What changed in this filing

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Item 7. Management’s Discussion and Analysis

2022-02-28 compared with 2021-03-01 · 358 added, 360 removed, 191 unchanged (79% of the section changed)

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OceanFirst Financial Corp.

has been the holding company for OceanFirst Bank since it acquired the stock of the Bank upon the Bank’s Conversion.

The Company conducts business primarily through its ownership of the Bank which, at December 31, 2020, operated its branch office and headquarters in Toms River, New Jersey, its administrative office located in Red Bank, New Jersey, an administrative office located in Mount Laurel, New Jersey, and 61 additional branch offices and six deposit production facilities located throughout central and southern New Jersey, and the greater metropolitan area of New York City.

The Bank also operated commercial loan production offices in New York City, the greater Philadelphia area and in Atlantic and Mercer Counties in New Jersey.

(the “Company”) has been the holding company for OceanFirst Bank N.A.

(the “Bank”) since it acquired the stock of the Bank upon the Bank’s Conversion.

The Company conducts business primarily through its ownership of the Bank, which, at December 31, 2021, operated its branch office and headquarters located in Toms River, New Jersey, its administrative office located in Red Bank, New Jersey, an administrative office located in Mount Laurel, New Jersey, 46 additional branch offices, and four deposit production facilities located throughout central and southern New Jersey and the greater metropolitan area of New York City and Philadelphia.

The Bank also operated commercial loan production offices in New Jersey, New York City, the greater Philadelphia area, Baltimore, and Boston.

The Company’s results of operations are primarily dependent on net interest income, which is the difference between the interest income earned on the Company’s interest-earning assets, such as loans and investments, and the interest expense on its interest-bearing liabilities, such as deposits and borrowings.

The Company also generates non-interest income such as income from bankcard services, trust and asset management products and services, deposit account services, bank owned life insurance, commercial loan swap income, and other fees.

The Company’s operating expenses primarily consist of compensation and employee benefits, occupancy and equipment, marketing, federal deposit insurance and regulatory assessments, data processing, check card processing, professional fees, and other general and administrative expenses.

The Company’s results of operations are also significantly affected by competition, general economic conditions including levels of unemployment and real estate values as well as changes in market interest rates, government policies and actions of regulatory agencies.

The Company’s results of operations are significantly affected by competition, general economic conditions including levels of unemployment and real estate values as well as changes in market interest rates, government policies, and actions of regulatory agencies.

Impact of COVID-19

On March 16, 2020, the Company announced a series of actions intended to help mitigate the impact of the COVID-19 virus outbreak on customers, employees and communities.

The Company offers its Borrower Relief Programs to address the needs of customers who were current on their loan payments as of either December 31, 2019 or the date of the modification.

In addition, in keeping with regulatory guidance under the Coronavirus Aid, Relief and Economic Security (“CARES”) Act, these loans are not considered troubled debt restructured (“TDR”) loans at December 31, 2020 and will not be reported as past due during the deferral period.

On December 27, 2020, the Coronavirus Response and Relief Supplemental Appropriations Act of 2021 was signed into law, which contains provisions that could directly impact financial institutions.

The act extends the PPP, which was originally established under the CARES Act, and provides the Company the ability to continue its Borrower Relief Program.

In keeping with regulatory guidance under the CARES Act, these loan deferrals are not considered TDR loans at December 31, 2020 and will not be reported as past due during the deferral period.

The Commercial Borrower Relief Program includes:

(1) public accommodation businesses, such as restaurants/caterers, and certain retail establishments, that are forced to close, which are eligible for full deferral of loan payments (principal and interest) for 90 days and immediate working capital facilities up to $200,000;

(2) public accommodation businesses that are reducing services in response to the pandemic (such as reducing capacity, transitioning to take-out only, etc.), which are eligible to make interest-only payments and defer principal payments for 90 days, and immediate working capital facilities up to $100,000;

and (3) additional relief programs, including but not limited to extension of initial forbearance periods, may be available to the Bank’s commercial borrowers on an individualized basis, depending on the borrower’s circumstances.

The Consumer Borrower Relief Program includes deferral of residential mortgage or consumer loan payments (principal and interest) for 90 days upon request.

To be eligible, the borrower must have experienced a financial hardship related to COVID-19.

Borrowers may apply for a second 90-day deferral period for hardships related to COVID-19.

Subsequent deferral requests may be available on an individualized basis, depending on the borrower’s circumstances.

At December 31, 2020, COVID-19 related loans under full forbearance have been substantially resolved.

On March 16, 2020, the Company announced a series of actions intended to help mitigate the impact of the COVID-19 pandemic on its customers, employees and communities.

The Company began offering its Borrower Relief Programs to address the needs of customers who were current on their loan payments as of either December 31, 2019 or the date of the modification.

In keeping with regulatory guidance under the Coronavirus Aid, Relief and Economic Security (“CARES”) Act, these loan deferrals were not considered troubled debt restructured (“TDR”) loans at December 31, 2021 and were not be reported as past due during the deferral period.

As of December 31, 2021, 99.6% of total loans complied with pre-COVID-19 terms.

Further, due to conditions caused by COVID-19, appraisals ordered in the current environment may not be indicative of the underlying loan collateral value.

As such, the Company may require multiple valuation approaches (sales comparison approach, income approach, cost approach), as applicable.

The Company assesses the individual facts and circumstances of COVID-19 related loan downgrades and, if a new appraisal is not necessary, an additional discount may be applied to an existing appraisal.

The Company also accepted and processed applications for loans under the PPP.

The Company disbursed $504 million and recorded deferred processing fees of $17.7 million.

The Company sold $298.1 million of these loans on October 29, 2020, recognizing a gain of $5.1 million.

At December 31, 2020, $95.4 million in PPP loans and $2.0 million in deferred fees remained on the balance sheet.

In addition, COVID-19 could cause a goodwill impairment test where a triggering event has occurred, and under certain circumstances may result in an impairment charge recorded in that period.

Such a charge would not impact the Company’s tangible stockholders’ equity to tangible assets ratio of 8.79% or regulatory capital.

The Company completed its annual goodwill impairment test as of August 31, 2020.

As part of this test, a quantitative assessment was performed to estimate the fair value of the Company by utilizing a weighted discounted cash flow method, guideline public company method and transaction method.

The results of the evaluation concluded that the fair value of the Company exceeded the carrying value, and therefore goodwill impairment did not exist as of the test date.

At December 31, 2020, the Company performed a qualitative assessment to ensure no events or circumstances had occurred subsequent to August 31, 2020 that would impact goodwill.

The Company determined based on the December 31, 2020 qualitative evaluation, no triggering events occurred and therefore no impairment existed.

The full impact of COVID-19 is unknown and rapidly evolving.

It is impacting the Company’s operations and financial results, as well as those of the Bank’s customers.

For the year ended December 31, 2020, the Company recognized an elevated credit loss expense of $59.4 million and an increase in operating expense of $4.5 million, each related to COVID-19.

As such, the Company may require multiple valuation approaches (sales comparison approach, income approach, or cost approach), as applicable.

The Company will assess the individual facts and circumstances of COVID-19 related loan downgrades and, if a new appraisal is not necessary, an additional discount may be applied to an existing appraisal.

The Company also accepted and processed applications for loans under the Paycheck Protection Program (“PPP”), which was originally established under the CARES Act.

At December 31, 2021, $22.9 million in PPP loans and $731,000 in deferred fees remained on the consolidated statements of financial condition.

There were $73.0 million of PPP loans originated during the year ended December 31, 2021.

On December 27, 2020, the Coronavirus Response and Relief Supplemental Appropriations (“CRRSA”) Act of 2021 was signed into law, which contained provisions that directly impacted financial institutions.

The CRRSA Act extended the PPP and provided the Company the ability to continue its Borrower Relief Programs and related TDR and past due reporting considerations.

For further discussion, refer to Risk Factors – Risk Related to the COVID-19 Pandemic.

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Two River’s results of operations are included in the consolidated results for the period beginning on January 1, 2020.

On January 1, 2020, the Company completed its acquisition of Country Bank which added $793.7 million to assets, $618.4 million to loans, $652.7 million to deposits.

On January 1, 2020, the Company completed its acquisition of Country Bank, which added $793.7 million to assets, $618.4 million to loans, and $652.7 million to deposits.

Country Bank’s results of operations are included in the consolidated results for the period beginning on January 1, 2020.

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Capital Bank’s results of operations are included in the consolidated results for the period beginning on February 1, 2019.

On January 31, 2018, the Company completed its acquisition of Sun which added $2.0 billion to assets, $1.5 billion to loans, and $1.6 billion to deposits.

Sun’s results of operations are included in the consolidated results for the period beginning on February 1, 2018.

These transactions have enhanced the Bank’s position as the premier community banking franchise in central and southern New Jersey, and metropolitan areas of Philadelphia and New York City and they have grown business lines, expanded the geographic footprint and improved financial performance.

These transactions have enhanced the Company’s position as the premier community banking franchise in central and southern New Jersey, and metropolitan areas of Philadelphia and New York City and they have grown business lines, expanded the geographic footprint and improved financial performance.

The Company will continue to evaluate potential acquisition opportunities to further create stockholder value.

The Company operates as a full-service community bank delivering commercial and consumer financing solutions, deposit services and wealth management products and services throughout New Jersey and the metropolitan areas of Philadelphia and New York City.

The Bank is the largest and oldest community-based financial institution headquartered in Ocean County, New Jersey.

The Company operates as a full-service regional bank delivering comprehensive financial products and services, which can include commercial and consumer financing, deposit services, and wealth management products and services, throughout New Jersey and the major metropolitan markets of Philadelphia, New York, Baltimore, Washington D.C., and Boston.

The Bank competes with larger, out-of-market financial service providers through its local and digital focus and the delivery of superior service.

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The Company’s strategy has been to grow profitability while limiting exposure to credit, interest rate, and operational risks.

To accomplish these objectives, the Bank has sought to (1) grow commercial loans through the offering of commercial lending services to local businesses;

(2) grow core deposits (defined as all deposits other than time deposits) through product offerings appealing to a broadened customer base;

To accomplish these objectives, the Bank has sought to:

(1) grow commercial loans through the offering of commercial lending services to local businesses and through strategic expansions to adjacent markets;

(2) grow core deposits (defined as all deposits excluding time deposits) through product offerings appealing to a broadened customer base;

and (3) increase non-interest income by expanding the menu of fee-based products and services and investing additional resources in these product lines.

The growth in these areas has occurred both organically and through acquisitions.

The Company will focus on prudent growth to create value for stockholders, which may include opportunistic acquisitions.

The Company focuses on prudent growth to create value for stockholders, which may include opportunistic acquisitions.

The Company will also continue to build additional operational infrastructure and invest in key personnel in response to growth and changing business conditions.

Growing Commercial Loans

With industry consolidation eliminating most locally-headquartered competitors, the Company fills a void for locally-delivered commercial loan and deposit services.

The Bank has strategically and steadily added experienced commercial lenders in various New Jersey counties as well as teams in New York City and the greater Philadelphia area.

At December 31, 2020, co mmercial loans (which include multi-family and commercial real estate loans, commercial construction loans and commercial and industrial loans) represented 65.5% of the Bank’s total loans, as compared to 48.5% at December 31, 2015.

Commercial loan products entail a higher degree of credit risk than is involved in residential real estate lending activity.

As a consequence, management continues to employ a well-defined credit policy focusing on quality underwriting and close management and Board monitoring.

See Risk Factors – The Bank’s emphasis on commercial lending may expose the Bank to increased lending risks .

With industry consolidation eliminating many locally-headquartered competitors, the Company fills a void for locally-delivered commercial loan and deposit services.

The Bank has strategically and steadily added experienced commercial lenders in various New Jersey counties as well as teams in New York City, the greater Philadelphia area, Baltimore, Washington D.C., and Boston.

At December 31, 2021, commercial loans (which includes multi-family and commercial real estate loans, commercial construction loans, and commercial and industrial loans) represented 68.2% of the Bank’s total loans, as compared to 56.1% at December 31, 2019.

Commercial loan products entail a higher degree of credit risk than residential real estate lending activity.

As a consequence, management continues to employ a well-defined credit policy focusing on quality underwriting and close oversight and Board monitoring.

See Risk Factors – Risks Related to Lending Activities – The Bank’s emphasis on commercial lending may expose the Bank to increased lending risks .

Increasing Core Deposits

The Bank seeks to increase core deposits (all deposits excluding time deposits) in its primary market area by improving market penetration.

The Bank seeks to increase core deposits in its primary market area by improving market penetration.

Core account development has benefited from Bank efforts to attract business deposits in conjunction with its commercial lending operations and from an expanded mix of retail core account products.

The Bank continues to invest in its digital products and customer experience with the Bank’s digital capabilities on par with national banks and fintechs.

As a result of these efforts the Bank’s core deposits ratio was 92.0% and the loans-to-deposits ratio was 88.6% at December 31, 2021.

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In 2018, the Bank replaced its third-party broker/dealer investment sales program with a hybrid robo-advisor product offered by the Bank’s partner, Nest Egg, a registered investment adviser.

Nest Egg is an investment platform that helps define and reach financial goals by providing access to high quality and cost-effective investments.

Nest Egg is an investment platform that helps customers define and reach financial goals by providing access to high quality and cost-effective investments.

It includes web-based tools as well as access to personal financial advisors via telephone, chat, or video.

At December 31, 2020, the Company had an ownership interest of less than 20% in NestEgg and a seat on the Board of Directors.

At December 31, 2021, the Company had an ownership interest of less than 20% in Nest Egg and a seat on the Board of Directors.

The Company’s minority interest in Nest Egg does not require separate entity reporting.

On January 29, 2021, the Company made a minority, non-controlling equity investment in Auxilior Capital Partners (“Auxilior”) and received a seat on the Auxilior Board of Directors.

During 2021, the Company made a minority, non-controlling equity investment in Auxilior Capital Partners (“Auxilior”) and received a seat on the Auxilior Board of Directors.

Auxilior was formed in 2020 as a nationwide specialty commercial equipment finance company focused on five key business verticals:

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In addition to origination, underwriting, asset management, and customer service functions within each industry vertical, Auxilior can syndicate full loans as well as participations to banks, funds, and other third-party buyers of assets.

In February 2022 , the Company signed an agreement to acquire a majority interest in Trident Abstract Title Agency, LLC with the right to acquire 100%.

This transaction will provide an additional source of non-interest income to benefit the Company.

Branch Rationalization and Service Delivery

Management continues to evaluate the Bank’s branch network for consolidation opportunities.

The Bank consolidated 13 branches in 2020, following the consolidation of eight and 17 branches in 2019 and 2018, respectively, bringing the total number of branches consolidated to 57 over the past five years.

In addition to branch consolidation, the Bank is adapting to the industry wide trend of declining branch activity by transitioning to a universal banker staffing model, with a smaller branch staff handling sales and service transactions, as well as increasing the marketing of products that feature digital and mobile services.

In certain locations, routine transactions are handled through Video Teller Machines, an advanced technology with live team members in a remote location performing transactions for multiple Video Teller Machines.

The Bank consolidated 13 branches in 2021, following the consolidation of 13 branches in 2020 and seven branches in 2019.

The Bank has consolidated 67 branch locations since 2013.

The Bank also sold two branches in 2021 with deposits of $100.9 million.

In addition to branch consolidations, the Bank is adapting to the industry wide trend of declining branch activity by transitioning to a universal banker staffing model, with a smaller branch staff handling sales and service transactions, as well as increasing the marketing of products that feature digital and mobile services.

In certain locations, routine transactions are handled through video teller machines, an advanced technology with live team members in a remote location that perform transactions for multiple video teller machines.

The Bank is also investing in multiple digital services to enhance the customer experience and improve security.

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Capital Management

In addition to the objectives described above, the Company actively manages its capital position to improve return on tangible equity.

The Company has, over the past few years, implemented or announced, five stock repurchase programs.

The most recent plan to repurchase up to 5% of outstanding common stock was announced on December 18, 2019 to repurchase up to an additional 2.5 million shares.

The Company suspended its repurchase activity on February 28, 2020 in light of the COVID-19 pandemic and subsequently determined to recommence repurchases under its existing stock repurchase plan in February 2021.

For the year ended December 31, 2020, the Company repurchased 648,851 shares of its common stock under these repurchase programs.

At December 31, 2020, 2,019,145 shares remain available for repurchase.

In May 2020, the Company raised $55.7 million of 7.0% fixed-to-floating rate non-cumulative perpetual preferred stock, with a par value of $0.01 and a liquidation price of $1,000 per share.

The proceeds were retained to strengthen capital and balance sheet liquidity entering the economic downturn.

The Company conducts capital stress testing, which includes various scenarios, as one means of evaluating capital adequacy.

The results of stress testing are considered in the capital planning process and strategy development.

In addition to the objectives described above, the Company actively manages its capital position to ensure adequate coverage and improve return on stockholders’ equity.

Over the past few years, the Company has implemented or announced six stock repurchase programs.

On December 18, 2019, the Company announced the plan to repurchase up to 5% of outstanding common stock or 2.5 million shares.

The Company suspended its repurchase activity on February 28, 2020 in light of the COVID-19 pandemic, and subsequently recommenced repurchases in February 2021.

On June 25, 2021, the Company announced the authorization to repurchase up to an additional 5% of the Company’s outstanding common stock, or 3.0 million shares.

For the year ended December 31, 2021, the Company repurchased 1,711,484 shares of its common stock under these repurchase programs and 3,307,661 shares remain available for repurchase.

Selected Financial Data

The selected consolidated financial and other data of the Company set forth below is derived in part from, and should be read in conjunction with the Consolidated Financial Statements of the Company and Notes thereto presented elsewhere in this Annual Report.

At December 31,

2021 2020 2019

(dollars in thousands)

Selected Financial Condition Data:

Total assets $ 11,739,616 $ 11,448,313 $ 8,246,145

Debt securities available-for-sale, at estimated fair value 568,255 183,302 150,960

Debt securities held-to-maturity, net of allowance for securities credit losses 1,139,193 937,253 768,873

Equity investments 101,155 107,079 10,136

Restricted equity investments, at cost 53,195 51,705 62,356

Loans receivable, net of allowance for loan credit losses 8,583,352 7,704,857 6,207,680

Deposits 9,732,816 9,427,616 6,328,777

FHLB advances — — 519,260

Securities sold under agreements to repurchase and other borrowings 347,910 363,925 168,540

Stockholders’ equity 1,516,553 1,484,130 1,153,119

For the Year Ended December 31,

2021 2020 2019

(dollars in thousands, except per share amounts)

Selected Operating Data:

Interest income $ 342,092 $ 379,608 $ 308,794

Interest expense 36,754 66,657 52,823

Net interest income 305,338 312,951 255,971

Credit loss (benefit) expense (11,832) 59,404 1,636

Net interest income after credit loss (benefit) expense 317,170 253,547 254,335

Other income (excluding net gain on equity investments and gain on sale of PPP loans) 44,786 47,611 41,898

Net gain on equity investments 7,145 21,214 267

Gain on sale of PPP loans — 5,101 —

Operating expenses (excluding FHLB advance prepayment fees, branch consolidation, and merger related expenses) 213,020 208,604 169,589

FHLB advance prepayment fees — 14,257 —

Branch consolidation expense 12,337 7,623 9,050

Merger related expenses 1,503 15,947 10,503

Income before provision for income taxes 142,241 81,042 107,358

Provision for income taxes 32,165 17,733 18,784

Net income $ 110,076 $ 61,212 $ 88,574

Net income available to common stockholders $ 106,060 $ 61,212 $ 88,574

Basic earnings per share $ 1.79 $ 1.02 $ 1.77

Diluted earnings per share $ 1.78 $ 1.02 $ 1.75

At or for the Year Ended December 31,

2021 2020 2019

Selected Financial Ratios and Other Data (1) :

Performance Ratios:

Return on average assets (2)

0.91 % 0.55 % 1.10 %

Return on average stockholders’ equity (2)

7.02 4.20 7.84

Stockholders’ equity to total assets 12.92 12.96 13.98

Net interest rate spread (3)

2.80 2.96 3.40

Net interest margin (4)

2.93 3.16 3.62

Operating expenses to average assets (2)

1.94 2.20 2.35

Efficiency ratio (2)(5)

63.50 63.70 63.44

Loans-to-deposits ratio (6)

88.60 82.27 98.20

Asset Quality Ratios:

Non-performing loans as a percent of total loans receivable (6)(7)

0.22 0.47 0.29

Non-performing assets as a percent of total assets (7)

0.16 0.32 0.22

Allowance for credit losses as a percent of total loans receivable (6)(8)

0.57 0.78 0.27

Allowance for credit losses as a percent of total non-performing loans (7)(8)

257.81 166.81 94.41

Wealth Management (dollars in thousands):

Wealth assets under administration and management (“AUA/M”) $ 287,404 $ 245,175 $ 195,415

Nest Egg AUA/M 428,558 398,174 347,606

Per Share Data:

Cash dividends per common share $ 0.68 $ 0.68 $ 0.68

Dividend payout ratio per common share 38.20 % 66.73 % 38.96 %

Stockholders’ equity per common share at end of period $ 25.63 $ 24.57 $ 22.88

Number of full-service customer facilities:

(1) With the exception of end of year ratios, all ratios are based on average daily balances.

(2) Performance ratios for 2021 include merger related expenses, branch consolidation expenses, and a net gain on equity investments of $6.7 million or $5.1 million, net of tax benefit.

Performance ratios for 2020 include a net gain on equity investments, gain on sale of PPP loans, FHLB advance prepayment fees, merger related expenses, branch consolidation expenses, and Two River Bancorp (“Two River”) and Country Bank Holding Company, Inc.

(“Country Bank”) opening credit loss expense under the CECL model of $14.3 million or $11.0 million, net of tax benefit.

Performance ratios for 2019 include merger related expenses, branch consolidation expenses, non-recurring professional fees, compensation expense due to the retirement of an executive officer, and the reduction in income tax expense from the revaluation of state deferred tax assets as a result of a change in the New Jersey tax code of $20.6 million, or $16.3 million, net of tax benefit.

(3) Net interest rate spread represents the difference between the weighted average yield on interest-earning assets and the weighted average cost of interest-bearing liabilities.

(4) Net interest margin represents net interest income as a percentage of average interest-earning assets.

(5) Efficiency ratio represents the ratio of operating expenses to the aggregate of other income and net interest income.

(6) Total loans receivable excludes loans held-for-sale.

(7) Non-performing assets consist of non-performing loans and real estate acquired through foreclosure.

Non-performing loans consist of all loans 90 days or more past due and other loans in the process of foreclosure.

It is the Company’s policy to cease accruing interest on all such loans and to reverse previously accrued interest.

(8) The loans acquired from prior bank acquisitions were recorded at fair value.

The net unamortized credit and purchased with credit deterioration (“PCD”) marks on these loans, not reflected in the allowance for loan credit losses, was $18.9 million, $28.0 million, and $30.3 million at December 31, 2021, 2020, and 2019, respectively.

Highlights of the Company’s financial results for the year ended December 31, 2021 were as follows:

Total assets increased to $11.45 billion at December 31, 2020, from $8.25 billion at December 31, 2019.

Loans receivable, net of allowance for credit losses, increased by $1.50 billion at December 31, 2020, as compared to December 31, 2019, while deposits increased $3.10 billion over the same period.

The increases were primarily the result of the Two River and Country Bank acquisitions and $1.51 billion of organic deposit growth.

Net income available to common stockholders for the year ended December 31, 2020 was $61.2 million, or $1.02 per diluted share, as compared to net income of $88.6 million, or $1.75 per diluted share for the prior year.

Net income for the year ended December 31, 2020 reflects net gain on equity investments, gain on sale of PPP loans, FHLB advance prepayment fees, branch consolidation expenses, merger related expenses, and Two River and Country Bank opening credit loss expense under the CECL model.

These items decreased net income, net of tax, for the year ended December 31, 2020 by $11.0 million.

Net income for the year ended December 31, 2019 included merger related expenses, branch consolidation expenses, non-recurring professional fees, compensation expense due to the retirement of an executive officer, and reduction in income tax expense from the revaluation of state deferred tax assets as a result of a change in the New Jersey tax code, of $16.3 million, net of tax.

These items reduced diluted earnings per share by $0.18 and $0.32, respectively, for the years ended December 31, 2020 and 2019.

Annual results for 2020 were impacted by the COVID-19 pandemic, through higher credit losses, net interest margin compression and increased operating expenses.

The Company remains well-capitalized with a tangible stockholders’ equity to tangible assets ratio of 8.79% at December 31, 2020.

Critical Accounting Policies

Note 1 Summary of Significant Accounting Policies, to the Company’s Audited Consolidated Financial Statements for the year ended December 31, 2020 contains a summary of significant accounting policies.

Total assets increased by $291.3 million to $11.74 billion at December 31, 2021, from $11.45 billion at December 31, 2020.

Cash and due from banks decreased by $1.07 billion to $204.9 million at December 31, 2021, from $1.27 billion at December

31, 2020, as excess liquidity was primarily used to fund loan growth and purchase securities.

Total loans, excluding PPP loans of $22.9 million and $95.4 million at December 31, 2021 and December 31, 2020, respectively, increased by $939.2 million, to $8.60 billion at December 31, 2021, from $7.66 billion at December 31, 2020, primarily due to organic growth, primarily in commercial loans, and $302.0 million in purchases of residential real estate loan pools.

Deposits increased by $305.2 million to $9.73 billion at December 31, 2021, from $9.43 billion at December 31, 2020.

The deposits growth is net of deposits sold of $100.9 million related to the sale of two branches in December 2021.

Total deposits, excluding time deposits of $775.0 million at December 31, 2021 and $1.37 billion at December 31, 2020, increased by $903.0 million to $8.96 billion at December 31, 2021, from $8.05 billion at December 31, 2020 as a result of the Company’s efforts to improve the quality of deposits .

Net income available to common stockholders for the year ended December 31, 2021 was $106.1 million, or $1.78 per diluted share, as compared to $61.2 million, or $1.02 per diluted share for the prior year.

Net income available to common stockholders for the year ended December 31, 2021 included merger related expenses, branch consolidation expenses, and a net gain on equity investments of $1.5 million, $12.3 million, and $7.1 million, respectively.

These items decreased net income for the year ended December 31, 2021 by $5.1 million, net of tax.

Net income for the year ended December 31, 2020 included a net gain on equity investments, merger related expenses, FHLB advance prepayment fees, branch consolidation expenses, gain on sale of PPP loans, and Two River and Country Bank opening credit loss expense under the CECL model of $20.9 million, $15.9 million, $14.3 million, $7.6 million, $5.1 million, and $2.4 million, respectively.

These items decreased net income for the year ended December 31, 2020 by $11.0 million, net of tax.

These items reduced diluted earnings per share by $0.08 and $0.18 for the years ended December 31, 2021 and 2020, respectively.

The Company remains well-capitalized with a stockholders’ equity to total assets ratio of 12.92% at December 31, 2021.

Critical Accounting Policies and Estimates

Summary of Significant Accounting Policies to the Company’s Audited Consolidated Financial Statements for the year ended December 31, 2021 contains a summary of significant accounting policies.

Various elements of these accounting policies, by their nature, are subject to estimation techniques, valuation assumptions and other subjective assessments.

Certain assets are carried in the consolidated statements of financial condition at estimated fair value or the lower of cost or estimated fair value.

Policies with respect to the methodology used to determine the allowance for credit losses and judgments regarding securities are the most critical accounting policies because they are important to the presentation of the Company’s financial condition and results of operations.

These judgments and policies involve a higher degree of complexity and require management to make difficult and subjective judgments which often require assumptions or estimates about highly uncertain matters.

Policies with respect to the methodology used to determine the allowance for credit losses is a critical accounting policy and estimate because of its importance to the presentation of the Company’s financial condition and results of operations.

The critical accounting policy involves a higher degree of complexity and requires management to make difficult and subjective judgments which often require assumptions or estimates about highly uncertain matters.

The use of different judgments, assumptions, and estimates could result in material differences in the results of operations or financial condition.

These critical accounting policies and their application are reviewed periodically, and at least annually, with the Audit Committee of the Board of Directors.

The critical accounting policy and its application is reviewed periodically, and at least annually, with the Audit Committee of the Board of Directors.

On January 1, 2020, the Company adopted Accounting Standards Update (“ASU”) 2016-13, Measurement of Credit Losses on Financial Instruments (Topic 326).

This ASU significantly changed the Company’s allowance for credit losses accounting policy that existed at December 31, 2019.

ASU 2016-13 is the most critical accounting policy in the preparation of the consolidated financial statements as of and for the period ended December 31, 2020.

Allowance for Credit Losses

Under the CECL model, the allowance for credit losses (“ACL”) on financial assets is a valuation allowance estimated at each balance sheet date in accordance with generally accepted accounting principles (“GAAP”) that is deducted from the financial assets’ amortized cost basis to present the net amount expected to be collected on the financial assets.

The CECL model also applies to certain off-balance sheet credit exposures.

The Company estimates the ACL on loans based on the underlying assets’ amortized cost basis, which is the amount at which the financing receivable is originated or acquired, adjusted for applicable accretion or amortization of premium, discount, net deferred fees or costs, collection of cash, and charge-offs.

In the event that collection of principal becomes uncertain, the Company has policies in place to write-off accrued interest receivable by reversing interest income in a timely manner.

Therefore, the Company has made a policy election to exclude accrued interest from the amortized cost basis and therefore excludes it from the measurement of the ACL.

For loans under forbearance as a result of COVID-19, the Company made a policy election to include the accrued interest receivable related to such loans in the amortized cost basis and therefore includes it in the measurement of the ACL.

Accrued interest receivable at December 31, 2020 was $35.3 million, of which $8.0 million related to forbearance loans.

Expected credit losses are reflected in the ACL through a charge to credit loss expense.

The Company’s estimate of the ACL reflects credit losses currently expected over the remaining contractual life of the assets.

When the Company deems all or a portion of a financial asset to be uncollectible the appropriate amount is written off and the ACL is reduced by the same amount.

The Company applies judgment to determine when a financial asset is deemed uncollectible.

When available information confirms that specific financial assets, or portions thereof, are uncollectible, these amounts are charged-off against the ACL.

Subsequent recoveries, if any, are credited to the ACL when received.

The Company measures the ACL of financial assets on a collective portfolio segment basis when the financial assets share similar risk characteristics.

The Company has identified the following portfolio segments of financial assets with similar risk characteristics for measuring expected credit losses:

commercial and industrial, commercial real estate - owner occupied, commercial real estate - investor (including commercial real estate - construction and land), residential real estate, consumer (including student loans) and held-to-maturity (“HTM”) debt securities.

The Company further segments the commercial loan portfolios by risk rating, and the residential and consumer loan portfolios by delinquency.

The HTM portfolio is segmented by rating category.

The Company’s methodology to measure the ACL incorporates both quantitative and qualitative information to assess lifetime expected credit losses at the portfolio segment level.

The quantitative component includes the calculation of loss rates using an open pool method.

Under this method, the Company calculates a loss rate based on historical loan level loss experience for portfolio segments with similar risk characteristics.

The historical loss rate is adjusted for select macroeconomic variables that consider both historical trends as well as forecasted trends for a single economic scenario.

The adjusted loss rate is calculated for an eight quarter forecast period then reverts to the historical loss rate on a straight-line basis over four quarters.

The adjusted loss rate is then applied to the exposure at default on an undiscounted basis.

The Company differentiates its loss-rate method for HTM debt securities by looking to publicly available historical default and recovery statistics based on the attributes of issuer type, rating category and time to maturity.

The Company measures expected credit losses of these financial assets by applying loss rates to the amortized cost basis of each asset taking into consideration amortization, prepayment and default assumptions.

Allowance for credit losses in accordance with ASU 2016-13 is a critical accounting policy in the preparation of the consolidated financial statements as of and for the period ended December 31, 2021.

Allowance for Credit Losses (“ACL”)

The Company’s methodology to measure the ACL incorporates both quantitative and qualitative information to assess lifetime

expected credit losses at the portfolio segment level.

The quantitative component of the ACL involves assumptions that require a significant level of estimation;

these include historical losses as a predictor of future performance, and the accuracy of macro-economic forecasts over a reasonable and supportable forecast period.

The Company has elected to use an open pool method and extends its look back period each quarter to capture as many data points as possible in its historical loss rate calculation.

A historical data set is expected to provide the best indication of future credit performance.

Alternative loss calculation methods, such as vintage and migration methodologies, limit observable data to closed pools of loans, which excludes performance data from the historical loss rate calculation.

Macro-economic forecasts used in the quantitative analysis are provided by a leader in global forecasting.

The Company uses the base case macro-economic forecast to reflect the consensus view of future economic conditions.

Electing scenarios that are stronger or weaker than the base case would reduce or increase, respectively, the ACL measurement.

The Company measures the accuracy of the macro-economic forecasts quarterly to identify any material deviations that would be considered for a

qualitative adjustment.

The Company assumes a reasonable and supportable forecast period of 8 quarters and a reversion period of 4 quarters based on the analysis of historical U.S.

business cycles.

Prepayment and forward interest rate projections are also assumptions used in the quantitative model subject to estimation.

These assumptions are consistent with the assumptions employed by the Company’s Interest Rate Risk (“IRR”) model.

Changes in these assumptions have varying implications to the ACL measurement.

For example, faster prepayment rates would shorten the life of loans and reduce the lifetime expected credit loss, whereas slower prepayment rates would have the inverse effect.

The Company considers qualitative adjustments to expected credit loss estimates for information not already captured in the loss estimation process.

Qualitative factor adjustments may increase or decrease management’s estimate of expected credit losses.

Adjustments will not be made for information that has already been considered and included in the quantitative allowance.

Qualitative loss factors are based on management's judgment of company, market, industry or business specific data, changes in loan composition, performance trends, regulatory changes, uncertainty of macroeconomic forecasts, and other asset specific risk characteristics.

Collateral Dependent Financial Assets

For collateral dependent financial assets where the Company has determined that foreclosure of the collateral is probable and where the borrower is experiencing financial difficulty, the ACL is measured based on the difference between the fair value of the collateral and the amortized cost basis of the asset as of the measurement date.

Fair value is generally calculated based on the value of the underlying collateral less an appraisal discount and the estimated cost to sell.

Due to conditions caused by COVID-19, appraisals ordered in the current environment may not be indicative of the underlying loan collateral value.

As such, the Company may require multiple valuation approaches (sales comparison approach, income approach, cost approach), as applicable.

The Company assesses the individual facts and circumstances of COVID-19-related loan downgrades and, if a new appraisal is not necessary, an additional discount may be applied to an existing appraisal.

Troubled Debt Restructured Loans

A loan that has been modified or renewed is considered a TDR when two conditions are met:

(1) the borrower is experiencing financial difficulty and (2) concessions are made for the borrower's benefit that would not otherwise be considered for a borrower or transaction with similar credit risk characteristics.

So long as they share similar risk characteristics, TDRs may be collectively evaluated and included in the Company’s existing portfolio segments to measure the ACL, unless the TDR is collateral dependent.

Loans modified in accordance with the CARES Act are not considered TDRs.

Loan Commitments and Allowance for Credit Losses on Off-Balance Sheet Credit Exposures

Financial assets include off-balance sheet credit instruments, such as commitments to make loans and commercial letters of credit, issued to meet customer financing needs.

The Company’s exposure to credit loss in the event of nonperformance by the other party to the financial instrument for off-balance sheet loan commitments is represented by the contractual amount of those instruments.

Such financial instruments are recorded when they are funded.

The Company records an allowance for credit losses on off-balance sheet credit exposures through a charge to credit loss expense for off-balance sheet credit exposures.

The ACL on off-balance sheet credit exposures is estimated by portfolio segment at each balance sheet date under the CECL model using the same methodologies as portfolio loans, taking into consideration management’s assumption of the likelihood that funding will occur, and is included in other liabilities on the Company’s consolidated balance sheets.

Acquired Loans

Acquired loans are recorded at fair value at the date of acquisition based on a discounted cash flow methodology that considers various factors including the type of loan and related collateral, classification status, fixed or variable interest rate, term of loan and whether or not the loan was amortizing, and a discount rate reflecting the Company’s assessment of risk inherent in the cash flow estimates.

Certain acquired loans are grouped together according to similar risk characteristics and are aggregated when applying various valuation techniques.

These cash flow evaluations are subjective as they require material estimates, all of which may be susceptible to significant change.

Prior to January 1, 2020, loans acquired in a business combination that had evidence of deterioration of credit quality since origination and for which it was probable, at acquisition, that the Company would be unable to collect all contractually required payments receivable were considered purchased credit impaired (“PCI”).

PCI loans were individually evaluated and recorded at fair value at the date of acquisition with no initial valuation allowance based on a discounted cash flow methodology that considered various factors including the type of loan and related collateral, classification status, fixed or variable interest rate, term of loan and whether or not the loan was amortizing, and a discount rate reflecting the Company’s assessment of risk inherent in the cash flow estimates.

Beginning on January 1, 2020, loans acquired in a business combination that have experienced more-than-insignificant deterioration in credit quality since origination are considered PCD loans.

The Company evaluated acquired loans for deterioration in credit quality based on any of, but not limited to, the following:

(1) non-accrual status;

(2) troubled debt restructured designation;

(3) risk ratings of special mention, substandard or doubtful;

(4) watchlist credits;

and (5) delinquency status, including loans that were current on acquisition date, but had been previously delinquent.

At the acquisition date, an estimate of expected credit losses was made for groups of PCD loans with similar risk characteristics and individual PCD loans without similar risk characteristics.

This initial allowance for credit losses is allocated to individual PCD loans and added to the purchase price or acquisition date fair values to establish the initial amortized cost basis of the PCD loans.

As the initial allowance for credit losses is added to the purchase price, there is no credit loss expense recognized upon acquisition of a PCD loan.

Any difference between the unpaid principal balance of PCD loans and the amortized cost basis is considered to relate to noncredit factors and results in a discount or premium.

Discounts and premiums are recognized through interest income on a level-yield method over the life of the loans.

All loans considered to be PCI prior to January 1, 2020 were converted to PCD on that date.

The transition adjustment for the PCI loans to PCD loans resulted in a reclassification of $3.2 million from the specific credit fair value adjustment to the allowance for credit losses on loans.

For acquired loans not deemed PCD at acquisition, the differences between the initial fair value and the unpaid principal balance are recognized as interest income on a level-yield basis over the lives of the related loans.

At the acquisition date, an initial allowance for expected credit losses is estimated and recorded as credit loss expense.

The subsequent measurement of expected credit losses for all acquired loans is the same as the subsequent measurement of expected credit losses for originated loans.

Qualitative loss factors are grounded in the Company’s long-term credit losses and reflect an assumption that past behavior is a reasonable predictor of future performance.

The Company considers the peak two-year net charge off rate to capture maximum potential volatility over the reasonable and supportable forecast period.

Historical losses that inform the guardrails for the qualitative adjustments are anchored to 2005 and extended annually.

This period is intended to represent the credit profile of the current portfolio and capture prior performance in a severe economic recession.

These guardrails are updated annually to capture recent behavior that is indicative of the credit profile of the current portfolio.

Management considers subjective, objective, and unique qualitative factors at each estimation date.

Subjective factors incorporate external factors, personnel, and controls, as well as portfolio composition and performances.

Subjective factors include local competition;

portfolio nature, volume and concentration;

credit trends;

lending policy, procedure and loan review;

lending management and staff;

regulatory changes and forecast uncertainty.

Objective factors address gaps in the quantitative model, such as the limited loss history and the inherent risk of Special Mention commercial real estate loans.

Unique factors will capture one-time events, such as environmental threats and model updates that are expected to impact performance over the forecast period.

Unique factors are identified, assessed, and documented in the quarter they are applied.

The Company incorporated unique factors in 2021 to address macro-economic variable volatility and alternative economic forecast projections.

Although management believes that it uses the best information available to establish the ACL in conformity with GAAP, future adjustments to the ACL may be necessary and results of operations could be adversely affected if circumstances differ substantially from the assumptions used in making the determinations.

For example, if the Company had elected a contemporaneous downside scenario where the macro-economic forecasts were weaker than the base case, the ACL measurement would have been approximately $5.2 million higher.

This sensitivity scenario does not represent a change in the Company’s expectations of the economic environment but provides a hypothetical result to assess the sensitivity of the ACL to changes in key inputs.

Given the level of uncertainty and the material impact on the ACL measurement, all assumptions are reviewed and updated as necessary at each estimation date.

Other than discussed above, there were no changes in the estimation methodology for these assumptions in 2021.

Analysis of Net Interest Income

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Net interest income depends upon the relative amounts of interest-earning assets and interest-bearing liabilities and the interest rate earned or paid on them.

For the years ended December 31, 2021, 2020, and 2019, interest income included net loan fees of $2.5 million and $6.0 million, and net loan costs of $672,000, respectively.

The following table sets forth certain information relating to the Company for each of the years ended December 31, 2021, 2020 and 2019.

1 unchanged sentence

Average balances are derived from average daily balances.

The yields and costs include fees which are considered adjustments to yields.

The yields and costs include certain fees and costs which are considered adjustments to yields.

For the Year Ended December 31,

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Loans receivable, net (2)

Commercial real estate 5,299,813 236,749 4.47 3,329,396 168,507 5.06 3,012,521 149,965 4.98

Commercial 5,362,265 221,144 4.12 5,299,813 236,749 4.47 3,329,396 168,507 5.06

Residential real estate 2,309,790 79,696 3.45 2,465,740 93,120 3.78 2,204,931 87,729 3.98

Home equity loans and lines 318,090 15,183 4.77 339,896 18,284 5.38 357,137 17,991 5.04

Other consumer 72,331 4,169 5.76 107,672 5,411 5.03 35,424 1,788 5.05

Allowance for credit losses, net of deferred loan costs and fees (33,343) — — (8,880) — — (9,972) — —

Home equity loans and lines and other consumer 298,193 14,397 4.83 390,421 19,352 4.96 447,568 23,695 5.29

Allowance for loan credit losses, net of deferred loan costs and fees (48,637) — — (33,343) — — (8,880) — —

Loans receivable, net (2)

7 unchanged sentences

Interest-bearing liabilities:

Interest-bearing checking accounts $ 3,168,889 19,395 0.61 % $ 2,517,068 16,820 0.67 % $ 2,336,917 9,219 0.39 %

Money market deposit accounts 677,554 2,902 0.43 605,607 4,919 0.81 571,997 2,818 0.49

Savings accounts 1,449,982 2,505 0.17 906,086 1,195 0.13 877,179 990 0.11

Interest-bearing checking $ 3,878,465 13,400 0.35 % $ 3,168,889 19,395 0.61 % $ 2,517,068 16,820 0.67 %

Money market 769,157 1,105 0.14 677,554 2,902 0.43 605,607 4,919 0.81

Savings 1,581,472 631 0.04 1,449,982 2,505 0.17 906,086 1,195 0.13

Time deposits

7 unchanged sentences

228,600 11,291 4.94 207,386 10,787 5.20 98,095 5,674 5.78

Total borrowings 363,539 11,544 3.18 746,176 18,367 2.46 550,545 14,391 2.61

Total interest-bearing liabilities 7,577,961 36,754 0.49 7,574,458 66,657 0.88 5,508,794 52,823 0.96

7,574,458 66,657 0.88 5,508,794 52,823 0.96 5,188,519 36,152 0.70

Non-interest-bearing deposits

18 unchanged sentences

137.36 % 130.65 % 128.51 %

(1) Amounts represent debt and equity securities, including FHLB and Federal Reserve Bank stock, and are recorded at average amortized cost, net of allowance for credit losses.

(2) Amount is net of deferred loan costs and fees, undisbursed loan funds, discounts and premiums and estimated loss allowances, and includes loans held-for-sale and non-performing loans.

(1) Amounts represent debt and equity securities, including FHLB and Federal Reserve Bank stock, and are recorded at average amortized cost, net of allowance for securities credit losses.

(2) Amount is net of deferred loan costs and fees, undisbursed loan funds, discounts and premiums and allowance for loan credit losses, and includes loans held-for-sale and non-performing loans.

(3) Net interest rate spread represents the difference between the yield on interest-earning assets and the cost of interest-bearing liabilities.

6 unchanged sentences

and (iii) the net change.

There were no out-of-period amounts excluded from the following table.

The changes attributable to the combined impact of volume and rate have been allocated proportionately to the changes due to volume and the changes due to rate.

6 unchanged sentences

Interest-earning deposits and short-term investments $ 509 $ (285) $ 224 $ 1,950 $ (2,215) $ (265)

$ 1,950 $ (2,215) $ (265) $ 159 $ 244 $ 403

Securities (1)

1 unchanged sentence

Loans receivable, net (2)

Commercial real estate 89,831 (21,589) 68,242 16,085 2,457 18,542

Commercial 2,812 (18,417) (15,605) 89,831 (21,589) 68,242

Residential real estate (5,640) (7,784) (13,424) 9,974 (4,583) 5,391

Home equity loans and lines (1,121) (1,980) (3,101) (891) 1,184 293

Other consumer (1,951) 709 (1,242) 3,630 (7) 3,623

Home equity loans and lines and other consumer (4,460) (495) (4,955) (2,918) (1,425) (4,343)

Loans receivable, net (2)

1 unchanged sentence

Total interest-earning assets 797 (38,313) (37,516) 101,696 (30,882) 70,814

101,542 (30,728) 70,814 27,890 4,250 32,140

Interest-bearing liabilities:

Interest-bearing checking accounts 4,158 (1,583) 2,575 737 6,864 7,601

Money market deposit accounts 522 (2,539) (2,017) 173 1,928 2,101

Savings accounts 866 444 1,310 31 174 205

Interest-bearing checking 3,611 (9,606) (5,995) 4,158 (1,583) 2,575

Money market 356 (2,153) (1,797) 522 (2,539) (2,017)

Savings 201 (2,075) (1,874) 866 444 1,310

Time deposits (6,935) (6,479) (13,414) 9,379 (1,389) 7,990

9,379 (1,389) 7,990 832 5,115 5,947

14,925 (5,067) 9,858 1,773 14,081 15,854

Total (2,767) (20,313) (23,080) 14,925 (5,067) 9,858

FHLB advances (3,509) (3,509) (7,018) 527 (1,950) (1,423)

527 (1,950) (1,423) 109 447 556

Securities sold under agreements to repurchase 40 (349) (309) 273 13 286

273 13 286 (5) 113 108

Other borrowings 1,063 (559) 504 5,734 (621) 5,113

5,734 (621) 5,113 200 (47) 153

Total borrowings (2,406) (4,417) (6,823) 6,534 (2,558) 3,976

Total interest-bearing liabilities (5,173) (24,730) (29,903) 21,459 (7,625) 13,834

21,459 (7,625) 13,834 2,077 14,594 16,671

Net change in net interest income $ 5,970 $ (13,583) $ (7,613) $ 80,237 $ (23,257) $ 56,980

$ 80,083 $ (23,103) $ 56,980 $ 25,813 $ (10,344) $ 15,469

(1) Amounts represent debt and equity securities, including FHLB and Federal Reserve Bank stock, and are recorded at average amortized cost, net of allowance for credit losses.

(2) Amount is net of deferred loan costs and fees, undisbursed loan funds, discounts and premiums and estimated loss allowances, and includes loans held-for-sale and non-performing loans.

(1) Amounts represent debt and equity securities, including FHLB and Federal Reserve Bank stock, and are recorded at average amortized cost, net of allowance for securities credit losses.

(2) Amount is net of deferred loan costs and fees, undisbursed loan funds, discounts and premiums and allowance for loan credit losses, and includes loans held-for-sale and non-performing loans.

Comparison of Financial Condition at December 31, 2021 and December 31, 2020

Total assets increased by $3.20 billion to $11.45 billion at December 31, 2020, from $8.25 billion at December 31, 2019, primarily as a result of the acquisitions of Two River and Country Bank, which added $2.03 billion to total assets.

Cash and due from banks increased by $1.15 billion to $1.27 billion at December 31, 2020, from $120.5 million at December 31, 2019, due to increased deposits, the Company’s decision to build liquidity during the economic downturn, the cash received from the issuance of subordinated notes and non-cumulative perpetual preferred stock as described below, and the cash received from loan sales throughout the year.

Loans receivable, net of allowance for credit losses, increased by $1.50 billion, to $7.70 billion at December 31, 2020, from $6.21 billion at December 31, 2019, primarily due to acquired loans from Two River and Country Bank of $1.56 billion.

As part of the acquisitions of Two River and Country Bank, the Company’s goodwill balance increased to $500.3 million at December 31, 2020, from $374.6 million at December 31, 2019 and core deposit intangibles increased to

$23.7 million, from $15.6 million.

Other assets increased by $39.4 million to $209.0 million at December 31, 2020, from $169.5 million at December 31, 2019, primarily due to an increase in swap positions.

Deposits increased by $3.10 billion, to $9.43 billion at December 31, 2020, from $6.33 billion at December 31, 2019, primarily due to acquired deposits from Two River and Country Bank of $1.59 billion and organic deposit growth of $1.51 billion.

The loan-to-deposit ratio at December 31, 2020 was 82.3%, as compared to 98.2% at December 31, 2019.

The Company utilized the excess liquidity to prepay all FHLB advances in the fourth quarter of 2020, bringing the balance to $0 at December 31, 2020 from $519.3 million at December 31, 2019.

The increase in other borrowings of $138.7 million, to $235.5 million at December 31, 2020, from $96.8 million at December 31, 2019, primarily resulted from the May 2020 issuance of $125.0 million in subordinated notes at an initial rate of 5.25% and a stated maturity of May 15, 2030.

Other liabilities increased by $92.7 million to $155.3 million at December 31, 2020, from $62.6 million at December 31, 2019, primarily due to an increase in swap positions.

Total assets increased by $291.3 million to $11.74 billion at December 31, 2021, from $11.45 billion at December 31, 2020.

Cash and due from banks decreased by $1.07 billion to $204.9 million at December 31, 2021, from $1.27 billion at December 31, 2020, as excess liquidity was primarily used to fund loan growth and purchase primarily mortgage- and asset-backed securities.

Total debt securities increased by $586.9 million at December 31, 2021, as compared to December 31, 2020.

Total loans, excluding PPP loans of $22.9 million and $95.4 million at December 31, 2021 and December 31, 2020, respectively, increased by $939.2 million, to $8.60 billion at December 31, 2021, from $7.66 billion at December 31, 2020, primarily due to loan originations, primarily in commercial loans, and $302.0 million in purchases of residential real estate loan pools.

Deposits increased by $305.2 million, to $9.73 billion at December 31, 2021, from $9.43 billion at December 31, 2020.

The deposits growth is net of deposits sold of $100.9 million related to the sale of two branches in December 2021.

Total deposits, excluding time deposits of $775.0 million at December 31, 2021 and $1.37 billion at December 31, 2020, increased by $903.0

million to $8.96 billion at December 31, 2021, from $8.05 billion at December 31, 2020 as a result of the Company’s efforts to improve the quality of deposits.

The loans-to-deposit ratio at December 31, 2021 was 88.6%, as compared to 82.3% at December 31, 2020.

Stockholders’ equity increased to $1.52 billion at December 31, 2021, as compared to $1.48 billion at December 31, 2020.

The acquisitions of Two River and Country Bank added $261.4 million to stockholders’ equity.

During the three months ended June 30, 2020, the Company raised $55.7 million from the issuance of 7.0% fixed-to-floating rate non-cumulative perpetual preferred stock, with a par value of $0.01 and a liquidation price of $1,000 per share.

Under the Company’s stock repurchase program, there were 2,019,145 shares available for repurchase at December 31, 2020.

The Company suspended its repurchase activity on February 28, 2020, due to the COVID-19 pandemic and has subsequently determined to recommence repurchases under its existing stock repurchase plan in February 2021.

For the year ended December 31, 2020, the Company repurchased 648,851 shares under the repurchase program at a weighted average cost of $22.83.

On June 25, 2021, the Company announced the authorization by the Board of Directors of the 2021 Stock Repurchase Program to repurchase up to an additional 3.0 million shares, which was approximately 5% of the Company’s outstanding common stock.

For the year ended December 31, 2021, the Company repurchased 1,711,484 shares under its stock repurchase program at a weighted average cost of $21.07, and there were 3,307,661 shares available for repurchase at December 31, 2021 under the existing repurchase programs.

Stockholders’ equity per common share increased to $25.63 at December 31, 2021, as compared to $24.57 at December 31, 2020.

Comparison of Operating Results for the Years Ended December 31, 2021 and December 31, 2020

These items decreased net income for the year ended December 31, 2021 by $5.1 million, net of tax.

Net income available to common stockholders for the year ended December 31, 2020 included a net gain on equity investments, merger related expenses, FHLB advance prepayment fees, branch consolidation expenses, gain on sale of PPP loans, and Two River and Country Bank opening credit loss expense under the CECL model of $20.9 million, $15.9 million, $14.3 million, $7.6 million, $5.1 million, and $2.4 million, respectively.

These items decreased net income for the year ended December 31, 2020 by $11.0 million, net of tax.

Interest Income

Interest income for the year ended December 31, 2021 decreased to $342.1 million, as compared to $379.6 million in the prior year.

Average interest-earning assets increased by $512.9 million for the year ended December 31, 2021, as compared to the prior year, primarily concentrated in excess balance sheet liquidity and increased securities.

Average loans receivable, net of allowance for loan credit losses, decreased by $201.0 million for the year ended December 31, 2021, as compared to the prior year, primarily due to reductions in PPP loans.

The yield on average interest-earning assets decreased to 3.29% for the year ended December 31, 2021, as compared to 3.84% for the prior year, due to decreases in market interest rates and a higher percentage of assets in lower-yielding cash and due from banks and securities.

Interest Expense

Interest expense for the year ended December 31, 2021 was $36.8 million, as compared to $66.7 million in the prior year.

Average interest-bearing liabilities increased $3.5 million for the year ended December 31, 2021, as compared to the prior year.

For the year ended December 31, 2021, the cost of average interest-bearing liabilities decreased to 0.49%, from 0.88% in the prior year.

The decrease was primarily due to repricing of deposit costs, maturities of higher-yielding time deposits, and repayment of all FHLB advances in 2020.

The total cost of deposits (including non-interest bearing deposits) decreased to 0.26% for the year ended December 31, 2021, as compared to 0.55% for the prior year, due to decreases in market interest rates.

Net Interest Income and Margin

Net interest income for the year ended December 31, 2021 decreased to $305.3 million, as compared to $313.0 million for the prior year, as a result of the lower interest rate environment.

Net interest margin decreased to 2.93% for the year ended December 31, 2021, from 3.16% for the prior year.

The net interest margin compression was primarily due to the excess balance sheet liquidity and the lower interest rate environment.

Benefit/Provision for Credit Loss Expense

Credit loss benefit for the year ended December 31, 2021 was $11.8 million, as compared to credit loss expense of $59.4 million for the prior year.

The credit loss benefit for the year ended December 31, 2021 was influenced by positive trends in the Bank’s asset quality combined with stabilizing trends in economic forecasts, including strong employment levels and modest GDP growth, partly offset by the continuing economic uncertainty related to COVID-19 variants.

Net loan recoveries were $461,000 for the year ended December 31, 2021, as compared to net loan charge-offs of $18.9 million in the prior year.

The year ended December 31, 2020 included $14.6 million of charge-offs related to the sale of higher risk commercial loans and $3.3 million of charge-offs related to the sale of under-performing residential and consumer loans.

Non-performing loans totaled $18.9 million at December 31, 2021, as compared to $36.4 million at December 31, 2020.

The decrease was primarily due to loans that returned to accrual status and partly due to loans that were paid off.

Non-interest Income

Other income for the year ended December 31, 2021 decreased to $51.9 million, as compared to $73.9 million for the prior year.

Other income for the year ended December 31, 2021 included a net gain of $7.1 million on equity investments, as compared to a net gain of $20.9 million on equity investments and a $5.1 million gain on the sale of PPP loans in the prior year.

The remaining decrease of $3.1 million in other income was primarily due to decreases in commercial loan swap income of $4.0 million due to lower new swaps in 2021 and fees and service charges of $2.0 million, partly offset by increases in bankcard services of $1.9 million, due to lower card activity in the prior year as a result of the pandemic, and income from bank owned life insurance of $408,000.

Non-interest Expense

Operating expenses for the year ended December 31, 2021 decreased to $226.9 million, as compared to $246.4 million in the prior year.

Operating expenses for the year ended December 31, 2021 included $13.8 million of merger related and branch consolidation expenses, as compared to $37.8 million of merger related expenses, branch consolidation expenses, and FHLB advance prepayment fees in the prior year.

The remaining increase of $4.4 million in operating expenses for the year ended December 31, 2021, as compared to the prior year, was primarily due to increases in compensation and benefits expense of $5.9 million, data processing expense of $4.1 million, and federal deposit insurance and regulatory assessments of $1.3 million.

The expense increases were partially due to additional funding for the Company’s ESOP plan, expenses related to the Company’s core conversion, and becoming a large bank for purposes of the Bank’s FDIC insurance assessment calculator.

These increases were partly offset by decreases in equipment expense of $2.3 million, professional fees of $1.2 million, other operating expense of $1.0 million, marketing expense of $948,000, and amortization of core deposit intangible of $733,000.

Income Tax Expense

The provision for income taxes for the year ended December 31, 2021 was $32.2 million, as compared to $17.7 million for the prior year.

The effective tax rate was 22.6% for the year ended December 31, 2021, as compared to 21.9% for the prior year.

Comparison of Operating Results for the Years Ended December 31, 2020 and December 31, 2019

Net income for the year ended December 31, 2020 reflects net gain on equity investments, gain on sale of PPP loans, FHLB advance prepayment fees, merger related expenses, branch consolidation expenses, and Two River and Country Bank opening credit loss expense under the CECL model.

These items decreased net income, net of tax, for the year ended December 31, 2020 by $11.0 million.

Net income for the year ended December 31, 2020 includes a net gain on equity investments, merger related expenses, FHLB advance prepayment fees, branch consolidation expenses, a gain on sale of PPP loans, and Two River and Country Bank opening credit loss expense under the CECL model of $20.9 million, $15.9 million, $14.3 million, $7.6 million, $5.1 million and $2.4 million, respectively .

These items decreased net income for the year ended December 31, 2020 by $11.0 million, net of tax.

These items decreased net income for the year ended December 31, 2019 by $16.3 million, net of tax.

The annual results were impacted by the COVID-19 pandemic, through higher credit losses, net interest margin compression and increased operating expenses.

10 unchanged sentences

The total cost of deposits (including non-interest bearing deposits) was 0.55% for the year ended December 31, 2020, as compared to 0.61% for the prior year.

Net Interest Income

Net Interest Income and Margin

Net interest income for the year ended December 31, 2020 increased to $313.0 million, as compared to $256.0 million for the prior year, reflecting an increase in interest-earning assets partly offset by a reduction in net interest margin.

1 unchanged sentence

The compression in net interest margin was primarily due to the lower interest rate environment, the origination of low-yielding PPP loans, and the excess balance sheet liquidity which the Company strategically accumulated entering the economic downturn.

Provision for Credit Losses

Provision for Credit Loss Expense

For the year ended December 31, 2020, credit loss expense was $59.4 million, as compared to $1.6 million for the prior year.

6 unchanged sentences

The allowance for credit losses for loans as a percent of total non-performing loans was 166.8% at December 31, 2020, as compared to 94.4% at December 31, 2019.

Non-interest Income

For the year ended December 31, 2020, other income increased to $73.9 million, as comp ared to $42.2 million in the prior year .

Other income for the year ended December 31, 2020 included $21.2 million of net gain on equity investments, $5.1 million of net gain on sale of PPP loans, and $2.8 million due to the acquisitions of Two River and Country Bank.

The remaining increase in other income was due to increases in commercial loan swap income of $2.8 million, net gain on sales of loans of $2.5 million, net gain on real estate operations of $981,000, and bankcard services of $577,000, partly offset by a decrease in fees and service charges of $4.4 million.

The waiver of certain fees during the COVID-19 pandemic may continue to suppress deposit fees income for the remainder of the public health crisis.

Operating Expenses

Other income for the year ended December 31, 2020 included $20.9 million o f a net gain on equity investments and $5.1 million of a gain on sale of PPP loans.

Non-interest Expense

Operating expenses increased to $246.4 million for the year ended December 31, 2020, as compared to $189.1 million in the prior year.

Operating expenses for the year ended December 31, 2020 included $37.8 million of merger related expenses, branch consolidation expenses, and FHLB advance prepayment fee as compared to $22.8 million of merger related expenses, branch consolidation expenses, non-recurring professional fees, and compensation expense due to the retirement of an executive officer in the prior year.

Operating expenses for the year ended December 31, 2020 included $15.9 million of merger related expenses, $14.3 million of FHLB advance prepayment fees, and $7.6 million of branch consolidation expenses, as compared to $10.5 million of merger related expenses, $9.1 million of branch consolidation expenses, $2.0 million of non-recurring professional fees, and $1.3 million of compensation expense due to the retirement of an executive officer in the prior year.

The remaining change in operating expenses over the prior year was primarily due to the acquisitions of Two River and Country Bank, which added $29.3 million for the year ended December 31, 2020.

The remaining increase in operating expenses for the year ended December 31, 2020 was primarily due to increases in compensation and benefits expense of $7.6 million, operating expenses attributable to the COVID-19 pandemic of $4.5 million, professional fees of $3.6 million, and federal deposit insurance expense of $2.0 million, partly offset by decreases in equipment expense of $1.8 million, occupancy expense of $1.6 million, and check card processing of $680,000.

Provision for Income Taxes

Income Tax Expense

The provision for income taxes for the year ended December 31, 2020 was $17.7 million, as compared to $18.8 million for the prior year.

3 unchanged sentences

Excluding the impact of the New Jersey tax code change, the effective tax rate for the year ended December 31, 2019 was 19.6%.

Comparison of Operating Results for the Years Ended December 31, 2019 and December 31, 2018

Net income for the year ended December 31, 2019 was $88.6 million, or $1.75 per diluted share, as compared to $71.9 million, or $1.51 per diluted share, for the corresponding prior year period.

Net income for the year ended December 31, 2018 included merger related expenses, branch consolidation expenses, and reduction of income tax expense from the revaluation of deferred tax assets as a result of the Tax Reform, which decreased net income, net of tax benefit, by $22.2 million for the year.

Excluding these items, net income for the year ended December 31, 2019 increased over the prior year period.

Interest Income

Interest income for the year ended December 31, 2019 increased to $308.8 million, as compared to $276.7 million, in the prior year.

Average interest-earning assets increased $595.9 million for the year ended December 31, 2019, as compared to the prior year.

The average for the year ended December 31, 2019 was favorably impacted by $341.9 million of interest-earning assets acquired from Capital Bank.

Average loans receivable, net, increased by $612.5 million for the year ended December 31, 2019, as compared to the prior year.

The increase was primarily due to organic loan growth, as well as the acquisition of Capital Bank, which contributed $250.3 million to average loans receivable, net.

The yield on average interest-earning assets increased to 4.36% for the year ended December 31, 2019, as compared to 4.27% for the prior year.

Interest Expense

Interest expense for the year ended December 31, 2019 was $52.8 million, as compared to $36.2 million in the prior year, due to an increase in average-interest bearing liabilities of $320.3 million, primarily related to the acquisition of Capital Bank.

For the year ended December 31, 2019, the cost of average interest-bearing liabilities increased to 0.96% from 0.70% in the prior year.

The total cost of deposits (including non-interest bearing deposits) was 0.61% for the year ended December 31, 2019, as compared to 0.39% in the prior year.

Net Interest Income

Net interest income for the year ended December 31, 2019 increased to $256.0 million, as compared to $240.5 million for the prior year, reflecting an increase in interest-earning assets.

The net interest margin decreased to 3.62% for the year ended December 31, 2019, from 3.71% for the prior year.

The decrease in net interest margin was primarily due to the increase in the cost of average interest bearing liabilities, partially offset by the increase in the yield on interest-earning assets.

Provision for Loan Losses

For the year ended December 31, 2019, the provision for loan losses was $1.6 million, as compared to $3.5 million for the prior year.

Net loan charge-offs were $1.4 million for the year ended December 31, 2019, as compared to net loan charge-offs of $2.6 million in the prior year.

Non-performing loans totaled $17.8 million at December 31, 2019, as compared to $17.4 million at December 31, 2018.

At December 31, 2019, the Company’s allowance for loan losses was 0.27% of total loans, as compared to 0.30% at December 31, 2018.

These ratios exclude existing fair value credit marks of $30.3 million at December 31, 2019 and $31.6 million at December 31, 2018 on loans acquired from Capital Bank, Sun, Ocean Shore, Cape, and Colonial American.

These loans were acquired at fair value with no related allowance for loan losses.

The allowance for loan losses as a percent of total non-performing loans was 94.4% at December 31, 2019, as compared to 95.2% at December 31, 2018.

For the year ended December 31, 2019, other income increased to $42.2 million, as compared to $34.8 million in the prior year.

The increase from the prior year was primarily due to an increase in derivative fee income of $4.6 million, a decrease in the loss

from real estate operations of $3.5 million and the impact of the Capital Bank acquisition, which added $1.5 million to other income for the year ended December 31, 2019.

These increases to other income were partially offset by decreases in fees and service charges of $1.3 million, rental income of $810,000 received primarily for January and February 2018 on the Company’s executive office, and decrease in the gain on sales of loans of $653,000, mostly related to the sale of one non-performing commercial loan relationship during the first quarter of 2018.

Operating Expenses

Operating expenses increased to $189.1 million for the year ended December 31, 2019, as compared to $186.3 million in the prior year.

Operating expenses for the year ended December 31, 2019 included $22.8 million of merger related expenses, branch consolidation expenses, non-recurring professional fees, and compensation expense due to the retirement of an executive officer as compared to $30.1 million of merger related and branch consolidation expenses in the prior year.

Excluding the impact of merger related expenses, branch consolidation expenses, non-recurring professional fees, and compensation expense due to the retirement of an executive officer, the change in operating expenses over the prior year was primarily due to the Capital Bank acquisition, which added $6.3 million in expenses for the year ended December 31, 2019.

The remaining increase in operating expenses, for the year ended December 31, 2019 from the prior year period was primarily due to increases in professional fees of $2.3 million, check card processing of $1.6 million, compensation and employee benefits expense of $1.3 million, and data processing of $1.0 million, partially offset by decreases in FDIC expense of $1.6 million, and occupancy of $1.1 million.

Provision for Income Taxes

The provision for income taxes for the year ended December 31, 2019 was $18.8 million, as compared to $13.6 million for the prior year.

The effective tax was 17.5% for the year ended December 31, 2019, as compared to 15.9% for the prior year.

2019 period included the reduction in income tax expense of $2.2 million from the revaluation of state deferred tax assets as a result of a change in the New Jersey tax code.

Excluding the impact of the New Jersey tax code change, the effective tax rate for the year ended December 31, 2019 was 19.6%.

The lower effective tax rate in the prior year period was primarily due to Tax Reform which required the Company to revalue its deferred tax asset, resulting in a tax benefit of $1.9 million, for the year ended December 31, 2018.

The remaining variance was due to larger tax benefits from employee stock option exercises in the prior year period.

Liquidity and Capital Resources

The Company’s primary sources of funds are deposits, principal and interest payments on loans and mortgage-backed securities, FHLB advances and other borrowings, including subordinated debt, and, to a lesser extent, investment maturities and proceeds from the sale of loans.

While scheduled amortization of loans is a predictable source of funds, deposit flows and loan prepayments are greatly influenced by interest rates, economic conditions and competition.

The Company has other sources of liquidity if a need for additional funds arises, including various lines of credit at multiple banks.

At December 31, 2020, the Bank had no outstanding overnight borrowings from the FHLB, compared to $270.0 million of outstanding overnight borrowings at December 31, 2019.

The primary sources of liquidity specifically available to OceanFirst Financial Corp.

are dividends from the Bank, the issuance of preferred and common stock, and debt.

For the year ended December 31, 2021, the holding company received dividend payments of $40.0 million from the Bank.

At December 31, 2021, OceanFirst Financial Corp.

held $72.3 million in cash.

The Company’s cash needs f or the year ended December 31, 2020 were also satisfied by net proceeds from the issuance of subordinated notes and preferred stock.

Subsequent to December 31, 2021, the Company has provided notice to its trustee that it will redeem $35.0 million of subordinated debt due September 30, 2026 as of March 30, 2022.

The debt currently carries an interest rate of 4.14% based on a floating rate of three months LIBOR plus 392 basis points.

The Bank’s primary sources of funds are deposits, principal and interest payments on loans, FHLB advances, access to the Federal Reserve discount window, other borrowings, investment maturities, and proceeds from the sale of loans and investments .

While scheduled amortization of loans and securities are predictable sources of funds, deposit flows, loan prepayments, and loan and investment sales are greatly influenced by interest rates, economic conditions, and competition.

The Bank has other sources of liquidity if a need for additional funds arises, including various lines of credit at multiple financial institutions.

At December 31, 2021 and 2020, the Bank had no outstanding overnight borrowings from the FHLB.

The Bank utilizes overnight borrowings from time-to-time to fund short-term liquidity needs.

FHLB advances, including overnight borrowings, totaled $0 at December 31, 2020, a decrease from $519.3 million at December 31, 2019.

The Company’s cash needs for the year ende d December 31, 2020 were primarily satisfied by the increase in deposits, net proceeds from the issuance of subordinated notes and preferred stock, principal payments on mortgage-backed securities, proceeds from maturities and calls of debt investment securities, proceeds from sales of loans, and acquired cash from acquisitions.

There were also no FHLB term advances at December 31, 2021 and 2020.

The Company’s cash needs for the year ended December 31, 2021 were primarily satisfied by the increase in deposits, principal repayments on debt securities held-to-maturity, and proceeds from maturities and calls of debt securities.

The cash was principally utilized for purchases of debt and equity securities, purchases of residential loan pools, loan originations, and payment for sale of branches.

The Company’s cash needs for the year ended December 31, 2020 were primarily satisfied by the increase in deposits, net proceeds from the issuance of subordinated notes and preferred stock, principal payments on mortgage-backed securities, proceeds from maturities and calls of debt securities, proceeds from sales of loans, and acquired cash from acquisitions.

The cash was principally utilized for repayment of FHLB advances, loan originations, the repayment of short-term borrowings, and the purchase of debt and equity securities.

The Company’s cash needs f or the year ended December 31, 2019 were primarily satisfied by principal payments on loans and mortgage-backed securities, proceeds from maturities and calls of debt securities, increased deposits, increased borrowings and acquired cash from Capital Bank.

The cash was principally utilized for loan originations, the purchase of loans receivable, the purchase of debt securities, and cash to fund the Two River acquisition.

In the normal course of business, the Bank routinely enters into various off-balance-sheet commitments, primarily relating to the origination and sale of loans.

At December 31, 2020, outstanding commitments to originate loans totaled $367.8 million and outstanding unused lines of credit totaled $1.04 billion, of which $668.1 million were commitments to commercial borrowers and $372.2 million were commitments to consumer borrowers and residential construction borrowers.

The Bank expects to have sufficient funds available to meet current commitments in the normal course of business.

At December 31, 2021, outstanding commitments to originate loans totaled $671.0 million and outstanding undrawn lines of credit totaled $1.37 billion, of which $1.01 billion were commitments to commercial and commercial construction borrowers and $358.6 million were commitments to consumer borrowers and residential construction borrowers.

Commitments to fund undrawn lines of credit and commitments to originate loans are agreements to lend to a customer as long as there is no violation of any condition established in the existing contracts.

Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee.

Since some of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements.

The Company’s exposure to credit risk is represented by the contractual amount of the instruments.

These commitments are further discussed in Note 13 Commitments, Contingencies and Concentrations of Credit Risk, to the Consolidated Financial Statements.

Time deposits scheduled to mature in one year or less totaled $552.7 million at December 31, 2021.

Based upon historical experience, management is optimistic about its ability to retain a significant portion of its renewing time deposits.

The Company has a detailed contingency funding plan and comprehensive reporting of funding trends on a monthly and quarterly basis which are reviewed by management.

Management also monitors cash on a daily basis to determine the liquidity needs of the Bank.

Management is optimistic about its ability to retain funds from maturing time deposits and placing them in market comparable deposit products.

At December 31, 2021, the Company also had various contractual obligations, which included debt obligations of $347.9 million, purchase obligations of $69.3 million, and lease obligations of $19.9 million.

Refer to Note 9 Borrowed Funds and Note 17 Leases to the Consolidated Financial Statements for further discussion of debt obligations and lease obligations, respectively.

Purchase obligations represent legally binding and enforceable agreements to purchase goods and services from third parties and consist primarily of contractual obligations under data processing servicing agreements.

Actual amounts expended vary based on transaction volumes, number of users, and other factors.

The Company expects to have sufficient funds available to meet current commitments in the normal course of business.

The Company has a detailed contingency funding plan and obtain comprehensive reporting of funding trends on a monthly and quarterly basis, which are reviewed by management.

Management also monitors cash on a daily basis to determine the liquidity needs of the Company and the Bank.

Additionally, management performs multiple liquidity stress test scenarios on a quarterly basis.

The Bank continues to maintain significant liquidity under all stress scenarios.

In response to COVID-19, management identified additional sources of contingent liquidity, including expanded borrowing capacity with the FHLB, the Federal Reserve and existing correspondent bank relationships.

In addition, in May 2020, the Company issued $125.0 million of subordinated notes at an initial rate of 5.25% and a stated maturity of May 15, 2030.

The Company also issued $55.9 million of 7.0% fixed-to-floating rate non-cumulative perpetual preferred stock.

The proceeds were retained to strengthen balance sheet liquidity entering the economic downturn.

Under the Company’s stock repurchase programs, shares of OceanFirst Financial Corp.

The Company and Bank continues to maintain significant liquidity under all stress scenarios.

Under the Company’s stock repurchase program, shares of OceanFirst Financial Corp.

common stock may be purchased in the open market and through other privately-negotiated transactions, from time-to-time, depending on market conditions.

The repurchased shares are held as treasury stock for general corporate purposes.

The Company suspended its repurchase activity on February 28, 2020 in light of the COVID-19 pandemic, and subsequently determined to recommence repurchases under its existing stock repurchase plan in February 2021.

For the year ended December 31, 2020, the Company repurchased 648,851 shares of common stock at a total cost of $14.8 million.

For the year ended December 31, 2019, the Company repurchased 1.1 million shares of common stock at a total cost of $26.1 million.

At December 31, 2020, there were 2.0 million shares available to be repurchased under the stock repurchase programs.

The Company suspended its repurchase activity on February 28, 2020 in light of the COVID-19 pandemic, and subsequently recommenced repurchases in February 2021.

For the year ended December 31, 2021, the Company repurchased 1,711,484 shares of its common stock at a total cost of $36.1 million.

For the year ended December 31, 2020, the Company repurchased 648,851 shares of its common stock at a total cost of $14.8 million.

At December 31, 2021, there were 3,307,661 shares available to be repurchased under the stock repurchase programs.

Cash dividends on common stock declared and paid during the year ended December 31, 2021 were $40.5 million, as compared to $40.8 million for the prior year.

The increase in dividends was a result of additional shares issued in the acquisitions of Two

River and Country Bank.

On January 27, 2022, the Company’s Board of Directors declared a quarterly cash dividend of $0.17 per common share.

The dividend was payable on February 19, 2021 to common stockholders of record at the close of business on February 8, 2021.

The Company also declared a quarterly cash dividend of $0.4375 per depository share, representing 1/40th interest in the Series A Preferred Stock, payable on February 15, 2021 to preferred stockholders of record on January 29, 2021.

The primary sources of liquidity specifically available to OceanFirst Financial Corp., the holding company of OceanFirst Bank, are capital distributions from the bank subsidiary, the issuance of preferred and common stock, and debt.

For the year ended December 31, 2020, the Company received dividend payments of $54.0 million from the Bank.

The Company’s ability to continue to pay dividends will be largely dependent upon capital distributions from the Bank, which may be adversely affected by capital restraints imposed by the applicable regulations.

The dividend was paid on February 18, 2022 to common stockholders of record at the close of business on February 7, 2022.

Cash dividends on preferred stock declared and paid during the year ended December 31, 2021 were $4.0 million, as compared to $2.1 million for the prior year.

The Company’s Board of Directors also declared a quarterly cash dividend of $0.4375 per depositary share, representing 1/40th interest in the Series A Preferred Stock, paid on February 15, 2022 to preferred stockholders of record on January 31, 2022.

The Company cannot predict whether the Bank will be permitted under applicable regulations to pay a dividend to the Company.

If applicable regulations or regulatory bodies prevent the Bank from paying a dividend to the Company, the Company may not have the liquidity necessary to pay a dividend in the future or pay a dividend at the same rate as historically paid or be able to meet current debt obligations.

At December 31, 2020, OceanFirst Financial Corp.

held $108.5 million in cash.

Additionally, regulations of the Federal Reserve may prevent the Company from either paying or increasing the cash dividend to common stockholders.

The Company and the Bank satisfy the criteria to be “well-capitalized” under the Prompt Corrective Action Regulations.

See Regulation and Supervision—Bank Regulation – Capital Requirements .

At December 31, 2020, the Company maintained tangible stockholders’ equity of $960.1 million for a tangible stockholders’ equity to tangible assets ratio of 8.79%.

Off-Balance-Sheet Arrangements and Contractual Obligations

In the normal course of operations, the Company engages in a variety of financial transactions that, in accordance with generally accepted accounting principles, are not recorded in the financial statements.

These transactions involve, to varying degrees, elements of credit, interest rate and liquidity risk.

Such transactions are used for general corporate purposes or for customer needs.

Corporate purpose transactions are used to help manage credit, interest rate, and liquidity risk or to optimize capital.

Customer transactions are used to manage customers’ requests for funding.

These financial instruments and commitments include unused consumer lines of credit and commitments to extend credit and are discussed in Note 13 Commitments, Contingencies and Concentrations of Credit Risk, to the Consolidated Financial Statements.

The Company enters into loan sale agreements with investors in the normal course of business.

The loan sale agreements generally require the Company to repurchase loans previously sold in the event of a violation of various representations and warranties customary in the mortgage banking industry.

The Company is also obligated to repurchase under a loss sharing arrangement with the FHLB relating to loans sold into the Mortgage Partnership Finance program.

As a result of the COVID-19 pandemic, some of these loans were placed on forbearance and the Company may be required to repurchase them in future periods.

In the opinion of management, the potential exposure related to the loan sale agreements and loans sold to the FHLB is adequately provided for in the reserve for repurchased loans and loss sharing obligations included in other liabilities.

At December 31, 2020 and 2019, the reserve for repurchased loans and loss sharing obligations amounted to $1.2 million and $1.1 million, respectively.

The following table shows the contractual obligations of the Company by expected payment period as of December 31, 2020 (in thousands).

Refer to Note 17 Leases, to the Consolidated Financial Statements for lease obligations.

Further discussion of these commitments is included in Note 9 Borrowed Funds, and Note 13 Commitments, Contingencies, and Concentrations of Credit Risk, to the Consolidated Financial Statements.

Contractual Obligation Total Less than

one year 1-3 years 3-5 years More than

Debt obligations $ 363,925 $ 128,649 $ 425 $ 476 $ 234,375

Commitments to originate loans 367,806 367,806 — — —

Commitments to fund unused lines of credit:

Commercial real estate 668,114 668,114 — — —

Consumer and residential construction 372,159 372,159 — — —

Purchase obligations 54,088 11,307 22,287 20,494 —

Debt obligations include advances from the FHLB and other borrowings and have defined terms.

Commitments to fund undrawn lines of credit and commitments to originate loans are agreements to lend to a customer as long as there is no violation of any condition established in the contract.

Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee.

Since some of the commitments are expected to expire without being

drawn upon, the total commitment amounts do not necessarily represent future cash requirements.

The Company’s exposure to credit risk is represented by the contractual amount of the instruments.

Actual amounts expended vary based on transaction volumes, number of users and other factors.

At December 31, 2021, the Company maintained stockholders’ equity of $1.52 billion for a stockholders’ equity to total assets ratio of 12.92%.

Impact of New Accounting Pronouncements

Accounting Pronouncements Adopted in 2021

In June 2016, the Financial Accounting Standards Board (“FASB”) issued ASU 2016-13.

This ASU significantly changed how entities measure credit losses for financial assets and certain other instruments that are measured at amortized cost.

The standard replaced the “incurred loss” approach with an “expected loss” model, which necessitates a forecast of lifetime losses.

The new model, referred to as the CECL model, applies to:

(1) financial assets subject to credit losses and measured at amortized cost, and (2) certain off-balance sheet credit exposures.

This includes, but is not limited to, loans, leases, held-to-maturity securities, loan commitments, and financial guarantees.

The CECL model does not apply to available-for-sale (“AFS”) debt securities.

The ASU simplifies the accounting model for purchased credit-impaired debt securities and loans.

The standard’s provisions are to be applied as a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is effective (i.e., modified retrospective approach).

The Company adopted ASU 2016-13 using the modified retrospective method for all financial assets measured at amortized cost.

Results for reporting periods beginning after January 1, 2020 are presented in accordance with ASU 2016-13, or Accounting Standards Codification (“ASC”) 326, while prior period amounts continue to be reported in accordance with previously applicable GAAP.

The Company recorded a net decrease to retained earnings of $4,000, net of tax, as of January 1, 2020 for the cumulative effect of adopting ASC 326.

The transition adjustment included a decrease in the allowance for credit losses on loans of $475,000, an increase in the allowance for credit losses on held to maturity debt securities of $1.3 million, and a decrease in the allowance for credit losses on off-balance sheet credit exposures of $788,000.

As allowed by ASC 326, the Company elected not to maintain pools of loans accounted for under ASC 310-30.

At December 31, 2019, purchase credit impaired (“PCI”) loans totaled $13.3 million.

In accordance with the standard, management did not reassess whether modifications of individually acquired financial assets accounted for in pools were troubled debt restructured loans as of the date of adoption.

Upon adoption, the Company’s PCI loans were converted to PCD loans as defined by ASC 326.

The transition adjustment for the PCI loans to PCD loans resulted in a reclassification of $3.2 million from the specific credit fair value adjustment to the allowance for credit losses on loans.

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

Historical credit loss experience provides the basis for the estimation of expected credit losses.

Adjustments to historical loss information are made for differences in current loan-specific risk characteristics such as differences in underwriting standards, portfolio mix, delinquency level, or term as well as changes in environmental conditions, such as changes in unemployment rates, property values, or other relevant factors.

At December 31, 2020, the Company utilized the December 15, 2020 forecast, from Oxford Economics, the most recent forecast available as of quarter end, to provide the macroeconomic forecasts for select variables.

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

The contractual term excludes expected extensions, renewals, and modifications.

In January 2017, the FASB issued ASU 2017-04, Intangibles - Goodwill and Other (Topic 350) - Simplifying the Test for Goodwill Impairment.

This ASU intends to simplify the subsequent measurement of goodwill, eliminating Step 2 from the goodwill impairment test.

Instead, an entity should perform its annual goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount.

An entity should recognize an impairment charge by which the carrying amount exceeds the reporting unit’s fair value;

however the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit.

The ASU also eliminates the requirement for any reporting unit with a zero or negative carrying amount to perform a qualitative assessment.

2017-04 is effective for fiscal years beginning after December 15, 2019.

The adoption of this update did not have an impact on the Company’s consolidated financial statements.

In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820) - Changes to the Disclosure Requirements for Fair Value Measurement.

This ASU updates the disclosure requirements on Fair Value measurements by (1) removing:

the disclosures for transfers between Level 1 and Level 2 of the fair value hierarchy, the policy for timing of transfers between levels, and the valuation processes for Level 3 fair value measurements;

(2) modifying:

disclosures for timing of liquidation of an investee’s assets and disclosures for uncertainty in measurement as of reporting date;

and (3) adding:

disclosures for changes in unrealized gains and losses included in other comprehensive income for recurring level 3 fair value measurements and disclosures for the range and weighted average of the significant unobservable inputs used to develop Level 3 fair value measurements.

ASU 2018-13 is effective for fiscal years beginning after December 15, 2019, with early adoption permitted to any removed or modified disclosures and delay adoption of additional disclosures until the effective date.

With the exception of the following, which should be applied prospectively, disclosures relating to changes in unrealized gains and losses, the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements, and the disclosures for uncertainty measurement, all other changes should be applied retrospectively to all periods presented upon the effective date.

The adoption of this update did not have an impact on the Company’s consolidated financial statements.

Refer to Note 15, Fair Value Measurements, for additional information.

In March 2020, FASB issued ASU 2020-04, “Reference Rate Reform (Topic 848) - Facilitation of the Effects of Reference Rate Reform on Financial Reporting” and in January 2021, the FASB issued ASU 2021-01 “Reference Rate Reform (Topic 848)”.

These ASUs provide guidance to ease the potential burden in accounting for, or recognizing the effects of, reference rate reform on financial reporting.

The updates provide optional expedients and exceptions for applying generally accepted accounting principles to contracts, hedging relationships, and other transactions, that reference LIBOR or another reference rate expected to be discontinued because of reference rate reform, if certain criteria are met.

In addition, the updates provide optional expedients for applying the requirements of certain Topics or Industry Subtopics in the Codification for contracts that are modified because of reference rate reform and contemporaneous modifications of other contract terms related to the replacement of the reference rate.

These ASUs are effective for all companies as of March 31, 2020 through December 31, 2022.

Once elected for a Topic or an Industry Subtopic, the amendments in these updates must be applied prospectively for all eligible contract modifications for that Topic or Industry Subtopic.

The Company adopted the temporary relief and optional expedients provided under these ASUs as of December 31, 2021 and will be applied prospectively until December 31 2022, except where otherwise permitted by the standard.

The Company has exposure to LIBOR-based products within its commercial lending and corporate treasury functions.

As of December 31, 2021, the Company ceased issuing LIBOR-based products and has transitioned to alternative reference rates, including, but not limited to, SOFR, Bloomberg published Bloomberg Short-Term Bank Yield Index, and Prime (collectively with other indices, “Alternative Rates”).

To prepare for the transition to Alternative Rates, management formed a cross-functional project team to address the LIBOR transition.

The project team performed an assessment to identify the potential risks related to the transition from LIBOR to Alternative Rates.

The project team provides updates to executive leadership and the Board.

The Company’s LIBOR transition plan is organized around key work streams, including continued engagement with regulators, industry working groups, counterparties, and clients, comprehensive review of legacy documentation, internal operational and technological readiness, and risk management, among other things.

For the tenors of U.S.

dollar LIBOR utilized by the Company, the administrator of LIBOR extended publication until June 30, 2023.

The Company has developed a transition plan for existing LIBOR-based products that are not expected to mature or settle prior to the cessation date.

Contract language for existing loans, securities, derivatives, and borrowings is under review and certain contracts will need updated provisions for the transition.

The Company has plans for impacted lines of business to remediate these contracts, train impacted teammates, and provide timely notice to clients and counterparties.

The Company may not be in a position to remediate or exit certain contracts, such as certain securities owned, and may be unable to completely remove exposure to LIBOR prior to the cessation date.

Current fallback language used for recent, renewed, and modified contracts is generally consistent with ARRC recommendations and includes use of “hardwired fallback” language, where appropriate.

The Company continues to manage the impact of these contracts and other financial instruments, systems implications, hedging strategies, and related operational and market risks on established project plans for business and operational readiness for the transition.

In January 2020, FASB issued ASU 2020-01, an update to Topic 321 Investments, Topic 323 Joint Ventures, and Topic 815 Derivatives and Hedging.

The update clarifies the accounting for certain equity securities upon the application or discontinuation of the equity method of accounting in accordance with Topic 321.

In addition, the update clarifies scope considerations for forward contracts and purchased options on certain securities.

This update was effective for financial statements issued for fiscal years and interim periods beginning after December 15, 2020.

The adoption of this standard did not have an impact on the Company’s financial statements.

Recent Accounting Pronouncements

In December 2019, FASB issued ASU 2019-12, “Income Taxes (Topic 740) - Simplifying the Accounting for Income Taxes.” As part of an initiative to reduce complexity in accounting standards for income taxes.

The amendments also improve consistent application of and simplify GAAP for other areas of Topic 740 by clarifying and amending existing guidance.

This update will be effective for financial statements issued for fiscal years and interim periods beginning after December 15, 2021 with early adoption permitted.

The Company does not expect the adoption of this standard to have a material impact on the Company’s financial statements.

Impact of Inflation and Changing Prices

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What changed 10-K

Item 7. Management’s Discussion and Analysis