in Q3 2022 and 69% year-to-date, reflecting lower saleable production due to higher interest rates and limited housing inventory[166] - Service charges on deposits increased by 35% year-to-date, primarily reflecting growth in commercial deposit relationships[163] - BOLI income increased year-over-year due to $69.1 million in additions from acquisitions and purchases during 2021[168] Noninterest Expenses Total noninterest expense increased 11% year-over-year to $61.4 million in Q3 2022, driven by higher salaries, data processing, and occupancy costs, with an adjusted efficiency ratio of 53.28% | Metric (in thousands) | Q3 2022 | Q2 2022 | Q3 2021 | 9 Months 2022 | 9 Months 2021 | | :-------------------- | :------ | :------ | :------ | :------------ | :------------ | | Total Noninterest Expense | $61,359 | $56,148 | $55,268 | $176,424 | $147,172 | | Salaries and wages | $28,420 | $28,056 | $27,919 | $84,695 | $72,278 | | Outsourced data processing costs | $5,393 | $6,043 | $5,610 | $17,592 | $14,754 | | Occupancy | $5,046 | $4,050 | $3,541 | $13,082 | $10,640 | | Legal and professional fees | $3,794 | $2,946 | $4,151 | $11,529 | $8,915 | | Other expenses | $7,506 | $5,347 | $3,984 | $17,576 | $12,067 | | Metric | Q3 2022 | Q2 2022 | Q3 2021 | 9 Months 2022 | 9 Months 2021 | | :----- | :------ | :------ | :------ | :------------ | :------------ | | Efficiency ratio | 57.13% | 56.22% | 59.55% | 58.45% | 55.99% | | Adjusted efficiency ratio | 53.28% | 53.15% | 51.50% | 53.73% | 52.29% | - Salaries and wages increased due to the addition of seasoned commercial banking teams and expansion of West and Central Florida teams[173] - Occupancy expenses increased due to the purchase of two previously leased branches, expected to save $0.3 million annually[177] Provision for Credit Losses The provision for credit losses was $4.7 million for Q3 2022, reflecting loan growth, economic forecast changes, and estimated losses from Hurricane Ian | Metric (in thousands) | Q3 2022 | Q2 2022 | Q3 2021 | | :-------------------- | :------ | :------ | :------ | | Provision for credit losses | $4,676 | $800 | $5,091 | - The Q3 2022 provision included impacts of loan growth, changes in economic forecast factors, and estimated losses from Hurricane Ian[185] Income Taxes Income tax expense for Q3 2022 was $9.1 million, while year-to-date tax expense decreased 8% to $23.8 million, primarily due to lower pre-tax income | Metric (in thousands) | Q3 2022 | Q2 2022 | Q3 2021 | 9 Months 2022 | 9 Months 2021 | | :-------------------- | :------ | :------ | :------ | :------------ | :------------ | | Provision for income taxes | $9,115 | $8,886 | $7,049 | $23,835 | $25,991 | - The decrease in year-to-date tax expense is primarily due to lower pre-tax income[186] Explanation of Certain Unaudited Non-GAAP Financial Measures This section reconciles GAAP and non-GAAP financial measures, which management uses to analyze performance and trends, providing useful supplemental information to investors - Non-GAAP financial measures are used by management for performance analysis, understanding trends, and facilitating comparisons with other financial institutions[187] - Reconciliations between GAAP and non-GAAP measures are provided, and these disclosures should not be considered an alternative to GAAP[187] | Metric (in thousands) | Q3 2022 | Q2 2022 | Q3 2021 | 9 Months 2022 | 9 Months 2021 | | :-------------------- | :------ | :------ | :------ | :------------ | :------------ | | Net income, as reported | $29,237 | $32,755 | $22,944 | $82,580 | $88,073 | | Adjusted net income | $32,837 | $36,327 | $29,350 | $96,220 | $98,098 | | Adjusted diluted earnings per share | $0.53 | $0.59 | $0.51 | $1.56 | $1.74 | | Adjusted Efficiency Ratio | 53.28% | 53.15% | 51.50% | 53.73% | 52.29% | Financial Condition Total assets increased 7% to $10.3 billion, driven by loan and securities growth, while nonperforming assets decreased 46% to $23.9 million, and deposits rose 9% to $8.8 billion, with capital ratios remaining strong Securities The debt securities portfolio grew 15% to $2.64 billion, with $246.7 million in unrealized losses on AFS securities due to rising rates, not credit quality, and 81% in U.S. Treasury and government obligations | Metric (in thousands) | Sep 30, 2022 | Dec 31, 2021 | Change (%) | | :-------------------- | :----------- | :----------- | :--------- | | Total debt securities portfolio | $2,635,440 | $2,282,959 | 15.44% | | Available-for-sale securities (Fair Value) | $1,860,734 | $1,644,319 | 13.16% | | Held-to-maturity securities (Amortized Cost) | $774,706 | $638,640 | 21.30% | - Available-for-sale securities had gross unrealized losses of $246.7 million at September 30, 2022, primarily due to rising interest rates, with no allowance for credit losses recorded as recovery of amortized cost is expected[196][202] - U.S. Treasury and U.S. government agencies and obligations of U.S. government sponsored entities totaled $2.1 billion, or 81%, of the total portfolio[197] Loan Portfolio The loan portfolio grew $765.8 million to $6.7 billion, driven by acquisitions and a residential loan pool purchase, with annualized organic growth of 7-10% and commercial loan originations up 61% year-over-year | Loan Segment (in thousands) | Sep 30, 2022 | Dec 31, 2021 | Change (%) | | :-------------------------- | :----------- | :----------- | :--------- | | Construction and land development | $361,913 | $230,824 | 56.79% | | Commercial real estate - owner-occupied | $1,253,459 | $1,197,774 | 4.65% | | Commercial real estate - non owner-occupied | $2,107,614 | $1,736,439 | 21.38% | | Residential real estate | $1,599,765 | $1,425,354 | 12.24% | | Commercial and financial | $1,182,384 | $1,069,356 | 10.57% | | Consumer | $180,416 | $174,175 | 3.58% | | Paycheck Protection Program | $5,294 | $91,107 | -94.18% | | Totals | $6,690,845 | $5,925,029 | 12.92% | - Loans, net of unearned income and excluding the allowance for credit losses, were $6.7 billion at September 30, 2022, a $765.8 million increase from December 31, 2021[203] - Commercial and commercial real estate loan originations increased by $446.4 million (61%) for the nine months ended September 30, 2022, compared to the prior year[204] - Excluding acquisitions, loans grew 7% on an annualized basis in Q1 and Q2 2022, and 10% in Q3 2022, with high single-digit growth expected in Q4 2022[203] Loan Concentrations Loan concentrations remain below regulatory limits, with construction and land development at 30% and total CRE at 191% of risk-based capital, and $1.6 billion in large commercial/CRE relationships, concentrated in Florida | Loan Concentration | Sep 30, 2022 | Dec 31, 2021 | | :----------------- | :----------- | :----------- | | Construction and land development loans as % of subsidiary bank total risk based capital | 30% | 22% | | Total CRE loans as % of subsidiary bank total risk based capital | 191% | 189% | - Commercial and CRE loan relationships greater than $10 million totaled $1.6 billion, representing 25% of the total portfolio at September 30, 2022[215] - The Company has a geographic concentration of credit in Florida[218] Nonperforming Loans, Troubled Debt Restructurings, Other Real Estate Owned, and Credit Quality Nonperforming assets decreased 46% to $23.9 million, driven by reduced nonaccrual loans and OREO, improving credit quality with nonperforming loans at 0.32% of total loans, and $4.1 million in accruing TDRs | Metric (in thousands) | Sep 30, 2022 | Dec 31, 2021 | Change (%) | | :-------------------- | :----------- | :----------- | :--------- | | Nonperforming Assets (NPAs) | $23,900 | $44,200 | -45.93% | | Nonaccrual loans | $21,500 | $30,600 | -29.90% | | Other real estate owned (OREO) | $2,400 | $13,600 | -82.35% | | Metric | Sep 30, 30, 2022 | Dec 31, 2021 | | :----- | :--------------- | :----------- | | Nonperforming loans to total loans outstanding | 0.32% | 0.52% | | Nonperforming assets to total assets | 0.23% | 0.46% | - Accruing TDRs totaled $4.1 million at September 30, 2022, and there was one default totaling $2 thousand on a modified TDR loan within the preceding twelve months during the nine months ended September 30, 2022[221][223] Allowance for Credit Losses on Loans The allowance for credit losses on loans is estimated using internal and external data, with a $12.1 million provision recorded year-to-date, resulting in a 1.42% ratio of allowance to total loans - The allowance for credit losses is estimated using relevant available information from internal and external sources, considering past events, current conditions, and reasonable and supportable forecasts[226] - A provision of $12.1 million was recorded for the nine months ended September 30, 2022, including $5.1 million for loans acquired in BBFC and Sabal Palm acquisitions[227] | Metric | Sep 30, 2022 | Jun 30, 2022 | Sep 30, 2021 | | :----- | :----------- | :----------- | :----------- | | Ratio of allowance for credit losses to total loans | 1.42% | 1.39% | 1.49% | | Ratio of allowance for credit losses to total loans (excluding PPP) | 1.43% | 1.39% | 1.54% | LIBOR Transition The Company ceased new LIBOR loans by December 31, 2021, and is transitioning $202 million in existing LIBOR-tied loans and derivatives to alternative reference rates, monitoring regulatory activity - The Company ceased issuance of new LIBOR loans as of December 31, 2021[230] - As of September 30, 2022, approximately $202 million in existing loans have repricing indices tied to LIBOR[230] - The Company is executing its LIBOR transition program and monitoring regulatory activity to facilitate the transition to alternative reference rates for loans, swap agreements, and other derivatives[229][230] Cash and Cash Equivalents and Liquidity Risk Management Cash and cash equivalents decreased to $218.6 million due to investments and loan growth, but the Company manages liquidity through diverse funding sources and substantial unsecured and secured lines of credit | Metric (in thousands) | Sep 30, 2022 | Dec 31, 2021 | Change (%) | | :-------------------- | :----------- | :----------- | :--------- | | Cash and cash equivalents | $218,615 | $737,729 | -70.36% | - Funding sources include customer-based deposits, collateral-backed borrowings, brokered deposits, and cash flows from operations, loans, and investments[232] - At September 30, 2022, the Company had available unsecured lines of credit of $165.0 million and secured lines of credit of $2.1 billion[238] Deposits and Borrowings Total deposits increased 9% to $8.8 billion, driven by organic growth and acquisitions, with noninterest demand deposits at 40% of the total, and subordinated debt stable at $71.9 million | Deposit Type (in thousands) | Sep 30, 2022 | Dec 31, 2021 | Change (%) | | :-------------------------- | :----------- | :----------- | :--------- | | Noninterest demand | $3,529,489 | $3,075,534 | 14.76% | | Interest-bearing demand | $2,170,251 | $1,890,212 | 14.81% | | Money market | $1,700,737 | $1,651,881 | 2.96% | | Savings | $938,081 | $895,019 | 4.81% | | Time certificates of deposit | $426,856 | $554,943 | -23.08% | | Total deposits | $8,765,414 | $8,067,589 | 8.65% | | Noninterest demand deposits as % of total deposits | 40% | 38% | 5.26% | - Total deposits increased by $697.8 million (9%) to $8.8 billion at September 30, 2022, reflecting organic growth and acquisitions[241] - Subordinated debt was $71.9 million at September 30, 2022, with a weighted average interest rate of 3.40% for the nine months ended September 30, 2022[244][245] Off-Balance Sheet Transactions Off-balance sheet lending commitments, primarily unfunded loan commitments and letters of credit, totaled $2.5 billion, with most expiring unfunded, not representing actual future credit exposure or liquidity requirements | Metric (in billions) | Sep 30, 2022 | Dec 31, 2021 | Change (%) | | :------------------- | :----------- | :----------- | :--------- | | Loan commitments | $2.5 | $2.0 | 25.00% | - A large majority of loan commitments and standby letters of credit expire without being funded, so total contractual amounts are not representative of actual future credit exposure or liquidity requirements[247] Capital Resources Equity capital decreased 2% to $1.3 billion due to a $180.2 million drop in AOCI from rising rates, but capital ratios remain well above regulatory minimums, with a 17.48% total risk-based capital ratio | Metric (in thousands) | Sep 30, 2022 | Dec 31, 2021 | Change (%) | | :-------------------- | :----------- | :----------- | :--------- | | Ending balance at September 30, 2022 and December 31, 2021 | $1,287,802 | $1,310,736 | -1.75% | | Change in accumulated other comprehensive income | $(180,220) | $(15,101) | 1099.00% | | Capital Ratio | Seacoast (Consolidated) | Seacoast Bank | Minimum to be Well Capitalized | | :------------ | :---------------------- | :------------ | :----------------------------- | | Total Risk-Based Capital Ratio | 17.48% | 16.04% | 10.00% | | Tier 1 Capital Ratio | 16.51% | 15.08% | 8.00% | | Common Equity Tier 1 Ratio (CET1) | 15.58% | 15.08% | 6.50% | | Leverage Ratio | 12.08% | 11.03% | 5.00% | - The Company believes its $71.9 million of trust preferred securities qualify as Tier 1 capital under Basel III guidelines[257] Critical Accounting Policies and Estimates Critical accounting policies involve significant judgments and estimates for credit losses (CECL), acquisition accounting, intangible assets, fair value measurements, debt securities impairment, and contingent liabilities, which can materially affect financial reporting - Critical accounting estimates include the allowance for credit losses, acquisition accounting, intangible assets and impairment testing, other fair value measurements, impairment of debt securities, and contingent liabilities[262] - The CECL methodology for allowance for credit losses uses discounted cash flow for commercial loans and loss rate for consumer loans, applying economic forecasts and reverting to historical data when forecasts are no longer supportable[261][262] - Acquired assets and assumed liabilities are recorded at fair value, with fair value estimates for acquired loans including expected prepayments and cash flows[270] - Goodwill is evaluated for impairment annually, and core deposit intangibles are amortized on a straight-line basis and evaluated for impairment at least annually[272] Interest Rate Sensitivity The Company manages interest rate risk via simulation modeling, projecting a positive impact on net interest income in rising rate scenarios, with a 24.5% positive cumulative interest rate sensitivity gap for the next 12 months - Interest rate risk is managed using simulation modeling to optimize financial position, liquidity, and net interest income while limiting volatility[281] | Change in Interest Rates | % Change in Projected Baseline Net Interest Income (1-12 months) | % Change in Projected Baseline Net Interest Income (13-24 months) | | :----------------------- | :--------------------------------------------------------------- | :---------------------------------------------------------------- | | +2.00% | 9.6% | 13.4% | | +1.00% | 4.8% | 6.6% | | Current | —% | —% | | -1.00% | (5.9%) | (9.2%) | - The Company had a positive cumulative interest rate sensitivity gap as a percentage of total earning assets of 24.5% at September 30, 2022, for the next 12 months[285] Effects of Inflation and Changing Prices Inflation primarily impacts financial institutions through interest rates, increasing operating costs and, with rising rates, decreasing investment and loan market values, potentially affecting liquidity, earnings, equity, and mortgage originations - Interest rates have a more significant impact on a financial institution's performance than the general level of inflation[288] - Inflation increases costs of goods and services, salaries, benefits, and occupancy expenses[288] - Inflation and rising interest rates generally decrease the market value of investments and loans, potentially adversely affecting liquidity, earnings, and shareholders' equity, and slowing mortgage originations[288][289] Item 3. Quantitative and Qualitative Disclosures about Market Risk The Company's primary market risk is interest rate risk, managed by ALCO through simulation analysis, monitoring impacts on net interest income and Economic Value of Equity (EVE), projecting a positive impact in rising rate scenarios - Interest rate risk is the Company's primary market risk, managed by the ALCO through policies and simulation analysis[291] - The ALCO uses simulation analysis to monitor changes in net interest income and Economic Value of Equity (EVE) due to changes in market interest rates[292] | Change in Interest Rates | % Change in Economic Value of Equity | | :----------------------- | :----------------------------------- | | +2.00% | 6.9% | | +1.00% | 3.9% | | Current | —% | | -1.00% | (6.6%) | Item 4. Controls and Procedures Management concluded that disclosure controls and procedures were effective as of September 30, 2022, with no material changes in internal control over financial reporting during the quarter - Disclosure controls and procedures were evaluated as effective as of September 30, 2022[298] - No material changes in internal control over financial reporting occurred during the quarter ended September 30, 2022[299] Part II. Other Information Item 1. Legal Proceedings The Company is routinely involved in legal actions, but management believes current proceedings will not materially adversely affect financial position, operating results, or cash flows - Management believes current legal proceedings are not likely to have a materially adverse effect on the Company's consolidated financial position, operating results, or cash flows[300] Item 1A. Risk Factors No material changes occurred to the risk factors disclosed in the Annual Report on Form 10-K for the year ended December 31, 2021, but investors should consider all potential risks - No material changes have occurred with respect to the risk factors disclosed in the Annual Report on Form 10-K for the year ended December 31, 2021[301] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds The Company repurchased 43,676 common shares at an average price of $34.35 for tax withholding related to stock awards, not under the $100 million share repurchase program | Period | Total Number of Shares Purchased | Average Price Paid Per Share | | :----- | :----------------------------- | :--------------------------- | | 1/1/22 to 1/31/22 | 940 | $35.39 | | 4/1/22 to 4/30/22 | 39,489 | $34.34 | | 7/1/22 to 7/31/22 | 3,247 | $34.28 | | Total - 9 Months | 43,676 | $34.35 (approx. weighted avg) | - Shares purchased were to satisfy tax withholding related to stock options and vesting of share-based awards[302] - As of September 30, 2022, no shares had been repurchased under the $100 million share repurchase program authorized on December 15, 2021[304] Item 3. Defaults upon Senior Securities No defaults upon senior securities occurred during the reported period - None[305] Item 4. Mine Safety Disclosures No mine safety disclosures were required for the reported period - None[306] Item 5. Other Information No other information was reported in this section - None[307] Item 6. Exhibits This section lists exhibits filed with Form 10-Q, including merger agreements, corporate documents, CEO/CFO certifications, and XBRL financial statements - Includes merger agreements for Apollo Bancshares, Inc., Drummond Banking Company, and Professional Holding Corp[309][310] - Includes Amended and Restated Articles of Incorporation and By-laws[311][316] - Includes Certifications of the Chief Executive Officer and Chief Financial Officer pursuant to Sections 302 and 906 of the Sarbanes-Oxley Act of 2002[317][320] Signatures The report was signed on November 4, 2022, by Charles M. Shaffer, Chairman and CEO, and Tracey L. Dexter, EVP and CFO, for Seacoast Banking Corporation of Florida - The report was signed by Charles M. Shaffer, Chairman and CEO, and Tracey L. Dexter, EVP and CFO, on November 4, 2022[323]